10-K 1 ikanos20141228-10k.htm 10-K Ikanos 2014.12.28-10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 0-51532
 
IKANOS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
73-1721486
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
47669 Fremont Boulevard
Fremont, California 94538
(Address of principal executive offices) (Zip Code)
(510) 979-0400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No   ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
ý
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of June 29, 2014 (the last day of Registrant’s second quarter of fiscal 2014), was approximately $20,637,841 based upon the June 27, 2014 closing price of the Common Stock as reported on The NASDAQ Capital Market. Shares of Common Stock held by each executive officer and director and by each person who owns more than 5% of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 16, 2015, there were 17,025,718 shares of the Registrant’s common stock, par value $ 0.001, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Registrant’s 2015 Annual Meeting of Stockholders.




IKANOS COMMUNICATIONS, INC.
Table of Contents
 
 
 
 
 
Page No.
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Item 15.
 




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, particularly in the sections entitled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and to future events with respect to our business and industry in general. Statements that include the words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms, or other similar expressions, identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, the following: our ability to raise additional capital in the future; our history of losses; our need for capital and ability to continue as a going concern; our utilization of a revolving credit facility; the volatility of our common stock; the opinions of the securities analysts that publish reports regarding our Company; our ability to develop and achieve market acceptance of new products and technologies as we transition away from older products; our dependence on a relatively small number of customers; the intensity of the competition we face in the semiconductor industry and the broadband communications market; general macroeconomic declines could reduce demand for our products; cyclical and unpredictable decreases in demand for our semiconductors; our ability to adequately forecast demand for our products; the length of our sales cycle; that the selling prices of our products are subject to decline over time and may do so more rapidly than we anticipate; our reliance on subcontractors to manufacture, test, and assemble our products; our dependence on and qualification of foundries to manufacture our products; changes in our product sales mix; our ability to secure production capacity; our ability to recruit and retain personnel, including our senior management team; the fluctuations in our operating results and expenses; our reliance on third-party technologies in our products; the development and future growth of the broadband digital subscriber line (DSL) and communications processing markets in general; the defense of third-party claims of infringement and the protection of our own intellectual property; currency fluctuations; undetected defects, errors, or failures in our products; the significant number of shares held by a single group of investors; rapidly changing technologies, standards, and regulations; and our accounting policies and disclosure controls.
The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this Annual Report on Form 10-K, including under the caption “Risk Factors” in Item 1A. Moreover, we operate in a very competitive and rapidly changing environment in which new risks emerge from time-to-time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Except as required by law, we undertake no obligation to publicly update any forward-looking statements for any reason after the date of this Annual Report on Form 10-K to conform these statements to actual results or to changes in our expectations.
In this Annual Report on Form 10-K, references to “Ikanos,” “we,” “us,” “our,” or the “Company” mean Ikanos Communications, Inc. and its subsidiaries, unless otherwise indicated or the context otherwise requires.
Ikanos Communications, Ikanos and the Ikanos logo, the “Bandwidth without boundaries” tagline, Fusiv, inSIGHT BXM, Ikanos NodeScale, and Ikanos Velocity are among the trademarks or registered trademarks of Ikanos Communications, Inc.

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ITEM 1.
BUSINESS
The following information should be read in conjunction with audited consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K.
Overview
We are a leading provider of advanced semiconductor products and software for delivering high speed broadband solutions to the connected home. Our broadband multi-mode and digital subscriber line (DSL) processors and other semiconductor offerings power carrier infrastructure (referred to as Access) and customer premises equipment (referred to as Gateway) for network equipment manufacturers (NEMs) supplying leading telecommunications service providers. Our products are at the core of DSL access multiplexers (DSLAMs), optical network terminals (ONTs), concentrators, modems, voice over Internet Protocol (VoIP) terminal adapters, integrated access devices (IADs), and residential gateways (RGs). On September 29, 2014, we entered into a collaborative arrangement with Alcatel-Lucent USA, Inc. (along with Alcatel-Lucent Participations, collectively known as “ALU”) on the development of ultra-broadband products.  We expect this collaboration to not only help increase our share of the broadband Access market, but to also positively impact our global carrier engagements as well as Gateway OEM interest in our products and technology. Our products have been deployed by service providers globally, including in Asia, Europe, and North and South America.
Our products reflect advanced designs in silicon, systems, and firmware and are programmable and highly-scalable. Our expertise in the integration of our digital signal processor (DSP) algorithms with advanced digital, analog, and mixed signal semiconductors enables us to offer high-performance, high-density, and low-power asymmetric DSL (ADSL) and very-high bit rate DSL (VDSL) products. We have released VDSL-based solutions to the market that offer vectoring and bonding to increase speeds over existing telecom carrier copper infrastructure. These products support high speed broadband service providers’ multi-play deployment plans to the connected home while keeping their capital and operating expenditures relatively low compared to competing frameworks. Our broadband DSL products consist of high performance Access and Gateway chips. We have demonstrated: (1) an aggregate downstream and upstream rate of 300 megabits per second (Mbps) over a single pair copper line at a distance of up to 200 meters, and (2) 150Mbps aggregate data rate up to a distance of 500 meters. Our next generation G.fast products for the ultra-broadband market are currently in development and will be designed to achieve speeds up to a gigabit per second (1Gbps or 1,000 Mbps). We also offer a line of multi-mode communications processors (CPs) for RGs that can support a variety of wide area network (WAN) topologies for telecom carriers, wireless carriers, and cable multiple system operators (MSOs), including Ethernet and gigabit Ethernet, passive optical network (PON), DSL, and LTE. In addition to our DSL and RG processors, our product portfolio also includes inSIGHT BXM software (inSIGHT), an innovative software suite of Gateway-based diagnostics and analytics software products.
Our semiconductor customers consist primarily of NEMs, original design manufacturers (ODMs), contract manufacturers (CMs), and original equipment manufacturers (OEMs), and include vendors such as Sagemcom Tunisie (Sagemcom), Askey Computer Corporation (Askey), NEC Corporation (NEC), and AVM Computersysteme Vertriebs GmbH (AVM). Our products are deployed in the networks of telecom carriers such as AT&T Inc. (AT&T), Bell Canada, KDDI Corporation (KDDI), Nippon Telegraph and Telephone Corporation (NTT), and Orange S.A. (formerly known as France Telecom) (Orange). In the last three years, we believe our products were deployed by geography as follows: the Americas, Europe, Asia, and Japan were 9%, 38%, 26%, and 27% in 2012, respectively; 15%, 56%, 18%, and 11% in 2013, respectively; and 21%, 53%, 5%, and 21% in 2014, respectively.
We are a fabless semiconductor company with design and development personnel in Fremont, California, Red Bank, New Jersey, and Bangalore, India and sales and application personnel in Europe, Asia and North America. Our headquarters are in Fremont, California and we had 235 employees globally as of December 28, 2014.
Market Opportunities for Service Providers
The growth of the Internet, the proliferation of advanced digital video and multimedia websites and service offerings, and the advancement of communications infrastructure have fundamentally changed the way people work, shop, entertain themselves, and communicate. According to Broadbandtrends, by 2019 the world’s broadband subscriber base is expected to be approximately 850 million users. We believe a majority of these users will be using DSL either over copper or a combination of copper and fiber. To remain competitive, DSL service providers must deliver higher bandwidth, both downstream and upstream, to enable customers to access exciting, new, and advanced services as well as generate new revenue streams. Today, these services include access to advanced digital media, video communications, and interactive broadband applications, including, among others:

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Over-the-Top (OTT) content;
High definition television (HDTV);
Ultra high definition television (UHDTV);
Internet protocol television (IPTV);
Video on demand (VOD);
Distance learning;
Telemedicine/eHealth;
Sending and receiving advanced digital media such as music, photos, and video;
Video conferencing;
Video surveillance;
Smart energy and home automation;
Streaming video and audio;
Multi-play gateways offering multi-screen viewing in the house;
Online gaming and game hosting; and
VoIP.
To effectively deliver these media-intensive services bandwidth of up to a gigabit per second is necessary. There are two major trends contributing to the demand for increased bandwidth. The first is OTT streaming of premium content, by providers such as Netflix, and the transition to higher resolution content of the 4K UHDTV and 8K UHDTV video formats. While this type of higher resolution content is not yet mainstream, telecom service providers understand the need to prepare their networks in advance for supporting these formats. The second trend is the rapid growth of cloud delivery and storage infrastructure for personal media. As cloud-based applications and storage continue to increase, uploads of user-generated content for access anywhere on any device becomes more important for consumers. We believe the popularity of applications such as Apple’s iCloud service and Google Drive are strong indicators of market direction.
Additionally, users are increasingly creating, interacting with, and transmitting video from their homes over multiple devices, including smart phones, tablets, and other network-connected devices. As a result, the ability to transmit information both upstream and downstream has become equally important to consumers. For example, use of websites like YouTube, Skype, Snapchat, and Instagram have increased bandwidth requirements for both upstream and downstream transmissions from the home as users share and view content. As data and media files increase in size and overall bandwidth demand pushes existing limits, carriers look for ways to expand their capacity and high speed service capabilities to maintain their customer bases and attract new customers.
Service providers can use a variety of network architectures to address this increased demand for bandwidth. DSL connectivity continues to constitute the majority of broadband infrastructure globally. In addition, fiber-to-the-node, fiber-to-the-curb, fiber-to-the-building, fiber-to-the-distribution-point, and other topologies in the hybrid-fiber-copper network, collectively referred to as FTTx, where telecommunication service providers (telcos) lay fiber deeper into the network, but not to the customer’s premises, use copper infrastructure and VDSL2 to cover the “last mile” to connect to the customer’s premises. With the recent ratification of the G.fast standard, the latest node in the evolution of high-speed broadband over copper networks, this trend is expected to continue, enabling telcos to offer speeds reaching a gigabit per second.
While fiber deployments are on the rise globally, many service providers have preferred a hybrid approach that combines fiber backbone networks with copper as the last mile delivery approach. FTTx architecture is chosen because replacing an existing network with fiber is costly and time-consuming, and the connection to customer premises is expensive and not easily scalable. According to telecom analysts quoted by Bloomberg Business Week, the cost associated with wholesale replacement of copper with fiber and extending it all the way to the home (FTTH) can be as much as $4,000 per household. These costs do not include the full cost of Access equipment upgrades and other necessary fiber-related infrastructure improvements, and vary based on geography and telco infrastructure in a given region.
In contrast, using a combination of fiber and copper, in conjunction with VDSL technology, gives service providers a cost effective solution for delivering the required bandwidth to enable today’s media-intensive applications and services in the home. AT&T has estimated that the cost per household of deploying a DSL-based solution in the last mile is approximately $300.
According to the International Telecommunication Union Telecommunications Standard Sector (ITU-T), there are over one billion residential copper lines deployed worldwide today representing a multi-billion dollar infrastructure investment. DSL continues its momentum allowing the world’s top carriers to leverage this existing infrastructure and offer high speed

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internet and value-added services, particularly as new types of FTTN technology deliver on the promise of data rates greater than 100Mbps for long loops, and the promise of the next generation of copper-based infrastructure, G.fast, which will deliver up to 1Gbps service for loops in the range of approximately 100 meters. One of the key market trends in xDSL broadband services is the transition from ADSL to VDSL and VDSL2 with vectoring. Vectoring is the latest technology in the VDSL standard in which the crosstalk noise across adjacent copper lines is canceled, thereby significantly increasing the data throughput supported on those lines. Vectoring technology is quickly becoming an integral part of new VDSL deployments, and is a required feature in the new G.fast standard.
Broadband Competitive Landscape
A key driver for telcos to adopt advanced DSL technologies is the competitive landscape driven by existing cable television infrastructure, where those services are also available locally. The following table illustrates the upstream and downstream speeds each DSL technology offers.
 
DSL Version
 
Max Downstream Speed
 
Max Upstream Speed
ADSL
 
7Mbps
 
800Kbps
ADSL2
 
8Mbps
 
1Mbps
ADSL2+
 
24Mbps
 
1Mbps
SHDSL
 
5.6Mbps
 
5.6Mbps
VDSL
 
55Mbps
 
15Mbps
VDSL2
 
100Mbps
 
100Mbps
VDSL2 with Bonding
 
150Mbps*
 
150Mbps*
Vectored VDSL2
 
200Mbps*
 
100Mbps*
Vectored VDSL2 plus 2-line Bonding
 
400Mbps**
 
200Mbps**
G.fast
 
Up to 1 Gbps***
 
Up to 1 Gbps***
Source: Broadbandtrends LLC
*
Ikanos Internal Testing
**
Ikanos estimates
***
Aggregate data rate (Downstream+Upstream) of 1Gbps
Higher data rates supported by the latest Data Over Cable Service Interface Specification (DOCSIS) standard have enabled MSOs to strengthen their position and grow their subscriber base, particularly in the U.S., in parts of Europe, and in Japan. We believe this dynamic exerts pressure on the telcos to remain competitive by accelerating the adoption of higher speed DSL with vectoring, which should create strong demand for future G.fast capable devices.
A key advantage that DSL service has over cable broadband delivery is that DSL is a dedicated point to point connection offering full bandwidth, while cable users share the available bandwidth over the entire local network medium. As a result, as residential density increases or bandwidth consumption increases, the quality of service for cable users will decline. In contrast, DSL subscribers have dedicated lines and bandwidth, and therefore are not impacted by other subscribers’ broadband usage. While FTTH deployments offer higher bandwidth in the one gigabit per second range, few carriers have undertaken this deployment strategy across the entire customer base because it is very expensive and instead rely on a hybrid strategy of fiber to the node and DSL to the home. Both the ITU-T and Cable Television Laboratories, Inc. (CableLabs) standard bodies have recently pushed forward with their standardization efforts to offer gigabit speeds for telecom and MSOs, resulting in new standards (G.fast for DSL and DOCSIS 3.1 for cable). The technological evolution of a copper-based solution is expected to continue towards 1 Gbps as demonstrated by recent carrier and OEM announcements about G.fast trials taking place around the globe.
Our Target Markets
We address two primary markets with our products: the broadband DSL market and the communications processor market. In these markets, we sell our products primarily to service providers through the OEMs, ODMs, and CMs that supply them, with the exception of inSIGHT, which we expect to sell directly to service providers.
Carrier-focused DSL -- Service providers use DSL-based technology to enable the cost-effective provisioning of advanced digital media, video, communications, and interactive broadband applications including broadcast television, OTT media, HDTV, UHDTV, IPTV, VOD, interactive television, peer-to-peer file sharing, sending and receiving advanced digital

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media, video conferencing, video surveillance, streaming audio and video, online gaming, game hosting, and VoIP, as well as traditional telephony services.
One of the relatively new segments of the DSL market is fiber-to-the-distribution-point (FTTdp). This configuration is typically deployed in scenarios where carriers extend the fiber line very close to a customer's home, but are unable to carry it inside the home for various reasons. The copper loop length in these deployments is typically 200 meters or less, and as such, carriers expect to achieve higher data rates than their typical deployments. Our Vx585, which is currently sampling to customers, and our Vx185 families, which are currently shipping and contain our innovative Fusiv® architecture and a high performance DSL engine, are well suited for offering these higher data rates, capable of reaching an aggregate data rate of 300Mbps up to 200 meters.
Residential Gateways -- Consumers demand a wide array of offerings from their service providers. Consumers want to be able to access OTT, VoIP telephony, IPTV, wireless connectivity, personal video recorder (PVR) services, security, file and photo sharing, gaming, and a host of other advanced offerings. However, service providers face a significant challenge delivering those offerings to multiple devices in the home simultaneously. Not only is there a greater need for bandwidth, but service providers also need to provide an end-user device that has the processing power to handle new services while managing their operating expenses. Our communications processor products help service providers meet this need.
Our Fusiv communications processors enable service providers to efficiently and cost-effectively deliver multi-play services to the residential, small office/home office, and small-to-medium enterprise markets. These devices utilize our unique distributed architecture, which includes multiple accelerator processors (APs) that offload switching, routing, and other tasks from the host central processing unit (CPU). As a result, we provide high levels of processing power for combined advanced services including VoIP, PVR, multi-mode DSL, and security, while supporting best-in-class quality of service (QoS) and wire-speed performance across all local area network (LAN) and WAN interfaces.
Our communications processors are designed to be the heart of the residential gateway which we believe is poised to become the centerpiece of the connected home. Whether the access infrastructure is copper, fiber, or wireless, the residential gateway, and the communications processor that powers it, must have robust performance to distribute bandwidth intensive services with appropriate security and other functionality. We intend to continue to adapt our product lines to address new markets and develop additional products specifically for those markets.
Diagnostics and Analytics Software -- As telcos offer higher speed broadband connectivity and enable more service and functionality to their subscribers, the cost of maintaining and supporting their infrastructure and these new services continue to rise at a rapid rate. As such, the ability to monitor the service delivery network, and identify causes of issues as they arise in real time is becoming more and more important. Ikanos’ inSIGHT software suite is designed to address these issues, enabling telcos to identify line impairments and noise issues quickly and with a high degree of accuracy, often without the need for sending a technician to the customer's home. In addition to identifying and determining the cause of network problems, inSIGHT offers certain software modules that allow telcos to monitor data traffic usage on a subscriber basis, which in turn can enable a range of applications including data-cap monitoring, traffic flow optimization, and parental control.
Ikanos Solutions -- DSL Processors for the Access and Residential Gateways
We have developed semiconductor products using our proprietary design techniques, specific purpose digital signal processor, and advanced mixed-signal design capabilities. Our DSL processors are used in a range of carrier solutions and devices in the connected home and offer the high performance, flexibility, and scalability needed to enable advanced services including multi-play, IPTV, security, eHealth, and home automation.
Our products form the basis of communications systems that are deployed by service providers in their infrastructure, as well as in the home, to enable subscribers to access data, voice, and video. We offer highly programmable products that support the multiple international standards used in broadband deployments worldwide, including ADSL, ADSL2, ADSL2+, VDSL, VDSL2, vectoring, and bonding. In addition, our products are equipped to handle high-speed Ethernet interfaces and provide wire-speed switching performance for FTTH, fixed wireless access, and cable deployments.
Our gateway processors are used in IADs to offer Internet access and other features in the home. Our gateway processors are often used in IADs where multiple features are offered, including multi-screen viewing, streaming, OTT, and WiFi, making integration of these features important. Our Gateway processor features also include an integrated security engine for high performance virtual private networks (VPNs), integrated DSP core for carrier grade voice processing, gigabit Ethernet MAC offload engine for line-rate processing, and WiFi offload acceleration processor for high performance WiFi support, including 802.11ac. These features and functions incorporated into our products had previously been developed by our customers as part of their own systems. By incorporating these system level features, we can enable our customers to reduce costs, accelerate time-to-market, and enhance the flexibility of their overall systems.

