S-1/A 1 d106686ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on October 20, 2017.

Registration No. 333-220871

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

To

Form S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

Aquantia Corp.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   3674   20-1199709

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Aquantia Corp.

105 E. Tasman Drive

San Jose, California 95134

(408) 228-8300

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

 

Faraj Aalaei

President and Chief Executive Officer

Aquantia Corp.

105 E. Tasman Drive

San Jose, California 95134

(408) 228-8300

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

 

Copies to:

 

Babak Yaghmaie
Robert W. Phillips

Joshua A. Kaufman
Cooley LLP

1114 Avenue of the Americas
New York, New York 10036

(212) 479-6000

 

Mark Voll

Chief Financial Officer

Aquantia Corp.

105 E. Tasman Drive
San Jose, California 95134

(408) 228-8300

 

Jorge del Calvo

Davina K. Kaile

Pillsbury Winthrop Shaw Pittman LLP

2550 Hanover Street

Palo Alto, California 94304

(650) 233-4500

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    ☐

 

Accelerated filer    ☐

 

Non-accelerated filer    ☒

   Smaller reporting company    ☐
 

(Do not check if a small reporting company)

   Emerging growth company    ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Proposed Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee(3)

Common Stock, $0.00001 par value per share

  $86,250,000   $10,738.13

 

 

(1)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes the aggregate offering price of additional shares that the underwriters have the option to purchase to cover over-allotments, if any.

(3)

The Registrant previously paid $10,738.13 of registration fee in connection with the initial filing of the Registration Statement.

 

 

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

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued October 20, 2017

             Shares

 

LOGO

COMMON STOCK

 

 

This is the initial public offering of shares of common stock of Aquantia Corp. We are offering              shares of our common stock. We anticipate that the initial public offering price will be between $         and $         per share.

 

 

We have applied to have our common stock listed on the New York Stock Exchange under the symbol “AQ.”

 

 

We are an “emerging growth company,” as defined under the federal securities laws, and are subject to reduced public company reporting requirements. Investing in our common stock involves risks. See “Risk Factors” beginning on page 16.

 

 

PRICE $             PER SHARE

 

 

 

      

Price to

Public

      

Underwriting
Discounts and
Commissions(1)

      

Proceeds to
Aquantia

 

Per share

       $                   $                   $           

Total

       $                              $                              $                      

 

(1)

See the section titled “Underwriting” for a description of the compensation payable to the underwriters.

We have granted the underwriters the right to purchase up to              additional shares of common stock from us to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2017.

 

 

 

MORGAN STANLEY   BARCLAYS   DEUTSCHE BANK SECURITIES
NEEDHAM & COMPANY     RAYMOND JAMES

                    , 2017


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LOGO

 

 

ACCELERATING CONNECTIVITY AQUANTIA AQUANTIA An Established Multi-Gig Ethernet Leader DATA CENTER ENTERPRISE ACCESS >1B ETHERNET PORTS Targeted in Multi-Gigabit Upgrade Cycle AUTOMOTIVE Driving Innovations in Autonomous Vehicles AQUANTIA


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     16  

Special Note Regarding Forward-Looking Statements

     39  

Industry and Market Data

     41  

Glossary

     42  

Use of Proceeds

     44  

Dividend Policy

     45  

Capitalization

     46  

Dilution

     48  

Selected Consolidated Financial Data

     51  

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

     53  

Business

     82  

Management

     101  
 

 

 

Neither the company nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have and are likely to have changed since that date.

Through and including                     , 2017 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither the company nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus, and does not contain all of the information you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our audited consolidated financial statements and related notes and the information set forth in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unless the context otherwise requires, the terms “Aquantia,” “the company,” “we,” “us,” and “our” in this prospectus refer to Aquantia Corp. and its subsidiaries.

AQUANTIA CORP.

Overview

We are a leader in the design, development and marketing of advanced high-speed communications integrated circuits, or ICs, for Ethernet connectivity in the data center, enterprise infrastructure and access markets. Our Ethernet solutions provide a critical interface between the high-speed analog signals transported over wired infrastructure and the digital information used in computing and networking equipment. Our products are designed to cost-effectively deliver leading-edge data speeds for use in the latest generation of communications infrastructure to alleviate network bandwidth bottlenecks caused by the exponential growth of global Internet Protocol, or IP, traffic. Many of our semiconductor solutions have established benchmarks in the industry in terms of performance, power consumption and density. Our innovative solutions enable our customers to differentiate their product offerings, position themselves to gain market share and drive the ongoing equipment infrastructure upgrade cycles in the data center, enterprise infrastructure and access markets.

Ethernet is a ubiquitous and evolving standard of network connectivity that is characterized by its reliability and backward compatibility, which enables easy upgrades and continuity of operation through upgrade cycles. One Gigabit Ethernet, or 1GbE, has been deployed as a mainstream wired connectivity standard for over a decade. However, 1GbE is increasingly insufficient to meet the bandwidth requirements that can accommodate the exponential growth of global IP traffic. As a result, the 1GbE infrastructure is currently undergoing an upgrade cycle that is driven by the need to alleviate bandwidth bottlenecks on the wired side of networking equipment, including the data center (servers and switches), the enterprise infrastructure (wireless access points, or APs, and switches), and the access (client connectivity for personal computers, or PCs, and carrier access) markets. Based on projections by Crehan Research Inc., or Crehan Research, 650 Group LLC, or 650 Group, IDC and Dell’oro Group, Inc., or Dell’oro, we estimate that across these markets, over one billion Ethernet ports will ship in 2017 and that this number will grow to 1.2 billion ports in 2020, representing a substantial opportunity for upgrade of the Ethernet physical layer, or PHY. In addition, we believe another new opportunity for Ethernet is emerging in the automotive market, as a result of increased investment in the development of autonomous vehicles, or self-driving cars. Historically, the transition to the next Ethernet generation has been led by the introduction of IC solutions that reliably and cost-effectively meet the new Ethernet standard. We believe that the current upgrade cycle will follow the same course.

As the data rate of PHY devices continues to increase, the technical challenges of designing high-speed communications ICs require a significantly new architectural approach. In order to meet next-generation performance requirements with low power consumption and a small footprint, our differentiated architecture combines our two fundamental innovations: Mixed-Mode Signal Processing, or MMSP, which partitions signal processing across analog and digital domains, and Multi-Core Signal Processing, or MCSP, which incorporates multiple customized units to more efficiently process digital signals. We also implement patented techniques in Analog Front-End, or AFE, algorithms, power management and programmability in the design of our products. Our

 



 

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next-generation Ethernet solutions have been developed by one of the most innovative design teams in the semiconductor industry, with deep expertise across multiple disciplines that range from analog and mixed-mode design to digital signal processing and communication theory. We have leveraged the expertise of our design team to achieve technological breakthroughs and bring what we believe to be best-in-class semiconductor solutions to market, anticipating the future technological needs of our customers and helping them shape their product roadmaps. Our best-in-class semiconductor solutions provide the functionalities that meet customers’ requirements, as well as the relevant Institute of Electrical and Electronics Engineers, or IEEE, standard. For example, in 2012 we created a novel technology that we call AQrate, which has since been adopted by the IEEE as the baseline for the IEEE 802.3bz standard that was ratified in September 2016 as the industry specifications for 2.5GBASE-T and 5GBASE-T products made by different manufacturers to be compatible with each other. This technology is currently being deployed in the enterprise infrastructure and access markets.

We are a fabless semiconductor company. We have shipped more than 10 million ports to customers across three semiconductor process generations, and are currently in mass production in 28nm process node. 28nm and other silicon process geometries, such as 40nm and 90nm, refer to the size of the process node in nanometers for a particular semiconductor manufacturing process. Our target markets include ASICs and ASSPs for Data Processing and Communications across the following applications: Enterprise LAN and Wireless LAN Infrastructure; Server, 1/2/4+ CPU socket; Storage Network Infrastructure and DAS/FAS Storage; PC, desktop-based; Service Provider Routers and Switches. We estimate that our total addressable market opportunity across these target markets is $11.5 billion in 2017.

We estimate that our serviceable addressable market opportunity across our application-specific standard product, or ASSP, and application-specific integrated circuit, or ASIC, applications is approximately 100 million ports of Multi-Gig Ethernet in 2020, based on projections by Crehan Research, 650 Group, IDC and Dell’oro, which we estimate would be equivalent to $800 million. While the combined data center, enterprise infrastructure and access market generally includes ICs that run at 2.5Gbps, 5Gbps, 10Gbps, 25Gbps, 40Gbps, 50Gbps, 100Gbps, 200Gbps and 400Gbps, our market excludes 40Gbps, 200Gbps and 400Gbps ICs because 40Gbps technology has experienced limited market adoption and is projected to decline over the next few years as it is replaced by 25/50/100Gbps, and 200Gbps and 400Gbps ICs are still at a very early stage of development with limited market adoption. Our end customers include Aruba (acquired by Hewlett-Packard Enterprise in 2015), Brocade, Cisco, Dell, Hewlett-Packard Enterprise, Huawei, IBM, Intel, Juniper, Oracle and Ruckus (acquired by Brocade in 2016). For the years ended December 31, 2014, 2015 and 2016 and the six months ended June 30, 2017, sales to Intel accounted for approximately 68%, 78%, 68% and 65% of our revenue, respectively. For the years ended December 31, 2014, 2015 and 2016, our revenue was $24.5 million, $80.8 million and $86.7 million, respectively, our net loss attributable to common stockholders was $27.8 million, $10.0 million and $0.4 million, respectively, and our non-GAAP net income (loss) was $(26.8) million, $1.3 million and $1.1 million, respectively. For the six months ended June 30, 2016 and 2017, our revenue was $41.4 million and $48.8 million, respectively, our net loss attributable to common stockholders was $0.7 million and $3.4 million, respectively, and our non-GAAP net loss was $0.3 million and $1.1 million, respectively. See the section titled “—Summary Consolidated Financial Data—Non-GAAP Financial Measures” below for additional information regarding non-GAAP financial measures and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures.

Industry Opportunities

The migration of data to the cloud and the proliferation of mobile devices are continuously driving the need for faster wired connections in data center, enterprise infrastructure and access environments. The legacy

 



 

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infrastructure currently installed in these environments is primed for the next upgrade cycle. The data transported over wired connections can be transmitted either optically or electrically, and the transport protocol is typically based on the widely deployed Ethernet standard. Optical solutions are generally able to carry high-bandwidth traffic over long distances, but can be cost-prohibitive in short-distance applications that are typical of the data center, enterprise infrastructure and access environments. Electrical copper-based interconnects are generally less expensive than optical solutions due to their implementation in silicon. The most commonly deployed interconnect solution is based on twisted-pair copper cabling, commonly called Ethernet cable, or BASE-T. The 100-meter reach of BASE-T, its ease of deployment and its large installed base have made it the preferred medium in many information technology, or IT, environments. According to Crehan Research, approximately 80% of all connections currently are between switches and servers (the two main components of data center architecture), and 80% of those connections are electrical, resulting in electrical interconnect solutions accounting for more than 60% of data center connections. In 2016, the majority of all links in data center and enterprise environments were based on GbE, and 90% of all GbE links were based on twisted-pair copper cabling.

The increasing demand for faster connectivity in corporate data centers has led network engineers to consider upgrading from GbE to 10GbE, with the 10GBASE-T standard experiencing the fastest growth among existing 10GbE PHY options, due to its reach, lower cost and backward compatibility with earlier generations of Ethernet. Crehan Research projects that shipments of 10GBASE-T in data centers will reach 29 million ports in 2020, representing approximately 23% of all ports shipping to data centers that year and a compound annual growth rate, or CAGR, of 27% from 2017 through 2020.

Another class of data center, the “cloud data center” or “hyperscale data center” for the largest cloud data centers, is witnessing a major transformation. In this class of data center, due to impact of social media and video applications, data requests by remote clients typically generate multiple queries and are often retrieved from multiple sources in different servers. The resulting data traffic pattern is called East-West, as data flows back and forth between adjacent servers within the data center before exiting the data center, as opposed to a North-South traffic pattern, characteristic of corporate data centers, in which a remote client retrieves data from a single server in the data center. The impact of this new trend and topology is a dramatic increase in bandwidth requirements between servers and switches towards speeds as high as 100Gbps for very short connections. Crehan Research projects that, out of a total of approximately 130 million ports shipping to data centers in 2020, shipment of 100Gigabit Ethernet, or 100GbE, together with 25GbE and 50GbE, will reach 47 million ports, representing approximately 37% of all ports added to data centers that year and a CAGR of 87% from 2017 through 2020.

In the enterprise infrastructure, 1GbE over twisted-pair copper cabling, or 1000BASE-T, has been adopted as the preferred connectivity between PCs, wireless local-area networks, or WLANs, APs and Ethernet switches. This adoption has been facilitated by the ease of deployment of Ethernet cables in ceilings and walls, and the relatively low cost of 1000BASE-T-based networking equipment. Ethernet cables have been widely deployed in this segment of the market, representing more than 90% of the worldwide base of cables installed between 2003 and 2014. With the advent of 802.11ac and 802.11ax, the latest IEEE standards for WiFi pushing throughput up to 5Gbps, the wired 1GbE connectivity between WLAN APs and switches has become insufficient and the need for a Multi-Gigabit/s, or Multi-Gig, Ethernet wired connectivity solution has emerged, in both the enterprise and small and medium sized business, or SMB, environments. 650 Group projects that shipments of 2.5GBASE-T and 5GBASE-T in the enterprise infrastructure market will reach 57 million ports in 2020, representing a CAGR of 112% from 2017 through 2020. 650 Group also estimates that in 2020, 385 million ports in enterprise and small- and medium-sized businesses still will be 1GbE, representing a significant opportunity for growth for Multi-Gig.

In the access market, which consists of PC connectivity (or client connectivity) and carrier termination devices and gateway boxes used at home and in offices (or carrier access) the need to adopt the Multi-Gig

 



 

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solution has emerged. Despite the trends towards lighter and thinner machines such as notebooks and laptops, IDC projects that PCs will continue to be equipped with Ethernet ports for the foreseeable future, estimating that 194 million PCs, or approximately 80% of the total market, will ship with an Ethernet port by 2020, driven by enterprise buyers and gamers. Based on current adoption trends, we estimate that 10 million ports of Multi-Gig Ethernet, in the form of 2.5GBASE-T, 5GBASE-T and 10GBASE-T, will ship in 2020 as PC users transition to Multi-Gig. Inside PCs, the Ethernet PHY device is typically integrated with a Media Access Control device, also referred to as the controller. We believe that integrated solutions combining both the PHY and the controller are likely to become the preferred choice of PC original equipment manufacturers. Our targeted carrier access market focuses on the last 100 meters between the carrier or service provider termination device, which is typically located in the basement of an apartment complex or the entry-door cabinet in an individual home, and the residential gateway box which is typically owned or leased by the consumer. As carriers and service providers deploy “last-mile” high bandwidth technologies, such as Passive Optical Network, or PON, Digital Subscriber Line, or DSL, and cable modem, the need has arisen to provide high-bandwidth, low-cost, easy-to-deploy solutions to connect termination devices and gateway boxes. The bandwidth requirement is now exceeding 1 Gbps in an increasing number of deployments, on distances that are typically within 100 meters between termination device and gateway box. In addition, we anticipate that the availability of Multi-Gig Ethernet on PCs, Network-Attach Storage, or NAS, as well as 802.11ac/ax WiFi extenders and wireless routers, will drive the need for gateways to migrate from 1GbE to Multi-Gig Ethernet on the local-area network, or LAN, side as well. Dell’oro projects that 74 million gateways will ship in 2020, representing a total of 370 million ports as gateways typically ship with five Ethernet ports per box. We estimate that seven million ports of Multi-Gig Ethernet will ship on the wide-area network, or WAN, and LAN sides of these gateways in 2020.

The automotive market is undergoing a transformation with the development of self-driving cars. Developing a fully autonomous vehicle requires innovation in the areas of image processing, fast and multi-dimensional decision-making processes, and deep learning, similar to some of the most advanced facial recognition algorithms or complex model simulations being handled by super computers in hyperscale data centers today. As a result, systems that are being contemplated by the car industry to deliver such capabilities will likely need high-speed signaling connecting together end points such as cameras and other sensors, processing units, and an array of switches for rich connectivity and redundancy. Ethernet is one of the most promising technologies to deliver the high-speed connectivity required for making the self-driving car a reality. The car environment has its own very stringent set of requirements such as low weight, low power consumption, limited electro-magnetic emissions and susceptibility, ability to support higher spread of environmental temperature, and low cost. In terms of connectivity, this matrix of requirements is well served by high-speed Multi-Gig Ethernet over copper cabling. The potential market opportunity is considerable. Raymond James estimates that the silicon content in autonomous vehicles will represent a $30 billion total addressable market by 2030. We are currently shipping products into this market but do not expect significant volume production to occur until 2019.

Challenges to the Adoption of 10GbE and Multi-Gig Ethernet over Copper Cabling

 

   

Technical Challenges. The continued increase in signal transmission speeds presents a number of technical challenges due to the significant impairments, such as attenuation, crosstalk and echo, suffered by the signal as it is transmitted over copper cabling. As transmission speeds increase beyond 1Gbps, the amount of processing required to be performed in the silicon layer to address these impairments increases correspondingly, leading to greater design complexity. In recent years, innovations in the areas of digital signal processing and semiconductor manufacturing have further advanced the use of copper cabling for high-speed data transmission.

 

   

Power Consumption. As the amount of processing performed in the silicon layer increases to address signal impairments, the power consumption of the entire PHY device also increases. In recent years,

 



 

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advancements in lithography and other manufacturing process technologies have allowed for significantly reduced transistor geometries, resulting in considerably lower power consumption per IC and a greater level of integration. Interconnect solutions based on 10GbE over copper cabling have benefited from these manufacturing advancements. For instance, first-generation solutions consumed up to 25W of power, requiring additional cooling technologies. Current generation solutions based on 28nm silicon reduce typical power to a couple of watts.

Nevertheless, addressing these technical challenges with conventional silicon architectures generally yields ICs that are inefficient and consume more power. We believe the design of complex signal processing solutions requires a novel architectural approach.

Our Solution

We have developed a differentiated architecture that leverages our deep technical design expertise to create integrated high-performance connectivity solutions that address the significant opportunities present in the data center, enterprise infrastructure and access markets. Our Ethernet PHY solutions provide a critical interface between the high-speed analog signals transported over wired infrastructure and the digital information used in computing and networking equipment. Our architecture combines our two fundamental innovations, MMSP and MCSP, as well as several other patented techniques in AFE design, algorithms, power management and programmability.

We initially used these core innovations in the development of 10GBASE-T PHY devices, and subsequently in custom ASICs for Intel that integrate our PHY devices with various elements of Intel’s proprietary technologies. These custom ASICs are driving the transition to 10GbE networking from legacy 1GbE technology in corporate data center applications. While the corporate data center market provides an opportunity for us to serve both server applications and switching applications, historically our core focus has been on the server portion of that market, primarily supporting our relationship with Intel.

More recently, we employed our fundamental PHY expertise to develop AQrate, our technology designed to improve transmission speeds from 1GbE to 5GbE over existing copper cabling infrastructure in the enterprise infrastructure and access market. Our Multi-Gig AQrate-based products are being deployed in WLAN APs and Enterprise/SMB switches.

Subsequently, we developed a Multi-Gig Ethernet controller and integrated it with our AQrate as well as our 10GBASE-T PHYs to deliver a size, power and cost-optimized solution for client connectivity in PCs for the access market. Our AQrate PHYs are also being integrated inside service provider gateways for deployment in the home to provide Multi-Gig speeds on the WAN side and in some cases also on the LAN side of the equipment.

We also developed a breakthrough 100GbE interconnect solution we call QuantumStream, leveraging on our core expertise and proprietary architecture. Our QuantumStream technology is capable of transporting data at a speed of 100Gbps over a single lane of copper cabling and is aimed at inter and intra rack connectivity of up to three meters, complementing longer reach optical connectivity solutions in hyperscale data centers and cloud computing environments. According to estimates by Crehan Research, this represents the majority of direct server and storage Ethernet network connections in hyperscale data centers.

We are currently developing solutions for Multi-Gig Ethernet over copper to serve the potential automotive market opportunity. We are also collaborating with several CPU/GPU chip manufacturers that specialize in artificial intelligence and complex processing for autonomous driving applications. We are currently shipping products into this market but do not expect significant volume production to occur until 2019.

 



 

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Benefits We Provide to Our Customers

We believe our solutions provide our customers the following benefits:

 

   

Performance. The combination of our MMSP and MCSP innovations creates an architecture that is die-size optimized for high performance. These core processing units are responsible for correcting impairments suffered by the signal as it is transmitted over Ethernet cable for Multi-Gig and 10GBASE-T, or over backplanes and direct attach cable in the case of 100GbE. We believe our innovative, low cost implementation of these building blocks delivers quality and reliability that exceed industry standards. This translates into additional margin in the system design, allowing customers to meet or even surpass quality expectations of their end customers.

 

   

Power. We produce ICs that reduce complexity in the digital signal processing logic due, in part, to our novel MMSP architecture. Architectural innovations such as our MMSP have enabled our PHY ICs to deliver low power consumption. For instance, our first generation PHY product was delivered at lower power in 90nm process node compared to similar products delivered by our competitors in 65nm process node. Additionally, since analog does not shrink through process scaling, and our architecture benefits from an intrinsically smaller design, we expect a sustainable and growing advantage as the design migrates to finer process geometries. We were the first to deliver a 28nm product to the market, and we endeavor to maintain our leadership position.

 

   

Port Density. Our proprietary analog architecture leads to small-footprint ICs. As we migrated our 10GbE solution to the 40nm process node, our higher density design allowed us to deliver the industry’s first 10GBASE-T quad-port in a 25mm x 25mm package. We believe this small-size package enabled our customers, for the first time, to design a high-density 48-port switch platform in a single-row of chipsets, instead of the inefficient 2-row design that was previously used. In addition to high port-density Ethernet switching applications, our small-footprint IC solutions are being used in space-constrained products such as WLAN APs and computing platforms. Recently, we have also introduced the industry’s smallest single-port 2.5GBASE-T, 5GBASE-T and 10GBASE-T PHY, designed on a 28nm process, with a footprint of 7mm x 11mm. Beside its application in space-constrained products such as WLAN APs and residential gateways, this IC was also designed in Aquantia-branded SFP+ pluggable modules supporting 2.5GBASE-T, 5GBASE-T and 10GBASE-T. These SFP+ products are currently being deployed in data center and enterprise-type switches and servers that have been shipped with empty SFP+ cages.

 

   

Innovation and Customer Focus. Given the technical challenges associated with developing high-speed PHY products, our customers typically rely on our technical expertise, deep understanding of the PHY market and execution track record to deliver them solutions. By anticipating future trends and demonstrating an in-depth understanding of our customers’ evolving needs, we believe we have the ability to translate our ideas into innovative product concepts, which in turn enables our customers to deliver best-in-class products into their markets. We operate at a high level of responsiveness to our customers’ needs due to our lean structure and process efficiency, and have a well-established track record of delivering on our customers’ specifications from the first silicon order.

 

   

High Quality. To sustain our market leadership, we emphasize high quality across all of our product lines and continuously work to exceed customer expectations. Our high-volume customers report quality metrics on products we ship that are significantly higher than industry norms. We have been able to maintain this standard of high quality across three generations of standard CMOS process technology, most recently in 28nm process node.

