10-K 1 anad20151231_10k.htm FORM 10-K anad20151231_10k.htm Table Of Contents

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-K

 

/x/ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015.

 

 

Or

 

 

/ /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

Commission File No. 0-25662

 

 

ANADIGICS, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

22-2582106

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

141 Mt. Bethel Road, Warren, New Jersey

07059

(Address of principal executive offices)

(Zip Code)

 

 

(908) 668-5000

(Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.01 par value

 

The above securities are registered on the NASDAQ Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes / / No /X/

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes / / No /X/

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes /X / No / /

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in information statements incorporated in Part III of this Form 10-K or any amendment to this Form 10-K. / /

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one): Large accelerated filer / / Accelerated filer / X / Non-accelerated filer (Do not check if a smaller reporting company) / / Smaller reporting company / /

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes / / No /X/

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant as of July 4, 2015 was approximately $61 million, based upon the closing sales price of the registrant’s common equity as quoted on the NASDAQ Global Market on such date.

 

The number of shares outstanding of the registrant's common stock as of March 1, 2016 was 89,792,296 (excluding 122,934 shares held in treasury).

 

Documents incorporated by reference: None.

 

 

TABLE OF CONTENTS

 

 

 

 

PART I

   
 

Glossary

 

Item 1:

Business

 6

Item 1A:

Risk Factors

 14

Item 1B:

Unresolved Staff Comments

 24

Item 2:

Properties

 24

Item 3: 

Legal Proceedings

 24

Item 4: 

Mine Safety Disclosures 

 24

 

 

 

PART II

 

 

Item 5: 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 24

Item 6:

Selected Financial Data

 25

Item 7:

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

 26

Item 7A:

Quantitative and Qualitative Disclosures About Market Risk

 33

Item 8:

Financial Statements and Supplementary Data

 34

Item 9:

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 55

Item 9A:

Controls and Procedures

 55

Item 9B:

Other Information

 58
     

PART III

   

Item 10:

Directors, Executive Officers and Corporate Governance

 58

Item 11:

Executive Compensation

 58

Item 12:

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 58

Item 13:

Certain Relationships and Related Transactions and Director Independence

 58

Item 14:

Principal Accounting Fees and Services

 58
     

PART IV

   

Item 15:

Exhibits, Financial Statement Schedules

 59

 

 

FORWARD-LOOKING INFORMATION

 

CERTAIN STATEMENTS IN THIS REPORT OR DOCUMENTS INCORPORATED HEREIN BY REFERENCE ARE FORWARD-LOOKING STATEMENTS (AS THAT TERM IS DEFINED IN THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) THAT INVOLVE RISKS AND UNCERTAINTIES. THESE FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE STATEMENT WILL INCLUDE WORDS SUCH AS WE "BELIEVE", "ANTICIPATE", "EXPECT" OR WORDS OF SIMILAR IMPORT. SIMILARLY, STATEMENTS THAT DESCRIBE OUR FUTURE PLANS, OBJECTIVES, ESTIMATES OR GOALS ARE FORWARD-LOOKING STATEMENTS. THE CAUTIONARY STATEMENTS MADE IN THIS REPORT SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS REPORT. YOU ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISK AND UNCERTAINTIES, AS WELL AS ASSUMPTIONS THAT IF THEY MATERIALIZE OR PROVE INCORRECT, COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FURTHER, ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT, ARE STATEMENTS THAT COULD BE DEEMED FORWARD-LOOKING STATEMENTS. WE ASSUME NO OBLIGATION AND DO NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS, EXCEPT AS MAY BE REQUIRED BY LAW. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS AND DEVELOPMENTS TO BE MATERIALLY DIFFERENT FROM THOSE EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS PRESENTED HEREIN INCLUDE THE RISK FACTORS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K, AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN.

 

PART I

 

Glossary

Term

Definition

3G

3G is the third generation of wireless telecommunications technology, which typically provides data speeds greater than 200 Kb/s.

4G

4G is the fourth generation of wireless telecommunications technology, which usually provides peak data throughput of up to approximately 100 Mb/s.

802.11

802.11 is an IEEE set of standards for WLAN. 802.11n specifies data rates up to 150 Mb/s and is widely used in a variety of infrastructure and mobile applications. The 802.11ac standard is replacing wired connectivity by offering data rates greater than 500 Mb/s. Wave 2 802.11ac devices offer even greater data rates, exceeding the speeds offered by 1,000 Mb/s wired connections.