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Our Products
We offer multiple product lines that are designed to address different segments of the communications processor and the high-speed broadband DSL markets. Service providers and OEMs choose our semiconductors from these multiple product lines based on a variety of factors such as the design of their networks, the distance between the fiber termination point and the customer premises, the technology that they want to deploy, the services that they want to offer, and system design constraints such as performance, density, and power consumption. By choosing our products for their hybrid fiber/xDSL networks, service providers are able to utilize their existing broadband infrastructure and maximize the return on their capital investments. We continue to invest in research and development efforts to maintain our technology leadership and innovation. We are currently in development of our next generation G.fast Access products. Our product portfolio will continue to include new products that are aligned with major trends and evolving standards.
DSL Processors for a Range of Access and Gateway Devices
Our families of DSL processors are designed for a range of devices that deliver high-speed access to the connected home. We believe our end-to-end solutions, while compliant with industry standards, provide a superior consumer experience and create opportunities for carrier service differentiation.
Fusiv Vx180 is an integrated communications processor that features a MIPS-based CPU core, VoIP capabilities, security, and best-in-class QoS. It includes a multi-mode VDSL2 data pump that is backward compatible to ADSL2+, ADSL2, and ADSL for flexibility across a range of service provider deployments. The product easily integrates with home networking technologies such as 802.11a/b/g/n. The Fusiv Vx180 offers two IFE options. The IFE5 supports up to the 30a profile with 100Mbps upstream and 100Mbps downstream performance. The IFE6 (integrated front end and line driver) supports up to the 17a profile and fall back to ADSL, ADSL2, and ADSL2+. This product family is currently shipping.
Fusiv Vx185 and Vx183 family of chipsets are high performance G.Vector-compliant communications processors designed specifically for the next generation of service gateways in the home. This family of products employs an innovative distributed architecture that incorporates AP engines for data path functions, which is designed to ensure the maximum host CPU processing power is available for customer applications. The Vx185/183 are our currently shipping gateway processors that leverage the advancements from the previous Fusiv family, while adding more processing power and critical interfaces to form the foundation for next-generation residential gateways. The highest performance product in this new family, the Vx185-HP, provides leading edge processing power, high speed wireless LAN interfaces for dual-band concurrent 802.11n and 802.11ac, VoIP, multi-mode bonded DSL, and security, while supporting carrier class QoS and gigabit wire-speed performance. The entire family of Vx185/183 chipsets supports all DSL with a seventh generation single integrated front end (IFE)—IFE7, including ADSL, ADSL2, ADSL2+, and all band plans of VDSL2, and further enhances IPTV and multi-play networks by being fully compliant with the ITU-T G.Vector standard. The Vx185 and Vx185-HP add support for VDSL2 bonding. This product family is currently shipping.
The Vx585 family, currently sampling, maintains the distributed architecture of the Vx185/183, while supporting an even higher level of performance with dual-core CPU architecture and additional, higher performance acceleration processor engines. With a combined DMIPS equivalence of approximately 16,000 for the highest performance member of the family, the Vx585-HP is one of the most powerful integrated DSL Gateway processors in the market. In addition, with the newly introduced offload engines for USB 3.0 and SATA interfaces, this new processor family offers very competitive NAS capabilities for local storage and cloud caching applications. A significant benefit for existing Fusiv customers is that the new chipset reuses the existing software for the Vx185/183, which has already been tested and successfully deployed on various carrier networks, facilitating customer time-to-market. The Vx585 family of processors was previously scheduled for production in 2014, but is currently scheduled to be production ready by mid-2015.
Our VDSL and ADSL chipsets for DSLAMs and other Access equipment include our Velocity family of products, including our Velocity-3 solution with Ikanos NodeScale™. Our Access solution includes the DSL digital signal processors and the analog front end and line drivers, as well, where appropriate, it is coupled with our vectoring engine chip.
The Velocity-1 solution consists of a low-power, full-featured A/VDSL access chipset providing up to 100Mbps symmetrical bandwidth and operating at a sub-one watt per port power consumption. It supports 8a/b/c/d, 12a/b, 17a, and 30a VDSL2 profiles as well as ADSL2+, ADSL2, and ADSL standards. Compliant with the power consumption standards of the European Commission’s Code of Conduct on Energy Consumption of Broadband Equipment, the Velocity-1 chipset utilizes up to 30MHz of spectrum. In addition, the chipset enables what we believe to be exceptional delivery of data-intensive multi-play applications,

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including multi-channel HD IPTV, high-speed data transmission, VOD, and VoIP. This product family is currently shipping.
The Velocity-3 solution is designed to provide full cancellation of crosstalk at the node level and full scalability to address various node sizes from 8 to 384 ports per node, while enabling easier deployment of vectored VDSL. Velocity-3 has one of the best rate-reach performances in the industry. We have demonstrated in carrier labs an aggregate of 150Mbps combined downstream and upstream performance, up to a distance of 500 meters in a 192-port DSLAM reference chassis. Velocity-3 started carrier and OEM trials in 2014 and continues into 2015.
In addition to all the products mentioned above, we also announced our Neos architecture in November of 2013. This architecture is the foundation for our next generation Access and Gateway products, currently in development, that are designed to be scalable, flexible, and capable of supporting the next node in the DSL standard evolution, called G.fast.
Gateway Processors
Our families of multi-mode Gateway processors complement our DSL broadband products and are designed to address a wide range of devices for value-added carrier services and high-speed access to the connected home. The Fusiv Multi-core Vx175 and Fusiv Vx173, and Fusiv Vx575 family, are built on our Fusiv family of processors and extend the range of access technologies and device types that can be supported by our products. These products can support enhanced carrier services and multiple screen support in the home. With these dual-core products, MSOs, PON service providers, and manufacturers can build a wide range of devices including multi-play gateways, energy gateways, mobile broadband routers, optical networking terminals, network attached storage, and others. In the Vx175, the host cores provide 1GHz of processing power, while the Vx173 host cores support 800MHz of host processing power. This family of products can run femtocell stacks, VoIP, and a range of other computational-intensive tasks. In addition to the dual-core MIPS-based processors, the Vx175 and Vx173 also include hardware accelerator processors delivering up to an additional 4GHz of processing power to provide flexibility and improved performance. The accelerator processor implementation enables bi-directional gigabit routing performance while consuming a small fraction of the Fusiv’s processing power. This processor family is currently shipping.
The Vx575 family maintains the distributed architecture of the Vx175/173, while supporting an even higher level of performance with a dual-core CPU architecture and additional, higher performance AP engines. The new high performance USB 3.0 offload engines enable support for LTE performance up to Category 7 (400Mbps). In addition, the integrated SATA acceleration processor allows for high speed local storage access for NAS and cloud caching applications. The reuse of existing software of the Vx175/173, which has already been tested and successfully deployed on various carrier networks, facilitates customer time-to-market. The Vx575 family of processors was previously scheduled for production in 2014, but is now scheduled to be production ready by mid-2015.
Silicon Product Families
The following summarizes the product families and the associated key features:

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Network
Node
Processor Type
Product Family
Key Features
Gateway
Integrated DSL Gateway Processor
Vx58x
Dual-core, up to combined 2.4GHz, A/VDSL 30a, VDSL2 vectoring & bonding, up to 11 GHz of Fusiv acceleration processors, USB 3.0, SATA
Vx185-HP
Single-core at 600MHz, A/VDSL 30a, VDSL2 vectoring & bonding, Fusiv accelerator processors, SATA, security
Vx185
Single-core at 500MHz, A/VDSL 30a, VDSL2 vectoring & bonding, Fusiv accelerator processors, SATA, security
Vx185-SE
Single-core at 500MHz, A/VDSL 30a, Fusiv accelerator processors, security
Vx183
Single-core at 400MHz, A/VDSL 30a, Fusiv accelerator processors
Multi-Mode Gateway Processor
Vx57x
Dual-core, up to combined 2.4GHz, up to 10 GHz of Fusiv AP, USB 3.0, SATA (expected to reach production in the second half of 2014)
Vx175
Dual-core at combined 1GHz, Fusiv accelerator processors, SATA, security
Vx173
Dual-core at combined 800 MHz, Fusiv accelerator processors
Access
DSL Processor
Velocity-1
100Mbps symmetrical bandwidth, 8, 12, 17, and 30 MHz VDSL2 profiles
Velocity-3
150/50Mbps, Ikanos NodeScale vectoring and bonding, full crosstalk cancellation across all tones and all ports, scalable architecture supporting up to 384 channels per node
inSIGHT Monitoring and Diagnostic Software
inSIGHT represents an expansion of our product portfolio by offering software as a product sold directly to carriers. While competing products can identify customer problems and offer coarse solutions, our diagnostic tool finds the source of the problem to create actionable recommendations that reduce carrier operating expenses and improves the quality of the end customer experience. Through its unique capabilities, inSIGHT helps isolate the cause of outages and noise issues, enables customer self-service, reduces operating expenses from service calls, and locates service upgrade opportunities. inSIGHT consists of advanced DSP algorithms that leverage our underlying Gateway architecture to identify and address two types of issues:
Line impairments—A large portion of the service disruptions that result in technical support calls are a result of impairments in the subscriber’s copper line. inSIGHT is able to detect these impairments, which include wire cuts (either inside or outside the house), bridge taps, corroded cables, micro filter issues, and incorrect cable types.
Noise interference—There are a variety of noise sources inside or near the home that could result in interference on the copper line, adversely impacting the bandwidth and therefore the consumer experience. These sources could be generated by home appliances and equipment, such as a treadmill or a power line modem. Depending on the source, the noise type could be narrow-band, wide-band, or impulse. inSIGHT has the ability to detect and identify the type of noise, which is critical before the source can be identified.
In addition to the above two main categories, the inSIGHT feature set has been expanded to include analytics capabilities related to the data traffic at subscriber homes. Our inSIGHT monitoring and diagnostic software is currently in field trials and is now scheduled to be ready for production in the second half of 2015.
Key Features of Our Solutions
Ikanos NodeScale Vectoring and Bonding Technology. One of the challenges in deploying very-high-speed Internet access over existing copper infrastructure is the degradation that occurs as a result of crosstalk between coincident copper wire pairs. Each wire can intermittently interfere with neighboring wires, thereby introducing noise, severely limiting line quality, throughput, and overall VDSL performance.
Our Ikanos NodeScale vectoring solution analyzes the crosstalk and interference environment in real time and creates a unique set of compensation signals that effectively eliminates both. Our Ikanos NodeScale vectoring chipset solution cancels noise across an entire network node and can scale to up to 384 ports in a single chassis, meeting the deployment requirements of the world’s leading service providers. In addition, our unique architecture also enables any-port to any-port bonding configuration within the DSLAM, thereby bringing additional flexibility to carriers when it comes to provisioning ports for

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their subscribers. Bonding allows a carrier to use two or more pairs of copper lines, when available, to offer higher overall throughput (typically twice the bandwidth achieved with a single pair) to the subscriber and more efficient use of the DSLAM.
Advanced bonding capabilities. Service providers can utilize two pairs of twisted copper wires and offer their customers bonded DSL technology. Bonding technology leverages the existing copper infrastructure and allows for increased data rates, longer loop lengths, and increased reliability. Our flexible xDSL DSP core architecture is capable of supporting 17MHz bandwidth, 2-pair bonded configurations that enable cost-optimized products for fiber-to-the-building (FTTB), FTTN, and Access deployments. This enables carriers to achieve speeds of over 200Mbps at 500 meters when vectoring with our Ikanos NodeScale solution.
High-performance communications processing. The delivery of high-quality video and other services requires a high-performance processor to handle the digital data streams that travel in both the upstream and downstream directions from the subscriber’s home. Common data processing functions include routing of IP-based packets, providing voice, video, and data streams with different classes of priority within the system and implementing VoIP, network security, and wireless LAN functionality. Our products include high-performance semiconductors that are designed to perform functions at rates of up to 1Gbps, which addresses both the latest generation of LAN and WAN technologies. We believe the combination of our high-performance communications processing products and our broad range of VDSL2 and ADSL2+ PHY products provides us a competitive advantage.
Integrated analog technology. Our analog products used in our DSL solution perform high-precision, power-efficient analog-to-digital and digital-to-analog signal conversion as well as various other functions necessary to interface between the DSP and the physical copper transmission medium. Our integrated analog technology includes programmable transmit and receive filters, low-noise amplifiers, and a power-optimized line driver with synthesized impedance and hybrid cancellation. Our analog technology enables systems to increase performance, adapt to noisy signal conditions, significantly reduce power consumption, and be programmed for multiple international standards. Additionally, our analog technology is highly integrated and eliminates a large number of discrete components used in other solutions. This critical feature reduces costs for our OEM customers and increases the number of connections, or ports, achievable in OEM systems.
Highly programmable platform and integrated software. The broadband service delivery industry is very competitive, with every player in the ecosystem, from the ODM to the carrier, looking for ways to differentiate its products or services. Our processor software allows for increased flexibility and reuse in the design of modems, Gateways, and other devices, which we believe allows our customers to expedite time-to-market for their new generations of products. The advanced Linux-based software we utilize enables NEMs to jump start their development processes. Our software incorporates routing, bridging, a complete VoIP stack, packet classification, marking, bandwidth management, and fast-path assisted QoS functions designed to deliver better performance and drivers. Our software enables manufacturers to reduce product development cycles, rapidly prototype, and quickly enter production with products ranging from simple modems to sophisticated gateways. Our flexible software architecture provides OEM customers with the ability to design this equipment with a variety of transport methodologies—or multiple methodologies—including Ethernet, xDSL, fixed wireless gateways, and PON. Using industry standard application programming interfaces (APIs) we enable our OEM customers and independent software design house partners to port their own unique applications to our hardware platform, without having to develop the low-level operating system functions or device-driver optimizations. This level of separation and hardware abstraction allows us to incorporate our expertise and know-how in the underlying architecture, while in parallel facilitating application customization and feature differentiation for our partners and customers.
High-performance DSP and advanced algorithms. Communications algorithms are sophisticated techniques used to transform signals between digital data streams and specially conditioned analog signals suitable for transmission over copper lines. It is critical that the DSP execute advanced algorithms in real time in order to reliably transmit and receive signals at high-speed transmission rates. We have designed high-performance, low-power usage DSPs for high transmission rate applications that utilize our proprietary integrated firmware. Our processing algorithms enable reliable transmission and recovery of signals at high-speed transmission rates over the existing copper lines even under noisy signal conditions. We believe the combination of speed and programmability of our DSP and our advanced algorithms provides us an important competitive advantage. In addition, our high performance DSPs play a crucial role in our new inSIGHT software that assists carriers in identifying line faults and noise patterns inside or near our Gateway devices. Using our high performance DSP engines and unique fault and noise detection algorithms, we are able to identify line integrity issues and noise sources locally on the Gateway devices, instead of transmitting a large amount of raw data to the cloud for network-based processing.
Flexible network interfaces. Service providers globally use multiple communication protocols for transmitting data, voice, and video over their networks. Such protocols include Asynchronous Transfer Mode (ATM) and Internet Protocol (IP). Our semiconductors have the capability to support multiple network protocols and interfaces, including ATM and IP, to a variety of different OEM systems. For example, service providers in Japan and Korea typically deploy IP-based line cards and

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platforms that use our semiconductors, while service providers in Europe and North America have historically deployed ATM-based systems and are in the process of migrating to IP-based systems.
Key Benefits of Our Technology for Our Customers
Enabling the delivery of a broad range of high speed broadband services. Our products provide high-speed transmission rates of up to 300Mbps, expected to grow to gigabit speeds with our next generation G.fast products, downstream and upstream combined, on a single copper pair of telephone lines. These transmission rates enable service providers to deliver a broad range of enhanced services to customers, including advanced digital content delivery, communications, and interactive broadband applications, such as broadcast television, HDTV, IPTV, VOD, interactive television, peer-to-peer file sharing, sending and receiving advanced digital media, video conferencing, video surveillance, streaming audio and video, online gaming, game hosting, and VoIP, as well as traditional voice telephony services.
Improving time-to-market with programmable systems-level products. Our products are programmable through our integrated firmware and standard APIs, which enables our customers to provide a single line card or residential gateway implementation to support multiple international standards. We believe our systems-level capabilities enable us to design our semiconductors to accelerate our customers’ time-to-market. Because of the programmability of our products, service providers can deliver multiple service packages and offer tiered pricing for these packages.
High-performance transmission over existing infrastructure. We believe our semiconductor solutions reduce service providers’ capital expenditures and costs, because they enable transmission of signals at high-speed rates over existing copper lines. As a result, service providers can leverage their previous investments in their access network infrastructure to deliver advanced revenue-generating services to customers. Our products are also compatible with service providers’ existing systems, enabling these service providers to add line card upgrades without having to completely replace existing hardware networking systems, thus lowering upfront capital expenditures and installation expense, decreasing service disruption, and reducing inventory costs. Moreover, we offer broadband semiconductors with combined ADSL2+ and VDSL2 support, thereby providing our customers with a convenient single source from which to purchase a wide range of broadband access semiconductors that are upgradeable in the field.
Turning technology into solutions for carriers. We strive to ensure that our current and future products and services strategy aligns with key market trends. One of the major trends in the industry today is the transition from ADSL to VDSL and VDSL with vectoring to offer higher bandwidth. As a result, carriers are focusing on deploying vectoring both in greenfield (new) and brownfield (existing) deployments. Our product portfolio encompasses a complete vectoring deployment strategy for carriers that is intended to address these practical issues. We expect that our unique Ikanos NodeScale vectoring capabilities will offer an industry-leading rate-reach performance so that carriers can maximize their return on investment. We also offer a vector-friendly software upgrade for the existing installed base of Gateway products that is downloadable in the field to ensure successful brownfield deployments.
End-to-end products. We offer semiconductors for both Access and Gateway to deliver seamless interoperability. Our products are compliant with industry standards, and we believe the availability of our end-to-end products offers carriers opportunities for added differentiation. Our Access and Gateway products, including our Ikanos NodeScale vectoring platform, are compatible with products of other vendors.
Proven technology. To date, we have shipped nearly half a billion ADSL and VDSL CPE and CO ports. Our products are deployed or are in field testing at leading service providers worldwide such as AT&T, Belgacom Group (Belgacom), Bell Canada, Koninklijke KPN N.V. (KPN), KT Corporation (formerly, Korea Telecom), NTT, Orange, Swisscom AG, Telecom Italia S.p.A., and Telefónica, S.A. Our semiconductors have been designed into systems offered by leading network OEMs including: Alcatel-Lucent, Arcadyan Technology Corporation, Askey, AVM, Cisco Systems, Inc., Flextronics Manufacturing (H.K.) Ltd. (Flextronics), Motorola, Inc., Pace plc, Paltek Corporation (Paltek), Sagemcom, and Xavi Technologies Corp. Our OEM customers and their client service providers conduct extensive system-level testing and field qualification of new semiconductors (generally over a six- to 18-month period) to ensure that they meet performance, standards compliance, and stability requirements before approval for mass deployment.
Reducing operating expense, improving consumer experience. Operational cost saving and reducing subscriber churn are two key concerns for carriers. Carriers have the opportunity to address both of these at the same time with our new inSIGHT software platform. The added visibility provided through timely and accurate reporting of service and continuity issues enables carriers to identify service problems faster and reduce resolution times, which translates into operational cost savings for the carriers and better customer experience. Competing solutions in the market today typically rely on a “cloud-based view” of the home to try to identify and solve line impairment and noise issues, which limits the accuracy and frequency of the information. With inSIGHT, the detection moves into the home, resulting in much higher accuracy in identifying and reporting issues, whether inside or near the home, which in turn translates to a faster time to resolution for carriers. While the

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specifics of cost savings vary from carrier to carrier, and region to region, we estimate that inSIGHT can create up to thirty dollars of annual cost savings per subscriber.
Our Strategy
Our objective is to become the leading provider of semiconductor products for the universal delivery of next-generation broadband services that transform the way people work, live, and play. We intend to continue to develop highly programmable solutions that deliver multi-play and interactive services over broadband using copper telephone lines and fiber that distribute these services to the connected home. The principal elements of our strategy are:
Continuous innovation. We have achieved a leadership position in deploying semiconductor solutions for the high-speed broadband market as well as the multi-play residential gateway markets. With respect to discrete multi-tone (DMT) based VDSL, we have been a leader in the development of standards for broadband over copper lines and our products are compliant with those standards. We continue to develop new technologies, such as bonding, Ikanos NodeScale vectoring, and inSIGHT, to extend and monitor our customers current broadband infrastructure as well as offer new customers cost-effective products to deliver high-speed broadband. Our solutions enable speeds of up to 300Mbps aggregate throughput on a single copper pair, expected to reach 1 Gbps with our next generation G.fast solutions, which will allow carriers to offer a wide variety of multi-play services. We intend to continue to drive the development of new standards for FTTB, FTTN, FTTdp, FTTH, and home networking through our involvement in a range of industry groups and continue to develop innovative products for these markets.
Key Ecosystem Partnerships - Strategic Relationship with Alcatel-Lucent. On September 29, 2014, we announced a collaborative arrangement with Alcatel-Lucent on ultra-broadband products. We anticipate that the collaboration will have a material positive impact on our future operations. Our expectation is that by leveraging the innovation and technical expertise of both companies, we will be able to offer differentiated ultra-broadband products, including G.fast solutions, to our entire customer base targeting the growing gigabit broadband market in a range of port configurations and deployment scenarios. As telcos plan their transition to VDSL, vectoring, and G.fast for faster broadband service to their subscribers, we believe the timing for these ultra-broadband products is aligned with the needs of the market.
We executed a term sheet which outlines certain requirements, deliverables, milestones, payments, and other funding under the collaborative arrangement as well as certain pricing terms pursuant to which Alcatel-Lucent would purchase products from us. While the term sheet is, for the most part, binding, the terms of the collaboration are expected to be further detailed in one or more definitive agreements, and entry into such definitive agreements is one of several conditions necessary in order for us to receive almost all of the payments and other funding.
Alcatel-Lucent and Ikanos have a history of collaboration dating back to the mid-2000’s, where the Alcatel-Lucent 7330 ISAM product used an Ikanos (Conexant) chipset for deployments in a wide range of global carriers, including AT&T and Bell Canada. Many of those devices are still in use today. We believe that our new collaboration with Alcatel-Lucent will be an opportunity for us to renew our relationship as a key supplier to Alcatel-Lucent, and will strengthen our position in the xDSL Access market.
We believe the collaboration will enable us to increase our share in the Access market. Should Alcatel-Lucent decide to deploy products resulting from our collaboration, we believe our Gateway products will also benefit as a result of carrier interest in minimizing interoperability risk when deploying new gear in consumer homes. In addition, end-to-end products from a single silicon vendor also provide an additional opportunity for customized features which allow carriers to differentiate the services they offer their customers.
Expand our product portfolio for new markets. Today, our products target broadband DSL deployments and unique services in the home, as well as software to monitor and maintain those deployments. Our communications processors can support a wide range of broadband access, including cable, wireless broadband, PON, Ethernet, and gigabit Ethernet. We also have products that complement these offerings and provide enhanced voice processing, wireless networking, and other capabilities. As consumer demand for higher bandwidth continues to increase, we are aligning our product roadmap to meet these demands. As such, we have demonstrated, using our existing products, 300Mbps aggregate bandwidth on a single copper pair to address carrier interest in short-loop FTTdp deployments. This also provides a stepping stone towards our next generation G.fast products, which will be designed to support a range of speeds up to 1 Gbps, depending on distance and line quality. We expect to expand our product portfolio to include additional broadband technologies to address incremental market opportunities, as well as add new communications processors and broadband DSL devices to further strengthen our position in core markets. In addition, we plan to expand our capabilities in enabling improved consumer quality of experience through inSIGHT and other similar future products.