Our Competitive Strengths

 

   

Differentiated Technology Architecture. We believe our connectivity solutions, many of which are protected with patents and our fundamental trade secrets around analog and mixed signal design,

 



 

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provide us with a significant competitive advantage across our target end markets. Our semiconductor solutions have repeatedly established benchmarks in the industry in terms of performance, power consumption and density. We believe our design techniques and technical innovations, including our MMSP and MCSP technology, enable us to successfully compete with and win designs against larger, more established peers. As of June 30, 2017, we had a total of 85 issued patents, 73 of which are U.S. patents, and 29 pending and provisional U.S. patent applications. We continue to invest in our core technology to stay ahead of the competition in the process node migration of our products.

 

   

Top Industry Talent. We believe the engineering and design talent of our employees is critical to our success. As of June 30, 2017, we employed 186 engineers with deep technical expertise in analog, digital signal processing and mixed-mode signal design, digital signal processing, communication theory and chip-level integration. Our highly talented team of engineers brings together expertise in varied products, including Ethernet PHYs, high-speed serializer/deserializer, Ethernet switching, cellular networking, memory, microprocessors, programmable logic arrays, PLDs, and experience from across industry leaders, including AMD, Beceem, Broadcom, Centillium, Intel, LSI Logic, National Semiconductor, Philips and Samsung. We intend to continue to aggressively recruit and seek to retain talented engineering and design personnel.

 

   

Consistent Long-Term Relationships with Leaders in Our Markets. We have built significant long-term relationships with, and have developed our solutions for, industry leaders, including Intel, the leader in server microprocessors, and Cisco, the leader in networking infrastructure. We have repeatedly demonstrated our ability to address and preempt the technological challenges facing each of these customers and, as a result, we are designed into several of their respective current systems and their emerging products and architectures. Our key customers rely on our technologically advanced solutions to enable their end products to provide their customers with the highest performance and reliability while maintaining a low total cost of ownership. As such, we have built significant long-term relationships with our key customers that enable them to trust our ability to successfully execute to their internal roadmaps and meet the needs of their end customers.

 

   

Market Insight and Vision. We are deeply involved with our customers in defining next-generation technologies by leveraging our market knowledge and product expertise in the data center, enterprise infrastructure and access markets. We are helping shape our customers’ roadmaps and product offerings to their end customers through our fundamental understanding of their technology cycles and product needs. We believe this has enabled us to anticipate market trends ahead of our competition, develop innovative technologies in existing markets and create new market opportunities.

 

   

Track Record of Execution. We believe we have demonstrated a track record of execution excellence by productizing existing technologies and bringing to market industry-defining technological developments. To date, we have shipped millions of data center-class ICs with our core communications technologies and have achieved more than 170 design wins for ASIC and PHY products across a variety of end markets with a growing number of existing and new customers. Similarly, we demonstrated our ability to bring an entirely new product to market with the successful development and launch of AQrate in the enterprise infrastructure and access markets. AQrate has been established as the technology leader through its adoption by the IEEE as the baseline for the IEEE 802.3bz standard for 2.5GBASE-T and 5GBASE-T products.

Our Strategy

Key elements of our strategy include:

 

   

Expand Market Share with Leaders in Existing Markets. Customers with which we have existing supplier relationships are continuously developing new products in existing and new application areas.

 



 

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These customers tend to be large multinational enterprises with significant annual budgets for IC purchases. We intend to increase our market share through our existing customer base by applying our design capabilities to new design programs and by continuing to foster deep relationships with these customers. We believe our product roadmaps will enhance our ability to win new business due to the fact that these new roadmaps have been developed in close collaboration with our existing customers. Further, these customers also typically include our products to develop their future product roadmaps.

 

   

Sell to New Customers in Existing Markets. We have successfully demonstrated a number of key benefits to our existing customers within certain applications and markets, such as the data center and enterprise infrastructure markets. We believe these customers’ products have become more competitive as a direct result of using our solutions. We intend to work with other leading original equipment manufacturers in our existing markets to help them realize similar benefits by deploying our IC solutions.

 

   

Broaden Product Portfolio to Target New Markets. We intend to continue to develop new products that we can leverage across our core data center and enterprise infrastructure markets, and use to penetrate the access and other new markets. In particular, we believe that our core expertise, IP and product portfolio can be leveraged to continue to expand into the access market and to address connectivity needs in the automotive market, where technology requirements for autonomous driving vehicles will push the bandwidth for wired high-speed connectivity well beyond the 100 Mbps and 1Gbps currently being deployed.

 

   

Continue to Enhance Key Technological Expertise. We maintain three intertwining areas of technical expertise: analog and mixed-mode signal design, signal processing and algorithms, and Ethernet networking. Our engineers have a deep knowledge of Ethernet and data networking that enables us to assist our customers in driving their product roadmaps. We intend to invest in research and development to continue to drive industry leadership. To maintain our position as a technology leader, we intend to continue to leverage our deep market insight and product roadmap knowledge of our customers and our customers’ customers to look ahead to new products and solutions.

Risks Associated with Our Business

Our business is subject to numerous risks, as more fully described in the section titled “Risk Factors” immediately following this prospectus summary. You should read these risks before you invest in our common stock. We may be unable, for many reasons, including those that are beyond our control, to implement our business strategy. In particular, risks associated with our business include, among others:

 

   

We depend on a limited number of customers for a substantial majority of our revenue, and believe that our operating results for the foreseeable future will continue to depend on sales to Intel and Cisco, our two largest customers. If we fail to retain or expand our customer relationships or if our customers cancel or reduce their purchase commitments, our revenue would decline significantly.

 

   

Our revenue and operating results have fluctuated in the past and may fluctuate from period to period in the future as a result of a variety of factors, many of which are beyond our control, including customer demand, our customer’s end customer demand, which we refer to as “end-market”, into which we have limited insight, product life cycles, market acceptance of our products and our customers’ products and pricing, product cost and product mix. Fluctuations in our revenue and operating results could cause our stock price to fluctuate.

 

   

Our success and future revenue depend on our ability to achieve design wins and to convince our current and prospective customers to design our products into their product offerings. If we do not continue to win designs or if our products are not designed into our customers’ product offerings, our results of operations and business will be harmed.

 



 

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The success of our products is dependent on our customers’ ability to develop products that achieve market acceptance, and our customers’ failure to do so could negatively affect our business.

 

   

Our target markets may not grow or develop as we currently expect, and if we fail to penetrate new markets, such as the access market, and scale successfully within those markets, our revenue and financial condition could be harmed.

 

   

If we are not able to successfully introduce and ship in volume new products as our existing products near the end of their product lifecycle, our business and revenue will suffer.

 

   

If we fail to accurately anticipate and respond to rapid technological change in the industries in which we operate, our ability to attract and retain customers could be impaired and our competitive position could be harmed.

 

   

If we fail to compete effectively, we may lose or fail to gain market share, which could negatively impact our operating results and our business.

 

   

We depend on third parties for our wafer, assembly and testing operations which exposes us to certain risks that may harm our business.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012. We intend to take advantage of certain exemptions under the JOBS Act from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these exemptions for up to five years or until we are no longer an “emerging growth company,” whichever is earlier.

We have irrevocably elected not to avail ourselves of the provision of the JOBS Act that permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Corporate Information

We were incorporated in Delaware on January 27, 2004. Our principal executive offices are located at 105 E. Tasman Drive, San Jose, California 95134 and our telephone number is (408) 228-8300. Our corporate website address is www.aquantia.com. Information contained on or accessible through our website is not a part of this prospectus, should not be relied on in determining whether to make an investment decision, and the inclusion of our website address in this prospectus is an inactive textual reference only.

We have obtained or are in the process of obtaining registered trademarks for Aquantia, AQrate and QuantumStream. This prospectus contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 



 

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THE OFFERING

 

Common stock offered by us

  

                 shares

Over-allotment option offered by us

  

                 shares

Common stock to be outstanding after this offering

  

                 shares (                  shares if the underwriters exercise their over-allotment option in full)

Use of proceeds

  

We estimate that the net proceeds to us from this offering will be approximately $         million (or $         million if the underwriters exercise their over-allotment option in full), based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We currently intend to use approximately $         million of the net proceeds we receive from this offering to prepay a portion of our outstanding indebtedness, though this may change due to market or other factors.

 

We intend to use the remaining net proceeds from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, product development, general and administrative matters, and capital expenditures, although we do not currently have any specific or preliminary plans with respect to use of proceeds for such purposes. We also may use a portion of the remaining net proceeds to acquire complementary businesses, products, services or technologies; however, we do not have agreements or commitments for any specific acquisitions at this time. See the section titled “Use of Proceeds.”

Risk factors

  

You should read the section titled “Risk Factors” for a discussion of certain of the factors to consider carefully before deciding to purchase any shares of our common stock.

Directed share program

  

At our request, the underwriters have reserved up to                  shares of common stock, or up to     % of the shares of common stock offered by this prospectus for sale, at the initial public offering price, to our directors, officers, certain employees, business associates, and friends and family of our directors and officers. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved

 



 

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shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.

Proposed NYSE trading symbol

  

“AQ”

The number of shares of our common stock to be outstanding after this offering is based on 25,503,080 shares of common stock outstanding as of June 30, 2017, and excludes:

 

   

3,882,957 shares of common stock issuable upon the exercise of outstanding stock options as of June 30, 2017, at a weighted-average exercise price of $4.44 per share;

 

   

                 shares of our common stock reserved for future issuance under our 2017 Equity Incentive Plan, or the 2017 Plan, which will become effective upon the execution and delivery of the underwriting agreement for this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under the 2017 Plan;

 

   

                 shares reserved for future issuance under the 2017 Employee Stock Purchase Plan, or the ESPP. which will become effective upon the execution and delivery of the underwriting agreement for this offering;

 

   

2,340,816 shares of convertible preferred stock issuable upon the exercise of convertible preferred stock warrants (excluding our Series C-1 convertible preferred stock warrants) outstanding as of June 30, 2017, at a weighted-average exercise price of $1.03 per share, which warrants will convert into warrants to purchase 234,079 shares of common stock, at a weighted-average exercise price of $10.32 per share, immediately prior to the closing of the offering; and

 

   

3,006,088 shares of Series C-1 convertible preferred stock issuable upon the exercise of our Series C-1 convertible preferred stock warrant outstanding as of June 30, 2017, at an exercise price of $0.01 per share, which will convert into a warrant to purchase 350,069 shares of common stock, at an exercise price of $0.0858713 per share, immediately prior to the closing of this offering.

Unless otherwise indicated, all information contained in this prospectus assumes or gives effect to:

 

   

the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws upon the closing of this offering;

 

   

a 1-for-10 reverse split of our common stock effected October 5, 2017;

 

   

no exercise by the underwriters of their option to purchase up to                  additional shares of our common stock to cover over-allotments, if any;

 

   

the automatic conversion of our convertible preferred stock warrants outstanding as of June 30, 2017 into warrants to purchase an aggregate of 584,148 shares of our common stock immediately prior to the closing of this offering and no exercise of these warrants; and

 

   

the automatic conversion of all of our convertible preferred stock outstanding as of June 30, 2017 into an aggregate of 20,816,754 shares of our common stock immediately prior to the closing of this offering.

 



 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The summary consolidated statements of operations data presented below for the years ended December 31, 2014, 2015 and 2016 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data presented below for the six months ended June 30, 2016 and 2017, and the consolidated balance sheet data as of June 30, 2017, are derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and, in the opinion of management, include all adjustments of a normal, recurring nature that are necessary for the fair presentation of the financial statements. The following summary consolidated financial data have been updated to reflect the completion of the 1-for-10 reverse stock split of our common stock which was effective on October 5, 2017 and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any period in the future and our results for the six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the full year.

 

    Year Ended December 31,     Six Months Ended June 30,  
    2014     2015     2016             2016                     2017          
    (in thousands, except share and per share data)  

Revenue

  $ 24,500     $ 80,807     $ 86,675     $ 41,374     $ 48,807  

Cost of revenue(1)

    16,189       41,511       34,064       16,183       20,959  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    8,311       39,296       52,611       25,191       27,848  

Operating expenses:

         

Research and development(1)

    27,343       25,262       36,553       17,301       20,944  

Sales and marketing(1)

    2,142       3,756       5,347       2,873       3,456  

General and administrative(1)

    4,403       6,284       7,124       3,796       4,475  

Collaboration and development charge(2)

          12,024                    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    33,888       47,326       49,024       23,970       28,875  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (25,577     (8,030     3,587       1,221       (1,027

Other income (expense):

         

Interest expense

    (2,164     (3,321     (3,334     (1,871     (1,016

Change in fair value of convertible preferred stock warrant liability

    (15     1,591       (544     78       (1,700

Other income, net

    12       5       14       3       28  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (2,167     (1,725     (3,864     (1,790     (2,688
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

    (27,744     (9,755     (277     (569     (3,715

Provision for (benefit from) income taxes

    56       200       168       106       (358
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders and comprehensive loss

  $ (27,800   $ (9,955   $ (445   $ (675   $ (3,357
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(3)

  $ (24.83   $ (6.64   $ (0.10   $ (0.17   $ (0.74
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share, basic and diluted(3)

    1,119,632       1,498,233       4,240,461       4,055,411       4,549,015  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to common stockholders, basic and diluted(3)

      $ 0.00       $ (0.07
     

 

 

     

 

 

 

Weighted-average shares used to compute pro forma net loss per share, basic(3)

        24,074,289         24,697,392  
     

 

 

     

 

 

 

Weighted-average shares used to compute pro forma net income per share, diluted(3)

        28,465,903         24,697,392  
     

 

 

     

 

 

 

 



 

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(1)

Stock-based compensation included in the consolidated statements of operations data above was as follows:

 

     Year Ended
December 31,
     Six Months
Ended June 30,
 
     2014      2015      2016          2016              2017      
     (in thousands)  

Cost of revenue

   $ 10      $ 19      $ 31      $ 15      $ 14  

Research and development

     382        373        489        206        293  

Sales and marketing

     36        71        95        46        64  

General and administrative

     430        329        324        182        178  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 858      $ 792      $ 939      $ 449      $ 549  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)

Collaboration and development charge represents the fair value of a fully vested warrant to purchase 9,756,160 shares of Series H convertible preferred stock issued to GLOBALFOUNDRIES U.S. Inc., which warrant was exercised in full on May 5, 2017. See Notes 2 and 18 to our audited consolidated financial statements included elsewhere in this prospectus.

(3)

See Note 15 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share attributable to common stockholders, pro forma net loss per share attributable to common stockholders, and the number of weighted-average shares used to compute the per share amounts.

 

     As of June 30, 2017  
     Actual     Pro Forma(1)      Pro Forma
As
Adjusted(2)(3)
 
           (in thousands)         

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 17,369     $ 17,369      $               

Working capital

     19,494       19,494     

Total assets

     62,882       62,882     

Total debt

     18,351       18,351     

Convertible preferred stock warrant liability

     3,847           

Total liabilities

     34,510       30,663     

Convertible preferred stock

     210,269           

Total stockholders’ deficit

     (181,897     32,219     

 

(1)

The pro forma column gives effect to (1) the automatic conversion of all of our outstanding convertible preferred stock into 20,816,754 shares of our common stock immediately prior to the closing of this offering, (2) the automatic conversion of our convertible preferred stock warrants into warrants to purchase an aggregate of 584,148 shares of our common stock immediately prior to the closing of this offering, and (3) the filing and effectiveness of our amended and restated certificate of incorporation upon the closing of this offering.

(2)

The pro forma as adjusted column gives effect to the pro forma adjustments described in footnote (1) above and gives further effect to (a) the sale of                  shares of common stock by us in this offering at an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (b) the application of approximately $         million of the net proceeds from this offering to prepay in full the outstanding indebtedness under our loan with Pinnacle Ventures L.L.C.

(3)

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), would increase (decrease), each of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity on a pro forma as adjusted basis by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each 1.0 million increase (decrease) in the number of shares offered by us as set forth on the cover page of this prospectus, would increase (decrease) each of our cash and cash equivalents, working capital, total asset and total stockholders’ (deficit) equity on a pro forma as adjusted basis by approximately $         million, assuming no change in the assumed initial public offering price per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information set forth in the table above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 



 

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Non-GAAP Financial Measures

We use the financial measures set forth below, which are non-GAAP financial measures, to help us analyze our financial results, establish budgets and operational goals for managing our business and to evaluate our performance. We also believe that the presentation of these non-GAAP financial measures in this prospectus provides an additional tool for investors to use in comparing our core business and results of operations over multiple periods with other companies in our industry, many of which present similar non-GAAP financial measures to investors. However, the non-GAAP financial measures presented in this prospectus may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated. The non-GAAP financial measures presented in this prospectus should not be considered as the sole measure of our performance and should not be considered in isolation from, or as a substitute for, comparable financial measures calculated in accordance with GAAP.

The information in the table below sets forth the non-GAAP financial measures that we use in this prospectus.

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
     2014     2015     2016     2016     2017  
     (dollars in thousands)  
          

Non-GAAP net income (loss)

   $ (26,757   $ 1,303     $ 1,071     $ (288   $ (1,092

Adjusted EBITDA

     (22,819     6,642       7,266       2,869       1,728  

Adjusted EBITDA margin

     (93 %)      8     8     7     4

Non-GAAP Net Income (Loss). We define non-GAAP net income (loss) as net loss attributable to common stockholders reported on our consolidated statements of operations and comprehensive loss, excluding the impact of the following non-cash charges: stock-based compensation, a collaboration and development charge, change in fair value of convertible preferred stock warrant liability and amortization of acquired intangibles resulting from business combination. We have presented non-GAAP net income (loss) because we believe that the exclusion of these non-cash charges allows for a more relevant comparison of our results of operations to other companies in our industry.

Adjusted EBITDA and Adjusted EBITDA Margin. We define adjusted EBITDA as our net loss attributable to common stockholders excluding: (1) stock-based compensation; (2) depreciation and amortization; (3) interest expense; (4) a collaboration and development charge; (5) change in fair value of convertible preferred stock warrant liability; (6) other income, net; and (7) income tax expense. We define adjusted EBITDA margin as adjusted EBITDA divided by revenue. We have presented adjusted EBITDA and adjusted EBITDA margin because we believe they are important measures used by industry analysts and investors to compare our performance against that of our peer group and they provide a useful measure for period-to-period comparisons of our core operating performance.

 



 

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Reconciliation of Non-GAAP Financial Measures

The following tables reconcile the most directly comparable GAAP financial measure to each of these non-GAAP financial measures.

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
     2014     2015     2016     2016     2017  
     (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

          

Non-GAAP Net Income (Loss):

          

Net loss attributable to common stockholders

   $ (27,800   $ (9,955   $ (445   $ (675   $ (3,357

Stock-based compensation

     858       792       939       449       549  

Amortization of acquired intangibles resulting from business combination

     170       33       33       16       16  

Change in fair value of convertible preferred stock warrant liability

     15       (1,591     544       (78     1,700  

Collaboration and development charge

           12,024                    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP net income (loss)

   $ (26,757   $ 1,303     $ 1,071     $ (288   $ (1,092
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA and Adjusted EBITDA Margin:

          

Net loss attributable to common stockholders

   $ (27,800   $ (9,955   $ (445   $ (675   $ (3,357

Stock-based compensation

     858       792       939       449       549  

Depreciation and amortization

     1,900       1,856       2,740       1,199       2,206  

Interest expense

     2,164       3,321       3,334       1,871       1,016  

Collaboration and development charge

           12,024                    

Change in fair value of convertible preferred stock warrant liability

     15       (1,591     544       (78     1,700  

Other income, net

     (12     (5     (14     (3     (28

Provision for (benefit from) income taxes

     56       200       168       106       (358
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (22,819   $ 6,642     $ 7,266     $ 2,869     $ 1,728  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

     24,500       80,807       86,675       41,374       48,807  

Adjusted EBITDA margin

     (93 )%      8     8     7     4

 



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before investing in our common stock. If any of the following risks are realized, in whole or in part, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operation.

Risks Related to Our Business and Our Industry

We depend on a limited number of customers for a substantial majority of our revenue. If we fail to retain or expand our customer relationships or if our customers cancel or reduce their purchase commitments, our revenue could decline significantly.

We derive a substantial majority of our revenue from a limited number of customers. We believe that our operating results for the foreseeable future will continue to depend on sales to Intel Corporation, or Intel, and Cisco Systems, Inc., or Cisco, our two largest customers. For the years ended December 31, 2014, 2015 and 2016 and the six months ended June 30, 2017, sales to Intel accounted for approximately 68%, 78%, 68% and 65% of our revenue, respectively. Substantially all of our sales to date, including sales to Intel and Cisco, have been made on a purchase order basis, which orders may be cancelled, changed or delayed with little or no notice or penalty. As a result of this customer concentration, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of Intel, Cisco or any other significant customer. In the future, Intel, Cisco or any other significant customer may decide to purchase fewer units than they have in the past, may alter their purchasing patterns at any time with limited notice, or may decide not to continue to purchase our semiconductor solutions at all, any of which could cause our revenue to decline materially and materially harm our financial condition and results of operations. In addition, our relationships with existing customers may deter potential customers who compete with these customers from buying our semiconductor solutions. If we are unable to diversify our customer base, we will continue to be susceptible to risks associated with customer concentration.

Our revenue and operating results may fluctuate from period to period, which could cause our stock price to fluctuate.

Our revenue and operating results have fluctuated in the past and may fluctuate from period to period in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following factors, as well as other factors described elsewhere in this prospectus:

 

   

customer demand and product life cycles;

 

   

the receipt, reduction or cancellation of orders by customers;

 

   

fluctuations in the levels of component inventories held by our customers, which have in the past caused significant fluctuations in our revenue;

 

   

the gain or loss of significant customers;

 

   

market acceptance of our products and our customers’ products;

 

   

our ability to develop, introduce and market new products and technologies on a timely basis;

 

   

the timing and extent of product development costs;

 

   

new product announcements and introductions by us or our competitors;

 

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our research and development costs and related new product expenditures;

 

   

seasonality and fluctuations in sales by product manufacturers that incorporate our semiconductor solutions into their products;

 

   

end-market demand into which we have limited insight, including cyclicality, seasonality and the competitive landscape;

 

   

cyclical fluctuations in the semiconductor market;

 

   

fluctuations in our manufacturing yields;

 

   

significant warranty claims, including those not covered by our suppliers; and

 

   

changes in our pricing, product cost and product mix.

As a result of these and other factors, you should not rely on the results of any prior quarterly or annual periods, or any historical trends reflected in such results, as indications of our future revenue or operating performance. Fluctuations in our revenue and operating results could cause our stock price to decline and, as a result, you may lose some or all of your investment.

We have an accumulated deficit and have incurred net losses in the past, and we may continue to incur net losses in the future.

As of June 30, 2017, we had an accumulated deficit of $195.6 million. We generated net losses of $27.8 million, $10.0 million and $0.4 million for the years ended December 31, 2014, 2015 and 2016, respectively and $3.4 million for the six months ended June 30, 2017. We may continue to incur net losses in the future.

Our success and future revenue depend on our ability to achieve design wins and to convince our current and prospective customers to design our products into their product offerings. If we do not continue to win designs or our products are not designed into our customers’ product offerings, our results of operations and business will be harmed.