CATV

Cable Television is the distribution of television programs, voice communications, and data access via RF signals transmitted through coaxial cables.

CMOS

Complementary Metal-Oxide Semiconductor is technology for constructing ICs, typically in a silicon process, and often for digital applications, such as controller and logic circuits.

CPE

Customer-Premises Equipment is any terminal or device that is located at the subscriber’s premises and connected to a service provider’s network.

DOCSIS

Data Over Cable Service Interface Specification is an international standard for cable television data, video and voice communications. Version 3.1 is anticipated to replace the currently widely used version 3.0, as MSOs upgrade their infrastructure over the next several years. DOCSIS 3.1 enables 10 times faster data speeds and greater high-definition video content.

FEIC

Front-End Integrated Circuit is a single RF die that typically contains the PA, RF switch, and low noise amplifier to save space and reduce design time for manufacturers.

Foundry

Foundry in the semiconductor industry refers to fabrication of ICs that are designed by a third party. Testing services may also be included in the Foundry model to provide additional value to design customers.

GaAs

Gallium Arsenide is a substrate material used in the manufacture of RF semiconductors. It is also used for epitaxial growth of InGaP semiconductors.

GaN

Gallium Nitride is a substrate material used in the manufacture of high power RF semiconductors, such as CATV infrastructure devices.

HBT

Heterojunction Bipolar Transistor is a structure that is commonly used for amplifying circuits.

IC

Integrated Circuit is a small electronic device made out of a semiconductor material, such as GaAs.

  

 

IEEE

Institute of Electrical and Electronics Engineers is a professional organization that establishes standards for communication protocols.

IoT

Internet of Things is the interconnection of embedded computing devices using the Internet and a variety of protocols, domains and applications for data exchange and communications.

InGaP

Indium Gallium Phosphide is semiconductor material, mainly used for HBT and pHEMT structures.

InGaP-Plus

InGaP-Plus™ is a proprietary ANADIGICS technology that combines HBT amplifying structures and pHEMT RF switches on a single die to enable greater levels of performance and integration.

LAN

Local Area Network is an interconnection of computers and other electronic devices in a limited area, such as a home, school, or business.

Laser

Laser is an optical device that uses stimulated emission of electromagnetic radiation to generate an intense, focused beam of coherent monochromatic light that can be projected onto precisely targeted locations.

LED

Light-emitting diode is a semiconductor light source often used in lighting, displays and sensors. LEDs are not capable of producing light as focused or intense as Lasers.

M2M

Machine-to-Machine refers to technologies that allow systems and components to communicate with each other, such as sensors and meters.

MESFET

Metal Semiconductor Field Effect Transistor is a structure that is commonly used in RF semiconductors, such as CATV infrastructure devices.

MIMO

Multiple-Input, Multiple-Output, commonly used in WiFi applications, is the use of multiple antennae at both the transmitter and receiver to improve communication performance.

MSO

Multiple-System Operator is an entity that operates multiple cable television systems, serving several communities or geographic areas.

PA

Power Amplifier is a circuit that increases the power of an electrical signal. An RF PA is used to convert a low-power RF signal to a larger signal, enabling the transmission of data from a transmitter antenna to a receiver antenna.

pHEMT

Pseudomorphic High-Electron-Mobility Transistor is a structure that is commonly used for switching circuits.

RF

Radio Frequency is term that commonly describes an electrical signal transmitted via radio waves.

RFIC

Radio Frequency Integrated Circuit is a semiconductor production for communications, including voice, data, and video.

Small-Cell

Small-Cell is a low-powered radio access node, such as picocells and femtocells, that has a limited coverage area. Small-cells are an alternative to traditional cellular towers that allow carriers to target dense areas that require additional wireless network capacity.

VCO

Voltage-Controlled Oscillator is an electronic circuit that produces a periodic, oscillating signal whose frequency is controlled by a voltage input and often used in RF communications, including point-to-point wireless backhaul networks.

VCSEL

Vertical-Cavity Surface-Emitting Laser is a diode with a monolithic Laser resonator, where the emitted light leaves the device in a direction perpendicular to the top surface. VCSELs are expected to be used in a variety of motion-capture and sensing applications, including gesture recognition and biometrics.