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Capitalize and expand on our existing service provider and OEM relationships. We believe that our close relationships with service providers and OEMs provide us with a deep understanding of their needs and enable us to continue to develop customized technology to meet their requirements. We have shipped nearly half a billion ports to date and intend to continue to capitalize on our close relationships with leading service providers and OEMs to facilitate the deployment of our products. In addition, we believe our relationships with carriers will expand as a result of selling inSIGHT directly to carriers.
We believe several key geographic areas that will be important in the transition from ADSL to VDSL, and therefore, key target areas for our business include India, China, South America, and Australia. We are working with local carriers, as well as key ecosystem participants in these markets to establish our value proposition and work to ensure that we will be a part of the expected growth in these geographies over the next several years.
In addition to our expansion efforts on the DSL side, we are also working on expanding our presence in other market segments deploying LTE networks by offering customers our gateway processors. Our ability to support both DSL and non-DSL networks is very attractive to OEMs who want to leverage a single platform to address multiple networks for their value-added services.
Customers and Service Providers
Customers
The markets for systems utilizing our products and services are mainly served by large OEMs, ODMs, and CMs. We market our products to service providers, but we primarily sell our products to equipment suppliers, with the exception of inSIGHT, which we will sell directly to service providers. In the past, we have derived a substantial portion of our revenue from sales to a relatively small number of customers. While we expect this trend to continue in the short-term, we are working to expand our customer base. In addition, expanding our product portfolio with new products including inSIGHT, the Vx585 family, and Velocity-3 should also help reduce our reliance on a small number of customers.
During 2014 Sagemcom, Amod, and Paltek accounted for 29%, 22%, and 16% of our revenue, respectively. During 2013, Sagemcom, Askey, AVM, and Paltek accounted for 24%, 14%, 11%, and 10% of our revenue, respectively. During 2012, Sagemcom, Askey, and Flextronics accounted for 19%, 13%, and 12% of revenue, respectively. (Amod is a distributor whose purchases from Ikanos are contracted to its end customer Askey while Askey is a contract manufacturer for Sagemcom.)Historically, substantially all of our sales have been to customers outside of the United States. Sales to customers in Asia accounted for 60% of revenue in 2014, 57% of revenue in 2013, and 68% of revenue in 2012. Sales to customers in Europe and North Africa accounted for 38% of revenue in 2014, 39% of revenue in 2013, and 29% of revenue in 2012.
We have a growing design win pipeline. We define a design win as having achieved one of the following: (i) a potential customer who has signed a memorandum of understanding or definitive agreement with us indicating their intention to design our product into its product portfolio; (ii) a customer has placed a prototype purchase order with us for at least 100 units; or (iii) a customer has provided us with a written intent to award a design to us with a specific carrier or end customer. Although not all design wins are expected to reach production, for the Vx185/3 and Vx175/3 processors, we have secured over 20 design wins, with half expected to reach production during the latter half of 2015. We also have several alpha customers expecting to sample our Vx58x/Vx57x processors when available.

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Telecommunication Service Providers
We work directly with various major service providers and their OEMs in connection with the optimization of our technology for trials or mass deployment into the service providers’ networks. Our OEM customers have sold products that include our semiconductors to major service providers, including:
 
 
AT&T (North America)
KPN (The Netherlands)
 
Belgacom (Belgium)
Nippon Telegraph & Telephone Corporation (Japan)
 
Bell Canada (Canada)
Swisscom (Switzerland)
 
Bouygues Telecom (France)
Telecom Italia (Italy)
 
Orange (France)
Telefónica (Spain)
 
KT Corporation (Korea)
KDDI (Japan)
Service and Support
To accelerate the design and development of our customers’ systems and the qualification and mass deployment of our technology, we have a Product Applications Engineering team and a Field Application Engineering team. These teams work closely with the OEMs as well as directly with the service providers. Applications engineers have expertise in hardware and firmware and have access to a variety of expertise within our company to ensure proper service and support for our OEM and service provider customers.
Our service and support involves multiple stages, including working with service providers as they evaluate our technology through the utilization of our reference platforms and optimizing our technology to meet the individual service providers’ performance and other requirements.
In parallel, our engineers help our customers with the design and review of their system designs. Our application engineers and field application engineers help customers’ engineers design their systems by providing the necessary reference designs, Gerber files, schematics, datasheets, sample firmware, and other documentation. By doing this, we assist our customers and the service providers they serve in meeting their deployment requirements. Once the hardware incorporating our chipsets is built by our customers, we work closely with the customers’ engineers to integrate our firmware into their systems through site visits and extensive field testing, which may include inter-operation with legacy equipment already deployed. This entire qualification cycle may take six to 18 months depending upon the region, service provider requirements, and deployment plans.
Sales, Business Development, and Product Marketing
Our sales and marketing strategy is to achieve design wins with leading suppliers and mass deployment with service providers worldwide. We consider a design win to occur when an OEM notifies us that it has selected our products to be incorporated into its system. We refer to our sales and marketing strategy as “direct touch,” as we have significant contact directly with the customers of our OEMs, the telecommunication service providers. We believe that applications support at the early stages of design is critical to reducing time to deployment and minimizing costly redesigns for our customers and the service providers. By simultaneously working with our customers and the service providers, we are able to use the pull of service provider network compatibility and interoperability to push design wins with our customers, which is further augmented by our support and service capabilities.
We also invest in establishing partnerships with the members of the ecosystem. These partners include ODMs, independent software design houses, and other silicon vendors with complementary technology we use in our reference designs. This investment in ecosystem partners is an important part of our strategy to provide our customers with total solutions that are as close to deployment-ready as possible, which minimizes time and effort for our customers.
We market and sell our products worldwide through a combination of direct sales and third-party sales representatives and distributors. We utilize sales representatives and distributors to expand the reach of our sales team. We have strategically located our sales, business development, and marketing personnel, field applications engineers, and sales representatives near our major customers in China, Europe, Japan, Korea, Taiwan, and the United States.
Our product marketing teams focus on our product strategy and management, product development roadmaps, product pricing and positioning, new product introduction and transition, demand assessment, competitive analysis, and marketing communications and promotions. Our marketing teams are also responsible for ensuring that product development activities, product launches, channel marketing program activities, and ongoing demand and supply planning occur on a well-managed,

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timely basis in coordination with our development, operations, and sales groups, as well as our customers. Our marketing teams are also responsible for organizing and managing our participation in trade shows, conferences, and relevant thought leadership events.
Competition
The semiconductor industry generally and the broadband communications market specifically are intensely competitive. In the xDSL and communications processing markets, we currently compete or expect to compete with, among others, Broadcom Corporation, Cavium, Inc., Cortina Systems, Inc., Huawei, Lantiq Deutschland GmbH (which recently announced a definitive merger agreement with Intel Corporation), Marvell Technology Group Ltd., M/A-COM Technology Solutions Holdings, Inc., PMC-Sierra, Inc., Metanoia Communication, QUALCOMM Incorporated, Realtek Semiconductor Corp., Sckipio Technologies, and MediaTek Inc. We may not be able to compete effectively against current and potential competitors, especially those with significantly greater resources and market leverage. Our competitors may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion, and sale of their products than we can. In addition, new competitors or alliances among existing competitors could emerge. Competition has resulted, and is expected to continue to result, in declining average selling prices for our products and market share. However, we believe that our products are not easily interchangeable with the products of our competitors, due to the level of collaboration in product design and development that is typically demanded by our customers from the earliest stages of development. But nevertheless, we must constantly maintain our technology developments in order to continue to achieve design wins with our customers.
We also consider other companies that have access to broadband or communications processing technology as potential future competitors. In addition, we may also face competition from newly established competitors, suppliers of products based on new or emerging technologies, and customers who choose to develop their own technology.
While the competitive landscape could continue to get more crowded, we believe that we are well positioned to compete favorably in the market, given our strong brand, our existing OEM and carrier relationships, our patent portfolio, our strong engineering team that continues to bring innovative and leading edge technology to market in products such as Velocity-3 and inSIGHT. In addition to performance, we believe our unique architectural and algorithmic qualities differentiate our solutions, resulting in superior scalability, robustness, and ease of deployment. By utilizing our inSIGHT diagnostic and monitoring capabilities, we believe our chipsets and software are uniquely differentiated from other silicon vendors in bringing significant operational cost savings to carriers and improved quality of experience to the subscriber.
Research and Development
Our research and development efforts are focused on the development of advanced semiconductors and related firmware. We employ experienced engineers who have significant expertise in interactive broadband and communications processing technologies. These areas of expertise include communication systems, system architecture, digital signal and communications processing, data networking, analog design, digital and mixed signal, very large scale integration development, firmware development, reference boards, and system design. In addition, we work closely with the research and development teams of our OEM customers and service providers. Our research and development expense was $48.1 million in 2014, $51.1 million in 2013, and $57.5 million in 2012.
Manufacturing
We are a fabless manufacturing company that utilizes our foundry partnerships to produce our semiconductor products, allowing us to focus our resources on value-added chip integration, intellectual property and software development, and advanced reference designs for the system-level solutions we provide. This manufacturing model provides us with access to the latest semiconductor processes, leveraging industry standard learning curves for cost, performance, and yields, and reduces our overall capital investment, as well as operating and support costs.
Our integrated circuits use semiconductor lithography nodes from 350nm silicon germanium (SiGe) for our line drivers, to 65nm Mixed Signal Complementary Metal Oxide Semiconductors (CMOS) for our analog front end products, to 40nm CMOS for our VDSL DSP and baseband product solutions. Development efforts are underway on our next generation CPE and CO products that will utilize the state of the art 16nm FinFET technology node. We have adopted a “fast follower” manufacturing strategy designed to ensure that each technology node is fully debugged and matured before committing our designs to production. We believe this approach reduces our cost associated with intellectual property development, test chips, design rule updates, and circuit re-spins, as well as the overall debugging efforts indicative of new process deployments.
We utilize the following third-party foundry partners:
Taiwan Semiconductor Manufacturing Corporation (TSMC) in Taiwan
Global Foundries, Inc. (formerly Chartered Semiconductor Manufacturing) in Singapore

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Tower Semiconductor Ltd. in California and Israel
Silterra Malaysia Sdn. Bhd. in Malaysia
For our backend assembly and test, we use both turn-key as well as more traditional two-stage manufacturing business models. These business models allow us the flexibility react to market demand fluctuations, and provide a dual source capacity model for assurance of supply to our customers. Our turn-key product flows provide short manufacturing cycle times and support final manufacturing of our products from wafer sort, to assembly, test, and finishing, including both shipping and warehouse functions. Two-stage product flows allow us to optimize our cost for both assembly and test, independently, while maintaining our ability to provided capacity and flexibility for our manufacturing demands.
We utilize the following third-party backend manufacturing partners:
Advanced Semiconductor Engineering, Inc. (ASE) in Taiwan and Singapore
Amkor Technology Inc. in the Philippines
King Yuan Electronics Co., Ltd. (KYEC) in Taiwan
STS (Science Technology Society) Semiconductor in Korea
Operations
In 2012, we expanded our outsourcing model by transitioning a majority of our day-to-day supply chain management, production test engineering, and production quality engineering functions (Master Services) to eSilicon Corporation (eSilicon) under a Master Services and Supply Agreement (Service Agreement). Pursuant to the Service Agreement, which will expire in October 2015, we place orders for our finished goods with eSilicon, who, in turn, contracts with wafer foundries and the assembly and test subcontractors and manages these operational functions for us on a day-to-day basis.
We maintain direct foundry and backend manufacturing support for our new product development efforts, including product and test engineering, as well as supply chain management designed to ensure timely new product releases and production ramps. This direct support allows us to work directly with our manufacturing partners to increase yields, lower manufacturing costs, and improve overall product quality faster than would be afforded alone. We maintain all responsibility for our manufacturing strategy, product flow, factory mix, customer quality, and capital purchasing decisions.
All our products are tested to ensure compliance with their respective data sheets after they are packaged or assembled. We ensure optimized test capacity and cost by purchasing some testers directly and consigning these testers to our manufacturing partners. Since these testers are industry standard platforms and complement the existing tester installed base of our manufacturing partners, there is great synergy and leverage for maintenance and support costs, keeping our overhead at a minimum. The use of consigned standard testers provides the lowest overall cost for test, while maintaining common hardware that can be used directly with our partner’s non-consigned equipment as needed for extra capacity.
Quality Assurance
Our quality assurance program begins with the design and development processes of our integrated circuits, hardware (reference boards), and software/firmware as well as our system level verification efforts. Our integrated circuit designs are subjected to extensive circuit simulation under extreme conditions of temperature, voltage, and processing before being committed to fabrication and we follow industry standard JEDEC and customer required reliability and qualification processes to ensure compliance with industry norms. Our software/firmware goes through formal testing per specified test plans and customer requirements.
We pre-qualify each of our third party manufacturing subcontractors and conduct periodic quality audits. We monitor foundry production to ensure consistent overall quality, reliability, and yield levels. All of the independent foundries and assembly and test subcontractors have been awarded ISO 9000 certification as well as being certified under other internationally accepted quality standards. In August 2006, we were certified to ISO 9001 standards and passed an ISO 9001:2008 surveillance audit in July 2013.
Environmental Regulation
We assess the environmental impact of our products to international standards. The manufacturing flows at all the subcontractors used by us are registered as ISO 14000, the international standard related to environmental management. We believe our products are compliant with the European Union’s Restriction of Hazardous Substances Directive (RoHS) and that materials are available to meet these emerging regulations.
Intellectual Property

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Our success and future growth will depend on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark, and trade secret laws, contractual provisions, and licenses to protect our intellectual property. We also attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees, and consultants, as well as through other security measures.
As of December 28, 2014, we had over 310 patents issued in the United States and more than 44 companion patents issued in foreign jurisdictions, primarily in Japan, China, Taiwan, and the United Kingdom. We also have more than 52 patent applications pending in the United States and approximately 129 patent applications pending in foreign jurisdictions. Our patent and patent applications cover features, arts, and methodologies employed in each of our existing product families, including G.fast, FTTdp, VDSL with vectoring (G.Vector), VDSL2, ADSL2+, ADSL2, ADSL, and SHDSL, as well as inSIGHT. The expiration dates range from 2015 through 2032. We continue to actively pursue the filing of additional patent applications.
We claim copyright protection for the documentation used in our products and for the firmware and software used in our products. Ikanos Communications, Ikanos and the Ikanos logo, the “Bandwidth without boundaries” tagline, Fusiv, inSIGHT BXM, Ikanos NodeScale, Neos, and Ikanos Velocity are among the trademarks or registered trademarks of Ikanos Communications.
Employees
As of December 28, 2014, we had a total of 235 full-time employees, of whom 178 were involved in research and development and 54 in sales, marketing, operations, finance, and administration. None of our employees is represented by a labor union. We have not experienced any work stoppages and believe that our relationship with our employees is good.
Backlog
Our sales are made pursuant to short-term purchase orders which, we believe, are not a reliable indicator of quarterly sales and sales trends.
Executive Officers of the Registrant
The following table sets forth the names, ages, and positions of our executive officers as of February 20, 2015:
Name
Age
Position
Omid Tahernia
54
President and Chief Executive Officer
Dennis Bencala
59
Chief Financial Officer and Vice President of Finance
Debajyoti Pal
56
Chief Technology Officer and Senior Vice President
Jim Murphy
60
Vice President, Worldwide Human Resources
Stu Krometis
55
Vice President, Worldwide Sales
There are no family relationships among any of our directors and executive officers.
Omid Tahernia has served as our President and Chief Executive Officer, and a member of our Board of Directors, since June 2012. Prior to joining Ikanos, Mr. Tahernia served as President and CEO of Tilera Corporation from October 2007 to October 2011. Mr. Tahernia was with Xilinx first as Vice President and General Manager of the DSP Division from July 2004 to June 2006 and later as Vice President and General Manager of the Processing Solutions Group from June 2006 to September 2007. Mr. Tahernia was employed by the Motorola, Inc.’s Semiconductor Group as Vice President and Director of Strategy and Business Development from June 2003 to July 2004 and Vice President and General Manager of the Wireless & Mobile Systems Division from December 1998 until June 2003. Mr. Tahernia holds a B.S.E.E. from Virginia Polytechnic Institute & State University, and an M.S.E.E. from Georgia Institute of Technology.
Dennis Bencala has served as our Chief Financial Officer (CFO) and Vice President of Finance since June 2010. Prior to joining Ikanos, Mr. Bencala was CFO of the Renewable Energy Test Center from October 2009 to June 2010. Mr. Bencala held successive positions at SiRF Technology Holdings, Inc. (SiRF) beginning with Corporate Controller in January 2000 and becoming Senior Director, Investor Relations and Business Development, in August 2007. He became acting CFO at SiRF in August 2008 and was CFO from September 2008 until October 2009. Prior to joining SiRF Mr. Bencala served as Corporate Controller at ScanVision, Inc., a developer of image sensing semiconductor products from June 1995 to December 1999. Mr. Bencala holds a B.S. in Finance from San Diego State University.
Debajyoti Pal has served as our Chief Technology Officer since August 2009. From April 2004 until August 2009, Dr. Pal was Chief Technology Officer and Executive in Residence at Tallwood Venture Capital. Prior to joining Tallwood,

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Dr. Pal founded Telicos Corporation in May 2002 and was President until April 2004. Dr. Pal was Vice President of Technology & Product Development of Virata Corporation and GlobespanVirata, Inc. from August 2000 until April 2002. In May 1998 he founded Excess Bandwidth Corporation and was Chief Technology Officer and Vice President Engineering until August 2000 when it was acquired by Virata. Dr. Pal received a bachelor’s degree in electronics and electrical communication engineering from the Indian Institute of Technology Kharagpur, an M.S.E.E. degree from Washington State University, and a Ph.D. in electrical engineering from Stanford University. Dr. Pal is a Fellow of the Institute of Electrical and Electronics Engineers (IEEE).
Jim Murphy has served as our Vice President, Worldwide Human Resources since June 2010. Prior to joining Ikanos he served as Vice President, Human Resources for North America and Asia Pacific for CSR plc from August 2009 until May 2010. From March 2006 until August 2009, Mr. Murphy was Vice President, Human Resources for SiRF. Prior to joining SiRF, Mr. Murphy was Senior Human Resources Director for North America at LSI Logic Corporation. Mr. Murphy holds a B.A. from Lawrence University and an M.B.A. from the University of Michigan.
Stu Krometis has served as our Vice President, Worldwide Sales since May 2013. Prior to joining Ikanos, he was Vice President, Sales APAC for Cavium, Inc. from July 2012 until May 2013. Mr. Krometis joined Cavium in October 2005 and served as Senior Director of Global Accounts and EMEA until July 2012. Mr. Krometis was regional sales manager at Applied Micro Circuits Corporation from December 2000 until May 2005. Mr. Krometis holds a B.B.A. in Business Administration from Roanoke College.
Where Can You Find Additional Information
With respect to the statements contained in this Annual Report on Form 10-K regarding the contents of any agreement or any other document, in each instance, the statement is qualified in all respects by the complete text of the agreement or document. You may inspect a copy of the reports and other information we file without charge at the Public Reference Room of the Securities and Exchange Commission (SEC) at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain copies of all or any part of this Annual Report on Form 10-K from such offices at prescribed rates. You may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy, and information statements, and other information regarding issuers, including our information which we file electronically with the SEC.
We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), and, in accordance therewith, file periodic reports, proxy statements, and other information with the SEC. Such periodic reports, proxy statements, and other information are available for inspection and copying at the Public Reference Room and website of the SEC referred to above. We maintain a website at www.ikanos.com. You may access our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC, free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The reference to our web address does not constitute incorporation by reference of the information contained at this site.