We sell our semiconductor solutions to customers who include our solutions in their hardware products. This selection process is typically lengthy and may require us to incur significant design and development expenditures and dedicate scarce engineering resources in pursuit of a single design win. If we fail to convince our current or prospective customers to include our products in their product offerings or fail to achieve a consistent number of design wins, our results of operations and business will be harmed.

Because of our extended sales cycle, our revenue in future years is highly dependent on design wins we are awarded today. It is typical that a design win today will not result in meaningful revenue until one year or later, if at all. For example, for the year ended December 31, 2016, substantially all of our revenue was derived from design wins for which revenue was first recognized more than 12 months ago. If we do not continue to win designs in the short term, our revenue in the following years will deteriorate.

Further, a significant portion of our revenue in any period may depend on a single product design win with a large customer. As a result, the loss of any key design win or any significant delay in the ramp of volume production of the customer’s products into which our product is designed could adversely affect our financial condition and results of operations. We may not be able to maintain sales to our key customers or continue to secure key design wins for a variety of reasons, and our customers can stop incorporating our products into their product offerings with limited notice to us and suffer little or no penalty.

The loss of a key customer or design win, a reduction in sales to any key customer, a significant delay or negative development in our customers’ product development plans, or our inability to attract new significant customers or secure new key design wins could seriously impact our revenue and materially and adversely affect our results of operations.

 

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The success of our products is dependent on our customers’ ability to develop products that achieve market acceptance, and our customers’ failure to do so could negatively affect our business.

The success of our semiconductor solutions is heavily dependent on the timely introduction, quality and market acceptance of our customers’ products incorporating our solutions, which may be impacted by factors beyond our control. Our customers’ products are often very complex and subject to design complexities that may result in design flaws, as well as potential defects, errors and bugs. We have in the past been subject to delays and project cancellations as a result of design flaws in the products developed by our customers, changing market requirements, such as the customer adding a new feature, or because a customer’s product fails their end customer’s evaluation or field trial. In other cases, customer products are delayed due to incompatible deliverables from other vendors. We incur significant design and development costs in connection with designing our products for customers’ products that may not ultimately achieve market acceptance. If our customers discover design flaws, defects, errors or bugs in their products, or if they experience changing market requirements, failed evaluations or field trials, or incompatible deliverables from other vendors, they may delay, change or cancel a project, and we may have incurred significant additional development costs and may not be able to recoup our costs, which in turn would adversely affect our business and financial results.

Defects in our products could harm our relationships with our customers and damage our reputation.

Defects in our products may cause our customers to be reluctant to buy our products, which could harm our ability to retain existing customers and attract new customers and adversely impact our reputation and financial results. The process of identifying a defective or potentially defective product in systems that have been widely distributed may be lengthy and require significant resources. Further, if we are unable to determine the root cause of a problem or find an appropriate solution, we may delay shipment to customers. As a result, we may incur significant replacement costs and contract damage claims from our customers, and our reputation and financial results may be adversely affected.

Our target markets may not grow or develop as we currently expect, and if we fail to penetrate new markets and scale successfully within those markets, our revenue and financial condition would be harmed.

A substantial majority of our revenue for the years ended December 31, 2014, 2015 and 2016 and the six months ended June 30, 2017 was derived from the data center market. In 2014, we began introducing products for the enterprise infrastructure market and, in 2016, we began introducing products into the access market which serves the client connectivity and carrier access markets. We are currently developing solutions for Multi-Gig Ethernet over copper with major car manufacturers and Tier-1 suppliers in the automotive market. Any deterioration in these markets or reduction in capital spending to support these markets could lead to a reduction in demand for our products, which would adversely affect our revenue and results of operations. Further, if our target markets do not grow or develop in ways that we currently expect, demand for our technology may not materialize as expected, which would also negatively impact our business.

We may be unable to predict the timing or development of trends in these end markets with any accuracy and these trends may not be beneficial to us. If we fail to accurately predict market requirements or market demand for these solutions, our business will suffer. A market shift towards an industry standard that we may not support could significantly decrease the demand for our solutions. For example, we have invested significant resources in developing semiconductor solutions to address 2.5GbE and 5GbE operation over today’s Cat5e and Cat6 cabling infrastructure. If these technologies are not adopted as an industry standard, our investment may not lead to future revenue.

Our future revenue growth, if any, will depend in part on our ability to expand within our existing markets, our ability to continue to penetrate newer markets, such as the access market which we entered in 2016, and our ability to enter into new markets, such as the automotive market. Each of these markets presents distinct and substantial challenges and risks and, in many cases, requires us to develop new customized solutions to address

 

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the particular requirements of that market. Meeting the technical requirements and securing design wins in any of these new markets will require a substantial investment of our time and resources. We cannot assure you that we will secure design wins from these or other new markets, or that we will achieve meaningful revenue from sales with these markets. If any of these markets do not develop as we currently anticipate or if we are unable to penetrate them and scale in them successfully, our projected revenue would decline.

If we are unable to manage our growth effectively, we may not be able to execute our business plan and our operating results and stock price could suffer.

In order to succeed in executing our business plan, we will need to manage our growth effectively as we make significant investments in research and development and sales and marketing, and expand our operations and infrastructure both domestically and internationally. In addition, in connection with operating as a public company, we will incur additional significant legal, accounting and other expenses that we did not incur as a private company. If our revenue does not increase to offset these increases in our expenses, we may not achieve or maintain profitability in future periods.

To manage our growth effectively, we must continue to expand our operations, engineering, financial accounting, internal management and other systems, procedures and controls. This may require substantial managerial and financial resources, and our efforts may not be successful. Any failure to successfully implement systems enhancements and improvements will likely have a negative impact on our ability to manage our expected growth, as well as our ability to ensure uninterrupted operation of key business systems and compliance with the rules and regulations applicable to public companies. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new semiconductor solutions, and we may fail to satisfy customer product or support requirements, maintain the quality of our solutions, execute our business plan or respond to competitive pressures, any of which could negatively affect our brand, results of operations and overall business.

The average selling prices of our products and of other products in our markets have decreased historically over time and may do so in the future, which could harm our revenue and gross margins.

The average selling prices of our products and of other semiconductor products in the markets we serve generally have decreased over time. Our revenue is derived from sales to large customers and, in some cases, we have agreed in advance to modest price reductions, generally over a period of time ranging from 18 months to five years, once the specified product begins to ship in volume. However, our customers may change their purchase orders and demand forecasts at any time with limited notice due in part to fluctuating end-market demand, which can sometimes lead to price renegotiations. Although these price renegotiations can sometimes result in the average selling prices fluctuating over the shorter term, we expect average selling prices generally to decline over the longer term as our products mature.

We seek to offset the anticipated reductions in our average selling prices by reducing the cost of our products through improvements in manufacturing yields and lower wafer, assembly and testing costs, developing new products, enhancing lower-cost products on a timely basis and increasing unit sales. However, if we are unable to offset these anticipated reductions in our average selling prices, our results of operations, cash flows and overall business could be negatively affected.

If we are not able to successfully introduce and ship in volume new products as our existing products near the end of their product lifecycle, our business and revenue will suffer.

We have developed products that we anticipate will have product life cycles of 10 years or more, as well as other products in more volatile high growth or rapidly changing areas, which may have shorter life cycles. Our future success depends, in part, on our ability to develop and introduce new technologies and products that generate new sources of revenue to replace, or build upon, existing revenue streams that may be dependent upon limited product life cycles. If we are unable to repeatedly introduce, in successive years, new products that ship

 

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in volume, or if our transition to these new products does not successfully occur prior to any decrease in revenue from our prior products, our revenue will likely decline significantly and rapidly.

Our gross margins may fluctuate due to a variety of factors, which could negatively impact our results of operations and our financial condition.

Our gross margins may fluctuate due to a number of factors, including customer and product mix, market acceptance of our new products, timing and seasonality of the end-market demand, yield, wafer pricing, competitive pricing dynamics and geographic and market pricing strategies.

Further, because we are so dependent on a few large customers, these customers have significant leverage with respect to negotiating pricing and other terms with us and may put downward pressure on our margins. To attract new customers or retain existing customers, we have in the past and will in the future offer certain customers favorable prices, which would decrease our average selling prices and likely impact gross margins. Further, we may also offer pricing incentives to our customers on earlier generations of products that inherently have a higher cost structure, which would negatively affect our gross margins.

Because we do not operate our own manufacturing, assembly or testing facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities, and our costs may even increase, which could further reduce our gross margins. We rely primarily on obtaining yield improvements and volume-based cost reductions to drive cost reductions in the manufacture of existing products, introducing new products that incorporate advanced features and optimize die size, and other price and performance factors that enable us to increase revenue while maintaining gross margins. To the extent that such cost reductions or revenue increases do not occur in a timely manner, our financial condition and results of operations could be adversely affected.

In addition, we maintain inventory of our products at various stages of production and in finished good inventory. We hold these inventories in anticipation of customer orders. If those customer orders do not materialize, we may have excess or obsolete inventory which we would have to reserve or write off, and our gross margins would be adversely affected.

Our customers require our products and our third-party contractors to undergo a lengthy and expensive qualification process which does not assure product sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, our business and operating results would suffer.

Prior to purchasing our semiconductor solutions, our customers require that both our solutions and our third-party contractors undergo extensive qualification processes, which involve testing of our products in the customers’ systems, as well as testing for reliability. This qualification process may continue for several months. However, qualification of a product by a customer does not assure any sales of the product to that customer. Even after successful qualification and sales of a product to a customer, a subsequent revision in our third-party contractors’ manufacturing process or our selection of a new supplier may require a new qualification process with our customers, which may result in delays and in our holding excess or obsolete inventory. After our products are qualified, it can take several months or more before the customer commences volume production of components or systems that incorporate our products. Despite these uncertainties, we devote substantial resources, including design, engineering, sales, marketing and management efforts, to qualifying our products with customers in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, sales of those products to the customer may be precluded or delayed, which would cause our business and operating results to suffer.

We may be subject to warranty or product liability claims, which could result in unexpected expenses and loss of market share.

From time to time, we may be subject to warranty or product liability claims that may require us to make significant expenditures to defend those claims, replace our solutions, refund payments or pay damage awards. We generally agree to indemnify our customers for defects in our products.

 

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If a customer’s equipment fails in use, the customer may incur significant monetary damages, including an equipment recall or associated replacement expenses as well as lost revenue. The customer may claim that a defect in our product caused the equipment failure and assert a claim against us to recover monetary damages. In certain situations, circumstances might warrant that we consider incurring the costs or expense related to a recall of one of our products in order to avoid the potential claims that may be raised should a customer reasonably rely upon our product and suffer a failure due to a design or manufacturing process defect. In addition, the cost of defending these claims and satisfying any arbitration award or judgment with respect to these claims would result in unexpected expenses and could harm our business prospects. Although we carry product liability insurance, this insurance is subject to significant deductibles and may not adequately cover our costs arising from defects in our products or otherwise.

If we fail to accurately anticipate and respond to rapid technological change in the industries in which we operate, our ability to attract and retain customers could be impaired and our competitive position could be harmed.

We operate in industries characterized by rapidly changing technologies as well as technological obsolescence. The introduction of new products by our competitors, the delay or cancellation of any of our customers’ product offerings for which our semiconductor solutions are designed, the market acceptance of products based on new or alternative technologies or the emergence of new industry standards could render our existing or future products uncompetitive, obsolete and otherwise unmarketable. Our failure to anticipate or timely develop new or enhanced products or technologies in response to changing market demand, whether due to technological shifts or otherwise, could result in the loss of customers and decreased revenue and have an adverse effect on our operating results.

If our products do not conform to, or are not compatible with, existing or emerging industry standards, demand for our existing solutions may decrease, which in turn would harm our business and operating results.

We design certain of our products to conform to current industry standards. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers or by our third-party suppliers. In addition, existing standards may be challenged as infringing upon the intellectual property rights of other companies or may be superseded by new innovations or standards.

Our ability to compete in the future will depend on our ability to identify and ensure compliance with evolving industry standards in our target markets, including in the data center and enterprise infrastructure markets. The emergence of new industry standards could render our products incompatible with products developed by third-party suppliers or make it difficult for our products to meet the requirements of certain original equipment manufacturers, or OEMs. If our customers or our third-party suppliers adopt new or competing industry standards with which our solutions are not compatible, or if industry groups fail to adopt standards with which our solutions are compatible, our products would become less desirable to our current or prospective customers. As a result, our sales would suffer, and we could be required to make significant expenditures to develop new solutions.

Although we believe our products are fully compliant with applicable industry standards, proprietary enhancements may not in the future result in full conformance with existing industry standards under all circumstances. Due to the interdependence of various components in the systems within which our products and the products of our competitors operate, once a design is adopted, customers are unlikely to switch to another design until the next generation of the applicable technology. For example, we have developed our AQrate technology, which is designed to address 2.5GbE and 5GbE operation over today’s Cat5e and Cat6 cabling infrastructure. If this semiconductor solution fails to meet the needs of our customers or penetrate new markets in a timely fashion, and does not gain acceptance, we may not maintain or may lose market share and our competitive position, and operating results will be adversely affected.

 

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We may experience difficulties demonstrating the value to customers of newer solutions if they believe existing solutions are adequate to meet end customer expectations. If we are unable to sell new generations of our product, our business would be harmed.

As we develop and introduce new solutions, we face the risk that customers may not value or be willing to bear the cost of incorporating these newer solutions into their product offerings, particularly if they believe their customers are satisfied with those current offerings. Regardless of the improved features or superior performance of the newer solutions, customers may be unwilling to adopt our new solutions due to design or pricing constraints. Because of the extensive time and resources that we invest in developing new solutions, if we are unable to sell customers new generations of our solutions, our revenue could decline and our business, financial condition, results of operations and cash flows would be negatively affected.

We depend on our executive officers and other key employees, and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could adversely affect our business.

Our success depends largely upon the continued services of our executive officers and other key employees, including our design and technical personnel. From time to time, there may be changes in our executive management team or other key personnel, which could disrupt our business. We do not have employment agreements with our executive officers or other key personnel that require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. The loss of one or more of our senior executive officers or other key employees could have an adverse effect on our business.

In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel in the San Francisco Bay Area, where our headquarters is located, and in other locations where we maintain offices, is intense, especially for engineers experienced in designing and developing semiconductor solutions. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached legal obligations, resulting in a diversion of our time and resources if we respond to them. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, it may adversely affect our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected.

We may be unable to make the substantial investments that are required to remain competitive in our business.

The semiconductor industry requires substantial and continuous investment in research and development in order to bring to market new and enhanced solutions. Our research and development expenses were $27.3 million, $25.3 million and $36.6 million for the years ended December 31, 2014, 2015 and 2016, respectively and $20.9 million for the six months ended June 30, 2017. We expect to increase our research and development expenditures compared to prior periods as part of our strategy to increase demand for our solutions in our current markets and to expand into additional markets. We are a smaller company with limited resources, and we may not have sufficient resources to maintain the level of investment in research and development required to remain competitive. In addition, we cannot assure you that the technologies, which are the focus of our research and development expenditures, will become commercially successful or generate any revenue.

If we fail to compete effectively, we may lose or fail to gain market share, which could negatively impact our operating results and our business.

The global semiconductor market in general, and the data center and enterprise communications markets in particular, is highly competitive. We compete in our target markets on the basis of a number of competitive factors. We expect competition to increase and intensify as additional semiconductor companies enter our target markets,

 

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and as internal silicon design resources of large OEMs grow. Increased competition could result in price pressure, reduced gross margins and loss of market share, any of which could harm our business, revenue and results of operations. Our competitors range from large, international companies offering a wide range of semiconductor products to smaller companies specializing in narrow market verticals. In the markets we serve, our primary competitors are Broadcom and Marvell. We expect competition in our current markets to increase in the future as existing competitors improve or expand their product offerings and as new competitors enter these markets. In addition, our future growth will depend in part on our ability to successfully enter and compete in new markets, such as the access market. Some of these markets will likely be served by only a few large, multinational OEMs with substantial negotiating and buying power relative to us and, in some instances, with internally developed silicon solutions that can be competitive to our products.

Our ability to compete successfully depends, in part, on factors that are outside of our control, including industry and general economic trends. Many of our competitors are substantially larger, have greater financial, technical, marketing, distribution, customer support and other resources, are more established than we are and have significantly better brand recognition and broader product offerings, which may enable them to better withstand adverse economic or market conditions in the future and reduce their pricing so as to compete against us. Our ability to compete successfully will depend on a number of factors, including:

 

   

our ability to define, design and regularly introduce new products that anticipate the functionality and integration needs of our customers’ next-generation products and applications;

 

   

our ability to build strong and long-lasting relationships with our customers and other industry participants;

 

   

our ability to capitalize on, and prevent losses due to, vertical integration by significant customers, including Intel and Cisco;

 

   

our solutions’ performance and cost-effectiveness relative to those of competing products;

 

   

the effectiveness and success of our customers’ products utilizing our solutions within their competitive end markets;

 

   

our research and development capabilities to provide innovative solutions and maintain our product roadmap;

 

   

the strength of our sales and marketing efforts, and our brand awareness and reputation;

 

   

our ability to deliver products in volume on a timely basis at competitive prices;

 

   

our ability to build and expand international operations in a cost-effective manner;

 

   

our ability to protect our intellectual property and obtain intellectual property rights from third parties that may be necessary to meet the evolving demands of the market;

 

   

our ability to promote and support our customers’ incorporation of our solutions into their products;

 

   

our ability to continue to develop products at each new technology node; and

 

   

our ability to retain high-level talent, including our management team and engineers.

Our competitors may also establish cooperative relationships among themselves or with third parties or may acquire companies that provide similar products to ours. As a result, new competitors or alliances may emerge that could capture significant market share. Any of these factors, alone or in combination with others, could harm our business and result in a loss of market share and an increase in pricing pressure. In addition, a number of our competitors are able to sell their solutions through multiple channels, including through distributors and third-party sales organizations, while we rely primarily on direct sales, which may provide our competitors with a strategic advantage in sales of their solutions and could harm our prospects and business.

 

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We depend on third parties for our wafer, assembly and testing operations, which exposes us to certain risks that may harm our business.

We operate an outsourced manufacturing business model. As a result, we rely on third parties for all of our manufacturing operations, including wafer fabrication, assembly and testing. Although we use multiple third-party supplier sources, we depend on these third parties to supply us with material of a requested quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. We do not have any long-term supply agreements with any of our manufacturing suppliers. These third-party manufacturers often serve customers that are larger than us or require a greater portion of their services, which may decrease our relative importance and negotiating leverage with these third parties.

If market demand for wafers or production and assembly materials increases, or if a supplier of our wafers ceases or suspends operations, our supply of wafers and other materials could become limited. We currently rely on Taiwan Semiconductor Manufacturing Company, or TSMC, for most of our semiconductor wafer production, and any disruption in their supply of wafers or any increases in their wafer or materials prices could adversely affect our gross margins and our ability to meet customer demands in a timely manner, or at all, and lead to reduced revenue. Moreover, wafers constitute a large portion of our product cost. If we are unable to purchase wafers at favorable prices, our gross margins would be adversely affected.

To ensure continued wafer supply, we may be required to establish alternative wafer supply sources, which could require significant expenditures and limit our negotiating leverage. We currently rely on TSMC as our primary foundry; and only a few foundry vendors have the capability to manufacture our most advanced solutions. If we engage alternative supply sources, we may encounter start-up difficulties and incur additional costs. In addition, shipments could be significantly delayed while these sources are qualified for volume production.

Certain of our manufacturing facilities are located outside of the United States, where we are subject to increased risk of political and economic instability, difficulties in managing operations, difficulties in enforcing contracts and our intellectual property, and employment and labor difficulties. Any of these factors could result in manufacturing and supply problems, and delays in our ability to provide our solutions to our customers on a timely basis, or at all. If we experience manufacturing problems at a particular location, we may be required to transfer manufacturing to a new location or supplier. Converting or transferring manufacturing from a primary location or supplier to a backup facility could be expensive and could take several quarters or more. During such a transition, we would be required to meet customer demand from our then-existing inventory, as well as any partially finished goods that could be modified to the required product specifications. We do not seek to maintain sufficient inventory to address a lengthy transition period because we believe it is uneconomical to keep more than minimal inventory on hand and because semiconductors are subject to a rapid obsolescence timeline. As a result, we may not be able to meet customer needs during such a transition, which could damage our customer relationships.

If one or more of these vendors terminates its relationship with us, or if we encounter any problems with our manufacturing supply chain, our ability to ship our solutions to our customers on time and in the quantity required would be adversely affected, which in turn could cause an unanticipated decline in our sales and loss of customers.

If the foundries that we employ do not achieve satisfactory yields or quality, our reputation and customer relationships could be harmed.

We depend on satisfactory foundry manufacturing capacity, wafer prices and production yields, as well as timely wafer delivery to meet customer demand and maintain gross margins. The fabrication of our products is a complex and technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields and, in some cases, cause production to be suspended. Our foundry vendors may experience manufacturing defects and reduced manufacturing yields from time to time. Further, any new foundry vendors we employ may present additional and unexpected manufacturing challenges that could require

 

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significant management time and focus. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by the foundries that we employ could result in lower than anticipated production yields or unacceptable performance of our devices. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Poor production yields from the foundries that we employ, or defects, integration issues or other performance problems in our solutions could significantly harm our customer relationships and financial results, and give rise to financial or other damages to our customers. Any product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.

We rely on our relationships with industry and technology leaders to enhance our product offerings and our inability to continue to develop or maintain such relationships in the future would harm our ability to remain competitive.

We develop many of our semiconductor products for applications in systems that are driven by industry and technology leaders in the communications and computing markets. We work with IC suppliers, OEMs, system manufacturers and standards bodies, such as the Institute of Electrical and Electronics, or IEEE, and the NBASE-T Alliance, to define industry conventions and standards within our target markets. For example, AQrate has been established as the technology leader through its adoption by the IEEE as the baseline for the IEEE 802.3bz standard for 2.5GBASE-T and 5GBASE-T products. We believe that these relationships enhance our ability to achieve market acceptance and widespread adoption of our products. If we are unable to continue to develop or maintain these relationships, our semiconductor solutions could become less desirable to our customers, our sales could suffer and our competitive position could be harmed.

We are subject to the cyclical nature of the semiconductor industry.

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry experienced a significant downturn during the most recent global recession. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns in the semiconductor industry could harm our business and operating results. Furthermore, any significant upturn in the semiconductor industry could result in increased competition for access to third-party foundry and assembly capacity. We are dependent on the availability of this capacity to manufacture and assemble our products and we can provide no assurance that adequate capacity will be available to us in the future.

Deterioration of the financial conditions of our customers could adversely affect our operating results.

The deterioration of the financial condition of our customers could adversely impact our collection of accounts receivable. We regularly review the collectability and creditworthiness of our customers to determine an appropriate allowance for doubtful accounts. Based on our review of our customers, substantially all of which are very large IC Suppliers, OEMs, we currently have no reserve for doubtful accounts. If our doubtful accounts, however, were to exceed our current or future allowance for doubtful accounts, our operating results would be adversely affected.

In preparing our consolidated financial statements, we make good faith estimates and judgments that may change or turn out to be erroneous, which could adversely affect our operating results for the periods in which we revise our estimates or judgments.