WiFi

WiFi is a WLAN network product that adheres to 802.11 communications standards.

WLAN

Wireless Local Area Network links two or more devices using a wireless connection.

 

 

ITEM 1. BUSINESS.

 

Overview

 

ANADIGICS, Inc. (“we” or the “Company”) is an innovator in technology, design, and manufacturing of RF semiconductor solutions for infrastructure and mobile communications and data transmission markets. We were incorporated in Delaware in 1984. Our headquarters is located at 141 Mt. Bethel Road, Warren, New Jersey 07059, and our telephone number at that address is 908-668-5000.

 

On January 15, 2016, we entered into an Agreement and Plan of Merger that was amended on February 1, 2016 and February 26, 2016 (as so amended, the “Merger Agreement”) with II-VI Incorporated, a Pennsylvania corporation (“II-VI”), and Regulus Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary of II-VI (the “Purchaser”). Pursuant to the Merger Agreement, the Parent would acquire the Company for a purchase price of $0.85 per share pursuant to a tender offer by Purchaser that commenced on February 2, 2016 and expired on March 11, 2016, under which approximately 53% of the Company’s outstanding shares were tendered and purchased by Purchaser, and which will be followed by a merger of the Purchaser into the Company. As a result of that merger, the Company will be a wholly-owned subsidiary of II-VI.

 

If the transactions contemplated by the Merger Agreement are consummated, the Purchaser will have acquired all of our issued and outstanding shares of common stock at a purchase price of $0.85 per share and, after making the required filings with the Securities and Exchange Commission, we would cease to be a reporting company under the Securities Exchange Act of 1934, as amended. The boards of directors of the Company, II-VI and Purchaser approved the Merger Agreement and the transactions contemplated by the II-VI Merger Agreement. There can be no assurance that a transaction will be consummated or that II-VI will not propose any adjustments to the II-VI Merger Agreement.

 

We provide RF solutions that solve the complex dataflow challenges that exist today and those that are expected to arise in the future. Our strategy is focused on manufacturing and delivering RF products that deliver outstanding performance, reliability, and integration to enable high-speed data communications and transmission. With our CATV, WiFi and wireless infrastructure products, we support the critical infrastructure data pipeline. Our WiFi mobile and Cellular products enable users to tap into this data pipeline, including accessing the Internet, video and voice. We also offer VCSEL Foundry capabilities that support the anticipated emergence of advanced sensing applications.

 

Our product portfolio includes line amplifiers, reverse path amplifiers, PAs, and FEICs. Our Foundry offering provides the capacity for high-volume VCSEL manufacturing and testing in support of anticipated sensing capabilities for a variety of markets, including mobile devices. Leveraging a variety of internal and external technologies and materials, including MESFET, InGaP-Plus™, CMOS, GaAs, and GaN, our products deliver exceptional performance and integration. We believe that when used in our customers’ data transmission and communication devices, our products cost-effectively enhance RF performance, reliability, and overall functionality.

 

We are a customer-centric organization that works closely with leading equipment designers and manufacturers to improve data transmission quality and system capacity. We also collaborate with industry-leading chipset providers where our functionality enhances their reference designs. These relationships enable us to target emerging trends in the market and help our customers achieve their performance, integration, and manufacturing goals.

 

Our products are optimized for a variety of infrastructure and mobile applications, which enable high-speed data transmission and communications.

 

Infrastructure applications

 

o

CATV: Our line amplifiers, reverse path amplifiers, and other RF products enable CATV infrastructure communications networks, as well as CPE devices, such as set-top boxes and cable modems. Our infrastructure products support triple-play communications services: high-speed data, high-definition video and voice.

 

o

WiFi: Our PAs and FEICs enable WiFi connectivity for infrastructure and multimedia applications, including access points, routers, media gateways, and set-top boxes. Our PAs and FEICs are optimized for the latest WiFi standards, including 802.11ac Wave 2, to provide a reliable, high-performance alternative to wired data networks. Our PAs also enable both wireless control of and video transmission in drone applications.

  

 

 

o

Wireless: Our PAs are crucial components in 3G and 4G Small-Cell base stations, including picocells, enterprise-class femtocells, and CPE devices that help carriers expand broadband network coverage and support greater levels of data transmission. Our VCOs are optimized for several applications, including point-to-point wireless backhaul networks.