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Item 1A.
Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this Annual Report on Form 10-K, and in our other filings with the SEC, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not presently known to us may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition, and results of operations could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment.
Risks Related to an Investment in Us
We have a history of losses, and future losses or the inability to raise additional capital may adversely impact our ability to continue as a going concern.
Our consolidated financial statements have been prepared on a going concern basis that assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. The report of our independent registered public accounting firm for the year ended December 28, 2014, included in this Annual Report on Form 10-K, contains an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a going concern as a result of recurring losses from operations. Since our inception, we have never been profitable on an annual basis and we have incurred significant net losses leading to an accumulated deficit of $369.4 million as of December 28, 2014.
We may need to seek financing in the future. These financings could include the sale of equity securities (which would result in dilution to our stockholders) or we may incur additional indebtedness (which would result in increased debt service obligations and could result in additional operating and financial covenants that would restrict our operations). There can be no assurance that any such equity or debt financing will be available in amounts or on terms acceptable to us, if at all. The failure to obtain additional equity or debt financing, if needed, could have a material adverse effect on our business, liquidity, and financial condition.
If we are unsuccessful in negotiating a definitive collaboration agreement with Alcatel-Lucent, we will not enjoy all of the benefits of the proposed collaboration and will lose any revenue that would have been generated under such agreement.
In September 2014 we signed a term sheet with Alcatel-Lucent ("ALU"), most of which is binding, outlining the terms of the collaboration arrangement and the requirement to negotiate a definitive collaboration agreement. If we fail to enter into a definitive agreement with ALU, we will not realize revenue from the potential sale of products resulting from the collaboration arrangement, which would harm our results of operations and our reputation.
If we do not enter into a definitive collaboration agreement with Alcatel-Lucent, we cannot draw down on the ALU Loan.
We have entered into a loan agreement with Alcatel Lucent under which we can borrow up to $10.0 million ("ALU Loan Agreement"). Our ability to draw on the ALU Loan is subject to the satisfaction of certain conditions precedent, including entering into a collaboration agreement with Alcatel-Lucent for the development of ultra-broadband products. Our inability to access the proceeds of the ALU Loan could have a negative effect on our liquidity, which could result in a failure to comply with certain covenants under our SVB Loan Agreement (as described below).
We utilize a revolving credit facility to fund our operations. Should we no longer have access to the revolving line of credit, it would materially impact our business, financial condition, and liquidity.
On October 7, 2014, we entered into a First Amended and Restated Loan and Security Agreement, or the SVB Loan Agreement, with Silicon Valley Bank, or SVB. Under the SVB Loan Agreement we may borrow up to $20 million, subject to certain limitations. The SVB Loan Agreement is collateralized by a first priority lien on all of our present and future property and assets, other than our intellectual property, which is subject to a second lien on and a first priority lien in favor of ALU. The SVB Loan Agreement also requires that we maintain a minimum monthly Adjusted Quick Ratio (as defined) of 1.2 to 1.0. From time-to-time we draw advances under the SVB Loan Agreement and repay the advances as our receivables are collected. As of December 28, 2014, the balance under the SVB Loan Agreement was approximately $10.8 million. We were not in compliance with the covenants contained in the original SVB loan agreement as of September 28, 2014. Those covenants were replaced when the SVB Loan Agreement was amended, and we are currently in compliance with all of the covenants in the SVB Loan Agreement. There can be no assurance that we will remain in compliance with the terms of the Amended SVB Loan Agreement in the future nor, should a default occur, that we would be successful in obtaining a further amendment to the agreement to avoid SVB declaring a default. Should we be in default of the terms of the SVB Loan Agreement and fail to obtain an amendment prior to SVB declaring us to be in default, SVB could require that any advances under the SVB Loan

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Agreement be repaid immediately, which immediate repayment would have a material adverse effect on our business, liquidity, and financial condition.
Our SVB Loan Agreement is subject to contractual and borrowing base limitations, which could adversely affect our liquidity and business.
The maximum amount we can borrow under our SVB Loan Agreement is subject to contractual and borrowing base limitations, which could significantly and negatively impact our future access to capital required to operate our business. Borrowing base limitations are based upon eligible accounts receivable. If our accounts receivable are deemed ineligible, because, for example, they are resident outside certain geographical regions or a receivable is older than 90 days, the amount we can borrow under the revolving credit facility would be reduced. These limitations could have a material adverse impact on our liquidity and business.
Our Loan Agreements contain financial covenants that may limit our operating and strategic flexibility.
Our SVB Loan Agreement and ALU Loan Agreement, or collectively, our Loan Agreements, contain financial covenants and other restrictions that limit our ability to engage in certain types of transactions. For example, these restrictions limit our ability to, or do not permit us to, incur additional debt, pay cash dividends, make other distributions or repurchase stock, engage in certain merger and acquisition activity, and make certain capital expenditures. There can be no assurance that we will be in compliance with all covenants in the future or that SVB or Alcatel-Lucent, or collectively, our Lenders, will agree to modify the SVB Loan Agreement or the ALU Loan Agreement, respectively, should that become necessary.
Events beyond our control could affect our ability to comply with the covenants. Failure to comply with the covenants or restrictions could result in a default under our Loan Agreements. If we do not cure an event of default or obtain necessary waivers within the required time periods, our Lenders would be permitted to accelerate the maturity of the debt under our Loan Agreements, foreclose upon our assets securing the debt, and terminate any further commitments to lend. Under these circumstances, we may not have sufficient funds or other resources to satisfy our other obligations. In addition, the limitations imposed by our Loan Agreements may significantly impair our ability to obtain other debt or equity financing.
There can be no assurance that any waivers we request will be received on a timely basis, if at all, or that any waivers obtained will extend for a sufficient period of time to avoid an acceleration event, an event of default, or other restrictions on our business. The failure to obtain any necessary waivers could have a material adverse effect on our business, liquidity, and financial condition.
Our history of losses as well as future losses or inability to raise additional capital, may adversely impact our relationships with customers and potential customers.
Since our inception, we have never been profitable on an annual basis and we have incurred significant net losses leading to an accumulated deficit of $369.4 million as of December 28, 2014. To achieve profitability, we will need to generate and sustain higher revenue and improve our gross margins, while maintaining expense levels that are appropriate and necessary for our business. We may not be able to achieve profitability and, even if we were able to attain profitability, we may not be able to sustain profitability on an on-going quarterly or annual basis. Since we compete with companies that have greater financial stability, our customers or potential customers may be reluctant to enter into arrangements with us due to the perceived risks to our long term viability and this, in turn, may adversely affect our financial results.
Risks Related to Our Common Stock
We recently implemented a reverse stock split in order to remain listed on NASDAQ and our inability to maintain such listing in the future could adversely affect the market liquidity of our common stock and harm our business.
Beginning on January 31, 2014, our common stock began to trade below $1.00 per share on The NASDAQ Stock Market, or NASDAQ. On March 18, 2014, we received notification from NASDAQ indicating that we were not in compliance with Nasdaq Marketplace Rule 5550(a)(2), which Rule provides that securities listed by NASDAQ must maintain a minimum closing bid price of $1.00 per share and that based upon the closing bid price for our securities for the previous 30 consecutive business days, we no longer meet this requirement. NASDAQ further notified the us that, in accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we will be provided 180 calendar days, or until September 15, 2014, to regain compliance by achieving a closing bid price of our securities of at least $1.00 per share for a minimum of ten consecutive business days at any time during the 180 calendar day period. As we did not anticipate regaining compliance by September 15, 2014, on September 2, 2014, we requested that NASDAQ grant to us a second 180 day compliance period. On September 16, 2014, NASDAQ notified us that we were eligible for a second 180 calendar day compliance period, or until March 16, 2015, to regain compliance, based on having met the continued listing requirements for market value of publicly held shares and all other

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applicable requirements for initial listing on NASDAQ, with the exception of the bid price requirement, and our written notice of our intention to cure the bid price deficiency during the second compliance period by effecting a reverse stock split, if necessary. Effective February 13, 2015 we implemented a 1:10 reverse split of our outstanding common stock and we were notified by NASDAQ thereafter that we had regained compliance with this continued listing requirements.
There can be no guarantee that we will be able to maintain compliance with the continued listing requirements of NASDAQ Marketplace Rule 5550(a)(2). If we are again subject to delisting for any reason, including the failure to maintain the minimum closing bid price, such action would adversely affect the market price and liquidity of the trading market for our common stockand our ability to obtain financing for the continuation of our operations and could result in the loss of confidence by our investors, suppliers, and employees.
The market price of our common stock has been and may continue to be volatile, and holders of our common stock may not be able to resell shares at or above the price paid, or at all.
The market price of our common stock has fluctuated substantially since our initial public offering and is likely to continue to be highly volatile and subject to wide fluctuations. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including:
quarter-to-quarter variations in our operating results;
failure to comply with NASDAQ minimum bid price, as discussed above;
changes in our senior management;
the success or failure of our new products;
the gain or loss of one or more significant customers or suppliers;
announcements of technological innovations or new products by our competitors, customers, or us;
the gain or loss of market share in any of our markets;
general economic and political conditions;
specific conditions in the semiconductor industry and broadband technology markets, including seasonality in sales of consumer products into which our products are incorporated;
continuing international conflicts and acts of terrorism;
changes in earnings estimates or investment recommendations by analysts;
changes in investor perceptions;
changes in product mix; or
changes in expectations relating to our products, plans, and strategic position or those of our competitors or customers.
The closing price of our common stock for the period of January 1, 2012 to December 28, 2014 ranged from a low of $2.80 to a high of $20.20. In addition, the market prices of securities of semiconductor and other technology companies have been volatile, particularly for companies like us, with relatively low trading volumes. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. Accordingly, holders of our common stock may not be able to resell their shares at or above the price paid.
If the securities analysts who currently publish reports on us do not continue to publish research or reports about our business, or if they issue an adverse opinion regarding our common stock, the market price of our common stock and trading volume could decline.

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The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us and our business. Currently, one analyst periodically publish reports about our company. If that analyst issues an adverse opinion regarding our common stock, the stock price would likely decline. If the analyst ceases coverage of us or fails to regularly publish reports on us, we could lose further visibility to the financial markets, which in turn could cause the market price of our common stock or trading volume to decline.
Takeover attempts that stockholders may consider favorable may be delayed or discouraged due to our corporate charter and bylaws which contain anti-takeover provisions, Delaware law in general, or the Tallwood Group’s significant ownership of our common stock.
Provisions in our certificate of incorporation may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:  

the right of our board of directors to expand the size of our Board and to elect directors to fill any such vacancies;
the establishment of a classified board of directors, which provides that not all members of the Board are elected at one time;
the prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of stockholders to elect director candidates;
the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;
the ability of our board of directors to alter our bylaws without obtaining stockholder approval;
the ability of our board of directors to issue, without stockholder approval, up to 1,000,000 shares of preferred stock with terms set by the board of directors, which rights could be senior to those of common stock;
the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend, or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors, and the ability of stockholders to take action;
the required approval of holders of a majority of the shares entitled to vote at an election of directors to remove directors for cause; and
no right of stockholders to call a special meeting of stockholders or to take action by written consent.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation, bylaws, and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.
Due to the significant number of shares of our common stock that the Tallwood Group holds, as discussed below, the Tallwood Group may have the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders, including a takeover attempt, and may have interests that diverge from, or even conflict with, our interests and those of our other stockholders.
Risks Related to Our Commercial Business
We are in a product-transition phase impacting revenue in the short term and we may not be able to adequately develop, market, or sell new products necessary to increase our quarterly revenue run rate.
Revenues from our more mature products are decreasing as these products near end-of-life and this decrease in revenues is likely to keep our quarterly revenue relatively flat to declining in the near term. Increases in revenue will be derived from new products, however, revenue from these new products may not offset the declines in revenue from our mature products in the short-term, long-term, or at all. Beginning in the third quarter of 2012, we began selling our next generation Gateway product Fusiv Vx185, Vx183, Vx175, and Vx173 chipsets. Further, we are currently developing a new broadband DSL Access

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platform that incorporates vectoring technology. The successful customer migration to our new products is critical to our business, takes substantial time and effort, and there is no assurance that we are or will be able to market and or sell new products and services in a timely manner. Our newer products and services, including our Vx585 family and Velocity-3 products, may continue to be delayed, and new products may not be accepted by the market, may be accepted later than anticipated, or may be replaced by newer products more quickly than anticipated. Our sales and operating results may be adversely affected if we are unable to bring new products to market, if customers delay purchases, or if acceptance of new products is slower than expected or to a smaller degree than expected, if at all. Failure of future offerings to be accepted by the market could have a material adverse effect on our business, operations, financial condition, and reputation.
Because we depend on a relatively small number of significant customers for a substantial portion of our revenue, the loss of any of our key customers, our inability to continue to sell existing and new products to our key customers in significant quantities, or our failure to attract significant new customers, could adversely impact our revenue and harm our business.
We have in the past, and expect in the future, to derive a substantial portion of our revenue from sales to a relatively small number of significant customers. Our three largest customers accounted for approximately 67% of our revenue for 2014 and four customers accounted for approximately 59% of our revenue for 2013. For the year ended December 28, 2014, Sagemcom, Amod Technology Inc., Ltd. (a distributor selling exclusively to Sagemcom’s OEM), and Paltek Corporation represented 29%, 22%, and 16% of our revenue, respectively. For the year ended December 29, 2013, Sagemcom, Askey ( a contract manufacturer for Sagemcom), AVM Computersysteme Vertriebs GmbH, and Paltek Corporation represented 24%, 14%, 11%, and 10% of our revenue, respectively. The composition and concentration of these customers has varied in the past, and we expect that it will continue to vary in the future. Accordingly, the loss of any significant customer or a decline in business with any significant customer would materially and adversely affect our financial condition and results of operations. In addition, we may experience pressure from significant customers to agree to customer-favorable sales terms and price reductions.
Our lack of long-term agreements with our customers could have a material adverse effect on our business.
We typically do not have contracts with our major customers that obligate them to purchase any minimum amount of products from us. Sales to these customers are made pursuant to purchase orders, which typically can be canceled or modified up to a specified point in time, which may be after we have incurred significant costs related to the sale. If any of our key customers significantly reduced or canceled its orders, our business and operating results could be adversely affected. Because many of our semiconductor products have long product design and development cycles, it would be difficult for us to replace revenues from key customers that reduce or cancel their existing orders for these products, which may happen if they experience lower than anticipated demand for their products or cancel a program. Any of these events could have a material adverse effect on our business.
We face intense competition in the semiconductor industry and the broadband communications markets, which could reduce our market share and negatively affect our revenue.
The semiconductor industry and the broadband communications markets are intensely competitive. In the VDSL or VDSL-like technology and communications processing markets, we currently compete or expect to compete with, among others, Broadcom Corporation, Cavium, Inc., Freescale Semiconductor, Inc., Lantiq Deutschland GmbH (which recently announced a definitive merger agreement with Intel Corporation), Marvell Technology Group Ltd., MediaTek Inc., PMC-Sierra, Inc., and Realtek Semiconductor Corp.
Many of our competitors have stronger manufacturing subcontractor relationships than we have as well as longer operating histories, greater name recognition, larger customer bases, and significantly greater financial, sales and marketing, manufacturing, distribution, technical, and other resources. In addition, many of our competitors have extensive technology libraries that could enable them to incorporate broadband or communications processing technologies into a system on a chip, creating a more attractive product line than ours. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements than we are able to. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers, or other third parties. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Existing or new competitors may also develop alternative technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of semiconductor integration, or lower cost. We cannot assure you that we will be able to compete successfully against current or new competitors, in which case we may lose market share and our revenue may fail to increase or may decline.
Our success is dependent upon achieving new design wins into commercially successful systems sold by our OEM and ODM customers.

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Our products are generally incorporated into our OEM and ODM customers’ systems at the design stage. As a result, we rely on OEMs and ODMs to select our products to be designed into their systems. We refer to this as a design pipeline win. A pipeline win is defined as achieving one of the following: a potential customer who has signed a memorandum of understanding to design our products into its portfolio; signed a definitive contract; entered into a prototype purchase order for 100 units; or issued an e-mail stating the customer's intent to award a design to us with a defined carrier or end customer.At any given time, we are competing for one or more design wins. We often incur significant expenditures over multiple quarters without any assurance that we will achieve a design win. Furthermore, even if we achieve a design win, we cannot be assured that the OEM or ODM equipment that we are designed into will be marketed, sold, or commercially successful and, accordingly, we may not generate any revenue from the design win. In addition, our OEM and ODM customers can choose at any time to discontinue their systems that include our products or delay deployment, which has occurred in the past from time-to-time. If we are unable to achieve design wins or if our OEM customers’ systems incorporating our products are not commercially successful or deployed, our operating results would suffer.
Our operating results have fluctuated significantly over time and are likely to continue to do so, and as a result, we may fail to meet or exceed our revenue forecasts or the expectations of securities analysts or investors, which could cause the market price of our common stock to decline.
Our industry is highly cyclical and is characterized by constant and rapid technological change, product obsolescence, price erosion, evolving standards, uncertain product life cycles, and wide fluctuations in product supply and demand. The industry has, from time-to-time, experienced significant and sometimes prolonged downturns, often connected with or in anticipation of maturing product cycles and declines in general economic conditions. To respond to these downturns, some service providers have decreased their capital expenditures, changed their purchasing practices to use refurbished equipment rather than purchasing new equipment, canceled or delayed new deployments, and taken a cautious approach to acquiring new equipment and technologies from OEMs, usually with very little notice. This, in turn, has reduced the demand for new semiconductors by our direct customers which could result in significant fluctuations of revenue as the economy changes. Any future downturns may reduce our revenue and could result in our accumulating excess inventory. By contrast, any upturn in the semiconductor industry could result in increased demand and competition for limited production capacity, which may affect our ability to ship products and prevent us from benefiting from such an upturn. Accordingly, our operating results may vary significantly as a result of the general conditions in the semiconductor or broadband communications industry, which could cause the market price of our common stock to decline.
Fluctuations in our expenses could affect our operating results.
Our expenses are subject to fluctuations resulting from various factors, including, but not limited to, higher expenses associated with new product releases, addressing technical issues arising from development efforts, unanticipated tapeout costs, additional or unanticipated costs for manufacturing or components because we do not have formal pricing arrangements with our subcontractors, costs of design tools, and large up-front license fees to third parties for intellectual property integrated into our products, as well as other factors identified throughout these risk factors.
Because many of our expenses are relatively fixed in the short term, or are incurred in advance of anticipated sales, we may not be able to reduce our expenses sufficiently to mitigate any reductions in revenue. Therefore, it may be necessary to take other measures to align expenses with revenue, including, implementation of a corporate restructuring plan. We last implemented a restructuring plan in 2012. Restructuring charges included expenses related to the severance for terminated employees and other exit-related costs arising from contractual and other obligations.
General macroeconomic conditions could reduce demand for services based upon our products.
Our business is susceptible to macroeconomic and other world market conditions. As an example, we believe that consumer-targeted broadband services, which are deployed using our technology, are part of most households’ discretionary spending. We believe the global financial economic downturn that began in 2008 and continues into 2014, particularly in Europe, negatively affected consumer confidence and spending. These outcomes and behaviors may adversely affect our business and financial condition. If individual consumers decide not to install-or discontinue purchasing-broadband services in their homes, whether to save money in an uncertain economic climate or otherwise, the resulting drop in demand could cause telecommunications service providers to reduce or stop placing orders for OEM equipment containing our products. Accordingly, the OEMs’ demand for our products could drop further, potentially having a materially negative effect on our revenue.
Industry consolidation may lead to increased competition and may harm our operating results.

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There has been a trend toward consolidation in our industry. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete for customers. This could have a material adverse effect on our business, financial condition, and results of operations. Furthermore, rapid consolidation could result in a decrease in the number of customers we serve. Loss of a major customer could have a material adverse effect on our business, financial condition, and results of operations.

If we are unable to develop, introduce, or achieve market acceptance of our new semiconductor products, our operating results would be adversely affected.
Our industry is characterized by rapid technological innovation and intense competition. Our future success will depend on our ability to continue to predict what new products are needed to meet the demand of the broadband, communications processor, or other markets addressable by our products and then introduce, develop, and distribute such products in a timely and cost-effective manner. The development of new semiconductor products is complex, and from time-to-time we have experienced delays in completing the development and introduction of new products. In the past we have invested substantial resources in developing and purchasing emerging technologies that did not achieve the market acceptance that we had expected.
Our ability to develop and deliver new semiconductor products successfully will depend on various factors, including our ability to:  
successfully integrate our products with our OEM customers’ products;
gain market acceptance of our products and our OEM customers’ products;
accurately predict market requirements and evolving industry standards;
accurately define new semiconductor products;
timely complete and introduce new product designs or features;
timely qualify and obtain industry interoperability certification of our products and the equipment into which our products will be incorporated;
ensure that our subcontractors have sufficient foundry capacity and packaging materials and achieve acceptable manufacturing yields; and
shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration.
If we are unable to develop and introduce new semiconductor products successfully and in a cost-effective and timely manner, we will not be able to attract new customers or retain our existing customers, which would harm our business.
If we do not successfully manage our inventory in the transition process to next generation semiconductor products, our operating results may be harmed.
If we are successful in developing new semiconductor products ahead of competitors but do not cost-effectively manage our inventory levels of existing products when making the transition to the new semiconductor products, our financial results could be negatively affected by high levels of obsolete inventory and our operating results would be harmed.
The average selling prices and gross margins of our products are subject to declines, which may harm our revenue and profitability.
Our products are subject to rapid declines in average selling prices due to pressure from customers. We have lowered our prices significantly at times to gain or maintain market share, and we expect to do so again in the future. In addition, we may not be able to reduce our costs of goods sold as rapidly as our prices decline. Our financial results, in particular, but not limited to, our gross margins, will suffer if we are unable to maintain or increase pricing, or are unable to offset any future reductions in our average selling prices by increasing our sales volumes, reducing our manufacturing costs, or developing new or enhanced products that command higher prices or better gross margins on a timely basis.