In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, we must make estimates and judgments in applying our most critical accounting policies. Those estimates and judgments have a significant impact on the results we report in our consolidated financial statements. The most difficult estimates and subjective judgments that we make relate to revenue recognition, inventories, stock-based compensation and income taxes. We base our estimates on historical experience, input

 

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from outside experts and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We also have other key accounting policies that are not as subjective, and therefore, their application would not require us to make estimates or judgments that are as difficult, but which nevertheless could significantly affect our financial reporting. Actual results may differ materially from these estimates. If these estimates, judgments or their related assumptions change, our operating results for the periods in which we revise our estimates, judgments or assumptions could be adversely and perhaps materially affected.

Changes to financial accounting standards may affect our results of operations and could cause us to change our business practices.

We prepare our consolidated financial statements to conform to GAAP. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the Securities and Exchange Commission, or the SEC, and various bodies formed to interpret and create accounting rules and regulations. Changes in accounting rules can have a significant effect on our reported financial results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our financial results or the way we conduct our business.

Our loan agreements contain certain restrictive covenants that may limit our operating flexibility.

Our loan agreements contain certain restrictive covenants that either limit our ability to, or require a mandatory prepayment in the event that we incur additional indebtedness or liens, merge with other companies or consummate certain changes of control, acquire other companies, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions. Our obligations under the loan agreements are secured by all of our property, with limited exceptions. We may not be able to generate sufficient cash flow or sales to pay the principal and interest under our outstanding debt obligations. Furthermore, our future working capital, borrowings, or equity financing could be unavailable to repay or refinance the amounts outstanding under our current debt obligations. In the event of a liquidation, our existing and any future lenders would be repaid all outstanding principal and interest prior to distribution of assets to unsecured creditors, and the holders of our common stock would receive a portion of any liquidation proceeds only if all of our creditors, including our existing and any future lenders, were first repaid in full.

We may not be able to accurately predict our future capital needs, and we may not be able to obtain additional financing to fund our operations.

We may need to raise additional funds in the future. Any required additional financing may not be available on terms acceptable to us, or at all. If we raise additional funds by issuing equity securities or convertible debt, investors may experience significant dilution of their ownership interest, and the newly-issued securities may have rights senior to those of the holders of our common stock. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility and would also require us to incur interest expense. If additional financing is not available when required or is not available on acceptable terms, we may have to scale back our operations or limit our production activities, and we may not be able to expand our business, develop or enhance our solutions, take advantage of business opportunities or respond to competitive pressures, which could negatively impact our revenue and the competitiveness of our products.

We may make acquisitions in the future that could disrupt our business, cause dilution to our stockholders, reduce our financial resources and harm our business.

In the future, we may acquire other businesses, products or technologies. Our ability to make acquisitions and successfully integrate personnel, technologies or operations of any acquired business is unproven. If we complete acquisitions, we may not achieve the combined revenue, cost synergies or other benefits from the

 

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acquisition that we anticipate, strengthen our competitive position or achieve our other goals in a timely manner, or at all, and these acquisitions may be viewed negatively by our customers, financial markets or investors. In addition, any acquisitions we make lead to difficulties in integrating personnel, technologies and operations from the acquired businesses and in retaining and motivating key personnel. Acquisitions may disrupt our ongoing operations, divert management from their primary responsibilities, subject us to additional liabilities, increase our expenses and adversely impact our business, results of operations, financial condition and cash flows. Acquisitions may also reduce our cash available for operations and other uses, and could result in an increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt, any of which could harm our business.

A portion of our operations is located outside of the United States, which subjects us to additional risks, including increased complexity and costs of managing international operations and geopolitical instability.

We outsource the manufacturing of all of our products to third parties that are primarily located in Asia. In addition, we have research and development design centers in Canada, India, the Netherlands and Russia, and we expect to continue to conduct business with companies that are located outside the United States, particularly in Eastern Europe and Asia. As a result of our international focus, we face numerous challenges and risks, including:

 

   

complexity and costs of managing international operations, including manufacture, assembly and testing of our products;

 

   

geopolitical and economic instability and military conflicts;

 

   

limited protection of our intellectual property and other assets;

 

   

compliance with local laws and regulations and unanticipated changes in local laws and regulations, including tax laws and regulations;

 

   

trade and foreign exchange restrictions and higher tariffs;

 

   

timing and availability of import and export licenses and other governmental approvals, permits and licenses, including export classification requirements;

 

   

foreign currency fluctuations and exchange losses relating to our international operating activities;

 

   

restrictions imposed by the U.S. government or foreign governments on our ability to do business with certain companies or in certain countries as a result of international political conflicts and the complexity of complying with those restrictions;

 

   

transportation delays and other consequences of limited local infrastructure, and disruptions, such as large scale outages or interruptions of service from utilities or telecommunications providers;

 

   

difficulties in staffing international operations;

 

   

local business and cultural factors that differ from our normal standards and practices;

 

   

differing employment practices and labor relations;

 

   

heightened risk of terrorist acts;

 

   

regional health issues, travel restrictions and natural disasters; and

 

   

work stoppages.

Fluctuations in exchange rates between and among the currencies of the countries in which we do business could adversely affect our results of operations.

Our sales have been historically denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to the currencies of the countries in which our customers operate could impair the ability of our customers to cost-effectively purchase or integrate our solutions into their product offerings, which may

 

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materially affect the demand for our solutions and cause these customers to reduce their orders, which in turn would adversely affect our revenue and business. If we increase operations in other currencies in the future, we may experience foreign exchange gains or losses due to the volatility of other currencies compared to the U.S. dollar. Certain of our employees are located in Canada, India, the Netherlands and Russia. Accordingly, a portion of our payroll as well as certain other operating expenses are paid in currencies other than the U.S. dollar. Our results of operations are denominated in U.S. dollars, and the difference in exchange rates in one period compared to another may directly impact period-to-period comparisons of our results of operations. Furthermore, currency exchange rates have been especially volatile in the recent past, and these currency fluctuations may make it difficult for us to predict our results of operations.

Failure to comply with the laws associated with our activities outside of the United States could subject us to penalties and other adverse consequences.

We face significant risks if we fail to comply with anti-corruption laws and anti-bribery laws, including, without limitation, the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.S. Travel Act and the UK Bribery Act 2010, that prohibit improper payments or offers of payment to foreign governments and political parties by us for the purpose of obtaining or retaining business. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other applicable laws and regulations. We are in the early stages of implementing our FCPA compliance program and cannot assure you that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. Any violation of these laws could result in severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracting, which could have an adverse effect on our reputation, business, financial condition and results of operations.

We are subject to government regulation, including import, export and economic sanctions laws and regulations that may expose us to liability and increase our costs.

Our products and technology are subject to U.S. export controls, including the U.S. Department of Commerce’s Export Administration Regulations and economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. These regulations may limit the export of our products and technology, and provision of our services outside of the United States, or may require export authorizations, including by license, a license exception or other appropriate government authorizations, including annual or semi-annual reporting and the filing of an encryption registration. Export control and economic sanctions laws may also include prohibitions on the sale or supply of certain of our products to embargoed or sanctioned countries, regions, governments, persons and entities. In addition, various countries regulate the importation of certain products, through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products. The exportation, reexportation, and importation of our products and technology and the provision of services, including by our partners, must comply with these laws or else we may be adversely affected, through reputational harm, government investigations, penalties, and a denial or curtailment of our ability to export our products and technology or provide services. Complying with export control and sanctions laws may be time consuming and may result in the delay or loss of sales opportunities. Although we take precautions to prevent our products and technology from being provided in violation of such laws, our products and technology may have previously been, and could in the future be, provided inadvertently in violation of such laws, despite the precautions we take. If we are found to be in violation of U.S. sanctions or export control laws, it could result in substantial fines and penalties for us and for the individuals working for us. Changes in export or import laws or corresponding sanctions, may adversely impact our operations, delay the introduction and sale of our products in international markets, or, in some cases, prevent the export or import of our products and technology to certain countries, regions, governments, persons or entities altogether, which could adversely affect our business, financial condition and results of operations.

 

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New or future changes to U.S. and non-U.S. tax laws could materially adversely affect our company.

New or future changes in tax laws, regulations, and treaties, or the interpretation thereof, in addition to tax regulations enacted but not in effect, tax policy initiatives and reforms under consideration in the United States or related to the Organisation for Economic Co-operation and Development’s, or OECD, Base Erosion and Profit Shifting, or BEPS, Project, the European Commission’s state aid investigations, and other initiatives could have an adverse effect on the taxation of international businesses. Furthermore, countries where we are subject to taxes, including the United States, are independently evaluating their tax policy and we may see significant changes in legislation and regulations concerning taxation. Certain countries have already enacted legislation, including those related to BEPS Project, which could affect international businesses, and other countries have become more aggressive in their approach to audits and enforcement of their applicable tax laws. The U.S. federal government has called for potentially substantial changes to U.S. tax policies and laws. We are unable to predict what future tax reform may be proposed or enacted or what effect such changes would have on our business, but any such changes, to the extent they are brought into tax legislation, regulations, policies, or practices, could increase our effective tax rates in the countries where we have operations and have an adverse effect on our overall tax rate, along with increasing the complexity, burden and cost of tax compliance, all of which could impact our operating results, cash flows and financial condition.

Tax regulatory authorities may disagree with our positions and conclusions regarding certain tax positions resulting in unanticipated costs or non-realization of expected benefits.

A tax authority may disagree with tax positions that we have taken. For example, the Internal Revenue Service or another tax authority could challenge our allocation of income by tax jurisdiction and the amounts paid between our affiliated companies pursuant to our intercompany arrangements and transfer pricing policies, including amounts paid with respect to our intellectual property in connection with our intercompany research and development cost sharing arrangement and legal structure. A tax authority may take the position that material income tax liabilities, interest and penalties are payable by us, in which case, we expect that we might contest such assessment. Contesting such an assessment may be lengthy and costly and if we were unsuccessful in disputing the assessment, the implications could be materially adverse to us and affect our anticipated effective tax rate or operating income, where applicable.

Catastrophic events may disrupt our business.

Our corporate headquarters and our foundry vendors are located in areas that are in active earthquake zones. In the event of a major earthquake, hurricane or other catastrophic event such as fire, power loss, telecommunications failure, cyber-attack, war, terrorist attack or disease outbreak, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our product development, breaches of data security, or loss of critical data, any of which could have an adverse effect on our future results of operations.

A breach of our security systems may damage our reputation and adversely affect our business.

Our security systems are designed to protect our customers’, suppliers’ and employees’ confidential information, as well as maintain the physical security of our facilities. We also rely on a number of third-party cloud-based service providers of corporate infrastructure services relating to, among other things, human resources, electronic communication services and some finance functions, and we are, of necessity, dependent on the security systems of these providers. Any security breaches or other unauthorized access by third parties to the systems of our cloud-based service providers or the existence of computer viruses in their data or software could expose us to a risk of information loss and misappropriation of confidential information. Accidental or willful security breaches or other unauthorized access by third parties to our information systems or facilities, or the existence of computer viruses in our data or software, could expose us to a risk of information loss and misappropriation of proprietary and confidential information. Any theft or misuse of this information could result

 

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in, among other things, unfavorable publicity, damage to our reputation, difficulty in marketing our products, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for liabilities and damages related to the theft or misuse of this information, any of which could have an adverse effect on our business, financial condition, our reputation and our relationships with our customers and suppliers. Since the techniques used to obtain unauthorized access or to sabotage systems change frequently and are often not recognized until after they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

Risks Related to Our Intellectual Property and Potential Product Liability

Our failure to adequately protect our intellectual property rights could impair our ability to compete effectively or defend ourselves from litigation, which could harm our business, financial condition and results of operations.

Our success depends, in part, on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements and other contractual protections, to protect our technologies and proprietary know-how, all of which offer only limited protection. The steps we have taken to protect our intellectual property rights may not be adequate to prevent misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to prevent such misappropriation or infringement is uncertain, particularly in countries outside of the United States. As of June 30, 2017, we had 85 issued patents, expiring generally between 2024 and 2032, three allowed patents in the United States, 29 pending and provisional patent applications in the United States and 12 issued international patents. Even if the pending patent applications are granted, the rights granted to us may not be meaningful or provide us with any commercial advantage. For example, these patents could be opposed, contested, circumvented, designed around by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. Further, we are a participant in the IEEE standard process and, as a result, have signed letters of assurance with the IEEE stipulating that we will agree to license to other members of the IEEE, under reasonable and non-discriminatory terms, patents containing essential claims that are necessary for the implementation of the IEEE standards for 10GBASE-T as well as 2.5GBASE-T and 5GBASE-T. Essential claims include any claim the practice of which was necessary to implement a portion of the IEEE standard when, at the time of IEEE’s approval, there was no commercially and technically feasible non-infringing alternative implementation method. To date, we do not license any of our patents to other members of the IEEE; however, we may decide, or otherwise be required pursuant to such letters of assurance, to enter into such licensing agreements with respect to a significant number of our patents relating to both our 10GBASE-T PHYs and our AQrate technology in the future. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer similar products or technologies. Our foreign patent protection is generally not as comprehensive as our U.S. patent protection and may not protect our intellectual property in some countries where our products are sold or may be sold in the future. Many U.S.-based companies have encountered substantial intellectual property infringement in foreign countries, including countries where we sell products. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. If such an impermissible use of our intellectual property or trade secrets were to occur, our ability to sell our solutions at competitive prices may be adversely affected and our business, financial condition, results of operations and cash flows could be adversely affected.

The legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain and evolving. We cannot assure you that others will not develop or patent similar or superior technologies or solutions, or that our patents, trademarks and other intellectual property will not be challenged, invalidated or circumvented by others.

Unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for doing so, which could harm our business. Monitoring unauthorized use of our intellectual property is difficult and costly. It is possible that unauthorized use of our

 

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intellectual property may have occurred or may occur without our knowledge. We cannot assure you that the steps we have taken will prevent unauthorized use of our intellectual property. Our failure to effectively protect our intellectual property could reduce the value of our technology in licensing arrangements or in cross-licensing negotiations.

We may in the future need to initiate infringement claims or litigation in order to try to protect our intellectual property rights. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and management, which could harm our business, whether or not such litigation results in a determination favorable to us. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, any enforcement of our patents or other intellectual property may provoke third parties to assert counterclaims against us. If we are unable to protect our proprietary rights or if third parties independently develop or gain access to our or similar technologies, our business, revenue, reputation and competitive position could be harmed.

We have granted the right to manufacture our custom products to our customers upon the occurrence of certain events. If our customers exercise such rights, our business and financial results would suffer.

We have granted certain of our customers, including Intel and Cisco, a worldwide, nonexclusive, nontransferable, perpetual, irrevocable right and license to manufacture or have manufactured our products that have been customized for them. These rights are exercisable only upon the occurrence of certain events, including for example, if we fail to consistently supply products in quantities ordered, we discontinue manufacture of such products or we experience an insolvency event. If these rights are triggered, and our customers choose to exercise these rights, our business and financial results would suffer.

Third parties’ assertions of infringement of their intellectual property rights could result in our having to incur significant costs and cause our operating results to suffer.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. We expect that in the future, particularly as a public company with an increased profile and visibility, we may receive communications from others alleging our infringement of patents, trade secrets or other intellectual property rights. Lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

 

   

stop selling solutions or using technology that contain the allegedly infringing intellectual property;

 

   

lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others;

 

   

incur significant legal expenses;

 

   

pay substantial damages to the party whose intellectual property rights we may be found to be infringing;

 

   

redesign those products that contain the allegedly infringing intellectual property; or

 

   

attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.

Any significant impairment of our intellectual property rights from any litigation we face could harm our business and our ability to compete.

 

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We may face claims of intellectual property infringement, which could be time-consuming and costly to defend or settle and which could result in the loss of significant rights and harm our relationships with our customers and distributors.

The semiconductor industry, the industry in which we operate, is characterized by companies that hold patents and other intellectual property rights and vigorously pursue, protect and enforce intellectual property rights. From time to time, third parties may assert against us and our customers and distributors their patent and other intellectual property rights to technologies that are important to our business.

Claims that our products, processes or technology infringe third-party intellectual property rights, regardless of their merit or resolution, could be costly to defend or settle and could divert the efforts and attention of our management and technical personnel.

Infringement claims also could harm our relationships with our customers or distributors and might deter future customers from doing business with us. We do not know whether we will prevail in these proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If any future proceedings result in an adverse outcome, we could be required to:

 

   

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

 

   

pay substantial damages for infringement by us or our customers;

 

   

expend significant resources to develop non-infringing products, processes or technology, which may not be successful;

 

   

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

 

   

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

 

   

pay substantial damages to our customers or end users to discontinue their use of or to replace infringing technology sold to them with non-infringing technology, if available.

Any of the foregoing results could adversely affect our business, financial condition and results of operations.

Any potential dispute involving our patents or other intellectual property could affect our customers, which could trigger our indemnification obligations to them and result in substantial expense to us.

In any potential dispute involving our patents or other intellectual property, our customers could also become the target of litigation. Our agreements with customers and other third parties generally include indemnification or other provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, or other liabilities relating to or arising from our solutions included in their products. Large indemnity payments or damage claims from contractual breach could harm our business, operating results, and financial condition. From time to time, customers require us to indemnify or otherwise be liable to them for breach of confidentiality or failure to implement adequate security measures with respect to their intellectual property and trade secrets. Although we normally contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them. Any litigation against our customers could trigger technical support and indemnification obligations under some of our agreements, which could result in substantial expense to us.

In addition, other customers or end customers with whom we do not have formal agreements requiring us to indemnify them may ask us to indemnify them if a claim is made as a condition to awarding future design wins to us. Because most of our customers are larger than we are and have greater resources than we do, they may be

 

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more likely to be the target of an infringement claim by third parties than we would be, which could increase our chances of becoming involved in a future lawsuit. If any such claims were to succeed, we might be forced to pay damages on behalf of our customers that could increase our expenses, disrupt our ability to sell our solutions and reduce our revenue. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other current and prospective customers, reduce demand for our solutions, and harm our business and results of operations. In addition to the time and expense required for us to supply support or indemnification to our customers, any such litigation could severely disrupt or shut down the business of our customers, which in turn could hurt our relations with our customers and cause the sale of our products to decrease.

Risks Related to Our Common Stock and this Offering

An active trading market for our common stock may not develop or be sustained and you may not be able to sell your shares at or above the initial public offering price, or at all.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price, or at all. An active market in our common stock may not develop upon the closing of this offering or, if it does develop, it may not be sustainable or liquid enough for you to sell your shares. We have applied to list our common stock on the New York Stock Exchange, or NYSE, but we cannot assure you that our stock will be listed and, even if it is, that an active trading market will develop.

Our stock price may be volatile and may decline, resulting in a loss of some or all of your investment.

The trading price and volume of our common stock is likely to be volatile and could fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

   

actual or anticipated fluctuations in our results of operations due to, among other things, changes in customer demand, product life cycles, pricing, ordering patterns and unforeseen operating costs;

 

   

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

   

failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or ratings by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

   

announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

announcements by our significant customers of changes to their product offerings, business plans or strategies;

 

   

changes in operating performance and stock market valuations of other technology companies generally, or those in the semiconductor industry;

 

   

timing and seasonality of the end-market demand;

 

   

cyclical fluctuations in the semiconductor market;

 

   

price and volume fluctuations in the overall stock market from time to time, including as a result of trends in the economy as a whole;

 

   

actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;

 

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new laws or regulations or new interpretations of existing laws, or regulations applicable to our business;

 

   

any major change in our management;

 

   

lawsuits threatened or filed against us; and

 

   

other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, the market for technology stocks and the stock markets in general have experienced extreme price and volume fluctuations. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of operations, financial condition and cash flows.

Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.

The market price of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares. Upon the closing of this offering, we will have approximately              shares of common stock outstanding, assuming no exercise of the underwriters’ over-allotment option. All of the shares of common stock sold in this offering will be freely transferable without restriction or additional registration under the Securities Act or 1933, as amended, or the Securities Act. Subject to the restrictions under Rule 144 under the Securities Act,              shares of common stock outstanding after this offering will be eligible for resale 180 days after the date of this prospectus upon the expiration of lock-up agreements or other contractual restrictions. In addition, at any time with or without public notice, Morgan Stanley & Co. LLC, as representative of the underwriters, may in its discretion release shares subject to the lock-up agreements prior to the expiration of this 180-day lock-up period. See the section titled “Shares Eligible for Future Sale” for additional information. As these resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them.

After this offering, subject to the lock-up agreements described above, the holders of an aggregate of 21,880,902 shares of our common stock as of June 30, 2017 will have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. We also intend to register shares of common stock that we may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing market stand-off or lock-up agreements.

Our directors, officers and principal stockholders beneficially own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Upon the closing of this offering, our directors, officers and beneficial owners of 5% or more of our outstanding stock and their respective affiliates will beneficially own an aggregate of approximately     % of our outstanding stock. Therefore, after this offering these stockholders will continue to have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders will be able to control elections of directors, amendments of our organizational documents, or the approval of any merger, sale of assets or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

 

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If securities analysts or industry analysts downgrade our common stock, publish negative research or reports or fail to publish reports about our business, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us, our business and our market. If one or more analysts adversely changes their recommendation regarding our stock or changes their recommendation about our competitors’ stock, our stock price would likely decline. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets which in turn could cause our stock price or trading volume to decline.

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase the value of our business, which could cause our stock price to decline.

We do not intend to pay dividends on our common stock so any returns will be limited to changes in the value of our common stock.

We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation, and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, our ability to pay cash dividends on our common stock is prohibited by the terms of our current debt financing arrangements. Any return to stockholders will therefore be limited to the increase, if any, in our stock price, which may never occur.

We might not be able to utilize a significant portion of our net operating loss carryforwards and research and development tax credit carryforwards.

As of December 31, 2016, we had U.S. federal and state net operating loss, or NOL, carryforwards of approximately $171.3 million and $102.3 million, respectively, and U.S. federal and state research and development tax credit carryforwards of approximately $6.1 million and $6.8 million, respectively. The U.S. federal NOL carryforwards begin to expire in 2025 and the state NOL carryforwards begin to expire in 2017. The U.S. federal research and development tax credit carryforwards begin to expire in 2026 and the state research and development tax credit carryforwards carry forward indefinitely. These net operating loss and U.S. federal tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of California state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We completed a Section 382 analysis and determined an ownership change occurred in July 2005 and November 2009, which resulted in reductions to the U.S. federal and California net operating losses of $35.5 million and $34.3 million, respectively, and U.S. federal research and development credits by $1.8 million. In addition, we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, including this offering, some of which may be outside of our control. If we determine that an ownership change has occurred and our ability to use our historical net operating loss and tax credit carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax obligations.

As a new investor, you will experience immediate and substantial dilution in the book value of the shares that you purchase in this offering.

The initial public offering price is substantially higher than the pro forma net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our

 

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total liabilities. Therefore, if you purchase shares of our common stock in this offering, at the assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus), you will experience immediate dilution of $             per share, the difference between the price per share you pay for our common stock and our pro forma net tangible book value per share as of                         , after giving effect to the issuance of              shares of our common stock in this offering. See “Dilution.” To the extent outstanding options or warrants to purchase our common stock are exercised, investors purchasing our common stock in this offering will experience further dilution.

Our actual operating results may not meet our guidance and investor expectations, which would likely cause our stock price to decline.