 

o

IoT: Our PAs are used in a variety of IoT applications, including automotive, M2M, and industrial devices. Each of these devices uses 3G and/or 4G cellular protocols to leverage data transmission capabilities for monitoring and control.

 

Mobile applications

 

o

WiFi: Our FEICs and PAs support the latest 802.11 standards and are designed to enable WiFi connectivity in drones, smartphones, tablets, notebooks, and gaming systems.

 

o

Cellular: Our PAs enable 3G and 4G wireless connectivity in mobile handsets, smartphones, tablets, and notebooks.

 

We continue to capitalize on emerging technologies to provide an advanced platform for both our internal product development and external designers.

 

Foundry

 

o

VCSEL: Our manufacturing capabilities, including a 6-inch GaAs wafer process, provide opportunities to serve a new range of customers. This is evidenced by our innovative Foundry development offering, which includes integrated large-scale wafer processing and high-yield test capabilities. We have developed the industry’s first 6-inch GaAs fabrication process for VCSELs.

 

We expect our business to benefit from four market dynamics directly related to increasingly ubiquitous connectivity resulting in an exponential growth of global data transmission, as well as the expansion in technologies for data collection.

 

 

1.

The expansion of 3G and 4G data infrastructure. The migration to 3G and 4G high-speed data standards enables mobile users to consume data more quickly, increasing the need for additional data capacity. As carriers seek cost-effective methods to increase network capacity, especially in dense geographic locations, Small-Cell solutions stand out as critical enablers. Small-Cell devices provide carriers with an economical, high performance solution that can be deployed quickly. Our family of Small-Cell PAs enable wireless infrastructure solutions that are more thermally efficient, consume less power, enable higher throughput, and provide greater coverage and range.

 

3G and 4G data connectivity is being embedded in an ever-expanding array of applications, from M2M devices to smartphones and tablets. Our PAs are designed for both IoT and mobile applications to provide superior linearity to support a high quality wireless connection.

 

 

2.

The expanded use of CATV infrastructure networks as a data pipeline. Global data consumption is increasing at a rapid pace, which places continuously larger demands on infrastructure networks worldwide. Many residential, business, and institutional customers utilize CATV systems, which provide high-definition video, data and voice services, to connect their devices to the Internet. The evolving DOCSIS 3.1 standard, which is expected to replace DOCSIS 3.0, provides a specification for greater CATV system bandwidth in support of enhanced services, including significantly faster data speeds and an expansion in system capacity. Our CATV infrastructure products, including line amplifiers and reverse path amplifiers, are optimized for the DOCSIS 3.1 standard, providing outstanding performance and reliability in support of stable, high-speed connectivity with maximum uptime. We believe our devices will allow network operators to take advantage of the DOCSIS 3.1 standard enabling them to offer a wider array of data transmission and video services.

 

 

3.

The advancement and implementation of sensing capabilities. From gesture recognition to biometrics, many of the objects we use daily are expected to include sensing functionality for the first time or gain even more advanced capabilities. VCSELs represent an ideal solution for these applications by offering better performance compared with LEDs and improved manufacturability and cost compared with edge-emitting Lasers. Our Foundry capabilities include the industry’s first 6-inch GaAs VCSEL fabrication process and enhanced testing platform to ensure greater uniformity in production volumes. These development services are available to a variety of customers from small design organizations to large semiconductor companies.

 

 

 

4.

The adoption of high-speed WiFi for data connectivity. Demand for instantaneous information and higher data speeds have paved the way for an unprecedented level of WiFi integration across a variety of applications, including routers, drones, smartphones, and tablets. The adoption of the high-performance 802.11ac standard enables data speeds that rival traditional wireline Ethernet networks and eliminates the need for costly interconnection cables between user devices.

  

Our PAs and FEICs are optimized for infrastructure and multimedia applications and deliver outstanding output power, gain, and linearity to ensure reliable transmission of data at extended ranges. They also provide excellent power-saving performance to help manufacturers manage the overall thermal design and capabilities of their products.

 

We also offer FEICs and PAs that are optimized for mobile applications. These solutions enable mobile devices to connect to high-performance WiFi infrastructure networks. Our WiFi products for mobile applications also feature greater efficiency and exceptional integration to maximize battery life and minimize space requirements.