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Our product sales mix is subject to frequent changes, which may impact our revenue and margin.
Our product margins vary widely by product and customer. As a result, a change in the sales mix of our products could have an impact on forecasted revenue and margins. For example, our Access product family generally has higher margins as compared to our Gateway product family. Furthermore, the product margins within our product families can vary based on the performance and type of deployment, as the market typically commands higher prices for higher performance. While we forecast a future product mix and make purchase decisions based on that forecast, actual results can be materially different which could negatively impact our revenue and margins.
Any defects in our products could harm our reputation, customer relationships, and results of operations.
Our products may contain undetected defects, errors, or failures, which may not become apparent until the products are in the hands of our customers or our customers’ customers. The occurrence of any defects, errors, or failures discovered after we have sold the product could result in:
 cancellation of orders;
product returns, repairs, or replacements;
monetary or other accommodations to our customers;
diversion of our resources;
legal actions by customers or customers’ end users;
increased insurance and warranty costs; and
other losses to us or to customers or end users.
Any of these occurrences could also result in the loss of or delay in market acceptance of these or other products and loss of sales, which could negatively affect our business and results of operations. As our products become even more complex in the future, this risk may intensify over time and may result in increased expenses.
The semiconductor industry is highly cyclical, which may cause our operating results to fluctuate.
We operate in the highly cyclical semiconductor industry. This industry is characterized by wide fluctuations in product supply and demand. In the past, the semiconductor industry has experienced significant downturns, often in connection with, or in anticipation of, excess manufacturing capacity worldwide, maturing product cycles, and declines in general economic conditions. Even if demand for our products remains constant, a lower level of available foundry capacity could increase our costs, which would likely have an adverse impact on our results of operations.
Changes in our senior management could negatively affect our operations and relationships with our customers and employees.
We have in the past and may in the future experience significant changes in our senior management team. In the past three years, we have appointed a new President and Chief Executive Officer, a new Vice President of Operations, a new Vice President of Marketing, and a new Vice President of Sales. Changes in our senior management or technical personnel could affect our customer relationships, employee morale, and our ability to operate in compliance with existing internal controls and regulations and harm our business. If we are unable to maintain a consistent senior management team or successfully integrate our current and future members of senior management, our business could be negatively affected.
Because competition for qualified personnel is intense in our industry, we may not be able to recruit and retain necessary personnel, which could impact our product development and sales.
Our future success depends on our ability to continue to attract, retain, and motivate our senior management team as well as qualified technical personnel, particularly software engineers, digital circuit designers, mixed-signal circuit designers, and systems and algorithms engineers. Competition for these employees is intense and many of our competitors may have greater name recognition and significantly greater financial resources to better compete for these employees. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of capacity

28



to develop and market our products. All of our key employees are employed on an “at will” basis. The loss of any of these key employees could slow our product development processes and sales efforts or harm the perception of our business. We may also incur increased operating expenses and be required to divert the attention of our senior management to recruit replacements for key employees. Also, our depressed common stock price may result in difficulty attracting and retaining personnel as stock options and other forms of incentive equity grants generally comprise a significant portion of our compensation packages for all employees, which could harm our ability to provide technologically competitive products.
Further, the changes in senior management as well as the multiple restructurings and reductions in force that we have recently experienced, have had, and may continue to have, a negative effect on employee morale and the ability to attract and retain qualified personnel.
Risks Related to Our Operations and Technology
We rely on third-party technologies for the development of our products, and our inability to use such technologies in the future or the failure of such technology would harm our ability to remain competitive.
We rely on third parties for technologies that are integrated into some of our products, including memory cells, input/output cells, hardware interfaces, and core processor logic. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed. Further, if we were to seek such a license and such license were available, we could be required to make significant payments with respect to past and/or future sales of our products, and such payments may adversely affect our financial condition and operating results. If a party determines to pursue claims against us for patent infringement, we might not be able to successfully defend against such claims. In addition, the third party intellectual property could also expose us to liability and, while we have not experienced material warranty costs in any period as a result of third party intellectual property, there can be no assurance that we will not experience such costs in the future.
Our service agreement with eSilicon Corporation, or eSilicon, limits our ownership and control of raw materials and work-in-process. Should eSilicon default on its contractual commitments to us or fail to timely deliver furnished goods, it would negatively impact our revenue and reputation.
In 2012, we entered into an agreement with eSilicon, or the Service Agreement, under which eSilicon handles a majority of our day-to-day supply chain management, production test engineering, and production quality engineering functions. Pursuant to the Service Agreement, we place orders for our finished goods with eSilicon, who, in turn, contracts with wafer foundries and assembly and test subcontractors, and manages these operational functions for us on a day-to-day basis. eSilicon owns the raw materials and work-in-process until such time as the products are delivered to us as finished goods. Should eSilicon default on its contractual obligation to deliver finished goods to us in a timely manner, or at all, we may be required to restart the wafer production process with a total cycle time of approximately one calendar quarter. As a result, we may be required to incur additional costs and we would experience delays in delivering products to our customers, which would result in decreased revenue, have a negative effect on operating results, and harm our reputation.
We are a fabless semiconductor company and failure to secure and maintain sufficient capacity with eSilicon and its subcontractors could significantly disrupt shipment of our products, impair our relationships with customers, and decrease sales, which would negatively impact our market share and operating results.
We are a fabless semiconductor company and are therefore dependent on and currently use multiple third-party wafer foundries and other subcontractors, located primarily in Israel, Malaysia, the Philippines, and Taiwan, to manufacture, assemble, and test all of our semiconductor devices. While we work with multiple suppliers, generally each individual product is made by one foundry and processed at a single assembly and test subcontractor. Accordingly, we have been and will continue to be greatly dependent on a limited number of suppliers to deliver quality products in a timely manner. In past periods of high demand in the semiconductor market, we have experienced delays in obtaining sufficient capacity to meet our demand and as a result were unable to deliver all of the products to our customers on a timely basis. In addition, we have experienced similar delays due to technical and quality control problems. We are dependent on eSilicon and, in turn, its suppliers to deliver our products on time.
If we and/or eSilicon were to need to qualify a new facility to meet a need for additional capacity, or if a foundry or subcontractor ceased working with eSilicon, as has happened in the past, or if production is disrupted (including an event where eSilicon ceases its business operations), we may be unable to meet our customer demand on a timely basis, or at all. We may be required to incur additional costs and may need to successfully qualify an alternative facility in order to not disrupt our business.

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Our service agreement with eSilicon terminates in October 2015 and should the service agreement not be renewed, we will incur costs and risks associated with a transition away from eSilicon, which could negatively impact our operating results.
When our service agreement with eSilicon terminates in October 2015, if it is not renewed, we will incur costs and risks associated with the transition back to providing such services ourselves or to a new outsourced service provider. Either transition will require the time and attention of management and introduces risk associated with ensuring the transition does not interrupt our supply of product. If such transition were to occur and our supply of product suffered from interruptions due to the transition, it would negatively impact our operating results and reputation.
In the event that we seek to use new wafer foundries to manufacture a portion of our semiconductor products, we may not be able to bring the new foundries on-line rapidly enough and may not achieve anticipated cost reductions.
As indicated above, we have used and will continue to use a limited number of independent wafer foundries to manufacture all of our semiconductor products, which could expose us to risks of delay, increased costs, and customer dissatisfaction in the event that any of these foundries are unable to meet our requirements. Additional wafer foundries may be sought to meet our future requirements but the qualification process typically requires several months or more. By the time a new foundry is qualified, the need for additional capacity may have passed or we may have lost the potential opportunity to a competitor. If qualification cannot be met in a timely manner, we would experience a significant interruption in supply of the affected products, which could in turn cause our costs of revenue to increase and our overall revenue to decrease. This would harm our customer relationships and our market share, as well as our operating results would suffer.
When demand for manufacturing capacity is high, we may take various actions to try to secure sufficient capacity, which could be costly and negatively impact our operating results.
Although we have purchase order commitments to supply specified levels of products to our OEM customers, neither we nor eSilicon have a guaranteed level of production capacity from any of our foundries or subcontractors’ facilities that we depend upon to produce our semiconductors. Facility capacity may not be available when we need it or at reasonable prices. We place our orders on the basis of our OEM customers’ purchase orders or our forecast of customer demand, and eSilicon or its foundries and subcontractors may not be able to meet our requirements in a timely manner, or at all.
In order to secure sufficient manufacturing facility capacity when demand is high and mitigate the risks described in the foregoing paragraphs, we may enter into various arrangements with eSilicon, or directly with foundries or other subcontractors, that could be costly and negatively affect our operating results, including minimum order quantities over extended periods, and payment of premiums to secure necessary lead-times.
We may not be able to make such arrangements in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility, not be on terms favorable to us, and may contain financial penalties if we do not use all of our allocated facility capacity. These penalties and obligations may be expensive and could harm our business.
Defects and poor performance in our products could result in a loss of customers, decreased revenue, unexpected expenses, and loss of market share, and we may face warranty and product liability claims arising from defective products.
We have experienced in the past, and may experience in the future, defects (commonly referred to as “bugs”) in our products which may not always be detected by testing processes. Defects can result from a variety of causes, including, but not limited to, manufacturing problems or third party intellectual property that we have incorporated into our products. If defects are discovered after our products have shipped, we have experienced, and could continue to experience, warranty and consequential damage claims from our customers. If we are unable to deliver quality products, our reputation would be harmed, which could result in the loss of future orders from our customers. Further, we may experience difficulties in achieving acceptable yields on some of our products, which may result in higher per unit cost, shipment delays, and increased expenses associated with resolving yield problems. If any of these adverse risks are realized and we are not able to offset the lost opportunities, our revenue, margins, and operating results would decline.
If our forecasts of our OEM customers’ demand are inaccurate, our financial condition and liquidity would suffer.
We place some orders with our suppliers based on the forecasts of our OEM customers’ demand. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates. If we do not accurately forecast customer demand, we may allocate resources to manufacturing products that we may not be able to sell. As a result, as we experienced in the past, we could have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our cost of revenue, negatively affect gross margins, and reduce our liquidity. Similarly, if our forecast underestimates customer demand, we may forgo revenue opportunities, lose market share, and damage customer relationships. Our failure to accurately manage inventory against demand would adversely affect our financial results.

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To remain competitive, we may need to migrate to smaller geometrical processes and our failure to do so may harm our business.
We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometrical processes, which are measured in microns or nanometers. We have in the past, and may in the future, experience some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which has resulted in reduced manufacturing yields, delays in product deliveries, and increased product costs and expenses. Additionally, upfront expenses associated with smaller geometrical process technologies such as for masks and tooling can be significantly higher than those for the processes that we currently use, and our migration to these newer process technologies can result in significantly higher research and development expenses.
Third-party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products, or seek licenses from third parties, and harm our business. In addition, any litigation that we are required to defend regarding such claims could result in significant expenses and diversion of our resources.
Other companies in the semiconductor industry and intellectual property holding companies often aggressively protect and pursue their intellectual property rights. From time-to-time, we receive, and we are likely to continue to receive in the future, notices that claim our products infringe upon other parties’ intellectual property rights. We may in the future be engaged in litigation with parties who claim that we have infringed their intellectual property rights or who may seek to invalidate one or more of our patents, and it is possible that we would not prevail in any such lawsuit. An adverse determination in any of these types of claims could prevent us from manufacturing or selling some of our products, could increase our costs of products and could expose us to significant liability. In addition, a court could issue a preliminary or permanent injunction that could require us to stop selling certain products in that market or redesign certain products offered for sale or that are under development. In addition, we may be liable for damages for past infringement and royalties for future use of the technology and we may be liable for treble damages if infringement is found to have been willful. Even if claims against us are not valid or successfully asserted, these claims could nevertheless result in significant costs and a diversion of management and personnel resources to defend.
Many companies in the semiconductor industry have significant patent portfolios. These companies and other parties may claim that our products infringe their proprietary rights. We may become involved in litigation as a result of allegations that we infringe the intellectual property rights of others. Any party asserting that our products infringe their proprietary rights could force us to defend ourselves, and possibly our customers, against the alleged infringement. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. We could also be forced to do one or more of the following:  

stop selling, incorporating, or using our products that utilize the challenged intellectual property;
obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all, or we could be required us to make significant payments with respect to past or future sales of our products;
redesign those products that use any allegedly infringing technology, which may be costly and time-consuming; or
refund to our customers amounts received for allegedly infringing technology or products.
Any potential dispute involving our patents or other intellectual property could also include our customers which could trigger our indemnification obligations to one or more of them and result in substantial expense to us.
In any potential dispute or claim involving a third party’s patents or other intellectual property, our customers could also become the target of litigation. We are aware of certain instances in which third parties have recently notified our customers that their products (incorporating our technology) may infringe on the third parties’ technology. We expect that our customers may receive similar notices in the future. Because we have entered into agreements whereby we have agreed to indemnify our customers for intellectual property claims made against them for products incorporating our technology, any litigation could trigger indemnification obligations. Any indemnity claim could adversely affect our relationships with our customers and result in substantial expense to us.
Other data transmission technologies and communications processing technologies may compete effectively with the services enabled by our products, which could adversely affect our revenue and business.
Our revenue currently is dependent upon the increase in demand for services that use broadband technology and integrated residential gateways. Besides xDSL and other discrete multi-tone, or DMT,-based technologies, service providers

31



can decide to deploy passive optical network or fiber and there would be reduced need for our products. If more service providers decide to extend fiber all the way to the home, commonly referred to as fiber to the home, or FTTH, deployment, it could harm our xDSL business. Furthermore, residential gateways compete against a variety of different data distribution technologies, including Ethernet routers, set-top boxes provided by cable and satellite providers, wireless, or WiFi and WiMax, and emerging power line and multimedia over coax alliance technologies. If any of these competing technologies proves to be more reliable, faster, less expensive, or has any other advantages over the broadband technologies we provide, the demand for our products may decrease and our business would be harmed.
Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and operating results to suffer.
We design our products to conform to regulations established by governments and to standards set by industry standards bodies worldwide, such as the Alliance for Telecommunications Industry Solutions, or ATIS, and the International Telecommunication Union Telecommunication Standard, or ITU-T. Because our products are designed to conform to current specific industry standards, if competing standards emerge that are preferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or competing industry standards with which our products are not compatible, industry groups adopt new standards, or governments issue new regulations with which our products are not compatible, our existing products would become less desirable to our customers, and our revenue and operating results would suffer.
If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our revenue, or increase our cost.
Our success will depend, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright, trademark, and trade secret laws, confidentiality agreements, and licensing arrangements to establish and protect our proprietary rights. From time-to-time we file new patent applications. These pending patent applications may not result in issued patents, and our existing and future patents may not be sufficiently broad to protect our proprietary technologies or may be determined to be invalid or unenforceable. While we are not currently aware of any misappropriation of our existing technology, policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly unauthorized use in foreign countries where we have not applied for patent protection and, even if such protection was available, the laws may not protect our proprietary rights as fully as United States law. The patents we have obtained or licensed, or may obtain or license in the future, may not be adequate to protect our proprietary rights. Our competitors may independently develop or may have already developed technology similar to us, duplicate our products, or design around any patents issued to us or our other intellectual property. In addition, we have been, and may be, required to license our patents as a result of our participation in various standards organizations. If competitors appropriate our technology and it is not adequately protected, our competitive position would be harmed, our legal costs would increase, and our revenue would decrease.
Changes in current or future laws or regulations or the imposition of new laws or regulations by federal or state agencies or foreign governments could impede the sale of our products or otherwise harm our business.
The effects of regulation on our customers and the industries in which they operate may materially and adversely impact our business. For example, various governments around the world have considered, and it is anticipated that others may consider, regulations that would limit or prohibit sales of certain telecommunications products manufactured in China. If these rules apply to equipment containing our semiconductor products, such regulation could reduce sales of our products and have a negative effect on our operating results.
In addition, the Ministry of Internal Affairs and Communications in Japan, the Ministry of Communications and Information in Korea, various national regulatory agencies in Europe, the European Commission in the European Union, and the U.S. Federal Communications Commission have broad jurisdiction over our target markets. Although the laws and regulations of these and other government agencies may not be directly applicable to our products, they do apply to much of the equipment into which our products are incorporated. Governmental regulatory agencies worldwide may affect the ability of telephone companies to offer certain services to their customers or other aspects of their business, which may in turn impede sales of our products.
In addition to the laws and regulations specific to telecommunications equipment, other laws and regulations affect our business. For instance, changes in tax, employment, and import/export laws and regulations, and their enforcement, commonly occur in the countries in which we operate. If changes in those laws and regulations, or in the enforcement of those laws and regulations, occur in a manner that we did not anticipate, those changes could cause us to have increased operating costs or to pay higher taxes, and thus have a negative effect on our operating results.

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Failure to maintain adequate internal controls as required by Section 404 of the Sarbanes-Oxley Act, or SOX, could harm our operating results, our ability to operate our business, and our investors’ view of us.
If we do not maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of SOX. Effective internal controls, particularly those related to revenue recognition, valuation of inventory, and warranty provisions, are necessary for us to produce reliable financial reports and are important in helping to prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.
We are exposed to legal, business, political, and economic risks associated with our international operations.
We currently obtain substantially all of our manufacturing, assembly, and testing services from suppliers and subcontractors located outside of the United States, and have a significant portion of our research and development team located in India. In addition, 99%. 97%, and 99% of our revenue for the years ended 2014, 2013 and 2012, respectively, were derived from sales to customers outside the United States. We have expanded our international business activities and may open other design and operational centers abroad. International operations are subject to many other inherent risks, including, but not limited to:  
political, social, and economic instability, including war and terrorist acts;
exposure to different legal standards, particularly with respect to intellectual property;
trade and travel restrictions;
the imposition of governmental controls and restrictions or unexpected changes in regulatory requirements;
burdens of complying with a variety of foreign laws;
import and export license requirements and restrictions of the United States and each other country in which we operate;
foreign technical standards;
changes in tariffs;
difficulties in staffing and managing international operations;
foreign currency exposure and fluctuations in currency exchange rates;
difficulties in collecting receivables from foreign entities or delayed revenue recognition; and
potentially adverse tax consequences.
Because we are currently almost wholly dependent on our foreign sales, as well as our research and development facilities located off-shore and operations in foreign jurisdictions, any of the factors described above could significantly harm our ability to produce quality products in a timely and cost effective manner, as well as our ability to increase or maintain our foreign sales.
Fluctuations in exchange rates among the U.S. dollar and other currencies in which we do business may adversely affect our operating results.
We maintain extensive operations internationally. We have offices or facilities in China, France, Germany, India, Japan, Korea, and Taiwan. We incur a portion of our expenses in currencies other than the U.S. dollar, including, predominantly, the Indian rupee and the Chinese yuan. A large portion of our cash is held by our international affiliates both in U.S. dollar and local currency denominations. As a result, we may experience foreign exchange gains or losses due to the volatility of these currencies compared to the U.S. dollar. Because we report our results in U.S. dollars, the difference in exchange rates in one period compared to another directly impacts period to period comparisons of our operating results. In addition, our sales have been historically denominated in U.S. dollars. Currency exchange rates have been especially volatile in the recent past and these currency fluctuations may make it difficult for us to predict and/or provide guidance on our results. Currently, we have not implemented any strategies to mitigate risks related to the impact of fluctuations in currency exchange rates and we cannot predict future currency exchange rate changes.