From time to time, we may release guidance in our earnings releases, earnings conference calls or otherwise, regarding our future performance that represent our management’s estimates as of the date of release. If given, this guidance, which will include forward-looking statements, will be based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. The principal reason that we expect to release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. With or without our guidance, analysts and other investors may publish expectations regarding our business, financial performance and results of operations. We do not accept any responsibility for any projections or reports published by any such third parties. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. If our actual performance does not meet or exceed our guidance or investor expectations, the trading price of our common stock is likely to decline.

We have not operated as a public company and may not be able to effectively or efficiently manage or transition to a public company.

We have never operated as a public company and will incur significant legal, accounting and other expenses that we did not incur as a private company. Our management team and other personnel will need to devote a substantial amount of time to, and we may not effectively or efficiently manage, our transition into a public company.

We intend to hire additional accounting and finance personnel with system implementation experience and expertise regarding compliance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. We may be unable to locate and hire qualified professionals with requisite technical and public company experience when and as needed. In addition, new employees will require time and training to learn our business and operating processes and procedures. If we are unable to recruit and retain additional finance personnel or if our finance and accounting team is unable for any reason to respond adequately to the increased demands that will result from being a public company, the quality and timeliness of our financial reporting may suffer, which could result in the identification of material weaknesses in our internal controls. Any consequences resulting from inaccuracies or delays in our reported financial statements could cause our stock price to decline and could harm our business, operating results and financial condition.

If we fail to strengthen our financial reporting systems, infrastructure and internal control over financial reporting to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to report our financial results timely and accurately and prevent fraud. We expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404 of the Sarbanes-Oxley Act, or Section 404.

We are in the process of implementing an enterprise resource planning, or ERP, system. This will require significant investment of capital and human resources, the re-engineering of many processes of our business and

 

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the attention of many employees who would otherwise be focused on other aspects of our business. Any disruptions, delays or deficiencies in the design and implementation of the improvements of a new ERP system could result in potentially much higher costs than we had anticipated and could adversely affect our ability to develop and launch solutions, fulfill contractual obligations, file reports with the SEC in a timely manner, otherwise operate our business or otherwise impact our controls environment. Any of these consequences could have an adverse effect on our results of operations and financial condition.

As a result of becoming a public company, we will become subject to additional regulatory compliance requirements, including Section 404, and if we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

Rules and regulations such as the Sarbanes-Oxley Act have increased our legal and finance compliance costs and made some activities more time consuming and costly. For example, Section 404 requires that our management report on, and our independent auditors attest to, the effectiveness of our internal control structure and procedures for financial reporting. However, our auditors will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer an “emerging growth company,” as defined in the JOBS Act. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. We may not be able to successfully complete the procedures and certification and attestation requirements of Section 404 by the time we will be required to do so. Implementing these changes may take a significant amount of time and may require specific compliance training of our personnel. In the future, we may discover areas of our internal controls that need improvement. If our auditors or we discover a material weakness or significant deficiency, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our consolidated financial statements and harm our stock price. Any inability to provide reliable financial reports or prevent fraud would harm our business. We may not be able to effectively and timely implement necessary control changes and employee training to ensure continued compliance with the Sarbanes-Oxley Act and other regulatory and reporting requirements. If we fail to successfully complete the procedures and certification and attestation requirements of Section 404, or if in the future our Chief Executive Officer, Chief Financial Officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we could be subject to investigations or sanctions by NYSE, the SEC or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the market price of our shares of common stock. We cannot assure you that we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management or, when applicable, our auditors will conclude that our internal controls are effective in future periods. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our certificate of incorporation and bylaws, as amended and restated in connection with this offering, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and bylaws include provisions that:

 

   

authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock;

 

   

require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

 

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specify that special meetings of our stockholders can be called only by our board of directors, the Chairman of our board of directors, or our Chief Executive Officer;

 

   

establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

 

   

establish that our board of directors is divided into three classes, with each class serving three-year staggered terms;

 

   

prohibit cumulative voting in the election of directors;

 

   

provide that our directors may be removed only for cause;

 

   

provide that vacancies on our board of directors may be filled by a majority of directors then in office, even if less than a quorum; and

 

   

require the approval of our board of directors or the holders of at least 66 2/3% of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder. See the section titled “Description of Capital Stock—Anti-Takeover Effects of Provisions of Our Certificate of Incorporation, Our Bylaws and Delaware Law” for additional information. Any delay or prevention of a change of control transaction or changes in our management could cause our stock price to decline.

Our charter documents designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain what they believe to be a favorable judicial forum for disputes with us or our directors, officers, or other employees.

Our certificate of incorporation and bylaws, as amended and restated in connection with this offering, provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws or (4) any action asserting a claim against us governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the provisions of our certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations and result in a diversion of the time and resources of our management and board of directors.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. We may, in some cases, use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

   

our ability to retain and expand our customer relationships and to achieve design wins;

 

   

the success, cost and timing of existing and future product designs;

 

   

our ability to address market and customer demands and to timely develop new or enhanced solutions to meet those demands;

 

   

the size and growth potential of the markets for our solutions, including as to the number of units to be sold and the price therefor that have been formulated based on current information and are subject to change as a result of the evolving technological landscape, competitive market dynamics and unforeseen developments;

 

   

our ability to serve our target markets;

 

   

anticipated trends, challenges and growth in our business and the markets in which we operate, including pricing expectations and effects of seasonality in our business;

 

   

our expectations regarding our revenue, gross margin and expenses;

 

   

our expectations regarding competition in our existing and new markets;

 

   

regulatory developments in the United States and foreign countries;

 

   

the performance of our third-party suppliers and manufacturers;

 

   

our and our customers’ ability to respond successfully to technological or industry developments;

 

   

our ability to attract and retain key management personnel;

 

   

the average selling prices of semiconductor solutions;

 

   

the accuracy of our estimates regarding capital requirements and needs for additional financing;

 

   

the industry standards to which our solutions conform;

 

   

our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act;

 

   

our expectations regarding our ability to obtain and maintain intellectual property protection for our technology; and

 

   

our use of the proceeds from this offering.

These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this prospectus and, while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. We discuss many of these risks in greater detail under the section titled “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. 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 we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

 

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We cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, or the Securities Act, do not protect any forward-looking statements that we make in connection with this offering.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements.

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity, and market size, is based on information and data from various sources, on assumptions that we have made that are based on that information and data and other similar sources, and on our knowledge of the markets for our products and services. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such information. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

Certain information in this prospectus is contained in:

 

   

IDC, PC Microprocessor—1Q15 and 3Q15 Vendor Shares;

 

   

IDC, WW Internet of Things Forecast 2015-2020—May 2015;

 

   

Dell’oro, WLAN Forecast—January 2016;

 

   

Cisco, Cisco Visual Networking Index: Forecast and Methodology, 2015-2020 White Paper—June 2016;

 

   

Crehan, Long-range Forecast—Data Center Switch Total—July 2017;

 

   

Crehan, Long-range Forecast—Server-class Adapter & LOM_Controller—July 2017;

 

   

650 Group, Long-range Forecast—Ethernet Switching & WLAN Access Points—June 2017;

 

   

IDC Worldwide Networking Technologies Embedded in PCs Forecast, 2017–2021—March 2017; and

 

   

Raymond James, From ADAS to Autonomous: A 25-Year Forecast and Full Value Chain Analysis, The 2017 Version—March 2017.

 

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GLOSSARY

The following capitalized phrases and their acronyms are used throughout this prospectus and have the meanings set forth below:

802.3bz: the standard introduced by IEEE for Ethernet over twisted pair copper wire at speeds of 2.5GbE and 5GbE.

ADAS: Advanced Driver Assistance Systems are systems to help the driver in the driving process.

ADC: Analog-to-digital converter.

AFE: Analog Front-End, the portion of an integrated circuit that receives and processes external analog signals.

AP: Access Point, a networking hardware device that allows wireless devices to connect to a network using Wi-Fi.

AQrate: Aquantia’s proprietary technology that provides 2.5GbE and 5GbE transmission speeds.

ASIC: an application specific integrated circuit.

ASSP: an application specific standard product.

Attenuation: reduction in the strength of a signal.

AVoE: audio-video over Ethernet equipment.

BASE-T: an acronym used by IEEE to identify an Ethernet protocol characterized by a broadband modulation of a signal transmitted over a twisted-pair copper cabling.

Cat5e and Cat6: twisted-pair copper cabling; typically used in legacy enterprise infrastructure.

CMOS: Complementary Metal-Oxide Semiconductor, which is a transistor technology used for the fabrication of integrated circuits.

Crosstalk: a phenomenon by which a signal creates an undesired effect on another signal, a type of noise that is often experienced with analog signals transmitted over twisted-pair cables.

DAC: Digital-to-analog converter.

Data Center: a facility used to house computing and networking systems and associated components, such as storage systems.

Design Tool: a software application that is used to design, simulate, verify and implement the functionality of an integrated circuit. The final output of the design tool is used to create an IC mask set.

Die: a small block of semiconducting material on which a given functional circuit is fabricated.

DOCSIS: Data Over Cable Service Interface Specification, which is an international telecommunications standard.

Echo: a type of noise that corresponds to the reflection of the transmitted signal unintentionally coupled into the received signal.

Ethernet: the most widely installed local area network (LAN) technology, which is a link layer protocol, describing how networked devices can format data for transmission to other network devices on the same network segment, and how to put that data out on the network connection.

Enterprise: hardware and software designed to meet the demands of a large organization, rather than individual users.

Footprint: the amount of space that part or all of an integrated circuit occupies.

Foundry: an enterprise that manufactures ICs and related components.

 

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GbE: a term which describes various technologies that transmit Ethernet frames. GbE or 1GbE refers to such transmission at a rate of one Gbps, 5GbE refers to such transmission at a rate of five Gbps and 10GbE refers to such transmission at a rate of 10Gbps.

Gbps: a measure of bandwidth on digital transmission medium representing billions of bits per second.

HDMI: a proprietary audio/video interface called High-Definition Multimedia Interface for transmitting uncompressed video data and compressed or uncompressed digital audio data from one device to another.

IC: integrated circuit, which is a semiconductor device on which an electronic circuit is formed. This is also referred to as a “chip” or a microchip.

IEEE: Institute of Electrical and Electronic Engineers, a technical professional society, dedicated to the advancement of technology.

IP: Internet protocol, which is the method or protocol by which data is sent from one computer to another on the Internet.

LAN: Local Area Network.

Leaf switch: device that aggregates traffic from server nodes and connects to the core of the network, consisting of spine switches. Its architecture is known as “leaf-spine”.

MCSP: Our proprietary Multi-Core Signal Processing technology, which incorporates multiple customized units to more efficiently process digital signals.

MMSP: Our proprietary Mixed-Mode Signal Processing technology, which partitions signal processing across analog and digital domains.

MPEG: an international standard set by the Moving Picture Experts Group for encoding and compressing video images.

NIC: Network interface card

nm: nanometer, which is a unit of length in the metric system, equal to one billionth of a meter.

OEM: an original equipment manufacturer.

OSI: Open Systems Interconnection model

PHY: an abbreviation for the physical layer circuitry. A PHY connects a link layer device (often called MAC as an abbreviation for media access control) to a physical medium such as an optical fiber or copper cable.

PLD: programmable logic device, which is an electronic component used to build reconfigurable digital circuits.

Process Nodes: the transistor width used to define a semiconductor manufacturing process. Smaller widths allow more transistors to be manufactured in the same silicon area. Process node is typically measured in nanometers, or nm (e.g., 28nm, 40nm, 90nm).

Serializer/Deserializer or SerDes: a pair of functional blocks commonly used in high speed communications, which convert data between serial and parallel interfaces.

SFP+: a small form factor module designed to operate at 10Gbps that is pluggable into a system.

WAN: Wide-Area Network.

WLAN: Wireless Local Area Network.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $         million (or approximately $         million if the underwriters’ over-allotment option is exercised in full) from the sale of the shares of common stock offered by us in this offering, based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Similarly, each 1.0 million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us by $         million, assuming no change in the assumed initial public offering price per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, establish a public market for our common stock and facilitate future access to the public equity markets by us, our employees and our stockholders, obtain additional capital to support our operations, and increase our visibility in the marketplace.

We intend to use approximately $         million of the net proceeds we receive from this offering to prepay in full the outstanding indebtedness under our term loan with Pinnacle Ventures, L.L.C. This loan bears interest at a rate equal to the greater of the prime rate plus 550 basis points, or 8.75% per annum, and matures July 1, 2018. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Obligations.” However, our intentions to prepay this loan may change due to market or other factors.

We currently intend to use the remaining net proceeds to us from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, product development, general and administrative matters, and capital expenditures, although we do not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes. We also may use a portion of the remaining net proceeds to acquire complementary businesses, products, services or technologies, however, we do not have agreements or commitments for any specific acquisitions at this time.

Our expected use of the net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering, or the amounts that we will actually spend on the uses set forth above. We will have broad discretion over the use of our net proceeds of this offering.

Pending the uses described above, we intend to invest the net proceeds from this offering in short-term, interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government. We may also make illiquid minority investments in private companies for strategic reasons, however, we do not have any agreements, commitments or plans for any specific minority investments at this time.

The amounts and timing of our actual use of the net proceeds will vary depending on numerous factors, including our ability to gain access to additional financing and the relative success and cost of our research and development programs. As a result, our management will have broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the net proceeds of this offering. In addition, we might decide to postpone or not pursue certain development activities if the net proceeds from this offering and any other sources of cash are less than expected.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We do not anticipate declaring or paying, in the foreseeable future, any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant. In addition, the terms of our existing credit facility with Hercules Technology Growth Capital, Inc. restricts our ability to pay dividends or make distributions.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2017:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to (1) the automatic conversion of all of our outstanding convertible preferred stock into 20,816,754 shares of our common stock immediately prior to the closing of this offering, (2) the automatic conversion of our convertible preferred stock warrants into warrants to purchase an aggregate of 584,148 shares of our common stock immediately prior to the closing of this offering and (3) the filing and effectiveness of our amended and restated certificate of incorporation upon the closing of this offering; and

 

   

on a pro forma as adjusted basis, giving effect to the pro forma adjustments discussed above and giving further effect to (1) the sale of          shares of our common stock by us in this offering at an assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (2) the application of approximately $         million of the net proceeds from this offering to prepay in full the outstanding indebtedness under our loan with Pinnacle Ventures L.L.C.

The pro forma information below is illustrative only and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

     As of June 30, 2017  
           Actual              Pro Forma        Pro Forma
As Adjusted(1)
 
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 17,369     $ 17,369     $               
  

 

 

   

 

 

   

 

 

 

Total debt

   $ 18,351     $ 18,351     $  

Preferred Stock Warrant Liability

     3,847          

Convertible preferred stock, $0.00001 par value: 213,351,797 shares authorized and 208,004,878 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     210,269          

Stockholders’ equity (deficit):

      

Preferred stock, $0.00001 par value:             shares authorized, no shares issued or outstanding, actual; and 10,000,000 shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted

              

Common stock, $0.00001 par value: 316,000,000 shares authorized and 4,686,326 shares issued and outstanding, actual; 400,000,000 shares authorized and 25,503,080 shares issued and outstanding, pro forma; and             shares authorized,             shares issued and             shares outstanding, pro forma as adjusted

              

Additional paid-in capital

     13,754       227,870    

Accumulated other comprehensive loss

     (2     (2  

Accumulated deficit

     (195,649     (195,649  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (181,897     32,219    
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 50,570     $ 50,570     $  
  

 

 

   

 

 

   

 

 

 

 

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(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders (deficit) equity, and total capitalization by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each 1.0 million increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) each of our cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity, and total capitalization by approximately $         million, assuming no change in the assumed initial public offering price per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

The number of shares of our common stock to be outstanding after this offering is based on 25,503,080 shares of common stock outstanding as of June 30, 2017, and excludes:

 

   

3,882,957 shares of common stock issuable upon the exercise of outstanding stock options as of June 30, 2017, at a weighted-average exercise price of $4.44 per share;

 

   

                 shares of our common stock reserved for future issuance under the 2017 Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under the 2017 Plan;

 

   

             shares reserved for future issuance under the ESPP, which will become effective upon the execution and delivery of the underwriting agreement for this offering;

 

   

2,340,816 shares of convertible preferred stock issuable upon the exercise of convertible preferred stock warrants (excluding our Series C-1 convertible preferred stock warrant) outstanding as of June 30, 2017, at a weighted-average exercise price of $1.03 per share, which warrants will convert into warrants to purchase 234,079 shares of common stock, at a weighted-average exercise price of $10.32 per share, immediately prior to the closing of the offering; and

 

   

3,006,088 shares of Series C-1 convertible preferred stock issuable upon the exercise of our Series C-1 convertible preferred stock warrant outstanding as of June 30, 2017, at an exercise price of approximately $0.01 per share, which will convert into a warrant to purchase 350,069 shares of common stock, at an exercise price of $0.0858713 per share, immediately prior to the closing of this offering.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

Our historical net tangible book value (deficit) as of June 30, 2017, was approximately $(186.9) million, or $(41.08) per share of our common stock. Our historical net tangible book value (deficit) per share represents our total tangible assets less our total liabilities and convertible preferred stock, which is not included within stockholders’ (deficit) equity, divided by the number of shares of common stock outstanding as of June 30, 2017.

Our pro forma net tangible book value as of June 30, 2017, was $27.3 million, or $1.10 per share of common stock. Pro forma net tangible book value gives effect to (1) the automatic conversion of all outstanding shares of our convertible preferred stock into 20,816,754 shares of common stock immediately prior to the closing of this offering and (2) the automatic conversion of our convertible preferred stock warrants into warrants to purchase an aggregate of 584,148 shares of our common stock immediately prior to the closing of this offering.

Pro forma as adjusted net tangible book value is our pro forma net tangible book value, plus the effect of (1) the sale of          shares of our common stock in this offering at an assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (2) the application of approximately $         million of the net proceeds from this offering to prepay in full the outstanding indebtedness under our loan with Pinnacle Ventures L.L.C. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing stockholders, and an immediate dilution of $         per share to new investors participating in this offering.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

     $               

Historical net tangible book value (deficit) per share as of June 30, 2017

   $ (41.08  

Increase per share attributable to the pro forma transactions described above

     42.18    

Pro forma net tangible book value per share as of June 30, 2017

     1.10    

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

    
  

 

 

   

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

    
    

 

 

 

Pro forma as adjusted dilution per share to investors participating in this offering

     $  
    

 

 

 

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the pro forma as adjusted net tangible book value per share by approximately $         per share and the dilution per share to investors participating in this offering by approximately $         per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each 1.0 million increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per share to investors participating in this offering by approximately $         and decrease (increase) the dilution in pro forma per share to investors participating in this offering by approximately $        , assuming no change in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus), and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value would increase to $         per share, representing an immediate increase in pro forma as adjusted net tangible book value to existing stockholders of $         per share and an immediate decrease of dilution of $         per share to investors participating in this offering.

The following table summarizes, on a pro forma as adjusted basis as of June 30, 2017, the number of shares purchased or to be purchased from us, the total consideration paid or to be paid to us, and the average price per share paid or to be paid to us by existing stockholders and investors participating in this offering at an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus), before deducting underwriting discounts and commissions and estimated offering expenses payable by us. As the table below shows, investors participating in this offering will pay an average price per share substantially higher than our existing stockholders paid.

 

    

 

Shares Purchased

    Total Consideration     Average
Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders before this offering

                     $                      $  

Investors participating in this offering

             $  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100   $        100  
  

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the total consideration paid by investors participating in this offering by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The foregoing discussion and tables are based on 25,503,080 shares of common stock outstanding as of June 30, 2017, and excludes:

 

   

3,882,957 shares of common stock issuable upon the exercise of outstanding stock options as of June 30, 2017, at a weighted-average exercise price of $4.44 per share;

 

   

                 shares of our common stock reserved for future issuance under the 2017 Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under the 2017 Plan;

 

   

             shares reserved for future issuance under the ESPP, which will become effective upon the execution and delivery of the underwriting agreement for this offering;

 

   

2,340,816 shares of convertible preferred stock issuable upon the exercise of convertible preferred stock warrants (excluding our Series C-1 convertible preferred stock warrant) outstanding as of June 30, 2017, at a weighted-average exercise price of $1.03 per share, which warrants will convert into warrants to purchase 234,079 shares of common stock, at a weighted-average exercise price of $10.32 per share, immediately prior to the closing of the offering; and

 

   

3,006,088 shares of Series C-1 convertible preferred stock issuable upon the exercise of our Series C-1 convertible preferred stock warrant outstanding as of June 30, 2017, at an exercise price of approximately $0.01 per share which will convert into a warrant to purchase 350,069 shares of common stock, at an exercise price of $0.0858713 per share, immediately prior to the closing of this offering.

We may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent we issue additional shares of common stock or other equity or convertible debt securities in the future, there will be further dilution to investors participating in this offering.

 

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If the underwriters exercise their over-allotment option in full, the number of shares of common stock held by existing stockholders will be reduced to                     , or          % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to                     , or          % of the total number of shares of common stock to be outstanding after this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated balance sheet data for the year ended December 31, 2014 is derived from our audited consolidated financial statements not included herein. The selected consolidated statements of operations data for the years ended December 31, 2014, 2015 and 2016 and the consolidated balance sheets data for the years ended December 31, 2016 and 2015 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data presented below for the six months ended June 30, 2016 and 2017, and the consolidated balance sheet data as of June 30, 2017, are derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and, in the opinion of management, include all adjustments of a normal, recurring nature that are necessary for the fair presentation of the financial statements. The selected consolidated financial data below have been updated to reflect the completion of the 1-for-10 reverse stock split of our common stock which was effected on October 5, 2017 and should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace, and are qualified in their entirety by, our consolidated financial statements and the related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any period in the future and our results for the six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the full year.

 

    Year Ended December 31,     Six Months Ended
June 30,
 
    2014     2015     2016     2016     2017  
    (in thousands, except share and per share data)  

Revenue

  $ 24,500     $ 80,807     $ 86,675     $ 41,374     $ 48,807  

Cost of revenue(1)

    16,189       41,511       34,064       16,183       20,959  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    8,311       39,296       52,611       25,191       27,848  

Operating expenses:

         

Research and development(1)

    27,343       25,262       36,553       17,301       20,944  

Sales and marketing(1)

    2,142       3,756       5,347       2,873       3,456  

General and administrative(1)

    4,403       6,284       7,124       3,796       4,475  

Collaboration and development charge(2)

          12,024                    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    33,888       47,326       49,024       23,970       28,875  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (25,577     (8,030     3,587       1,221       (1,027

Other income (expense):

         

Interest expense

    (2,164     (3,321     (3,334     (1,871     (1,016

Change in fair value of convertible preferred stock warrant liability

    (15     1,591       (544     78       (1,700

Other income, net

    12       5       14       3       28  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (2,167     (1,725     (3,864     (1,790     (2,688
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

    (27,744     (9,755     (277     (569     (3,715

Provision for (benefit from) income taxes

    56       200       168       106       (358
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders and comprehensive loss

  $ (27,800   $ (9,955   $ (445   $ (675   $ (3,357
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(3)

  $ (24.83   $ (6.64   $ (0.10   $ (0.17   $ (0.74
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share, basic and diluted(3)

    1,119,632       1,498,233       4,240,461       4,055,411       4,549,015  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to common stockholders, basic and diluted(3)

      $ 0.00       $ (0.07
     

 

 

     

 

 

 

Weighted-average shares used to compute pro forma net loss per share, basic(3)

        24,074,289         24,697,392  
     

 

 

     

 

 

 

Weighted-average shares used to compute pro forma net income per share, diluted(3)

        28,465,903         24,697,392  
     

 

 

     

 

 

 

 

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(1)

Stock-based compensation included in the consolidated statements of operations data above was as follows:

 

     Year Ended December 31,      Six Months Ended
June 30,
 
       2014          2015          2016          2016          2017    
    

(in thousands)

 

Cost of revenue

   $ 10      $ 19      $ 31      $ 15      $ 14  

Research and development

     382        373        489        206        293  

Sales and marketing

     36        71        95        46        64  

General and administrative

     430        329        324        182        178  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 858      $ 792      $ 939      $ 449      $ 549  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)

Collaboration and development charge represents the fair value of a fully vested warrant to purchase 9,756,160 shares of Series H convertible preferred stock issued to GLOBALFOUNDRIES U.S. Inc., which was exercised in full on May 5, 2017. See Notes 2 and 18 to our audited consolidated financial statements included elsewhere in this prospectus.