 

We believe that our offerings are well positioned to address these market opportunities by delivering exceptional performance and value in the infrastructure and mobile markets, as well as cost-effective, high-volume Foundry capabilities for the sensing market.

 

Industry Background

 

CATV Market

 

We are a leading supplier of RF amplifiers to the CATV infrastructure market. Equipment upgrades are being driven by continued demand for converged voice, data, and video services, especially in emerging markets, such as China. The increased demand, along with the rapidly growing volume of content, including high-definition video on demand, requires greater bandwidth. Our DOCSIS 3.0 line amplifier MMICs and hybrid modules deliver high performance with industry-leading reliability to support these network upgrades.

 

The anticipated migration from DOCSIS 3.0 to DOCSIS 3.1 will require significant infrastructure upgrades. With data rates up to ten times higher than the previous standard, DOCSIS 3.1 not only enables even more advanced video services, but also enhanced multimedia streaming. To achieve this level of performance, DOCSIS 3.1 requires greater bandwidth up to 1.2 GHz. Our family of DOCSIS 3.1 products has been optimized to support the latest upgrade and expansion cycle with GaAs, pHEMT, and GaN amplifiers. We anticipate that our DOCSIS 3.1 products will benefit from the typically long infrastructure product lifecycle.

 

WiFi Markets

 

     Infrastructure

WiFi data consumption continues to increase as 802.11ac functionality is embedded in a greater variety of devices. Released in December 2013, the high-performance 802.11ac standard provides data rates greater than 500 Mb/s and represents a viable replacement for wired solutions without the need for costly cable connections to user devices. MIMO infrastructure devices, including routers, access points, and base stations are being released to capitalize on the speed advantages offered by the 802.11ac standard. Additionally, the increased data rates are enabling reliable transmission of high-definition video utilizing WiFi networks, fueling 802.11ac adoption in multimedia applications, such as media gateways and set-top boxes. 802.11ac Wave 2 solutions enable multi-user MIMO functionality to provide even higher data throughput at greater range and coverage than existing Wave 1 solutions.

 

Our 802.11ac WiFi PAs and FEMs are designed for infrastructure and multimedia applications to deliver an outstanding combination of linearity, efficiency, gain, thermal characteristics, and integration, which enable high-performance MIMO designs, while reducing bill of materials costs and minimizing circuit board space requirements. We collaborate with reference design leaders to ensure compatibility with the latest chipsets and minimize design time for equipment manufacturers.

 

WiFi connectivity is also being utilized in new applications, such as drones. Our infrastructure PAs deliver exceptional linearity, output power and efficiency to effectively control and transmit high-resolution photographs and video between the unmanned aerial vehicle and the controller over long distances.

 

 

     Mobile

WiFi is one of the most used methods for data connectivity and attachment rates for ultra-fast 802.11ac in mobile devices continue to rise. Our FEICs provide an excellent combination of integration, efficiency, and linearity, which enable mobile devices to take advantage of the larger data pipeline offered by 802.11ac infrastructure equipment. Our FEICs are specified on leading reference designs and help reduce external components to minimize time-to-market.

 

We believe that we are well-positioned through our WiFi PA and FEIC product families to support the industry-wide transition to 802.11ac.

 

3G and 4G Cellular Markets

 

     Wireless Infrastructure

The accelerating data consumption of 3G and 4G devices is placing tremendous pressure on existing cellular infrastructure. Carriers are seeking pragmatic solutions over costly traditional infrastructure build outs to solve this challenge. Small-Cell base stations enable carriers to target specific areas of dense data, including urban areas, offices, college campuses, and entertainment venues. Our manufacturing processes and design technologies enable us to provide PAs optimized for new Small-Cell wireless infrastructure equipment that will support this improvement in wireless networks. Our Small-Cell infrastructure PAs have a leadership position in the market and are specified on multiple reference designs.

 

Cellular networks typically rely on fiber optic connections at each tower to provide wireless users with data and voice services. New point-to-point systems use wireless connectivity to replace fiber optics, making it easier for wireless carriers to expand their coverage by simplifying construction and providing greater flexibility to select the best placement. Our VCOs are optimized for point-to-point base stations with an industry-leading combination of output power and phase noise.