33



Several of the facilities that manufacture our products, most of our OEM customers and the service providers they serve, and our California headquarters are located in regions that are subject to earthquakes and other natural disasters.
Several of our subcontractors’ facilities that manufacture, assemble, and test our products, and most of our wafer foundries, are located in Malaysia, the Philippines, and Taiwan. Several of our large customers are located in Japan and Korea. The Asia-Pacific region has experienced significant earthquakes and other natural disasters in the past and will be subject to seismic activities in the future. Any earthquake or other natural disaster in these areas could significantly disrupt these manufacturing facilities’ production capabilities and could result in our experiencing a significant delay in delivery, or substantial shortage of wafers, in particular, and possibly in higher wafer prices, and increased production costs in general. Natural disasters could also adversely affect our customers and their demand for our products. Our headquarters in California is also located near major earthquake fault lines. If there is a major earthquake or any other natural disaster in a region where one of our facilities is located, it could significantly disrupt our operations.
Changes in our tax rates could affect our future results.
Our future effective tax rates could be favorably or unfavorably affected by the absolute amount and future geographic distribution of our pre-tax income, our ability to successfully shift our operating activities to foreign jurisdictions, and the amount and timing of intercompany payments from our foreign operations that are subject to U.S. income taxes. In addition, our subsidiary in India is currently being audited by the tax authorities in that country. Should the audit or any subsequent appeals result in a decision adverse to us, such decision could not only result in assessments for prior periods, but also an increased tax rate in future periods.
Regulations related to “conflict minerals” have resulted in additional expenses, may make our supply chain more complex, and may result in damage to our reputation with customers.
On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted new requirements for companies that use certain minerals and metals, known as “conflict minerals,” in their products, whether or not these products are manufactured by third parties. These requirements require companies to diligence, disclose, and report whether or not such minerals originate from the Democratic Republic of the Congo, or DRC, and adjoining countries. There were and continue to be costs associated with complying with these rules, includes costs related to determining the source of any of the relevant minerals and metals used in our products. In addition, the implementation of these new requirements could adversely affect the sourcing, availability, and pricing of such minerals. For example, there may only be a limited number of suppliers offering “conflict free” materials, we cannot be sure that we will be able to obtain necessary “conflict free” materials from such suppliers in sufficient quantities or at reasonable prices. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation, could increase our costs, and could adversely affect our manufacturing operations. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products be certified as conflict mineral free.
Risks Related to Tallwood
The Tallwood Group may exercise significant influence over us as a significant stockholder and holder of a right to elect the proportionate number of directors equal to its ownership interest in us.
As of February 15, 2015, the Tallwood Group beneficially owned approximately 51% of our outstanding common stock.
We are also party to a Stockholder Agreement with the Tallwood Group, which, among other things, contains certain governance arrangements and various provisions relating to board composition, stock ownership, transfers by the Tallwood Group, voting, registration rights, and other matters. Subject to certain exceptions, the Tallwood Group is permitted under the terms of the Stockholder Agreement to maintain their ownership interest in us in subsequent equity offerings. Given their current ownership interest in us, the Tallwood Group may have the ability to control or significantly influence the outcome of any matter submitted for the vote of our stockholders. The Tallwood Group may also have interests that diverge from, or even conflict with, our interests and those of our other stockholders. Certain voting restrictions in the Stockholder Agreement require that the Tallwood Group vote all shares owned by it in excess of 37.5% of the outstanding voting shares in the same proportion as the votes of all stockholders that are not affiliated with the Tallwood Group, will expire five years after the Rights Offering. At that time, the Tallwood Group may continue to own a majority of the outstanding voting shares, which will give the Tallwood Group the ability to control our Board and the outcome of any vote of our stockholders, which could have a material adverse effect on the other stockholders. Even if the Tallwood Group does not own a majority of the outstanding voting shares, it may have substantial holdings that could give the Tallwood Group effective control of the affairs of our Company because it may own a majority of the shares that actually vote at any meeting of our stockholders.

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The market price of our common stock may decline as a result of future sales of our common stock by the Tallwood Group.
We are unable to predict the potential effects of the Tallwood Group’s ownership of our outstanding common stock on the trading activity in and market price of our common stock. Pursuant to the Stockholder Agreement, we have granted the Tallwood Group and their permitted transferees’ registration rights for the resale of all shares of our common stock that the Tallwood Group holds. Any such resale would increase the number of shares of our common stock available for public trading. Sales by the Tallwood Group or their permitted transferees of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.
Stockholders may not want to invest in our company given the significant ownership of our common stock by the Tallwood Group.
The Tallwood Group’s ownership of our common stock may delay, deter or prevent acts that would be favored by our other stockholders and its interests may not always coincide with our interests or the interests of our other stockholders. In addition, the Tallwood Group may seek to cause us to take courses of action that, in its judgment, could enhance its investments in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders. As a result, this concentration of stock ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with a significant stockholder.

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ITEM 1B.
UNRESOLVED STAFF COMMENTS
None

ITEM 2.
PROPERTIES
Facilities
Our headquarters are located in Fremont, California, where we lease approximately 73,500 square feet of space under lease agreements that expire in March 2016. The Fremont facility location is primarily utilized for research and development, sales and support, operations management, and general administrative functions. We also have other significant facility locations in the United States and India, including a 57,400 square foot research and development facility in Red Bank, New Jersey, whose lease expires in March 2018, and a 28,600 square foot research and development facility in Bangalore, India, whose lease expires in June 2017.
We believe that our facilities are adequate for the next 12 months and that, if required, suitable additional space will be available on commercially reasonable terms to accommodate our operations.

ITEM 3.
Legal Proceedings
From time-to-time, in the normal course of business, we are a party to litigation matters that have involved and may involve in the future, among other things, claims related to intellectual property infringement as well as employment-related disputes. We are subject to claims and litigation arising in the ordinary course of business, however, we do not believe, based on currently available facts and circumstances, that the final outcome of these matters, taken individually or as a whole, will have a material adverse effect on our consolidated results of operations or financial position. The results of litigation are inherently uncertain and material adverse outcomes are possible. We have not provided accruals for any legal matters in our financial statements as potential losses for such matters are not considered probable and reasonably estimable. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy any liabilities arising from the matters described above will not have a material adverse effect our consolidated results of operations, financial position, or cash flows.

ITEM 4.
Mine Safety Disclosures
None.


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PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock is quoted on The NASDAQ Capital Market under the symbol IKAN. The following table sets forth the high and low sales prices of our common stock as reported on The NASDAQ Capital Market for the fiscal periods indicated. The prices reflect retroactively the 1:10 reverse stock split that occurred on February 13, 2015.
 
High
 
Low
2013
 
 
 
First quarter
$
20.40

 
$
12.50

Second quarter
$
21.10

 
$
11.50

Third quarter
$
14.80

 
$
11.20

Fourth quarter
$
14.50

 
$
10.20

2014
 
 
 
First quarter
$
12.90

 
$
8.10

Second quarter
$
9.10

 
$
4.00

Third quarter
$
4.70

 
$
3.00

Fourth quarter
$
4.40

 
$
2.80

As of March 11, 2015, there were approximately 32 holders of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our common stock or other securities. We currently anticipate that we will retain all of our future earnings for use in the expansion and operation of our business and do not anticipate paying any cash dividends in the foreseeable future. We also may incur indebtedness in the future that may prohibit or effectively restrict the payment of dividends on our common stock. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors.
Equity Compensation Plan Information
The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Part III, Item 12 of this Annual Report on Form 10-K.

Sale of Unregistered Securities
During the three years ended December 28, 2014, we issued 3,963,414 shares of unregistered common stock in a private placement as described below.
On September 29, 2014, Ikanos Communications, Inc. (the “Company”) sold an aggregate of 39.6 million shares of common stock, par value $0.001 per share (the “Common Stock”), at a purchase price of $4.10 per share (the “Purchase Price”), resulting in aggregate gross proceeds to the Company of approximately $16.25 million, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) by and among the Company, a group of investors affiliated with Tallwood Venture Capital (collectively, the “Tallwood Group”) and Alcatel-Lucent Participations, S.A. (“Alcatel-Lucent Participations”), in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon Section 4(a)(2) of the Securities Act (the “Private Placement”). The Tallwood Group and Alcatel-Lucent Participations purchased $11.25 million and $5.0 million, or 2.74 million and 1.22 million shares, of Common Stock, respectively. Alcatel-Lucent Participations and Alcatel-Lucent USA Inc. (“Alcatel-Lucent USA”) are subsidiaries of Alcatel-Lucent (collectively referred to herein as “Alcatel-Lucent”).
The Tallwood Group is the Company’s largest single stockholder and prior to the Private Placement held approximately 31.8% of the outstanding shares of Common Stock. Immediately following the Private Placement, the Tallwood Group held approximately 43% of the outstanding shares of Common Stock. The Tallwood Group purchased an additional 2.74 million shares of Common Stock at the Purchase Price of $4.10 for $11.25 million during our Rights Offering which concluded on February 4, 2015. Two members of the Company’s board of directors (the “Board of Directors”) are affiliated with the

37



Tallwood Group. Diosdado Banatao, the Chairman of the Board, is a Founder and Managing Partner of Tallwood Venture Capital, and George Pavlov, a director, is a General Partner of Tallwood Venture Capital. The proceeds from the private placement and the Rights Offering will be used for general corporate purposes.
On January 9, 2015, the Company filed a registration statement on Form S-3 to register for resale the shares of Common Stock acquired by Alcatel-Lucent Participations in the Private Placement. During the first quarter of 2015, we plan to file a registration statement on Form S-1 to register for resale the shares of the Common Stock acquired by the Tallwood Group in the Private Placement, the 31.6 million shares owned by the Tallwood Group prior to the Private Placement, and the 2.74 millon shares of common stock purchased by the Tallwood Group in the Rights Offering.





38



ITEM 6.
SELECTED FINANCIAL DATA
We have retrospectively applied the effect of our 1:10 reverse stock split to all shares outstanding, earnings per share, and equity plan amounts for all periods presented in this 2014 Annual Report on Form 10-K.
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 Annual Report on Form 10-K. Our fiscal years are the 52 or 53 week periods ended on the Sunday nearest the end of December. Historical results are not necessarily indicative of the results to be expected in the future.
 
 
Fiscal Year Ended
 
2010
 
2011
 
2012
 
2013
 
2014
 
(In thousands, except per share data)
Consolidated Statements of Operations
 
 
 
 
 
 
 
 
 
Revenue
$
191,677

 
$
136,591

 
$
125,948

 
$
79,749

 
$
48,364

Cost of revenue (1)
126,692

 
65,944

 
64,750

 
39,078

 
25,324

Gross profit
64,985

 
70,647

 
61,198

 
40,671

 
23,040

Operating expenses:
 
 
 
 
 
 
 
 
 
Research and development (1)
60,769

 
55,796

 
57,543

 
51,075

 
48,124

Selling, general and administrative (1)
27,239

 
22,287

 
19,056

 
18,816

 
17,389

Asset impairments
21,378

 

 

 

 

Restructuring charges (1)
5,794

 
(109
)
 
1,062

 

 

Total operating expenses
115,180

 
77,974

 
77,661

 
69,891

 
65,513

Loss from operations
(50,195
)
 
(7,327
)
 
(16,463
)
 
(29,220
)
 
(42,473
)
Investment gain

 
1,295

 

 

 

Other income (expense), net
51

 
(383
)
 
(108
)
 
(578
)
 
(246
)
Loss before income taxes
(50,144
)
 
(6,415
)
 
(16,571
)
 
(29,798
)
 
(42,719
)
Provision (benefit) for income taxes
(381
)
 
1,082

 
1,014

 
589

 
606

Net loss
$
(49,763
)
 
$
(7,497
)
 
$
(17,585
)
 
$
(30,387
)
 
$
(43,325
)
Basic and diluted net loss per share
$
(8.77
)
 
$
(1.09
)
 
$
(2.52
)
 
$
(4.07
)
 
$
(3.97
)
Weighted average number of shares—basic and diluted (2)
5,671

 
6,866

 
6,970

 
7,473

 
10,908

(1)
Amounts include stock-based compensation as follows:
 
Fiscal Year Ended
 
2010
 
2011
 
2012
 
2013
 
2014
Cost of revenue
$
106

 
$
58

 
$
8

 
$
8

 
$
16

Research and development
1,684

 
2,273

 
2,007

 
2,435

 
2,374

Selling, general and administrative
1,480

 
844

 
877

 
1,130

 
1,390

Restructuring
111

 

 

 

 


(2)
The basic and diluted net loss computations exclude potential shares of common stock issuable upon the exercise of options and warrants to purchase common stock when their effect would be anti-dilutive. See “Note 1. Ikanos and Summary of Significant Accounting Policies” to the consolidated financial statements included in this report.

39



 
Fiscal Year Ended
 
2010
 
2011
 
2012
 
2013
 
2014
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and short-term investments
$
30,950

 
$
34,760

 
$
31,176

 
$
39,516

 
$
15,691

Working capital
50,541

 
48,926

 
36,571

 
35,746

 
12,831

Total assets
89,697

 
77,607

 
73,848

 
71,952

 
46,110

Revolving line

 

 
5,000

 
12,000

 
10,841

Total stockholders’ equity
65,521

 
60,722

 
46,627

 
45,391

 
22,015


40





ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K.
Overview
We were incorporated in April 1999 and, through December 31, 2001, we were engaged principally in research and development. We began commercial shipment of our products in the fourth quarter of 2002. Our revenue was $125.9 million in 2012, $79.7 million in 2013, and $48.4 million in 2014. Revenue fluctuations are characteristic of our industry and affect our business, especially due to the concentration of our revenue among a few customers and a limited number of products. These fluctuations can result from a variety of factors, including the inability to offset lower demand for products that near end-of-life with new product offerings as a result of development delays, competitive pricing pressures, or the inability to meet product requirements. We have limited visibility into the buying patterns of our OEMs, who, in turn, are affected by changes in the buying and roll out patterns of the service provider market. In order to obtain future revenue growth we must be successful in designing our new products to match customer requirements while delivering the requisite products within the customers' required development cycle.
We incurred a net loss of $43.3 million in 2014 and had an accumulated deficit of $369.4 million as of December 28, 2014. As a result of our planned increase in development spending associated with our next generation G.fast offering, recurring losses from operations, and our need to stay in compliance with our debt covenant, there is uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt as to our ability to continue as a going concern. There can be no assurance that such additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to us.
Beginning in January 2014, the price of our common stock began to trade below $1.00. Shortly thereafter, we received notice from The NASDAQ Stock Market that we were no longer in compliance with Marketplace Rule 5550(a)(2) and if we did not regain compliance within the time alloted our common stock would be subject to being delisted from NASDAQ. We were subsequently granted two 180 day periods to regain compliance, the second of which would have expired on March 16, 2015. To address this issue of noncompliance, on February 11, 2015, at a Special Meeting of Stockholders (the "Special Meeting"), our stockholders approved an amendment to our Restated Certificate of Incorporation to effect a reverse stock split of our common stock at a ratio to be determined by our Board of Directors at a ratio of not less than one-for-five (1:5) and not more than one-for-ten (1:10). At a meeting of the Board of Directors immediately following the Special Meeting, the Board of Directors directed Ikanos management to implement a 1:10 reverse stock split, effective immediately. We have retrospectively applied the effect of this 1:10 reverse stock split to all shares outstanding, earnings per share, and equity plan amounts for all periods presented in this Annual Report on Form 10-K. Subsequent to implementing the reverse stock split, we received notification from NASDAQ that we were in compliance with Marketplace Rule 5550(a)(2) and, therefore, that we had regained compliance with the continued listing requirements of NASDAQ.
We are a leading provider of advanced semiconductor products and software for delivering high speed broadband solutions to the connected home. Our broadband multi-mode and digital subscriber line ("DSL") processors and other semiconductor offerings power carrier infrastructure (referred to as "Access") and customer premises equipment (referred to as "Gateway") for network equipment manufacturers ("NEMs") supplying leading telecommunications service providers. Our products are at the core of DSL access multiplexers ("DSLAMs"), optical network terminals ("ONTs"), concentrators, modems, voice over Internet Protocol ("VoIP") terminal adapters, integrated access devices ("IADs"), and residential gateways ("RGs"). On September 29, 2014, we entered into a collaboration arrangement with Alcatel-Lucent USA, Inc. (along with Alcatel-Lucent Participations, collectively known as “ALU”) on the development of ultra-broadband products. We expect this collaboration to not only help increase our share of the broadband Access market but to also positively impact our global carrier engagements, as well as Gateway OEM interest in our products and technology. Our products have been deployed by service providers globally, including in Asia, Europe, and North and South America.
On October 7, 2014, we entered into a First Amended and Restated Loan and Security Agreement (the "Amended SVB Loan Agreement") with SVB. The Amended SVB Loan Agreement amends and restates the SVB Loan Agreement, originally dated January 14, 2011, and subsequently amended, and extends the maturity date until October 2017. Under the Amended SVB Loan Agreement, we may borrow up to $20.0 million, subject to certain limitations. As of December 28, 2014, $10.8 million was outstanding under the Amended SVB Loan Agreement. Interest on advances against the line was equal to 5.75% as of December 28, 2014 and was payable monthly. We utilize the line of credit with SVB to partially fund our

41



operations. We were in compliance with all covenants as of December 28, 2014, but were not in compliance with the covenant in January 2015 and received a waiver. We expect to be in compliance for the remainder of the quarter ended March 29, 2015. However, we anticipate that we may not be in compliance with all of the covenants contained in the Amended SVB Loan Agreement during certain periods of 2015 and, accordingly, have begun negotiations with SVB.
In connection with the collaboration noted above, ALU and a group of investors affiliated with Tallwood Venture Capital (the “Tallwood Group”) collectively agreed to a financial commitment of up to $45.0 million, consisting of the purchase through our private placement on September 29, 2014 of approximately 4.0 million shares of the Company’s common stock at $4.10 per share for proceeds of $15.1 million (net of issuance costs of $1.2 million); ALU’s commitment to loan the Company up to $10.0 million following the satisfaction of certain conditions (the “ALU Loan Agreement”); the Tallwood Group’s agreement to purchase from us an additional $11.2 million of common stock; and ALU’s agreement to provide an additional $7.5 million of other funding associated with the collaboration, subject to entry into a definitive collaboration agreement. The completion of the definitive collaboration agreement is a condition necessary for us to receive the $7.5 million and the loan proceeds.
We filed a Registration Statement on Form S-1 on October 20, 2014 and amended it thereafter (declared effective on November 26, 2014) under which we distributed to the holders of our common stock non-transferable subscription rights to purchase 14.5 million shares of our common stock (the "Rights Offering"). Each subscription right entitled the rights holder to purchase 1.459707 shares of our common stock at $4.10 per share. The Rights Offering closed on February 4, 2015 and we sold 3.0 million shares and realized $11.5 million, net of issuance costs of $0.8 million. The Tallwood Group participated in the Rights Offering and, thereby, fulfilled its commitment by investing $11.2 million to purchase an additional 2.7 million shares of our common stock.
Our products reflect advanced designs in silicon, systems, and firmware and are programmable and highly-scalable. Our expertise in the integration of our digital signal processor (DSP) algorithms with advanced digital, analog, and mixed signal semiconductors enables us to offer high-performance, high-density, and low-power asymmetric DSL (ADSL) and very-high bit rate DSL (VDSL) products. We have released to production VDSL-based solutions to the market that offer vectoring and bonding to increase speeds over existing telecom carrier copper infrastructure. These products support high speed broadband service providers’ multi-play deployment plans to the connected home while keeping their capital and operating expenditures relatively low compared to competing frameworks. Our broadband DSL products consist of high performance Access and Gateway chips. We have demonstrated: (1) an aggregate downstream and upstream rate of 300 megabits per second (Mbps) over a single pair copper line at a distance of up to 200 meters, and (2) 150Mbps aggregate data rate up to a distance of 500 meters. Our next generation G.fast products for the ultra-broadband market are currently in development and will be designed to achieve speeds up to a gigabit per second (1Gbps or 1,000 Mbps). We also offer a line of multi-mode communications processors (CPs) for RGs that can support a variety of wide area network (WAN) topologies for telecom carriers, wireless carriers, and cable multiple system operators (MSOs), including Ethernet and gigabit Ethernet, passive optical network (PON), DSL, and LTE. In addition to our DSL and RG processors, our product portfolio also includes inSIGHT BXM software (inSIGHT), an innovative software suite of Gateway-based diagnostics and analytics software products.
Outsourcing all of our semiconductor fabrication, assembly, and test functions allows us to focus on the design, development, marketing, and sales of our products and reduces the level of our capital investment. In 2012, we expanded our outsourcing model by transitioning a majority of our day-to-day supply chain management, production test engineering, and production quality engineering functions (Master Services) to eSilicon Corporation (eSilicon) under a Master Services and Supply Agreement (Service Agreement). Pursuant to the Service Agreement, which will expire in October 2015, we place orders for our finished goods products with eSilicon, who, in turn, contracts with wafer foundries and the assembly and test subcontractors and manages these operational functions for us on a day-to-day level.
Our semiconductor customers consist primarily of NEMs, original design manufacturers (ODMs), contract manufacturers (CMs), and original equipment manufacturers (OEMs), and include vendors such as Sagemcom Tunisie (Sagemcom), Askey Computer Corporation (Askey), NEC Corporation (NEC), and AVM Computersysteme Vertriebs GmbH (AVM). Our products are deployed in the networks of telecom carriers such as AT&T Inc. (AT&T), Bell Canada, Orange S.A. (formerly, known as France Telecom) (Orange), KDDI Corporation (KDDI), and Nippon Telegraph and Telephone Corporation (NTT).
Our families of DSL processors are designed for a range of devices that deliver high-speed access to the connected home. Following are overviews of the progress on our latest products:
We are currently shipping our Fusiv Vx185 and Vx183 family of chipsets which are high performance G.Vector-compliant communications processors designed specifically for the next generation of service gateways in the home.
 The Vx585 family, currently sampling, maintains the distributed architecture of the Vx185/183, while supporting an even higher level of performance with a dual-core CPU architecture and additional, higher performance acceleration