(3)

See Note 15 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share attributable to common stockholders, pro forma net loss per share attributable to common stockholders, and the number of weighted-average shares used to compute the per share amounts.

 

     As of December 31,     As of June 30,
2017
 
     2014     2015     2016    
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 7,056     $ 34,290     $ 28,893     $ 17,369  

Working capital

     9,397       38,305       26,268       19,494  

Total assets

     20,571       66,565       65,709       62,882  

Total debt

     23,308       28,909       18,229       18,351  

Convertible preferred stock warrant liability

     1,863       12,346       12,885       3,847  

Total liabilities

     35,483       52,299       46,082       34,510  

Convertible preferred stock

     162,183       199,153       199,434       210,269  

Total stockholders’ deficit

     (177,095     (184,887     (179,807     (181,897

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this prospectus.

Overview

We are a leader in the design, development and marketing of advanced high-speed communications integrated circuits, or ICs, for Ethernet connectivity in the data center, enterprise infrastructure and access markets. Our Ethernet solutions provide a critical interface between the high-speed analog signals transported over wired infrastructure and the digital information used in computing and networking equipment. Our products are designed to cost-effectively deliver leading-edge data speeds for use in the latest generation of communications infrastructure to alleviate network bandwidth bottlenecks caused by the exponential growth of global Internet Protocol, or IP, traffic. Many of our semiconductor solutions have established benchmarks in the industry in terms of performance, power consumption and density. Our innovative solutions enable our customers to differentiate their product offerings, position themselves to gain market share and drive the ongoing equipment infrastructure upgrade cycles in the data center, enterprise infrastructure and access markets.

We are a fabless semiconductor company. We have shipped more than 10 million ports to customers across three semiconductor process generations, and are currently in mass production in 28nm process node. 28nm and other silicon process geometries, such as 40nm and 90nm, refer to the size of the process node in nanometers for a particular semiconductor manufacturing process. Our end customers include Aruba (acquired by Hewlett-Packard Enterprise in 2015), Brocade, Cisco, Dell, Hewlett-Packard Enterprise, Huawei, IBM, Intel, Juniper, Oracle and Ruckus (acquired by Brocade in 2016). For the years ended December 31, 2014, 2015 and 2016, our revenue was $24.5 million, $80.8 million and $86.7 million, respectively, our net loss attributable to common stockholders was $27.8 million, $10.0 million and $0.4 million, respectively, and our non-GAAP net income (loss) was $(26.8) million, $1.3 million and $1.1 million, respectively. For the six months ended June 30, 2016 and 2017, our revenue was $41.4 million and $48.8 million, respectively, our net loss attributable to common stockholders was $0.7 million and $3.4 million, respectively, and our non-GAAP net loss was $0.3 million and $1.1 million, respectively. See the section titled “Prospectus Summary—Summary Consolidated Financial Data—Non-GAAP Financial Measures” for additional information regarding non-GAAP financial measures and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures.

We derive revenue from our products, which include our 10GBASE-T physical layer devices, or PHYs, custom ASICs for Intel and our recently developed AQrate product line. We currently generate revenue from the sale of our products directly to IC suppliers, original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs. We market and sell our products through our direct sales force.

We shipped our first products in 2009. Historically, a significant portion of our revenue has been generated from our largest customer, Intel, including sales to contract manufacturers or ODMs at the direction of this customer in the data center market. In the year ended December 31, 2014, Intel accounted for 68% of our revenue and Brocade accounted for 10% of our revenue. For the years ended December 31, 2015 and 2016, Intel accounted for 78% and 68% and Cisco accounted for 13% and 21% of our revenue, respectively. For the six months ended June 30, 2017, Intel accounted for 65% and Cisco accounted for 27% of our revenue, respectively. Our 10 largest customers collectively accounted for 99%, 98%, 98% and 98% of our revenue in the years ended December 31, 2014, 2015 and 2016 and the six months ended June 30, 2017, respectively. To continue to grow our revenue, it is important that we acquire new customers and sell additional products to our existing customers.

 

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While we intend to expand our customer base over time, the markets we serve tend to be highly concentrated, and we expect that a large portion of our revenue will continue to be derived from a relatively small number of customers for the foreseeable future. As the markets expand, the market share of our largest customers may not increase proportionally and may decrease as competition enters into the market. This may impact our revenue in the future.

Key Factors Affecting Our Performance

Pricing and Product Cost. Our pricing and margins depend on the volumes and the features of the ICs we provide to our customers. We believe the primary driver of gross margin is the average selling prices, or ASPs, negotiated between us and our customers relative to volume, material costs and yield improvement. Typically, our selling prices are contractually set for multiple quarters and our prototype selling prices are higher than our selling prices at volume production. In certain cases, we have agreed in advance to modest price reductions, generally over a period of time ranging from 18 months to five years, once the specified product begins to ship in volume. However, our customers may change their purchase orders and demand forecasts at any time with limited notice, which can sometimes lead to price renegotiations. Although these price renegotiations can sometimes result in ASPs of our products fluctuating over the shorter term, we expect ASPs generally to decline over the longer term as our products mature. These declines often coincide with improvements in manufacturing yields and lower wafer, assembly and testing costs, which offset some or all of the margin reduction that results from lower ASPs. Since we rely on third-party wafer foundries and assembly and test contractors to manufacture, assemble and test our ICs, we maintain a close relationship with our suppliers to improve quality, increase yields and lower manufacturing costs. In addition, our customers may seek to renegotiate product pricing under the contracts or purchase orders we have with them based on volume or other factors, which could drive fluctuations in ASPs.

Design Wins with New and Existing Customers. Our existing and prospective customers tend to be multinational enterprises with large annual purchases of ICs that are continuously developing new products for existing and new application areas. Our solutions enable our customers to differentiate their product offerings and position themselves to gain market share and drive the next upgrade cycles in data center and enterprise infrastructure. We have programs in place to help our existing customers use our solutions throughout their product portfolio, and we work closely with our existing and prospective customers to understand their product roadmaps and strategies. Because of our extended sales cycle, our revenue in future years is highly dependent on design wins we are awarded today. Further, because we expect our revenue relating to our mature products to decline in the future, we consider design wins critical to our future success and anticipate being increasingly dependent on revenue from newer design wins for our newer products.

Customer Demand and Product Life Cycles. Once customers design our ICs into their products, we closely monitor all phases of the product life cycle, including the initial design phase, prototype production, volume production and inventories. For example, during the periods presented, we had several products progressing through their product life cycles. In the data center market, the majority of our revenue for the periods presented was derived from our 10GBASE-T custom ASIC product, which we refer to as Twinville. In late 2015, we introduced and began to record revenue from our Sageville and Coppervale products. We anticipate that our Twinville product will transition to these two newer ASIC products over time, although the timing and rate of such transition will depend on our customers’ adoption of these products and the demand for our customers’ products. In the enterprise infrastructure market, during the periods presented, we developed our 5GBASE-T and 2.5GBASE-T AQrate product. We first shipped our AQrate products into the enterprise infrastructure market in the fourth quarter of 2014. We began shipping AQrate products in volume in 2015 and 2016. We also started to ship our multiple lines of products into the access market in the fourth quarter of 2016. We expect the revenue from our AQrate products, and therefore the percentage of our total revenue attributable to the enterprise infrastructure and access markets, to increase from the current levels.

We also carefully monitor changes in customer demand and end-market demand, including seasonality, cyclicality and the competitive landscape. Our customers share their development schedules with us, including

 

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the projected launch dates of their product offerings. Once our customers are in production, they generally will provide nine to 12-month forecasts of expected demand, which gives us an indication of future demand. However, our customers may change their purchase orders and demand forecasts at any time with limited notice. In light of our significant customer concentration, our revenue is likely to be materially and disproportionally due in part to fluctuating end-market demand impacted by the purchasing decisions of our largest customers.

Seasonality

Our revenue is subject to some seasonal variation as we begin to serve many markets and end-markets which historically experience lower sales in the first quarter of the year which may result in slower growth and lower sales as compared to other quarters.

Components of Results of Operations

Revenue

We generate revenue from the sale of our products. We sell our products direct to our customers and to our customers’ manufacturing subcontractors, and do not currently have a material amount of revenue sold to distributors during the sales process. We offer a limited number of customer rebates and accrue an estimate of such rebates at the time revenue is recognized. Such rebates were not material in any of the periods presented, and the differences between the actual amount of such rebates and our estimates also were not material. Revenue is recognized when delivery has occurred, persuasive evidence of an arrangement exists, the price is fixed or determinable, and collection of the resulting receivable is reasonably assured. Delivery is considered to have occurred when title and risk of loss have passed to the customer. There are no circumstances where revenue is recognized prior to delivery. Customer purchase orders are generally used to determine the existence of an arrangement. We evaluate whether the price is fixed or determinable based on the payment terms associated with the transaction. With respect to collectability, we perform credit checks for new customers and perform ongoing evaluations of our existing customers’ financial condition. We defer revenue if any revenue recognition criteria have not been met. In 2009, we entered into a multiple-element agreement with Intel resulting in an aggregate of $12.5 million of deferred revenue to be amortized over the estimated term through June 30, 2016. The revenue recognized for the years ended December 31, 2014, 2015 and 2016 was $3.1 million, $3.1 million and $1.6 million, respectively. This revenue is non-recurring for future periods and we cannot predict if we will be able to enter into similar arrangements in the future periods. See Note 8 to our audited consolidated financial statements included elsewhere in this prospectus for more information about this arrangement.

Our success and future revenue depend on our ability to achieve design wins and to convince our current and prospective customers to design our products into their product offerings. In addition, our revenue may fluctuate as a result of a variety of factors including customer demand and product life cycles, product cost and product mix sold during the period.

In the fourth quarter of 2014, we first began to ship into the enterprise infrastructure market and began shipping in volume in 2015. Due to the introduction of our AQrate products, we anticipate that revenue from the enterprise infrastructure market will grow at a greater rate than revenue from the data center market over the next two years. In the fourth quarter of 2016, we started to sample our first access market products. We believe that this market will represent a significant portion of our revenue in the near future.

We anticipate that our revenue will fluctuate based on a variety of factors including the amount and timing of customer and end-market demand, product life cycles, average selling price which declines as our product reaches maturity, production schedule, and product mix sold during the period. In addition, we may introduce new products at lower average selling price than our existing products with the intent of increasing the market demand for our products, which may cause a fluctuation in our revenues during the period in which these new products are introduced.

 

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Cost of Revenue

Cost of revenue consists of costs of materials, primarily wafers processed by third-party foundries, costs associated with packaging, assembly and testing paid to our third-party contract manufacturers, and personnel and other costs associated with our manufacturing operations. Our cost of revenue also includes allocation of overhead and facility costs, depreciation of production equipment, inventory write-downs and amortization of production mask costs. As we introduce new products, the cost of revenue will fluctuate depending on yield, volume and production cost of these products.

Gross Margin

Gross margin, or gross profit as a percentage of revenue, has been, and will continue to be, affected by a variety of factors, including product mix, ASPs, material costs, production costs that are themselves dependent upon improvements to yield, production efficiencies, elimination or addition to production processes as required by our end customers and timing of such improvements, and increasing manufacturing overhead to support the greater number of products and markets we serve.

We expect our gross margin to fluctuate on a quarterly basis as a result of changes in ASPs due to new product introductions, existing product transitions to high-volume manufacturing, product maturation and fluctuations in manufacturing costs.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing and general and administrative expenses, and a collaboration and development charge. Personnel costs are the most significant component of our operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and commissions. Our operating expenses also include allocated costs of facilities, information technology, depreciation and amortization. Although our operating expenses may fluctuate, we expect our overall operating expenses to increase in absolute dollars over time.

 

   

Research and Development. Our research and development expenses consist primarily of personnel costs, pre-production engineering mask costs, software license and intellectual property expenses, design tools and prototype-related expenses, facility costs, supplies and depreciation expense. We expense research and development costs as incurred. In addition, we enter into development agreements with some of our customers that provide fees that partially offset development costs. Such fees are recognized upon completion of the contract deliverables or milestones, and acceptance by the customer if required. We believe that continued investment in our products and services is important for our future growth and acquisition of new customers and, as a result, we expect our research and development expenses to continue to increase on an absolute basis.

 

   

Sales and Marketing. Sales and marketing expenses consist of personnel costs, field application engineering support, travel costs, professional and consulting fees and allocated overhead costs. We expect sales and marketing expense to increase in absolute dollars as we increase our sales and marketing personnel and grow our international operations.

 

   

General and Administrative. General and administrative expenses consist of personnel costs, professional and consulting fees, legal and allocated overhead costs. We expect general and administrative expense to increase in absolute dollars as we grow our operations and incur additional expenses associated with operating as a public company.

 

   

Collaboration and Development Charge. Collaboration and development charge in the first quarter of 2015 represents the fair value of a fully vested convertible preferred stock warrant exercisable for 9,756,160 shares of Series H convertible preferred stock, which was exercised in full on May 5, 2017. This warrant was issued to GLOBALFOUNDRIES U.S. Inc., or GLOBALFOUNDRIES, at an exercise

 

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price of $0.01 per share in connection with a letter agreement to collaborate on the development of products that we plan to have manufactured by GLOBALFOUNDRIES upon qualification. We do not expect to incur further such charges associated with this agreement.

Other Income (Expense)

Other income (expense) consists primarily of interest expense on our outstanding debt, change in fair value of preferred stock warrant liability and foreign exchange gains and losses. See Note 10 to our audited consolidated financial statements included elsewhere in this prospectus for more information about our debt.

Convertible preferred stock warrants are classified as liabilities on our consolidated balance sheets and remeasured to fair value at each balance sheet date with the corresponding change recorded as other income (expense). Upon the earlier of the exercise of the warrants or the completion of a liquidation event, including the completion of this offering, the liability will be reclassified to convertible preferred stock or stockholders’ equity (deficit), at which time it will no longer be subject to fair value accounting. See Note 11 to our audited consolidated financial statements for more information about our convertible preferred stock warrants.

Income Tax Expense

Income tax expense consists primarily of state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We have a full valuation allowance for deferred tax assets as the realization of the full amount of our deferred tax assets is uncertain, including net operating loss, or NOL, carryforwards, and tax credits related primarily to research and development. We expect to maintain this full valuation allowance until realization of the deferred tax assets becomes more likely than not.

At December 31, 2016, we had NOL carryforwards of approximately $171.3 million and $102.3 million for U.S. federal and state income tax purposes, respectively, and had research and development tax credit carryforwards of approximately $6.1 million and $6.8 million for U.S. federal and state income tax purposes, respectively. The NOL carryforwards begin to expire in 2025 for U.S. federal income tax purposes and begin to expire in 2017 for state income tax purposes. The U.S. federal tax credit carryforwards begin to expire in 2026 and the state tax credits carry forward indefinitely.

Internal Revenue Code Section 382 and similar California rules place a limitation on the amount of taxable income that can be offset by NOL carryforwards after a change in control (generally greater than 50% in ownership). Generally, after a control change, a corporation cannot deduct NOL carryforwards in excess of the Section 382 limitations. Due to these provisions, utilization of NOL and tax credit carryforwards may be subject to annual limitations regarding their utilization against taxable income in future periods. We completed a Section 382 analysis and determined an ownership change occurred in July 2005 and November 2009, which resulted in reductions to our U.S. federal and California net operating losses of $35.5 million and $34.3 million, respectively, and U.S. federal research and development credits by $1.8 million.

 

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Results of Operations

The following table summarizes our results of operations for the periods presented. The period-to-period comparison of results is not necessarily indicative of results to be expected for future periods.

 

     Year Ended
December 31,
    Six Months
Ended June 30,
 
     2014     2015     2016     2016      2017  
     (in thousands)  

Consolidated Statements of Operations Data:

           

Revenue

   $ 24,500     $ 80,807     $ 86,675     $ 41,374      $ 48,807  

Cost of revenue

     16,189       41,511       34,064       16,183        20,959  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     8,311       39,296       52,611       25,191        27,848  

Operating expenses:

           

Research and development

     27,343       25,262       36,553       17,301        20,944  

Sales and marketing

     2,142       3,756       5,347       2,873        3,456  

General and administrative

     4,403       6,284       7,124       3,796        4,475  

Collaboration and development charge

           12,024                     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     33,888       47,326       49,024       23,970        28,875  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income (loss) from operations

     (25,577     (8,030     3,587       1,221        (1,027

Other income (expense):

           

Interest expense

     (2,164     (3,321     (3,334     (1,871      (1,016

Change in fair value of convertible preferred stock warrant liability

     (15     1,591       (544     78        (1,700

Other income, net

     12       5       14       3        28  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total other income (expense)

     (2,167     (1,725     (3,864     (1,790      (2,688
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loss before income tax expense

     (27,744     (9,755     (277     (569      (3,715

Provision for (benefit from) income taxes

     56       200       168       106        (358
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net loss attributable to common stockholders

   $ (27,800   $ (9,955   $ (445   $ (675    $ (3,357
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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The following table summarizes our results of operations as a percentage of revenue for each of the periods indicated:

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
       2014         2015         2016         2016         2017    

Consolidated Statements of Operations Data:

          

Revenue

     100     100     100     100     100

Cost of revenue

     66       51       39       39       43  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     34       49       61       61       57  

Operating expenses:

          

Research and development

     112       31       43       42       44  

Sales and marketing

     9       5       6       7       7  

General and administrative

     18       8       8       9       9  

Collaboration and development charge

           15                    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     139       59       57       58       60  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (105     (10     4       3       (3

Other income (expense):

          

Interest expense

     (9     (4     (4     (5     (2

Change in fair value of convertible preferred stock warrant liability

           2       (1           (3

Other income, net

                              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (9     (2     (5     (5     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

     (114     (12     (1     (2     (8

Provision for (benefit from) income taxes

                             (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders and comprehensive loss

     (114 )%      (12 )%      (1 )%      (2 )%      (7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Financial Measures

We use the financial measures set forth below, which are non-GAAP financial measures, to help us analyze our financial results, establish budgets and operational goals for managing our business and to evaluate our performance. We also believe that the presentation of these non-GAAP financial measures in this prospectus provides an additional tool for investors to use in comparing our core business and results of operations over multiple periods with other companies in our industry, many of which present similar non-GAAP financial measures to investors. However, the non-GAAP financial measures presented in this prospectus may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated. The non-GAAP financial measures presented in this prospectus should not be considered as the sole measure of our performance and should not be considered in isolation from, or as a substitute for, comparable financial measures calculated in accordance with GAAP.

The information in the table below sets forth the non-GAAP financial measures that we use in this prospectus.

 

     Year Ended
December 31,
    Six Months
Ended June 30,
 
     2014     2015     2016     2016     2017  
     (dollars in thousands)  

Non-GAAP net income (loss)

   $ (26,757   $ 1,303     $ 1,071     $ (288   $ (1,092

Adjusted EBITDA

     (22,819     6,642       7,266       2,869       1,728  

Adjusted EBITDA margin

     (93 %)      8     8     7     4

 

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Non-GAAP Net Income (Loss). We define non-GAAP net income (loss) as net loss attributable to common stockholders reported on our consolidated statements of operations and comprehensive loss, excluding the impact of the following non-cash charges: stock-based compensation, a collaboration and development charge, change in fair value of convertible preferred stock warrant liability and amortization of acquired intangibles resulting from business combination. We have presented non-GAAP income (loss) from operations because we believe that the exclusion of these non-cash charges allows for a more accurate comparison of our results of operations to other companies in our industry.

Adjusted EBITDA and Adjusted EBITDA Margin. We define adjusted EBITDA as our net loss attributable to common stockholders excluding: (1) stock-based compensation; (2) depreciation and amortization; (3) interest expense; (4) a collaboration and development charge; (5) change in fair value of convertible preferred stock warrant liability; (6) other income, net; and (7) income tax expense. We define adjusted EBITDA margin as adjusted EBITDA divided by revenue. We have presented adjusted EBITDA and adjusted EBITDA margin because we believe they are important measures used by industry analysts and investors to compare our performance against that of our peer group and they provide a useful measure for period-to-period comparisons of our core operating performance.

See the section titled “Prospectus Summary—Summary Consolidated Financial Data—Non-GAAP Financial Measures” for additional information regarding non-GAAP financial measures and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures.

Comparison of the Six Months Ended June 30, 2016 and 2017

Revenue

 

     Six Months Ended
June 30,
     Change  
     2016      2017      $      %  
     (dollars in thousands)  

Revenue by market

           

Data center

   $ 29,259      $ 32,760      $ 3,501        12

Enterprise infrastructure

     12,115        15,375        3,260        27  

Access

            580        580            *  

Automotive

            92        92            *  
  

 

 

    

 

 

    

 

 

    

Total Revenue

   $ 41,374      $ 48,807      $ 7,433        18  
  

 

 

    

 

 

    

 

 

    

 

*

Percentage change not meaningful

Revenue increased by $7.4 million, or 18%, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily attributable to a $3.3 million increase in product sales volume sold to the enterprise infrastructure market, while ASP impact for products in volume production was not significant, and $0.6 million in products sold to the access market, which is a new market since the fourth quarter of 2016, and a $3.5 million increase in revenue to the data center market. The $3.5 million increase in the data center market revenue consisted of higher unit sales of $7.9 million due to fluctuating customer demand, offset by $2.8 million related to lower ASP due to product mix and a $1.6 million impact on non-recurring deferred revenue recognized for the six months ended June 30, 2016.

 

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Cost of Revenue, Gross Profit and Gross Margin

 

     Six Months Ended
June 30,
    Change  
     2016     2017     $      %  
     (dollars in thousands)  

Cost of revenue

   $ 16,183     $ 20,959     $ 4,776        30

Gross Profit

   $ 25,191     $ 27,848     $ 2,657        11

Gross Margin

     61     57        (4 )pts 

Cost of revenue increased by $4.8 million, or 30%, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. The increase was primarily due to $5.6 million of product costs on higher unit sales, offset by $1.1 million in lower manufacturing costs related to products sold as the production process matured.

Gross profit increased by $2.7 million, or 11%, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. For the six months ended June 30, 2017, our gross margin decreased by 4%. The gross margin decrease was primarily due to the impact of $1.6 million of the aforementioned deferred revenue recognized for the six months ended June 30, 2016, which approximates 4% of total revenue for the six months ended June 30, 2016.