 

     IoT

We live in an ever more interconnected world with 3G and 4G connectivity being embedded in a variety of applications, from M2M to automotive and industrial. The catalysts for the anticipated growth of IoT are the expanding use of sensors, improvements provided by communication with appliances and machines, and demand for greater control. To provide manufacturers with a solution that enables high-speed embedded connectivity across multiple bands and modes, our PAs provide outstanding output power, linearity, and integration. These advantages ensure reliable connectivity to 3G and 4G data networks, while minimizing space requirements.

 

     Mobile

The market for 3G and 4G mobile devices continues to grow as users increasingly rely on smartphones and tablets to access network data. Additionally, new features, including larger screens, faster processors, and better cameras are enhancing the user experience and driving upgrades. Our cellular PAs deliver strong performance to enable connectivity in 3G and 4G mobile devices, including smartphones.

 

VCSEL Foundry Market

 

Motion-capture and sensing functionality is currently offered in some common consumer electronics devices, such as ambient light sensors in smartphones. However, these capabilities are expected to become more robust and serve as an integral part in the way users interact with their environment. Major applications for sensing include smartphones, tablets, gaming systems, and vehicles with gesture recognition; wearables with biometric sensors that can provide real-time information; and mobile computing that can provide a simulated 3D experience. We anticipate that VCSELs will be used for many of these applications because they provide inherently better performance compared with LEDs. VCSELs also offer improved manufacturability and lower cost compared with edge-emitting Lasers. However, in order for VCSELs to successfully displace these technologies, we believe that they will need to be manufactured with the same scale, quality, and cost structure as LEDs. We have successfully demonstrated the industry’s first 6-inch GaAs VCSEL fabrication process. This larger substrate quadruples the gross area per wafer compared with today’s commonly used 3-inch wafer technology and more than doubles that of 4-inch technology. More gross area per wafer not only allows for substantially greater scalability, but can also make VCSELs more economical as the die size increases in support of emitter arrays and pragmatic for high-volume manufacture of smaller die sizes to be used in mobile applications. The advanced wafer fab and test capabilities that our facility offers also improve yields and provide better repeatability. Foundry revenues are categorized within Infrastructure revenue.

 

 

Our Strategy

 

We aim to create value through innovative RF products and services that enable instantaneous connectivity anytime, anywhere to support the unyielding demand for greater data consumption. The key elements of our strategy include:

 

 

Deliver shareholder value through a sale of the Company. We believe that the Company must achieve greater scale to more effectively compete in this industry. Through a sale of the Company to an entity with additional resources, we believe that ANADIGICS will become more competitive. Additionally, we intend to capture return for our shareholders through this merger or sale of the Company, thereby maximizing shareholder value.

 

 

Target market segments that value our differentiated RF solutions. We believe that key segments within the infrastructure and mobile markets are both expected to grow over time and face complex technical hurdles. We continue to identify opportunities where we can help customers overcome these data communications challenges and realize the tremendous value of our unique solutions. This is particularly applicable to our infrastructure offerings, where our products are enabling the global expansion of various data pipelines, across multiple standards, to support the exponential increase in data use. Our solutions include CATV line amplifiers with industry-leading reliability, WiFi PAs and FEICs for infrastructure applications that deliver higher-efficiency and greater data speeds at extended range, PAs to lead the evolving Small-Cell market, and FEICs and PAs to enable high-performance wireless connectivity in mobile devices. We are also utilizing our unique 6-inch GaAs process technology to now offer VCSEL Foundry capabilities, where customers can access our more-efficient platform to manufacture their designs and test the resulting devices in high volume. Delivering leading technology products in volume requires expert execution and can result in added value throughout the industry supply chain. Additionally, we are committed to continually evolving our technology advantage, developing new processes internally and evaluating alternative, but fair-priced external capabilities, to provide our design and operations teams with maximum flexibility. We believe this approach ensures that we are able to offer the right technology foundation for new offerings.

 

 

Work closely with industry-leading customers. We continue to develop and strengthen relationships with manufacturers and system designers in the infrastructure and mobile markets. We believe that this collaboration provides us with improved industry trend visibility and voice, more accurate technology roadmaps and insight into next-generation product specifications.

 

Products & Services

 

We classify our revenues based upon the end application of the product in which our ICs are used: infrastructure and mobile. Of our total net sales for the years ended December 31, 2015, 2014 and 2013, infrastructure products accounted for approximately 72%, 45% and 27%, respectively, and mobile products accounted for approximately 28%, 55% and 73%, respectively.