42



processor engines. The Vx585 family of processors was previously scheduled for production in 2014, but is currently scheduled to be production ready by mid-2015.
Our Access Velocity-3 solution combines the rich feature set of the Velocity family with innovative Ikanos NodeScale vectoring technology. Velocity-3 started carrier and OEM trials in 2014 and continues into 2015.
Our families of multi-mode gateway processors complement our DSL broadband products and are designed to address a wide range of devices for value-added carrier services and high-speed access to the digital home. The Fusiv Multi-core Vx175 and Fusiv Vx173, and Fusiv Vx575 family, are built on our Fusiv family of processors and extend the range of access technologies and device types that can be supported by our products. The Vx575 family of processors was previously scheduled for production in 2014, but is currently scheduled to be production ready by mid-2015.
We are currently in development of our next generation Access platform, G.fast.
inSIGHT represents an expansion of our product portfolio by offering software as a product sold directly to carriers. Our inSIGHT monitoring and diagnostic software is in field trials and is now scheduled to be ready for production in the latter half of 2015.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and the results of operations are based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). In preparing our consolidated financial statements, we make assumptions, judgments, and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments, and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of our Board of Directors. We believe that the assumptions, judgments, and estimates involved in the accounting for revenue, cost of revenue, marketable securities, accounts receivable, inventories, warranty, income taxes, impairment of goodwill and related intangibles, acquisitions, and stock-based compensation expense have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. Historically, our assumptions, judgments, and estimates relative to our critical accounting policies have not differed materially from actual results.
Revenue Recognition
Our revenue is primarily derived from sales of our semiconductor products. Revenue from product sales is generally recognized upon shipment, net of sales returns, rebates, and allowances and other deferrals that pertain to software delivery obligations. Revenue from product sales to distributors is generally recognized under the sell-in method when product is delivered to the distributor offset by any contractual return rights.
As is typical in our industry, the selling prices of our products generally decline over time. Therefore, our ability to increase revenue is dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products.
We generally sell our products to OEMs through a combination of our direct sales force, third-party sales representatives, and distributors. Sales are generally made under short-term, non-cancelable purchase orders. We also have volume purchase agreements with certain customers who provide us with non-binding forecasts. Although certain OEM customers may provide us with rolling forecasts, our ability to predict future sales in any given period is limited and subject to change based on demand for our OEM customers’ systems and their supply chain decisions. Historically, a small number of OEM customers, the composition of which has varied over time, have accounted for a substantial portion of our revenue. We expect that significant customer concentration will continue for the foreseeable future, but it may diversify across more carrier end customers as we expect more service providers worldwide to begin deployments of our broadband solutions. Sales through distributors are made under the sell-in method under which we recognize revenue when product is delivered to the distributor offset by any contractual return right at the time of sale.
We recognize revenue when the following criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred, 3) our price to the customer is fixed or determinable, and 4) collection is reasonably assured. Since our semiconductor products are reliant upon firmware, we defer revenue recognition until the essential firmware is delivered and when legal title and risk of ownership has transferred. In addition, we record reductions to revenue for estimated product returns and pricing adjustments, such as volume purchase incentives, 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, specific criteria included in volume purchase incentives agreements, and other factors known at the time. Additional reductions to revenue would result if

43



actual product returns exceed our estimates or if we settle any claims brought by our customers that are in excess of our standard warranty terms for cash payments. Revenue from product sales to distributors is recognized under the sell-in method when product is delivered to the distributor offset by any contractual return rights.
As noted above, in multi-element arrangements that include combination of semiconductor products with firmware that is essential to the semiconductor products’ functionality, when certain firmware elements are not yet delivered, 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. We allocate the arrangement consideration based on each element’s relative fair value using vendor-specific objective evidence, third-party evidence, or estimated selling prices, as the basis of fair value. 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. Revenue is recognized for the accounting units when the basic revenue recognition criteria are met.
Cost of Revenue
Our cost of revenue consists primarily of the cost of silicon wafers purchased from third-party foundries and third-party costs associated with assembling, testing, and shipping of our semiconductors. Because we do not have formal, long-term pricing agreements with our manufacturing partners, our wafer costs and services are subject to price fluctuations based on the cyclical demand for semiconductors, among other factors. In addition, after we purchase wafers from foundries, we may incur yield loss related to the manufacturing process that creates usable die from the wafers. Manufacturing yield is the percentage of acceptable product resulting from the manufacturing process determined at the time that the product is tested. If our manufacturing yield decreases, our cost per unit increases. This could have a significant adverse effect on our cost of revenue. In addition to raw material costs and usage, the cost of revenue also includes payments to eSilicon under our Services Agreement, accruals for actual and estimated warranty obligations and write-downs of excess and obsolete inventories, payroll and related personnel costs, certain variable cost components such as gold adder, licensed third-party intellectual property, depreciation of equipment, and amortization of acquisition-related intangibles.
Research and Development Expenses
Research and development (R&D) expenses are recognized as incurred and generally consist of compensation and associated expenses of employees engaged in research and development, contractors, tape-out expenses, reference board development, development testing, evaluation kits and tools stock-based compensation amortization of acquisition-related intangibles and depreciation expense. Before releasing new products, we incur charges for mask sets, prototype wafers, mask set revisions, bring-up boards, and other qualification materials, which we refer to as tape-out expenses. These tape-out expenses may cause our R&D expenses to fluctuate because they are not incurred uniformly every quarter.
Accounts Receivable Allowance
We perform ongoing credit evaluations of our customers and adjust credit limits, as determined by our review of current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience, our anticipation of uncollectible accounts receivable, and any specific customer collection issues that we have identified. While our credit losses have historically been low and within our expectations, we may not continue to experience the same credit loss rates that we have in the past. Our receivables are concentrated in a relatively small number of customers. Therefore, a significant change in the liquidity, financial terms, financial position, or willingness to pay timely, or at all, of any one of our significant customers would have a significant impact on our results of operations and cash flows.
Inventory
We value our inventory at the lower of cost or estimated market value. Cost is determined by the first-in, first-out method and estimated market value represents the estimated net realizable value. We estimate market value based on our current pricing, market conditions, and specific customer information. We write down inventory for estimated obsolescence of unmarketable inventory and quantities on hand in excess of estimated near-term demand and market conditions. If actual shipments are less favorable than expected, additional charges may be required. Additionally, we specifically reduce inventory to the lower of cost or market if pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. Once inventory is written down, a new accounting basis is established, and it is not written back up in future periods. However, if such inventory is subsequently sold, gross margins will be positively affected.

44



Warranty
We provide for the estimated cost of product warranties at the time revenue is recognized based on our historical experience of similar products. While we engage in product quality programs and processes, including monitoring and evaluating the quality of our suppliers, our warranty accrual is affected by our contractual obligations, product failure rates, and the estimated and actual cost incurred by us and our customers for replacing defective parts. Costs may include replacement parts, labor to rework, and freight charges. We monitor product returns during the warranty period and maintain an accrual for the related warranty expenses. Should actual failure rates, cost of product replacement, and inbound and outbound freight costs differ from our estimates, revisions to the estimated warranty reserve would be required.
Accounting for Income Taxes
We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the balance sheets, as well as operating loss and tax credit carry-forwards. We have recorded a full valuation allowance against our deferred tax assets except for certain foreign tax jurisdictions. Based on our historical losses and other available objective evidence, we have determined it is more likely than not that the deferred tax assets will not be realized. While we have considered potential future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the full valuation allowance, in the event that we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax assets would increase net income in the period such determination was made. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. Further, in accordance with authoritative guidance, we recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
Prior to the fourth quarter of 2011, we did not provide for Federal income tax and withholding taxes for unremitted foreign earnings of our foreign affiliates because the unremitted earnings were deemed to be permanently reinvested. Beginning in the fourth quarter of 2011, we began to provide for Federal income tax and foreign withholding taxes for those unremitted earnings because we determined that those funds may no longer be permanently reinvested.
Stock-Based Compensation Expense
We account for share-based compensation related to share-based transactions in accordance with authoritative guidance. Under the fair value recognition provisions, share-based payment expense is estimated at the grant date based on the fair value of the award and is recognized as an expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility and expected life. We have estimated the expected volatility as an input into the Black-Scholes valuation formula when assessing the fair value of options granted. Our current estimate of volatility was based upon a blend of average historical volatilities of our stock price and that of our peer group. To the extent volatility of our stock price increases in the future, our estimates of the fair value of options granted in the future could increase, thereby increasing share-based payment expense in future periods. In addition, we apply an expected forfeiture rate when amortizing share-based payment expense. Our estimate of the forfeiture rate was primarily based upon historical experience of employee turnover. To the extent that we revise this estimate in the future, our share-based payment expense could be materially affected in the quarter of revision, as well as in following quarters. Our expected term of options granted was derived from the average midpoint between vesting and the contractual term. In the future, we may change or refine our approach of deriving these input estimates as empirical evidence regarding these input estimates becomes available. These changes could impact our fair value of options granted in the future.
The above items are not a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by authoritative guidance with no need for our management’s judgment in its application. There are also areas in which our management’s judgment in selecting any available alternative would not produce a materially different result. See our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K that contain accounting policies and other disclosures in accordance with authoritative guidance.
Results of Operations

45



 
2014
 
Percent of Total Revenue
 
2013
 
Percent of Total Revenue
 
2012
 
Percent of Total Revenue
 
(in thousands, except percent)
Revenue
$
48,364

 
100
 %
 
$
79,749

 
100
 %
 
$
125,948

 
100
 %
Cost of revenue
25,324

 
52

 
39,078

 
49

 
64,750

 
51

Gross profit
23,040

 
48

 
40,671

 
51

 
61,198

 
49

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
48,124

 
99

 
51,075

 
64

 
57,543

 
46

Selling, general, and administrative
17,389

 
36

 
18,816

 
24

 
19,056

 
15

Restructuring

 

 

 

 
1,062

 
1

Total operating expenses
65,513

 
135

 
69,891

 
88

 
77,661

 
62

Loss from operations
(42,473
)
 
(88
)
 
(29,220
)
 
(37
)
 
(16,463
)
 
(13
)
Other expense, net
(246
)
 
(1
)
 
(578
)
 
(1
)
 
(108
)
 

Loss before provision for income taxes
(42,719
)
 
(88
)
 
(29,798
)
 
(37
)
 
(16,571
)
 
(13
)
Provision for income taxes
606

 
1

 
589

 
1

 
1,014

 
1

Net loss
$
(43,325
)
 
(90
)%
 
$
(30,387
)
 
(38
)%
 
$
(17,585
)
 
(14
)%

Revenue by Product Family
The following table presents net revenue by reportable product family:
 
 
Year Ended
 
2014 vs 2013
 
2013 vs 2012
 
 
2014
 
2013
 
2012
 
$ Change
 
% Change
 
$ Change
 
% Change
 
 
(in millions except percent)
Gateway
 
$
37.7

 
$
60.4

 
$
94.0

 
$
(22.7
)
 
(38
)%
 
$
(33.6
)
 
(36
)%
Access
 
10.7

 
19.3

 
32.0

 
(8.6
)
 
(45
)
 
(12.7
)
 
(40
)
Total revenue
 
$
48.4

 
$
79.7

 
$
126

 
$
(31.3
)
 
(39
)
 
$
(46.3
)
 
(37
)
We track our products within two product families: Gateway and Access. The Access product family consists of semiconductor and software products that power the carrier infrastructure, as well as any node in a hybrid-fiber-copper network where fiber is terminated and copper is used to reach the consumer premises. The Gateway product family includes a variety of processors and the associated software designed for devices deployed at the customer premises.
Total revenue for 2014 declined by $31.3 million, or 39%, to $48.4 million from $79.7 million in 2013. Our four largest customers accounted for approximately 75% of our revenue in 2014. Our four largest customers accounted for approximately 60% of our revenue in 2013. During 2012, we began selling our next generation Gateway product chipsets (Fusiv Vx185, Vx183, Vx175, and Vx173). As noted above, even with the introduction of these new products, we continued to be adversely affected by the aging of our existing products as well as changes affecting the entire broadband industry generally. We have generally been experiencing quarterly revenue declines over the last three years.
Two factors were primarily responsible for the decline in our 2014 revenue. First, the decline in our legacy products was greater than the growth in revenue of our new products. However, concurrent with this, we did see a continuing shift in our revenue mix in favor of our new products. Revenue from new products (Vx 183/185/180/175/173 and Velocity-1) reached approximately 78% in 2014 versus approximately 58% in 2013. Secondly, we have continued to experience delays in our new product introduction, which, in turn, has pushed out the ramp of our new products in some end markets. We anticipate that customer ramps of our new products will continue to gain momentum.
The following table presents our direct customers that accounted for more than 10% of our revenue for the years indicated:


46



Our Direct Customer
2014
 
2013
 
2012
Sagemcom
29
%
 
24
%
 
19
%
Amod**
22

 
*

 
*

Paltek Corporation
16

 
10

 
*

Askey***
*

 
14

 
13

AVM
*

 
11

 
*

Flextronics Manufacturing (H.K.) Ltd.
*

 
*

 
12

*
Less than 10%
**
Amod is a distributor whose purchases from us are contracted to its end customer, Askey.
***
Askey is a contract manufacturer for Sagemcom.

Revenue by Country as a Percentage of Total Revenue
 
2014
 
2013
 
2012
Taiwan
35
%
 
22
%
 
18
%
France
30

 
25

 
20

Japan
21

 
18

 
19

Germany
5

 
12

 
6

China
2

 
5

 
12

Hong Kong

 
2

 
14

United States
1

 
3

 
1

Other
6

 
13

 
10

The table above reflects sales to our direct customers based on where they are headquartered. It does not necessarily reflect carrier deployment of our products as we do not sell directly to carriers. Comparing 2014 to 2013, the increase in sales to Taiwan reflects the increase in sales to Amod, a distributor whose purchases from us are contracted to its end customer, Askey, who, in turn, is a contract manufacturer for Sagemcom. Sales to France reflect an increase in percent of our direct sales to Sagemcom. Comparing 2013 to 2012 by geography, revenue increases as a percent of sales in France and Germany were offset by declines in revenue from China and Hong Kong.
Cost of Revenue and Gross Margin  
 
 
 
 
 
 
 
 
 
2014
 
2013
 
2012
 
 
Gross margin
 
48
%
 
51
%
 
49
%
Gross margin decreased 3% from 2013 to 2014 due primarily to two factors. In 2014 we increased the amount of revenue sold through lower-margin distributors from 5% of revenue in 2013 to 38% of our revenue in 2014. Margins were also adversely affected by a change in product mix from higher margin Access products to lower margin Gateway products.
Gross margin improved 2% in 2013 from 2012 due to lower intangible amortization costs and lower royalty costs. Intangible amortization was $1.1 million, or 1% of total revenue, lower in 2013 compared to 2012. In 2012, charges related to the patent license agreement in 2012 and prior years amounted to $1.5 million, or 1% of total revenue. Costs related to this patent license agreement were $0.5 million, or 1% of total revenue, in 2013.
Research and Development Expenses (in millions except percent)
Research and development (R&D) expenses are recognized as incurred and generally consist of compensation (including stock compensation expense) and associated expenses of employees engaged in research and development; contractors; tape-out expenses; reference board development; development testing, evaluation kits and tools; stock-based compensation; amortization of acquisition-related intangibles; and depreciation expense. Before releasing new products, we incur charges for mask sets, prototype wafers, mask set revisions, bring-up boards, and other qualification materials, which we refer to as tape-out expenses. These tape-out expenses may cause our R&D expenses to fluctuate because they are not incurred uniformly every quarter.
The following table presents details of research and development expense:

47



 
 
Year Ended
 
2014 vs 2013
 
2013 vs 2012
 
 
2014
 
2013
 
2012
 
$ Change
 
% Change
 
$ Change
 
%Change
 
 
( In millions, except percent)
Salaries and benefits
 
$
30.1

 
$
33.9

 
$
33.6

 
$
(3.8
)
 
(11
)%
 
$
0.3

 
1
 %
Development and design costs
 
9.3

 
8.0

 
14.2

 
1.3

 
16
 %
 
(6.2
)
 
(44
)%
Other
 
8.7

 
9.2

 
9.7

 
(0.5
)
 
(5
)%
 
(0.5
)
 
(5
)%
 
 
$
48.1

 
$
51.1

 
$
57.5

 
$
(3.0
)
 
(6
)%
 
$
(6.4
)
 
(11
)%
   (as a % of revenue)
 
99
%
 
64
%
 
46
%
 
 
 
 
 
 
 
 
Number of employees
 
178

 
202
 
205

 
(24
)
 
(12
)%
 
(3
)
 
(1
)%
The 2014 decrease of 6% in R&D expenses is attributable to an 11% decrease in salaries and benefits, the result of a 24 person reduction during 2014. These reductions were offset somewhat by higher development and design expense associated with costs related to our VX 58x/57x product lines. The 2013 decrease of 11% in R&D expenses is attributable to higher development and design costs related to Velocity 3 product development in 2012 than in 2013. In 2015, we expect that our salaries and benefits as well as our development and design costs will increase in association with the development of our next generation G.fast Access products.
Selling, General, and Administrative Expenses (in millions except percent)
Selling, general, and administrative (SG&A) expenses generally consist of compensation and related expenses for personnel; public company expenses; legal, recruiting and auditing fees; and depreciation.
The following table presents details of selling, general and administrative expenses:
 
 
Year Ended
 
2014 vs 2013
 
2013 vs 2012
 
 
2014
 
2013
 
2012
 
$ Change
 
%Change
 
$ Change
 
%Change
 
 
( In millions, except percent)
Salaries and benefits
 
$
11.9

 
$
12.6

 
$
12.4

 
$
(0.7
)
 
(6
)%
 
$
0.2

 
2
 %
Legal and accounting
 
2.3

 
3.0

 
2.9

 
(0.7
)
 
(23
)
 
0.1

 
3

Other
 
3.2

 
3.2

 
3.8

 

 

 
(0.6
)
 
(16
)
 
 
$
17.4

 
$
18.8

 
$
19.1

 
$
(1.4
)
 
(7
)
 
$
(0.3
)
 
(2
)
   (as a % of revenue)
 
36
%
 
24
%
 
15
%
 

 
 
 

 
 
Number of employees
 
54

 
61

 
57

 
 
 
(11
)%
 

 
7
 %
The 7% decrease in SG&A costs in 2014 is attributable to a 6% decrease in personnel costs, the result of a seven person reduction in 2014, and lower legal and accounting costs. SG&A costs in 2013 were relatively flat compared to 2012.
Interest and Other Income (Expense), Net
Interest income and other, net consists of interest income earned on our cash, cash equivalents, and short-term investments, other non-operating expenses, and interest expense, primarily related to loans under our Loan Agreement with SVB. It also includes other non-operating income and expense items such as gains and losses on foreign exchange and the sales of fixed assets.
Other expense, net was $0.2 million in 2014 compared to $0.6 million in 2013 and to $0.1 million in 2012. The expense in 2014 was primarily driven by interest costs related to our Amended SVB Loan Agreement. The expense of $0.6 million in 2013 was attributable to exchange losses resulting from a decline in the Indian rupee and the euro and interest expense related to the Loan Agreement of $0.2 million. The $0.1 million expense in 2012 resulted predominantly from foreign exchange losses recognized on the Indian rupee and euro offset by interest income of $0.1 million on our certificates of deposit.
Provision for Income Taxes
Income taxes are comprised mostly of federal income tax, foreign income taxes, and state minimum taxes. The income tax provision decreased by $0.4 million to $0.6 million for 2013 compared to $1.0 million for 2012. There was no significant tax contingency recorded during 2014. Our income tax provision primarily represents foreign taxes on certain of our international subsidiaries as well as federal taxes on unremitted earnings of foreign subsidiaries.