Operating Expenses

 

     Six Months Ended
June 30,
     Change  
     2016      2017      $      %  
     (dollars in thousands)  

Operating expenses:

           

Research and development

   $ 17,301      $ 20,944      $ 3,643        21

Sales and marketing

     2,873        3,456        583        20  

General and administrative

     3,796        4,475        679        18  
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 23,970      $ 28,875      $ 4,905        20  
  

 

 

    

 

 

    

 

 

    

Research and development expenses increased $3.6 million, or 21%, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to an increase of $1.9 million in personnel-related costs as we continued to expand our research and development headcount, $0.6 million in design tools and prototype-related expenses and $0.7 million in depreciation and amortization related to lab equipment and licenses, and a $0.5 million decrease in product development fees received from a customer in the prior year, which fees offset our research and development costs.

Sales and marketing expenses increased $0.6 million, or 20%, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to an increase in personnel-related costs of $0.4 million and marketing tradeshow costs of $0.1 million.

General and administrative expenses increased $0.7 million, or 18%, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to an increase of $0.3 million for consulting and $0.3 million in legal and audit fees incurred.

 

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Other Income (Expense)

 

     Six Months Ended
June 30,
    Change  
     2016     2017     $     %  
     (dollars in thousands)  

Other income (expense):

        

Interest expense

   $ (1,871   $ (1,016   $ 855       (46 )% 

Change in fair value of convertible preferred stock warrant liability

     78       (1,700     (1,778         *  

Other income, net

     3       28       25           *  
  

 

 

   

 

 

   

 

 

   

Total other income (expense):

   $ (1,790   $ (2,688   $ (898     50  
  

 

 

   

 

 

   

 

 

   

 

*

Percentage change not meaningful

Other expense for the six months ended June 30, 2017 increased by $0.9 million compared to the six months ended June 30, 2016 and primarily reflected $1.8 million in non-cash expense resulted in increase in the fair value of the convertible preferred stock warrant liability, offset by $0.9 million in lower interest expense as the principal of the debt was being repaid.

We will continue to record adjustments to the fair value of these warrants at each balance sheet date until the earlier of the exercise of the warrants or the completion of a liquidation event, including the completion of this offering, at which time, the liability will be reclassified to convertible preferred stock or stockholders’ equity (deficit) and will no longer be subject to fair value accounting.

Income Tax Expense

 

     Six Months Ended
June 30,
    Change  
       2016          2017       $     %  
     (dollars in thousands)  

Provision for (benefit from) Income taxes

   $ 106      $ (358   $ (464     *

Income tax expense decreased by $0.5 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to a research credit benefit from a foreign tax jurisdiction, offset by higher income tax related to our foreign subsidiaries.

Comparison of the Years Ended December 31, 2015 and 2016

Revenue

 

     Year Ended
December 31,
     Change  
     2015      2016      $     %  
     (dollars in thousands)  

Revenue by market

          

Data center

   $ 72,549      $ 64,024      $ (8,525     (12 )% 

Enterprise infrastructure

     8,258        22,476        14,218       172  

Access

            175        175       *  
  

 

 

    

 

 

    

 

 

   

Total Revenue

   $ 80,807      $ 86,675      $ 5,868       7  
  

 

 

    

 

 

    

 

 

   

 

*

Percentage change not meaningful

Revenue increased by $5.9 million, or 7%, for the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to an increase of $14.2 million, or 172%, an increase in enterprise

 

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infrastructure market revenue, offset by a decrease of $8.5 million in data center market revenue. The increase in enterprise infrastructure market revenue was primarily due to $18.4 million in higher unit sales, offset by $4.4 million attributable to lower ASPs as products sold were transitioning to volume production. The decrease in data center market revenue was primarily due to $10.4 million in lower unit sales due to fluctuating customer demand, partially offset by an increase of $3.4 million attributable to higher ASP due to product mix. In addition, data center market revenue included the recognition of deferred revenue in the year ended December 31, 2016 of $1.6 million as compared to $3.1 million for the year ended December 31, 2015 as the deferred revenue was fully recognized by June 30, 2016.

Cost of Revenue, Gross Profit and Gross Margin

 

     Year Ended
December 31,
    Change  
     2015     2016     $     %  
     (dollars in thousands)  

Cost of revenue

   $ 41,511     $ 34,064     $ (7,447     (18 )% 

Gross Profit

   $ 39,296     $ 52,611     $ 13,315       34

Gross Margin

     49     61       12 pts 

Cost of revenue decreased by $7.4 million, or 18% for the year ended December 31, 2016 compared to the year ended December 31, 2015. The decrease was primarily related to savings from yield improvements achieved through quality assurance processes with our manufacturers and cost reductions from our supply chain achieved through negotiation on production and material costs, partially offset by the higher direct operations costs of managing a greater number of products across multiple markets.

Gross profit increased by $13.3 million, or 34%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. For the year ended December 31, 2016, our gross margin increased by 12 percentage points. Adjusted for the $3.1 million and $1.6 million of the aforementioned deferred revenue recognized in each period which is non-recurring after June 2016, our adjusted gross margin would have been 47% and 60% for the years ended December 31, 2015 and 2016, respectively, resulting in 13 percentage points increase. The increase in gross margin was due to yield improvement and cost reductions from our supply chain.

Operating Expenses

 

     Year Ended
December 31,
     Change  
     2015      2016      $     %  
     (dollars in thousands)  

Operating expenses:

          

Research and development

   $ 25,262      $ 36,553      $ 11,291       45

Sales and marketing

     3,756        5,347        1,591       42  

General and administrative

     6,284        7,124        840       13  

Collaboration and development charge

     12,024               (12,024     *  
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 47,326      $ 49,024      $ 1,698       4  
  

 

 

    

 

 

    

 

 

   

 

*

Percentage change not meaningful

Research and development expenses increased $11.3 million, or 45%, for the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to an increase of $5.3 million in personnel-related costs as we continued to expand our research and development headcount, an increase of $1.1 million in design tools and prototype-related expenses and $4.8 million decrease in product development fees received from our customers in the prior year, which fees offset our research and development costs.

 

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Sales and marketing expenses increased $1.6 million, or 42%, for the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to an increase of $1.0 million in personnel-related costs as we increased our headcount to support our growth, and an increase of $0.2 million in consulting fees and third party commissions.

General and administrative expenses increased $0.8 million, or 13%, for the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to an increase of $0.9 million in personnel-related costs.

Collaboration and development charge represents the fair value of a fully vested warrant to purchase 9,756,160 shares of Series H convertible preferred stock issued to GLOBALFOUNDRIES in 2015, which was subsequently exercised in full on May 5, 2017.

Other Income (Expense)

 

     Year Ended
December 31,
    Change  
     2015     2016     $     %  
     (dollars in thousands)  

Other income (expense):

        

Interest expense

   $ (3,321   $ (3,334   $ (13    

Change in fair value of convertible preferred stock warrant liability

     1,591       (544     (2,135         *  

Other income, net

     5       14       9           *  
  

 

 

   

 

 

   

 

 

   

Total other income (expense):

   $ (1,725   $ (3,864   $ (2,139         *  
  

 

 

   

 

 

   

 

 

   

 

*

Percentage change not meaningful

Other income (expense) for the year ended December 31, 2016 increased $2.1 million compared to the year ended December 31, 2015 primarily due to the change in fair value of the convertible preferred stock warrant liability.

We will continue to record adjustments to the fair value of these warrants at each reporting period until the earlier of the exercise of the warrants or the completion of a liquidation event, including the completion of this offering, at which time, the liability will be reclassified to convertible preferred stock or stockholders’ equity (deficit) and will no longer be subject to fair value accounting.

Income Tax Expense

 

     Year Ended
December 31,
     Change  
       2015          2016        $     %  
     (dollars in thousands)  

Income tax expense

   $ 200      $ 168      $ (32     (16 )% 

Income tax expense decreased by $32,000 for the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to a decrease in the U.S. alternative minimum tax that was reduced by available credits. Our consolidated effective tax rate for the year ended December 31, 2016 was (61)% compared to (2)% for the year ended December 31, 2015 mainly due to a smaller loss before income tax balance. The consolidated effective tax rate for the year ended December 31, 2016 differed from the U.S. statutory rate primarily due to the impact of changes in reserves for uncertain tax positions and in the valuation allowance for deferred tax assets, offset by the impact of higher state taxes and research and development credit.

 

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Comparison of the Years Ended December 31, 2014 and 2015

Revenue

 

     Year Ended
December 31,
     Change  
     2014      2015      $      %  
     (dollars in thousands)  

Revenue by market

           

Data center

   $ 23,931      $ 72,549      $ 48,618        203

Enterprise infrastructure

     569        8,258        7,689        *  
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 24,500      $ 80,807      $ 56,307        230  
  

 

 

    

 

 

    

 

 

    

 

*

Percentage change not meaningful

Revenue increased by $56.3 million, or 230%, for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to $50.0 million, or 103%, in higher unit volumes of our data center products sold to our largest customer, offset by $1.4 million, or 3%, attributable to lower ASP. In addition, the $7.6 million increase in enterprise infrastructure market revenue for the year ended December 31, 2015 resulted from the increase in volumes of our AQrate products in 2015, which we first began to ship into the enterprise infrastructure market in the fourth quarter of 2014 and began shipping in volume in 2015. Due to the introduction of our AQrate products, we anticipate that revenue from the enterprise infrastructure market will grow at a greater rate than revenue from the data center market over the next two years.

Cost of Revenue, Gross Profit and Gross Margin

 

     Year Ended
December 31,
    Change  
     2014     2015     $      %  
     (dollars in thousands)  

Cost of revenue

   $ 16,189     $ 41,511     $ 25,322        156

Gross profit

   $ 8,311     $ 39,296     $ 30,985        373

Gross margin

     34     49        15 pts 

Cost of revenue increased by $25.3 million, or 156% for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase was primarily related to costs associated with an increase in the volume of products sold.

Gross profit increased by $31.0 million, or 373%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. For the year ended December 31, 2015, our gross margin increased by 15 percentage points due to yield improvement and cost reductions from our supply chain as the result of higher production volumes. This increase in gross margin was partially offset by a lower ASP of approximately 3% for our Twinville product for the year ended December 31, 2015 compared to the year ended December 31, 2014.

 

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Operating Expenses

 

     Year Ended
December 31,
     Change  
     2014      2015      $     %  
     (dollars in thousands)  

Operating expenses:

          

Research and development

   $ 27,343      $ 25,262      $ (2,081     (8 )% 

Sales and marketing

     2,142        3,756        1,614       75  

General and administrative

     4,403        6,284        1,881       43  

Collaboration and development charge

            12,024        12,024       *  
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 33,888      $ 47,326      $ 13,438       40  
  

 

 

    

 

 

    

 

 

   

 

*

Percentage change not meaningful

Research and development expenses decreased $2.1 million, or 8%, for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to an increase of $4.8 million in product development fees from our customers (which offset expenses) and a $3.3 million decrease in engineering mask costs. This decrease was partially offset by an increase of $3.3 million in personnel costs as we increased our headcount to support continued investment in our future product offerings, a $2.4 million increase in costs related to the expansion of our international offices and a $0.3 million increase in design tools and prototype-related expenses.

Sales and marketing expenses increased $1.6 million, or 75%, for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to an increase of $1.3 million in personnel costs as we increased our headcount to support our growth, and an increase of $0.4 million in facility and IT costs.

General and administrative expenses increased $1.9 million, or 43%, for the year ended December 31, 2015 compared to the year ended December 31, 2014, due to an increase of $1.5 million in professional services and legal fees and a $0.4 million increase in personnel costs primarily to support our growth in operations and preparation to operate as a public company.

Collaboration and development charge represents the fair value of a fully vested warrant to purchase 9,756,160 shares of Series H convertible preferred stock issued to GLOBALFOUNDRIES, which was subsequently exercised in full on May 5, 2017.

Other Income (Expense)

 

     Year Ended
December 31,
    Change  
     2014     2015     $     %  
     (dollars in thousands)  

Other income (expense):

      

Interest expense

   $ (2,164   $ (3,321   $ (1,157     53

Change in fair value of convertible preferred stock warrant liability

     (15     1,591       1,606       *  

Other income, net

     12       5       (7     *  
  

 

 

   

 

 

   

 

 

   

Total other income (expense)

   $ (2,167   $ (1,725   $ 442       (20
  

 

 

   

 

 

   

 

 

   

 

*

Percentage change not meaningful

Other income (expense) decreased $0.4 million for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily as a result of a $1.6 million change in fair value of the convertible preferred stock warrant liability, partially offset by an increase of $1.2 million in interest expense relating to our outstanding long-term debt and borrowings under our line of credit.

 

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We will continue to record adjustments to the fair value of these warrants at each balance sheet date until the earlier of the exercise of the warrants or the completion of a liquidation event, including the completion of this offering, at which time, the liability will be reclassified to stockholders’ equity (deficit) and will no longer be subject to fair value accounting.

Income Tax Expense

 

     Year Ended
December 31,
     Change  
     2014      2015      $      %  
     (dollars in thousands)  

Income tax expense

   $ 56      $ 200      $ 144        257

Income tax expense increased $0.1 million for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to an increase in foreign income tax and U.S. federal income tax related to alternative minimum tax. Our consolidated effective tax rate for the year ended December 31, 2015 was (2)%, which represents an approximate decrease of 2% compared to the year ended December 31, 2014. The consolidated effective tax rate for the year ended December 31, 2015 differed from the U.S. statutory rate primarily as a result of changes in the valuation allowance for deferred tax assets.

Quarterly Results of Operations

The following tables set forth selected unaudited quarterly consolidated statements of operations data for each of the nine quarters in the period ended June 30, 2017, as well as the percentage that each line item represents of revenue for each quarter. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments of a normal, recurring nature that are necessary for the fair presentation of the results of operations for these periods in accordance with generally accepted accounting principles in the United States. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of operating results to be expected for the full fiscal year or any future period.

 

    Three Months Ended  
    June 30,
2015
    Sep. 30,
2015
    Dec. 31,
2015
    Mar. 31,
2016
    June 30,
2016
    Sep. 30,
2016
    Dec. 31,
2016
    Mar. 31,
2017
    June 30,
2017
 
    (dollars in thousands)  

Quarterly results of operations

                 

Revenue

  $ 19,539     $ 25,463     $ 24,280     $ 19,562     $ 21,812     $ 22,534     $ 22,767     $ 23,643     $ 25,164  

Cost of revenue

    10,337       13,496       10,501       7,909       8,274       9,127       8,754       10,047       10,912  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    9,202       11,967       13,779       11,653       13,538       13,407       14,013       13,596       14,252  

Operating expenses:

                 

Research and development

    7,516       8,377       5,831       8,183       9,118       9,321       9,931       10,407       10,537  

Sales and marketing

    916       1,013       1,168       1,389       1,484       1,344       1,130       1,634       1,822  

General and administrative

    1,427       1,474       2,335       1,718       2,078       1,891       1,437       2,227       2,248  

Collaboration and development charge

                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    9,859       10,864       9,334       11,290       12,680       12,556       12,498       14,268       14,607  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (657     1,103       4,445       363       858       851       1,515       (672     (355

Other income (expense):

                 

Interest expense

    (806     (794     (838     (861     (1,010     (779     (684     (559     (457

Change in fair value of convertible preferred stock warrant liability

    (90     1,857       (144           78             (622     (660     (1,040

Other income, net

    10       (6     (7     7       (4     (6     17       17       11  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (886     1,057       (989     (854     (936     (785     (1,289     (1,202     (1,486
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense

    (1,543     2,160       3,456       (491     (78     66       226       (1,874     (1,841

Provision for (benefit from) Income taxes

    29       25       119       59       47       (22     84       151       (509
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders and comprehensive loss

  $ (1,572   $ 2,135     $ 3,337     $ (550   $ (125   $ 88     $ 142     $ (2,025   $ (1,332
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Three Months Ended  
    June 30,
2015
    Sep. 30,
2015
    Dec. 31,
2015
    Mar. 31,
2016
    June 30,
2016
    Sep. 30,
2016
    Dec. 31,
2016
    Mar. 31,
2017
    June 30,
2017
 

Quarterly results of operations

                 

Revenue

    100%       100%       100%       100%       100%       100%       100%       100%       100%  

Cost of revenue

    53       53       43       40       38       41       38       42       43  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    47       47       57       60       62       59       62       58       57  

Operating expenses:

                 

Research and development

    38       33       24       43       41       42       44       44       42  

Sales and marketing

    5       4       5       7       7       6       5       7       7  

General and administrative

    7       6       10       9       10       8       6       10       9  

Collaboration and development charge

                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    50       43       39       59       58       56       55       61       58  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (3)       4       18       1       4       3       7       (3)       (1)  

Other income (expense):

                 

Interest expense

    (4)       (3)       (3)       (4)       (5)       (3)       (3)       (2)       (2)  

Change in fair value of convertible preferred stock warrant liability

    (1)       7       (1)                         (3)       (3)       (4)  

Other income, net

                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (5)       4       (4)       (4)       (5)       (3)       (6)       (5)       (6)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense

    (8)       8       14       (3)       (1)             1       (8)       (7)  

Provision for (benefit from) Income taxes

                                              1       (2)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders and comprehensive loss

    (8)%       8%       14%       (3)%       (1)%       —%       1%       (9)%       (5)%  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Revenue Trends

Our quarterly revenue increased for all quarters presented in 2015 and 2016, with the exception of the fourth quarter of 2015 and the first quarter of 2016. The overall increase in the third quarter of 2015 was primarily due to an increase in unit volumes sold to the data center market. The modest decrease in revenue in the fourth quarter of 2015 and in the first quarter of 2016 was primarily the result of a decrease in unit volumes to the data center market, partially offset by a higher unit volume sold to the enterprise infrastructure market. The increase in higher unit volumes for the enterprise infrastructure market continued in the second quarter of 2016 which accounted for $4.4 million additional revenue, partially offset by $2.1 million decline in the data center market revenue. The slight increase in revenue in the third and fourth quarter of 2016 was attributable to $2.2 million and $2.4 million, respectively, of higher data center market revenue due to higher ASPs and higher unit volumes, partially offset by $1.5 million and $2.1 million declines, respectively, in our enterprise infrastructure market revenue due to lower unit volume. The increase in revenue in the first quarter of 2017 was primarily attributable to $3.3 million of higher enterprise infrastructure market revenue due to higher unit volumes and $0.2 million of higher access market revenue due to higher unit volumes and ASPs, offset partially by a $2.6 million decline in our data center market revenue due to lower unit volumes and ASPs. The increase of $1.5 million in revenue in the second quarter of 2017 was primarily attributable to $1.3 million of higher data center market revenue due to higher unit volumes as customer demand fluctuated, and $0.3 million of higher enterprise infrastructure market revenue due to higher unit volumes offset by lower ASPs as volume production increased. Due to the introduction of our AQrate products to the enterprise infrastructure and access markets, we anticipate that revenue from these markets will fluctuate quarter to quarter as our customers establish better forecasts of their end customers’ demand but revenue from these markets will grow at a greater rate than revenue from the data center market over the next two years.

 

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Quarterly Cost of Revenue and Gross Profit and Gross Margin Trends

Increases in gross margin are primarily due to yield improvement and cost reductions from our supply chain as the result of higher production volumes and fluctuations in ASPs. Our quarterly gross margins ranged from a low of 47% in the second quarter of 2015 to 62% in the second and fourth quarters of 2016. Gross margin generally increased sequentially in 2015, primarily due to an increase in revenue from our data center market as described above. Gross margin increased for the first and second quarters of 2016 primarily due to yield improvement and cost reductions from our supply chain. For the third quarter of 2016, the decrease is due to $0.8 million of deferred revenue recognized in the second quarter which was non-recurring. Gross margin increased in the fourth quarter of 2016 primarily due to the sale of previously written off inventory. For the first quarter of 2017, the gross margin decrease is due to revenue and ASP decline in our data center market. For the second quarter of 2017, gross margin increased primarily due to an increase in revenue from our data center market as described above.

Quarterly Operating Expense Trends

Total operating expenses, excluding the collaboration and development charge and product development fees received from our customers, increased from $9.9 million to $12.7 million from the second quarter of 2015 to the second quarter in 2016 and remained at approximately $12.6 million for both third and fourth quarters of 2016. Our total operating expenses, excluding the collaboration and development charge and product development fees received from our customers, increased sequentially for all quarters in 2015 and 2016 and the first and second quarter of 2017 with the exception of the third and fourth quarters of 2016, which remained principally unchanged from the prior quarter. The sequential increases were due primarily to increased personnel costs, prototype-related and consulting expenses to support our research and development efforts, growth in operations and costs to prepare to operate as a public company. The fourth quarter of 2015 had lower net research and development costs, primarily due to $2.2 million in product development fees received from our customers which is an offset to research and development expenses.

Research and development expenses fluctuated during the nine quarters ended June 30, 2017 but increased from the second quarter of 2015 to the second quarter of 2017, with the exception of the fourth quarter of 2015, due primarily to our increased headcount and the expansion of our international offices to support the development of our future products. The decrease in research and development expense in the fourth quarter of 2015 was the result of $2.7 million in decreased prototype-related expenses and $2.2 million in product development fees from our customers, partially offset by higher personnel costs. The research and development expense in the first quarter of 2016 included $0.5 million in product development fees from our customers which is an offset to research and development expenses.

Sales and marketing expenses ranged from $0.9 million to $1.8 million for the nine quarters ended June 30, 2017. With the exception of the third and fourth quarters of 2016, sales and marketing expenses increased each quarter since the second quarter of 2015 through the second quarter of 2016 primarily due to an increase in personnel-related costs associated with increased headcount and increased spending in marketing programs to drive future revenue growth. Sales and marketing expenses decreased in the third and fourth quarters of 2016, primarily due to the fluctuation on the timing and spending of marketing programs and lower third party commission. Sales and marketing expenses increased in the first and second quarter of 2017, primarily due to increased headcount to drive future revenue growth.

General and administrative expenses fluctuated during the nine quarters ended June 30, 2017. In 2015, general and administrative expenses increased sequentially from $1.4 million in the second quarter of 2015 to $2.3 million in the fourth quarter of 2015, primarily due to increased personnel costs and professional service fees associated with the preparation to operate as a public company. General and administrative expenses for 2016 fluctuated between quarters with $1.7 million in the first quarter of 2016, $2.1 million in the second quarter, $1.9 million in the third quarter, decreased to $1.4 million in the fourth quarter of 2016 and then increased to $2.2 million in both the first and second quarters of 2017. The fluctuations were primarily due to increased

 

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personnel costs and the timing in incurring professional service fees associated with tax advisory and preparation to operate as a public company.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through cash generated from product sales, as well as proceeds from our convertible preferred stock and debt financings. As of June 30, 2017, we had cash and cash equivalents of $17.4 million. In March and July 2015, we issued and sold an aggregate of 25,848,278 shares of our Series H convertible preferred stock for net proceeds of $37.0 million. Since our inception through June 30, 2017, we have sold an aggregate of 208,004,878 shares of our convertible preferred stock for aggregate net proceeds of $199.5 million. Our principal use of cash is to fund our operations to support our growth.