48



We are subject to taxation in the U.S., various states, and certain foreign jurisdictions. We are currently undergoing an income tax audit in India. Otherwise, there are no ongoing examinations by income taxing authorities at this time. We do not expect any material adjustments to our reserves. Our tax years from 2007 to 2014 remain open in various tax jurisdictions.
Liquidity, Capital Resources, and Going Concern
Working Capital, Cash and Cash Equivalents and Short-Term Investments
The following table presents working capital, cash and cash equivalents, and marketable securities:
 
 
 
Year Ended
 
 
 
 
 
2014
 
2013
 
$ Change
 
 
 
(In millions)
Working capital
 
 
$
12.8

 
$
35.7

 
$
(22.9
)
Cash and cash equivalents
 
 
$
13.3

 
$
36.0

 
$
(22.7
)
Short-term investments
 
 
2.4

 
3.5

 
(1.1
)
     Total
 
 
15.7

 
39.5

 
(23.8
)
Revolving line
 
 
10.8

 
12.0

 
(1.2
)
Cash and cash equivalents, net of revolving line
 
 
$
4.9

 
$
27.5

 
$
(22.6
)
We have funded our operations primarily through cash from private and public offerings of our common stock, our line of credit, cash generated from the sale of our products, proceeds from the exercise of stock options, and stock purchased under our employee stock purchase plan. Our uses of cash include payroll and payroll-related expenses, manufacturing costs, purchases of equipment, tools, and software as well as operating expenses, such as product tapeouts, marketing programs, travel, professional services, facilities, and other costs. We incurred net losses of $43.3 million, $30.4 million, and $17.6 million in 2014, 2013, and 2012, respectively, and had an accumulated deficit of $369.4 million as of December 28, 2014.
Primarily as a result of our net losses, our cash and cash equivalents, net of our revolving line, decreased by $22.6 million to $4.9 million for the year ended December 28, 2014. On February 4, 2015, we completed our Rights Offering and realized $11.6 million, net of transaction costs of $0.8 million. However, there can be no assurance that we will be able to raise additional capital necessary to fund our operations in 2015. Further, we anticipate that we may not be in compliance with the covenant contained in the Amended SVB Loan Agreement during certain periods of 2015 and, accordingly, we have begun discussions with SVB. As a result of our planned increase in development spending during 2015, recurring losses from operations and the need to stay in compliance with a debt covenant, if we are unable to raise sufficient additional capital through alternative debt or equity arrangements, there will be uncertainty regarding our ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to our ability to continue as a going concern. There can be no assurance that such additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to us.
Cash, cash equivalents, and short-term investments held by foreign subsidiaries was $4.6 million, $6.5 million, and $6.6 million at year end 2014, 2013, and 2012, respectively.
ALU Collaboration and Rights Offering
On September 29, 2014, as part of our collaboration with ALU on the development of ultra-broadband products, ALU and a group of investors affiliated with Tallwood Venture Capital (the “Tallwood Group”) collectively agreed to a financial commitment of up to $45.0 million, which consists of the purchase of approximately 4.0 million shares of the Company’s common stock at $4.10 per share for aggregate gross proceeds of $16.3 million, ALU’s commitment to loan the Company up to $10.0 million following the satisfaction of certain conditions (the “ALU Loan Agreement”), the Tallwood Group’s agreement to purchase an aggregate of an additional $11.2 million of common stock at the same per share price in the rights offering, and ALU’s agreement to provide an additional $7.5 million of other funding associated with the collaboration, subject to entry into a definitive collaboration agreement. Entry into the definitive collaboration agreement is a condition necessary for the Company to receive the remaining payments and other funding which makes up the remainder of in the financial commitment.
Our Rights Offering closed on February 4, 2015 and we issued 3.0 million shares and received gross proceeds of $12.3 million. After deducting legal, accounting, and other costs we realized net proceeds of $11.5 million from the Rights Offering. Tallwood participated in the Rights Offering and, thereby, fulfilled its agreement by investing $11.2 million to purchase an additional 2.7 million shares of our common stock.

49



Amended SVB Loan Agreement
We utilize the line of credit under the Amended SVB Loan Agreement to partially fund our operations, which agreement was originally entered into in January 2011 and amended periodically thereafter. On October 7, 2014, we entered into the Amended SVB Loan Agreement which amends and restates the prior agreement and extends the maturity date until October 2017. The Amended SVB Loan Agreement is collateralized by a first priority lien on all of our present and future assets, other than our intellectual property, and a second lien on our intellectual property. The Amended SVB Loan Agreement also requires that we maintain a minimum monthly Adjusted Quick Ratio requirement of 1.2 to 1.0, as defined in the Amended SVB Loan Agreement. We will need to continue to take further actions during the remainder of 2014 to generate adequate cash flows or earnings to ensure compliance with the Amended SVB Loan Agreement and fund our capital requirements.
As of December 28, 2014, $10.8 million was outstanding under the Amended SVB Loan Agreement. Interest on advances against the line is equal to 5.75% as of December 28, 2014 and is payable monthly.
We were in compliance with the Adjusted Quick Ratio covenant as of December 28, 2014, but we were not in compliance with the covenant at the end of January 2015; we sought and received a waiver from SVB with respect to this noncompliance. We expect to be in compliance with all of the covenants contained in the Amended SVB Loan Agreement through the remainder of the first quarter of 2015. However, we anticipate that we may not be in compliance with all of the covenants contained in the Amended SVB Loan Agreement during certain later periods of 2015 and, accordingly, we have begun discussions with SVB to address these potential instances of noncompliance.
Operating, Investing, and Financing Activities
The following table summarizes our statement of cash flows (in millions):
 
2014
 
2013
 
2012
Statements of Cash Flows Data:
 
 
 
 
 
Cash and cash equivalents—beginning of year
$
36.0

 
$
28.4

 
$
34.8

Net cash used in operating activities
(34.4
)
 
(20.0
)
 
(2.3
)
Net cash used in investing activities
(2.8
)
 
(5.0
)
 
(9.7
)
Net cash provided by financing activities
14.5

 
32.6

 
5.6

Cash and cash equivalents—end of year
$
13.3

 
$
36.0

 
$
28.4

Operating Activities
During 2014, we used $34.4 million in net cash from operating activities while incurring a loss of $43.3 million. Included in the net loss were non-cash charges amounting to $8.5 million that resulted from depreciation of $4.3 million, stock-based compensation of $3.8 million and the amortization of intangible assets and acquired technology of $0.5 million. Favorable cash flow resulted from a reduction in accounts receivable of $2.0 million, but was offset by lower accounts payable and accrued liabilities of $1.7 million. Accounts receivable days sales outstanding increased from 86 days at the end of 2013 to 109 at the end of 2014 due principally to the timing of shipments with a greater percentage being shipped in the latter part of the quarter. Inventories remained flat from the end of 2013 to 2014. Purchase commitments increased from $5.1 million at the end of 2013 to $6.7 million at the end of 2014. Prepaid wafers purchased by eSilicon on our behalf increased from $0.8 million at the end of 2013 to $1.0 million at the end of 2014 .
During 2013, we used $20.0 million in net cash from operating activities while incurring a loss of $30.4 million. Included in the net loss were non-cash charges amounting to $8.7 million that resulted from amortization of intangibles and acquired technology of $0.8 million, stock-based compensation of $3.6 million, and depreciation and amortization of $4.3 million. Favorable cash flow resulted from a decrease in inventories of $6.1 million and in prepaid expenses and other assets of $3.3 million. This improvement was offset by a decrease in accounts payable and accrued liabilities of $7.5 million and an increase in accounts receivable of $0.1 million. Prepaid expenses declined primarily due to lower prepaid wafer purchases for eSilicon. Prepayment to eSilicon was $0.8 million as of December 29, 2013 compared to $2.7 million as of December 30, 2012. Accounts receivable days sales outstanding have grown from 45 days as of December 30, 2012 to 86 days as of December 29, 2013 as sales declines and timing of shipments have changed from 2012 to 2013, with a higher percentage of shipments being later in our fiscal periods, resulting in higher receivables at our period end.
During 2012, we used $2.3 million in net cash from operating activities while incurring a loss of $17.6 million. Included in the net loss were non-cash charges amounting to $10.2 million that resulted from amortization of intangibles and acquired technology of $2.1 million, stock-based compensation of $2.9 million, depreciation and amortization of $5.2 million.

50



Cash flow from reductions in accounts receivable of $2.6 million and inventory of $1.4 million and increases in accounts payable and accrued liabilities of $5.2 million were partially offset by an increase in prepaid expense and other assets of $4.1 million. The decrease in accounts receivable reflects lower fourth quarter sales ($31.8 million in 2012 versus $35.4 million in 2011). Days sales outstanding were 45 days as of December 30, 2012 compared to days sales outstanding of 47 days as of January 1, 2012. The lower inventory balance reflects the effect of our Services Agreement with eSilicon, who is responsible for purchasing and assembling our products as discussed above. Prepaid expenses increased primarily due to prepayments to eSilicon of $2.7 million as of December 30, 2012. There was no prepayment to eSilicon as of January 1, 2012.
Investing Activities
During 2014, cash used in investing activities was $2.8 million, which was comprised of the purchases of property and equipment of $3.9 million, offset in part by the net maturities and sales of certificates of deposit of $1.1 million. During 2013, cash flow used in investing activities was $5.0 million, which was comprised of the purchases of property and equipment of $4.3 million and the net purchases of certificates of deposit of $0.7 million. During 2012, cash flow used in investing activities was $9.7 million, which was comprised of the purchases of property and equipment of $6.9 million and the net purchases of certificates of deposit of $2.8 million.
Financing Activities
During 2014, cash flow from financing activities provided $14.5 million. In September we sold an aggregate of 4.0 million shares of our common stock in a private placement to the Tallwood Group and ALU for $16.3 million. After deducting legal, accounting and certain other fees we realized net proceeds of $15.1 million. We also realized $0.5 million from stock purchases of our stock under our Employee Stock Purchase Plan. Net repayment under our Revolving Line was $1.2 million.
During 2013, cash flow from financing activities provided $32.6 million. In November 2013 we sold an aggregate of 26.4 million shares of common stock in an underwritten offering for $26.4 million. After deducting underwriting fees, legal, accounting, and other costs, we realized net proceeds of $24.0 million. Employee purchases of our common stock under our Employee Stock Purchase Plan amounted to $1.6 million. Net proceeds under our Loan Agreement were $7.0 million as we drew down $35.3 million and repaid $28.3 million.
During 2012, cash flow from financing activities provided $5.6 million. Employee purchases of our stock under the Employee Stock Purchase Plan amounted to $0.6 million. Net proceeds under our Revolving Line Loan Agreement were $5.0 million as we drew down a total of $10.0 million under the agreement during the third and fourth quarters and repaid $5.0 million in the fourth quarter.
Contractual Commitments and Off Balance Sheet Arrangements
We do not use off balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off balance sheet arrangements such as special purpose entities and research and development arrangements. Accordingly, our liquidity and capital resources are not subject to off balance sheet risks from unconsolidated entities.
We lease certain office facilities, equipment, and software under non-cancelable operating leases. The following table summarizes our contractual obligations as of December 28, 2014 and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in millions):
 
Total
 
2015
 
2016 and
2017
 
2018 and
2019
 
There-
after
Operating lease payments
$
6.5

 
$
2.5

 
$
3.6

 
$
0.4

 
$

CAD software tools
11.1

 
5.6

 
5.5

 

 

Intellectual property purchase obligations (1)
6.0

 
2.0

 
4.0

 

 

Inventory purchase obligations
6.7

 
6.7

 

 

 

Non-current income tax payable
0.8

 

 

 

 
0.8

Royalties
1.2

 
0.8

 
0.4

 

 

 
$
32.3

 
$
17.6

 
$
13.5

 
$
0.4

 
$
0.8

 
 
 
 
 
 
 
 
 
 
(1) During the quarter ending March 29, 2015, we expect to utilize the intellectual property purchase obligations and to capitalize the $6.0 million obligation as property and equipment with a six year useful life. The payment commitment will remained unchanged.
For the purpose of this table, purchase obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are

51



based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, we have purchase orders that represent authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements.
Computer aided design (CAD) tools are expensed when utilized. We expect to have a majority of the tools expensed prior to the fulfillment of payment obligations as a result of the ongoing G.fast related product development.
Non-current income tax payable represents both the tax obligation and related accrued interest. We are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to the uncertainties in the timing of tax outcomes.
In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant, and we are unable to estimate the maximum potential impact of these indemnification provisions on our future consolidated results of operations.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This guidance applies to any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This guidance supersedes existing revenue recognition guidance, including most industry-specific guidance, as well as certain related guidance on accounting for contract costs. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early adoption is not permitted. An entity should apply the guidance using one of two methods: retrospectively to each prior reporting period presented, with practical expedients or retrospectively with the cumulative effect of initial adoption of the guidance recognized at the date of initial application. We are currently evaluating the effect that the standard will have upon our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We are in the process of evaluating the provisions of ASU 2014-15.


ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our line of credit. We do not use derivative financial instruments in our investment portfolio. The primary objective of our investment activities is to preserve principal and meet liquidity needs, while maximizing yields and without significantly increasing risk. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer, or type of investment. As of December 28, 2014, we had investments of $2.4 million in certificates of deposit. Our cash and cash equivalents consist of cash and money market accounts.
As of December 28, 2014, we had cash and cash equivalents totaling $13.3 million. We do not enter into investments for trading or speculative purposes. If the return on our investments were to change by one hundred basis points, the effect would be de minimis.
As of December 28, 2014, we had $10.8 million outstanding under our line of credit with SVB. The interest rate was variable and was 5.75% under the revolving line at December 28, 2014. If the rates were to change by one hundred basis points and the balance remained the same, the effect would be approximately $0.1 million.
Foreign Currency Risk

52



Our revenue and cost of revenue are predominately denominated in U.S. dollars. An increase of the U.S. dollar relative to the currencies of the countries in which our customers operate would make our products more expensive to them and increase pricing pressure or reduce demand for our products. We also incur a portion of our expenses in currencies other than the U.S. dollar, including the euro, the Japanese yen, Korean won, Indian rupee, Singapore dollar, the Chinese yuan, and the Taiwanese dollar. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. We expect that our foreign currency exposure will increase as our operations in India and other countries expand. If exchange rates were to change by ten percent, the effect would be to increase/decrease income by approximately $1.0 million.

53



ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IKANOS COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
 


54



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Ikanos Communications, Inc.:
We have audited the accompanying consolidated balance sheet of Ikanos Communications, Inc. and subsidiaries (the “Company”) as of December 28, 2014, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year ended December 28, 2014. We also have audited the Company’s internal control over financial reporting as of December 28, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ikanos Communications, Inc. and subsidiaries as of December 28, 2014, and the consolidated results of their operations and their cash flows for the year ended December 28, 2014, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Ikanos Communications, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 28, 2014 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited the adjustments to the 2013 and 2012 consolidated financial statements of the Company to retroactively apply the change in accounting resulting from the reverse stock split, as described in Note 15. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2013 and 2012 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2013 and 2012 consolidated financial statements taken as a whole.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, is subject to certain debt covenants and may require additional financing to fund future capital and operating requirements. These factors raise substantial doubt about the ability of the Company to continue as a going concern. Management’s plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.

/s/ Moss Adams LLP
San Francisco, California
March 19, 2015

55



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Ikanos Communications, Inc:

In our opinion, the accompanying consolidated balance sheet as of December 29, 2013 and the related consolidated statements of operations, stockholders’ equity, comprehensive loss and cash flows present fairly for each of the two years in the period ended December 29, 2013, before the effects of the adjustments to retrospectively apply the effect of the reverse stock split described in Note 15, present fairly, in all material respects, the financial position of Ikanos Communications, Inc. and its subsidiaries (the “Company”) at December 29, 2013, and the results of their operations and their cash flows for each of the two years in the period ended December 29, 2013, in conformity with accounting principles generally accepted in the United States of America (the 2013 financial statements before the effects of the adjustments discussed in Note 15 are not presented herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements on our audits. We conducted our audits, before the effects of the adjustments described above, of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, is subject to certain restrictive debt covenants and may require additional financing to fund future capital and operating requirements that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the effect of the reverse split of the Company’s common stock described in Note 15 and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have properly applied. Those adjustments were audited by other auditors.



/s/ PricewaterhouseCoopers LLP

San Jose, California
February 28, 2014


56



IKANOS COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
 
December 28,
2014
 
December 29,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
13,270

 
$
36,043

Short-term investments
2,421

 
3,473

Accounts receivable, net
13,849

 
15,892

Inventory, net
1,964

 
2,017

Prepaid expenses and other current assets
3,682

 
3,245

Total current assets
35,186

 
60,670

Property and equipment, net
8,581

 
8,612

Intangible assets, net
239

 
718

Other assets
2,104

 
1,952

 
$
46,110

 
$
71,952

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Revolving line
$
10,841

 
$
12,000

Accounts payable
5,054

 
4,692

Accrued liabilities
6,460

 
8,232

Total current liabilities
22,355

 
24,924

Long-term liabilities
1,740

 
1,637

Total liabilities
24,095

 
26,561

Commitments and contingencies (Note 12)

 

Stockholders’ equity:
 
 
 
Preferred stock; $0.001 par value; 1,000 and 1,000 shares authorized, respectively; 0.001 and 0.001 share issued and outstanding, respectively

 

Common stock: $0.001 par value; 425,000 and 150,000 shares authorized, respectively; 13,994 and 9,931 issued, respectively, and 13,936 and 9,875 outstanding, respectively
139

 
99

Additional paid-in capital
390,729

 
363,811

Warrants
558

 
7,567

Accumulated deficit
(369,411
)
 
(326,086
)
Total stockholders’ equity
22,015

 
45,391

 
$
46,110

 
$
71,952


The accompanying notes are an integral part of these consolidated financial statements.
57



IKANOS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
 
Year Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Revenue
$
48,364

 
$
79,749

 
$
125,948

Cost of revenue
25,324

 
39,078

 
64,750

Gross profit
23,040

 
40,671

 
61,198

Operating expenses:
 
 
 
 
 
Research and development
48,124

 
51,075

 
57,543

Selling, general, and administrative
17,389

 
18,816

 
19,056

Restructuring charges

 

 
1,062

Total operating expenses
65,513

 
69,891

 
77,661

Loss from operations
(42,473
)
 
(29,220
)
 
(16,463
)
Interest and other expense, net
(246
)
 
(578
)
 
(108
)
Loss before provision for income taxes
(42,719
)
 
(29,798
)
 
(16,571
)
Provision for income taxes
606

 
589

 
1,014

Net loss
$
(43,325
)
 
$
(30,387
)
 
$
(17,585
)
Basic and diluted net loss per share
$
(3.97
)
 
$
(4.07
)
 
$
(2.52
)
Weighted average number of shares (basic and diluted)
10,908

 
7,473

 
6,970


The accompanying notes are an integral part of these consolidated financial statements.
58



IKANOS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, except per share data)
 
 
Year Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Net loss
$
(43,325
)
 
$
(30,387
)
 
$
(17,585
)
Other comprehensive loss, net of tax

 

 

Comprehensive loss
$
(43,325
)
 
$
(30,387
)
 
$
(17,585
)

The accompanying notes are an integral part of these consolidated financial statements.
59



IKANOS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
 
 
Common Stock
 
Additional
Paid in
Capital
 
Warrants
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance at January 1, 2012
6,933

 
$
70

 
$
331,199

 
$
7,567

 
$
(278,114
)
 
$
60,722

Net loss

 

 

 

 
(17,585
)
 
(17,585
)
Stock-based compensation

 

 
2,892

 

 

 
2,892

Issuance of common stock under employee stock plans
79

 
1

 
597

 

 

 
598

Vesting of restricted stock
19

 

 

 

 

 

Balance at December 30, 2012
7,031

 
71

 
334,688

 
7,567

 
(295,699
)
 
46,627

Net loss

 

 

 

 
(30,387
)
 
(30,387
)
Stock-based compensation

 

 
3,573

 

 

 
3,573

Common Stock Offering, net of issuance costs
2,639

 
26

 
23,943

 

 

 
23,969

Issuance of common stock under employee stock plans
176

 
2

 
1,607

 

 

 
1,609

Vesting of restricted stock
28

 

 

 

 

 

Balance at December 29, 2013
9,874

 
99

 
363,811

 
7,567

 
(326,086
)
 
45,391

Net loss

 

 

 

 
(43,325
)
 
(43,325
)
Stock-based compensation

 

 
3,780

 

 

 
3,780

Common Stock Offering, net of issuance costs
3,963

 
40

 
15,075

 

 

 
15,115

Issuance of common stock under employee stock plans
99

 

 
496

 


 

 
496

Expiration of warrants issued to Tallwood

 

 
7,567

 
(7,567
)
 

 

Warrants issued to Alcatel Lucent

 

 

 
558

 

 
558

Balance at December 28, 2014
13,936

 
$
139

 
$
390,729

 
$
558

 
$
(369,411
)
 
$
22,015


The accompanying notes are an integral part of these consolidated financial statements.
60



IKANOS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Year Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(43,325
)
 
$
(30,387
)
 
$
(17,585
)
Adjustments to reconcile net loss to net cash used by operating activities:
 
 
 
 
 
Depreciation
4,278

 
4,282

 
5,256

Stock-based compensation expense
3,780

 
3,573

 
2,892

Amortization of intangible assets and acquired technology
479

 
811

 
2,073

Changes in assets and liabilities:
 
 
 
 
 
Accounts receivable, net
2,043

 
(144
)
 
2,560

Inventory
53

 
6,105

 
1,352

Prepaid expenses and other assets
(31
)
 
3,307

 
(4,077
)
Accounts payable and accrued liabilities
(1,700
)
 
(7,516