We believe that our existing cash and cash equivalents, our expected cash flows from product sales, and funds available for borrowing under our credit facilities will be sufficient to meet our cash needs for at least the next 12 months. Over the longer term, our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our sales and marketing and research and development expenditures, and the continuing market acceptance of our solutions. In the event that we need to borrow funds or issue additional equity, we cannot assure you that any such additional financing will be available on terms acceptable to us, if at all. In addition, any future borrowings may result in additional restrictions on our business and any issuance of additional equity would result in dilution to investors. If we are unable to raise additional capital when we need it, it would harm our business, results of operations and financial condition.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

 

    Year Ended December 31,     Six Months Ended March 31,  
    2014     2015     2016           2016                 2017        
   

(in thousands)

 

Net cash provided by (used in) operating activities

  $ (23,978   $ (11,512   $ 12,138     $ 3,139     $ (8,755

Net cash used in investing activities

    (1,299     (4,174     (8,431     (1,673     (2,775

Net cash provided by (used in) financing activities

    27,678       42,920       (9,104     (3,696     6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  $ 2,401     $ 27,234     $ (5,397   $ (2,230   $ (11,524
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities

We have historically used cash in operating activities due to our net losses, adjusted for changes in our operating assets and liabilities, particularly from accounts receivable, inventories, prepaid expenses and other assets, accounts payable and accrued expenses, deferred revenue and non-cash expense items such as depreciation and amortization, stock-based compensation expense, issuance of convertible preferred stock warrants and the change in fair value of our convertible preferred stock warrant liability and amortization of our debt discount.

For the six months ended June 30, 2017, cash used in operating activities was approximately $8.8 million. The cash used in operating activities was primarily due to $10.2 million in net change in operating assets and liabilities and a net loss of $3.4 million, offset by non-cash expenses of $4.8 million.

For the year ended December 31, 2016, cash provided by operating activities was approximately $12.1 million. The cash provided by operating activities was primarily the result of decreased inventories of $9.6 million as product revenue increased, non-cash items totaling $5.4 million, offset by other changes in operating assets and liabilities of $0.4 million, net loss of $0.4 million, and decrease in deferred revenue of $2.1 million primarily from the recognition of previously recorded deferred revenue related to a significant agreement with Intel.

 

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For the year ended December 31, 2015, we used approximately $11.5 million of cash in operating activities. The cash used in operating activities was primarily the result of increased inventories of $12.7 million to support our future product sales, our net loss of $10.0 million offset by non-cash items totaling $14.4 million, an increase in accounts receivable of $5.2 million due to increased product sales during 2015, and a decrease in deferred revenue of $2.7 million primarily from the recognition of previously deferred revenue related to a significant agreement with Intel. The cash used in operating activities was partially offset by increases in accounts payable and accrued expenses of $3.4 million primarily due to higher compensation and benefit accruals resulting from increased headcount and increased professional services costs due to preparing to operate as a public company, and a decrease in prepaid expenses and other assets of $1.3 million. Non-cash items included $12.1 million for the issuance of convertible preferred stock warrants primarily related to a collaboration and development charge, $1.9 million of depreciation and amortization, $1.2 million amortization of debt discount and non-cash interest expense, and $0.8 million of stock compensation expense, offset by a $1.6 million revaluation of our convertible preferred stock warrants.

For the year ended December 31, 2014, we used approximately $24.0 million of cash in operating activities. The cash used in operating activities was primarily the result of our net loss of $27.8 million offset by non-cash items totaling $3.0 million, an increase in prepaid expenses and other assets of $4.4 million primarily due to the prepayment of processed wafer inventory, a decrease in deferred revenue of $3.1 million primarily due to the recognition of previously deferred revenue, and a $0.1 million increase in accounts receivable. The cash used in operating activities was partially offset by a decrease of $6.8 million in inventory due to inventory purchased in 2013 in advance of 2014 anticipated product demand, and increases in accounts payable and accrued expenses of $1.5 million. Non-cash items consisted of $1.9 million of depreciation and amortization, $0.9 million of stock-based compensation expense and $0.2 million of amortization of debt discount and non-cash interest expense.

Investing Activities

Our investing activities consist of capital expenditures for property and equipment purchases and IP licenses. Our capital expenditures for property and equipment have primarily been for general business purposes, including machinery and equipment, leasehold improvements, software and computer equipment used internally, and production masks to manufacture our products.

For the six months ended June 30, 2017, we used approximately $2.8 million in investing activities, consisted of $1.9 million for the purchases of property and equipment for general business purposes and $0.9 million for the purchases of short-term investments.

For the year ended December 31, 2016 we used approximately $8.4 million in investing activities for the purchase of production masks, IP licenses and other property and equipment for general business purposes.

For the year ended December 31, 2015 we used approximately $4.2 million in investing activities for the purchase of production masks and other property and equipment for general business purposes.

For the year ended December 31, 2014, we used approximately $1.3 million in investing activities primarily for the purchase of property and equipment for general business purposes.

Financing Activities

Cash generated by financing activities includes proceeds from borrowings under our credit facilities, proceeds from our issuance of common stock following employee stock option exercises and issuance of convertible preferred stock. Cash used in financing activities includes repayment of debt under our credit facilities and payment of costs related to this offering.

For the six months ended June 30, 2017, we generated $6,000 of cash in financing activities, consisting of proceeds of $5.0 million from a draw down on our line of credit and $0.8 million in proceeds from the exercise of

 

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employee stock options and preferred stock warrants, offset by repayments of our borrowings of $5.1 million and payments of $0.6 million on costs related to this offering.

For the year ended December 31, 2016, we used $9.1 million of cash in financing activities, consisting of $11.6 million used in repayments of our line of credit and borrowings and payments of $2.4 million on costs related to this offering, partially offset by $4.9 million proceeds from the exercise of employee stock options and preferred stock warrants.

For the year ended December 31, 2015, we generated $43.0 million of cash from financing activities, consisting of $37.0 million of cash from the issuance of our Series H convertible preferred stock, net of issuance costs, $20.2 million from our line of credit and $1.4 million from the issuance of common stock, primarily related to the exercise of employee stock options; offset by the repayment of $15.2 million on our line of credit, $0.2 million of debt issuance costs and $0.2 million of costs related to this offering. During the year ended December 31, 2015, our outstanding balance on our line of credit ranged from $0 to $10.3 million.

For the year ended December 31, 2014, we generated $27.7 million of cash from financing activities, consisting of $19.9 million from the issuance of our Series G convertible preferred stock, net of issuance costs, $8.2 million from our loan with Pinnacle Ventures, L.L.C., or Pinnacle, net of issuance costs, $3.0 million from our line of credit with Silicon Valley Bank and $0.3 million from the issuance of common stock, primarily related to the exercise of employee stock options; offset by a $3.9 million repayment in full of our line of credit with Silicon Valley Bank. During the year ended December 31, 2014, our line of credit balance with Silicon Valley Bank ranged from $0 to $3.0 million.

Debt Obligations

The following table summarizes our debt obligations as of December 31, 2014, 2015 and 2016 and June 30, 2017:

 

    As of December 31,     As of
June 30,

2017
 
    2014     2015     2016    
    (in thousands)  

Term loans

  $ 23,800     $ 23,800     $ 17,241     $ 12,070  

Final payment liability

    41       641       1,192       1,376  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total term loans

    23,841       24,441       18,433       13,446  

Unamortized debt discount

    (889     (533     (204     (95

Less: unamortized debt discount in other current assets

    356                    
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance term loans

    23,308       23,908       18,229       13,351  

Bank borrowings—line of credit

          5,001             5,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt

    23,308       28,909       18,229       18,351  

Less: long-term debt, current portion and bank borrowings—line of credit

          (12,455     (11,238     (17,377
 

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

  $ 23,308     $ 16,454     $ 6,991     $ 974  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pinnacle Loan and Security Agreement. In April 2013, we entered into a Loan and Security Agreement with Pinnacle for an aggregate principal amount of $15.0 million. The interest rate on this loan was the greater of the prime rate plus 925 basis points, or 12.5% per annum. At December 31, 2014, the interest rate on this loan was 12.5%. We were required to make interest-only payments for the first 24 months of the loan starting in April 2013 and thereafter to make 18 equal monthly payments from April 2015 until maturity in October 2016. In connection with this loan, we issued a warrant to Pinnacle to purchase up to 646,551 shares of our Series F convertible preferred stock at an exercise price of $0.928 per share. This loan also provided a right to convert a

 

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portion of the outstanding principal of the loan into shares of our Series F convertible preferred stock, which right expired unexercised on June 30, 2014.

On December 16, 2014, we entered into an Amended and Restated Loan and Security Agreement with Pinnacle pursuant to which we borrowed an additional $8.8 million and modified the terms of the existing loan of $15.0 million. As of December 31, 2015, our aggregate principal amount outstanding under the amended loan was $23.8 million. The interest rate on this loan, effective January 1, 2015, is the greater of the prime rate plus 550 basis points, or 8.75% per annum. As of December 31, 2016, the interest rate on this loan was 9.25%. As of June 30, 2017, the interest rate on this loan was 9.50% as prime rate increased. Monthly principal payments on this loan begin in May 2016, and an additional final payment of $1.5 million is due upon the earliest to occur of the maturity date of July 1, 2018 or the prepayment of all outstanding principal and accrued and unpaid interest. In connection with this loan, we issued a fully-vested warrant to Pinnacle to purchase up to 640,129 shares of our Series G convertible preferred stock at an exercise price of $1.4314298 per share. This loan with Pinnacle is subordinated to the loan with Hercules Technology Growth Capital, or Hercules Technology, pursuant to a subordination agreement.

We intend to prepay in full the outstanding amounts under this term loan with a portion of the net proceeds from this offering. See the section titled “Use of Proceeds.”

Hercules Technology Growth Capital Loan and Security Agreement. In January 2015, we entered into a Loan and Security Agreement with Hercules Technology for an $11.5 million revolving line of credit. The line of credit is based upon a percentage of eligible receivables and eligible customer purchase orders. The line of credit bears a variable rate of interest based upon the prime rate and changes in our borrowing base eligibility and whether the borrowing base is based on eligible accounts receivables or eligible purchase orders or both. At December 31, 2016, we had a line of credit of $11.5 million available to be borrowed at a rate of 7.35% as the $5.0 million outstanding at December 31, 2015 was repaid in full on January 5, 2016. As of June 30, 2017, the balance outstanding under this line of credit was $5.0 million. The line of credit matures on February 1, 2018. An end-of-term charge of $0.3 million is owed upon the earliest to occur of the maturity date, the date of prepayment of the outstanding secured obligations or the date that the secured obligations become due and payable. In connection with this loan, we issued a warrant to Hercules Technology to purchase up to 196,831 shares of our convertible preferred stock at an exercise price of $1.4314298 per share. At the election of the holder, these warrants may be exercised for Series G or Series H convertible preferred stock.

Contractual Obligations and Commitments

Set forth below is information concerning our contractual commitments and obligations as of December 31, 2016:

 

     Payments due by period  
     Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 
     (in thousands)  

Debt obligations

   $ 17,242      $ 10,595        6,647      $      $  

Operating leases

     1,624        982        642                

Purchase obligations

     11,431        9,433        1,998                
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,297      $ 21,010      $ 9,287      $      $  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2016, our operating lease obligations are for our U.S. headquarters and our international research facilities that expire at various dates through February 2020. Purchase obligations consist of non-cancelable agreements and purchase orders for goods and services. See Note 9 to our audited consolidated financial statements included elsewhere in this prospectus.

 

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Off-Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our audited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our audited consolidated financial statements are described below.

Revenue Recognition

We sell our products direct to our customers and to our customers’ manufacturing subcontractors, and do not currently have a significant amount of revenue sold to distributors during the sales process. We offer a limited number of customer rebates and accrue an estimate of such rebates at the time revenue is recognized. Such rebates were not material in any of the periods presented, and the differences between the actual amount of such rebates and our estimates also were not material. Revenue is recognized when delivery has occurred, persuasive evidence of an arrangement exists, the price is fixed or determinable, and collection of the resulting receivable is reasonably assured. Delivery is considered to have occurred when title and risk of loss have passed to the customer. There are no circumstances where revenue is recognized prior to delivery. Customer purchase orders are generally used to determine the existence of an arrangement. We evaluate whether the price is fixed or determinable based on the payment terms associated with the transaction. With respect to collectability, we perform credit checks for new customers and perform ongoing evaluations of our existing customers’ financial condition. We defer revenue if any revenue recognition criteria have not been met.

Inventories

Inventories consist of processed wafers, work-in-process and finished goods and are stated at the lower of standard cost or net realizable value. Standard costs approximate actual costs and are based on a first-in, first-out basis. We perform detailed reviews of the net realizable value of inventories, both on hand as well as for inventories that we are committed to purchase and write down the inventory value for estimated deterioration, excess and obsolete and other factors based on management’s assessment of future demand and market conditions. Once written down, inventory write-downs are not reversed until the inventory is sold or scrapped.

Convertible Preferred Stock Warrant Liability

We account for our outstanding convertible preferred stock warrants as derivative liabilities as the terms of the warrants are not fixed due to potential adjustments in the exercise price and the number of shares upon an equity financing at a lower price. The convertible preferred stock warrants are initially recorded at fair value when issued, with gains and losses arising from changes in fair value recognized in other income (expense) in the consolidated statements of operations and comprehensive loss at each period end while such instruments are outstanding and classified as liabilities. Upon the earlier of the exercise of the warrants or the completion of a

 

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liquidation event, including the completion of this offering, at which time, the warrants will convert to warrants to purchase common stock, the liability will be reclassified to convertible preferred stock or stockholders’ equity (deficit), and will no longer be subject to fair value accounting. The fair values of the convertible preferred stock warrants issued in connection with debt agreements are recorded as debt discounts and are amortized as non-cash interest expense in the consolidated statement of operations over the expected repayment period of the debt agreements. The fair value of the convertible preferred stock warrants issued in connection with a letter agreement to collaborate on the development of products with GLOBALFOUNDRIES was recorded as an operating expense at the date of issuance.

The assumptions used to determine the fair value of convertible preferred stock warrants were as follows:

 

     Year Ended December 31,      Six Months Ended
June 30,
2017
 
     2014      2015      2016     
Valuation method    Monte Carlo
Simulation
     Monte Carlo
Simulation
     Black-Scholes
Pricing Model
    

Black-Scholes

Pricing Model

 

Risk-free interest rate

     0.43% - 2.22%        0.10% - 2.21%        0.39% - 2.25%        0.89% - 2.24%  

Expected term

     1.0 - 9.7 yrs        0.2 - 9.0 yrs        0.3 - 9.0 yrs        0.8 - 7.9 yrs  

Expected dividends

     0%        0%        0%        0%  

Volatility

     35% - 50%        35% - 50%        25% - 50%        25% - 35%  

Fair value of preferred stock:

           

Convertible preferred Series A

   $ 0.48      $ 0.37      $ 0.44      $ 0.78  

Convertible preferred Series B

     0.77        0.62        0.73        1.11  

Convertible preferred Series C-1

     0.77        0.62        0.73        1.11  

Convertible preferred Series D

     0.83        0.67        0.78        1.19  

Convertible preferred Series E

     0.81        0.69        0.77        1.03  

Convertible preferred Series F

     0.95        0.84        0.91        1.11  

Convertible preferred Series G

     1.43        1.36        1.40        1.49  

Convertible preferred Series H

            1.42        1.43        1.50  

Stock-Based Compensation

Compensation expense related to stock-based transactions is measured and recognized in the financial statements at fair value. Stock-based compensation expense is measured at the grant date based on the fair value of the equity award and is recognized as expense over the requisite service period, which is generally the vesting period. We estimate the fair value of each equity award on the date of grant using the Black-Scholes option-pricing model and recognize the related stock-based compensation expense on the straight-line method. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected volatility, expected term, risk-free interest rate, and expected dividends.

We account for equity instruments issued to non-employees based on the fair value of the awards determined using the Black-Scholes option pricing model. The fair value of such instruments is recognized as an expense over the period in which the related services are received.

We estimated the fair value of stock-based awards granted using the following valuation assumptions:

 

     Year Ended December 31,    Six Months
Ended June 30,
     2014    2015    2016    2016    2017

Risk-free interest rate

   1.66% - 1.98%    1.51% - 2.32%    1.46% - 2.43%    1.46% - 1.88%    1.94% - 2.40%

Expected term

   5.5 - 10 yrs    5.3 - 10 yrs    6.1 - 10 yrs    6.1 - 10 yrs    6.1 - 9.6 yrs

Expected dividends

   0%    0%    0%    0%    0%

Volatility

   44%    41% - 42%    30% - 34%    34%    27% - 30%

 

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Fair Value of Common Stock

The fair value of the shares of common stock underlying the stock options has historically been the responsibility of and determined by our board of directors. Because there has been no public market for our common stock, the board of directors determined fair value of common stock at the time of grant of the option by considering a number of objective and subjective factors including independent contemporaneous third-party valuations of our common stock, our operating and financial performance, the lack of liquidity of our capital stock and general and industry specific economic outlooks, amongst other factors.

Expected Term

The expected term of stock options represents the weighted-average period the stock options are expected to be outstanding. For option grants that are considered to be “plain vanilla”, we have opted to use the simplified method for estimating the expected term, which calculates the expected term as the average of the time-to-vesting and the contractual life of the options.

Expected Volatility

The expected stock price volatility assumption was determined by examining the historical volatilities of a group of industry peers, as we do not have any trading history for our common stock. We will continue to analyze the historical stock price volatility and expected term assumptions as more historical data for our common stock becomes available.

Risk-Free Interest Rate

The risk-free rate assumption was based on U.S. Treasury instruments with terms that were consistent with the expected term of the option grants.

Expected Dividends

The expected dividend yield was 0% as we have not paid, and do not expect to pay, cash dividends in the foreseeable future.

The following table summarizes the effects of stock-based compensation on our consolidated statements of operations and comprehensive loss for the years ended December 31, 2014, 2015 and 2016 and the six months ended June 30, 2016 and 2017.

 

     Year Ended
December 31,
     Six Months Ended
June 30,
 
     2014      2015      2016          2016              2017      
     (in thousands)  

Cost of revenue

   $ 10      $ 19      $ 31      $ 15      $ 14  

Research and development

     382        373        489        206        293  

Sales and marketing

     36        71        95        46        64  

General and administrative

     430        329        324        182        178  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 858      $ 792      $ 939      $ 449      $ 549  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2017, we had approximately $5.5 million of unrecognized stock-based compensation expense which we expect to recognize over a weighted-average period of approximately 3.5 years.

The intrinsic value of all outstanding options as of June 30, 2017 was $21.2 million based on the estimated fair market value of our common stock of $9.90 per share.

 

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Common Stock Valuations

Our board of directors determined the fair value of the common stock underlying our stock options. The board of directors granted options to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on each grant date.

The common stock valuations were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions we use in the valuation model are based on future expectations combined with management judgment. Our board of directors is comprised of a majority of non-employee directors who we believe have the relevant experience and expertise to determine a fair value of our common stock on each respective grant date. In the absence of a public trading market for our common stock, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the common stock’s fair value as of the date of each option grant, including the following factors:

 

   

valuations performed by an unrelated third-party specialist;

 

   

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

 

   

our operating and financial performance;

 

   

current business conditions and projections;

 

   

the market performance of comparable publicly traded companies;

 

   

our history and the introduction of new products and services;

 

   

our stage of development;

 

   

the hiring of key personnel;

 

   

the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of the company, given prevailing market conditions;

 

   

any adjustment necessary to recognize a lack of marketability for our common stock; and

 

   

U.S. and global capital market conditions.

At each grant date, our board of directors reviewed any recent events and their potential impact on the estimated fair value per share of the common stock. For grants of stock awards made on dates for which there was no valuation performed by an independent valuation specialist, our board of directors determined the fair value of our common stock on the date of grant based upon the immediately preceding valuation and other pertinent information available to it at the time of grant.

Our common stock valuation models have historically utilized a market approach, which bases the valuation of our common stock on multiples of revenue, operating income, net income and similar metrics of publicly traded companies we believe are similar to us in terms of size, product market, liquidity, financial leverage, revenue, profitability, growth and other factors. We also examine transactions in the same or similar assets at the measurement date. These transactions can include venture investments in private firms, or stock market trading prices of similar publicly traded companies.

We also allocate value to each class of stock using an Option Pricing Model, or OPM, and Probability Weighted Expected Return Method, or PWERM. The OPM treats common stock and convertible preferred stock as call options on an enterprise value, with exercise prices based on the liquidation preference of our convertible preferred stock. The common stock is modeled as a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after our convertible preferred stock is liquidated. The OPM is appropriate to use when the range of possible future outcomes is difficult to predict and thus creates highly speculative forecasts. PWERM involves a forward-looking analysis of the possible future outcomes of the enterprise. This method is particularly useful when

 

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discrete future outcomes can be predicted at a relatively high confidence level with a probability distribution. Discrete future outcomes considered under the PWERM include an initial public offering, or IPO, as well as non-IPO market based outcomes. Determining the fair value of the enterprise using the PWERM requires us to develop assumptions and estimates for both the probability of an IPO liquidity event and non-IPO outcomes, as well as the values we expect those outcomes could yield. We apply significant judgment in developing these assumptions and estimates, primarily based upon the enterprise value we determined using the market approach, our knowledge of the business and our reasonable expectations of discrete outcomes occurring.

In determining the estimated fair value of our common stock, our board of directors also considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we applied discounts to reflect the lack of marketability of our common stock based on the expected time to liquidity. The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.

The key subjective factors and assumptions used in our valuations primarily consisted of: (1) the selection of the appropriate market comparable transactions, (2) the selection of the appropriate comparable publicly traded companies, (3) the financial forecasts utilized to determine future cash balances and necessary capital requirements, (4) the probability and timing of the various possible liquidity events, (5) the estimated weighted-average cost of capital and (6) the discount for lack of marketability of our common stock.

Following the closing of this offering, the fair value of our common stock will be determined based on the closing price of our common stock on the NYSE on the grant date.

Income Taxes

Deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the financial statements carrying amounts and the tax basis of assets and liabilities and net operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

A tax position can be recognized only if it is more likely than not to be sustained based solely on its technical merits as of the reporting date and then only in an amount more likely than not to be sustained upon review by the tax authorities. We consider many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

Recent Accounting Pronouncements

In May 2017, the Financial Accounting Standards Board, or the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. It provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years and early adoption is permitted. We are currently evaluating the impact of adoption of this new standard on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new guidance requires entities to recognize assets and liabilities for leases with terms of more than 12 months and additional disclosures to better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018. Early adoption is permitted. We are evaluating the impact of this new standard on our consolidated financial statements.

 

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In August 2015, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), an update that deferred the effective date of the new guidance they previously issued in May 2014 related to the recognition and reporting of revenue that establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The guidance allows for the use of either the full or modified retrospective transition method. This new standard will be effective for us on January 1, 2018, although adoption as of the original effective date of January 1, 2017 is permitted. We intend to use the modified retrospective method and are evaluating the impact of this new standard on our consolidated financial statements and disclosure.

Adopted

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which requires entities to measure most inventory “at the lower of cost and net realizable value”, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures, one of which is net realizable value). This standard will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard did not have a significant impact on our consolidated financial statements.

In March 2016, the FASB, issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance affects entities that issue share-based payment awards to their employees. The guidance is designed to simplify several aspects of accounting for share-based payment award transactions which include: the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and forfeiture rate calculations. The guidance is effective for us in the first quarter of fiscal 2017. The adoption of this standard did not have a material impact on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230), which provides guidance for eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective retrospectively for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. We early adopted this guidance in 2016, and the adoption of this guidance did not result in any adjustments.