 

     Infrastructure

 

Our infrastructure product line encompasses RF solutions to enable CATV, WiFi, Wireless, and IoT equipment. Principal infrastructure products include:

 

CATV

 

o

Surface Mount Line Amplifiers & Line Amplifier Hybrid Modules: Boost signals within CATV system amplifiers in the downstream path to ensure high-speed data download speeds, as well as high-definition video and voice.

 

o

Reverse Path Amplifiers: Ensure rapid data upload speeds and video on demand requests, as well as superior voice clarity, by increasing the signal strength within CATV system amplifiers in the upstream path.

 

o

Gain Block Amplifiers: Increase the RF signal at intermediate points in the CATV network and at individual subscriber locations.

 

o

Optical Network RF Amplifiers: Enable high-speed data downloads, sharp video, and clear voice in fiber-to-the-premises optical network terminals.

 

 

 

WiFi

 

o

PAs: Enable stable wireless connections, rapid data download speeds and clear video by strengthening signals in WiFi infrastructure and multimedia devices, as well as drones.

 

o

FEICs: Boost WiFi signals to mobile devices, enabling broader range and coverage in principally medium-power applications.

 

Wireless

 

o

PAs: Increase signal strength in Small-Cell base stations to ensure stable 3G and 4G connections with mobile devices, rapid data download speeds and clear voice.

 

o

Voltage-Controlled Oscillators: Create a controlled signal in point-to-point wireless backhaul base stations to enable high-speed data and voice clarity.

 

IoT

 

o

PAs: Amplify 3G and 4G signals in IoT devices to enable rapid upload speeds.

 

    Mobile

 

Our mobile product line includes RF solutions to enable wireless connectivity in a variety of mobile devices, including smartphones, tablets, notebook computers, and gaming devices. Principal mobile products include:

 

WiFi

 

o

FEICs: Boost WiFi signals in mobile devices to enable fast upload speeds.

 

o

PAs: Increase the strength of WiFi signals in mobile devices to enable fast upload speeds.

 

Cellular

 

o

PAs: Enable high-speed uploads and voice clarity by amplifying 3G and 4G signals in mobile devices.

 

    Foundry

 

Our capabilities include manufacture and test of VCSEL devices for a variety of sensing applications. Principal offerings include:

 

Foundry

 

o

VCSELs: Provide industry-leading designers with the ability to manufacture and test VCSELs in volume.

 

Marketing, Sales, Distribution and Customer Support

 

Marketing

 

Through our marketing efforts, we actively generate awareness about our products and services and the benefits they provide to customers and end users. The technical nature of our solutions requires a proactive marketing strategy. At the same time, market demands need to be pursued and addressed. Our marketing team utilizes a variety of communication channels to promote our solutions to both existing and prospective customers. We visit key customers and prospects regularly. We present at sales events and expositions worldwide. We produce and widely circulate brochures, technical literature, feature articles, advertisements and website content. We are committed to building and maintaining close relationships with our existing customers and fostering new ties with potential customers. Our strategic marketing processes allow us to reinforce existing relationships and penetrate new markets for our products and services.

 

Sales & Distribution

 

We believe that the technical nature of our products and markets demands an unwavering commitment to building and maintaining close relationships with our customers, as well as developing new relationships with potential customers. That is why we leverage a multi-channel sales structure that is customer-centric and focused on responsiveness.

 

Our products and Foundry offerings are primarily sold directly to customers. To promote sales, our sales representatives, assisted by our technical staff and senior management, regularly meet with our customers and prospective customers worldwide. Our targeted direct sales program facilitates our penetration in existing markets and our development of sales in new markets.

 

We selectively use independent manufacturers’ sales representatives and distributors to complement our direct sales efforts. By working with key distributors like Richardson-RFPD, Alltek Technology, Long Trump, Takachiho Koheki, and Blue Arrow, who have extensive sales networks and experience, we are able to maintain local practices regarding inventories and payment terms, while supporting growth. We believe this is critical to our objective of expanding our customer base, especially in infrastructure markets.

 

 

Customer Support

 

Maintaining strong relationships with customers and reinforcing goodwill with them goes beyond marketing and sales. We are strongly committed to customer support. Our design and applications staff actively communicate with customers throughout the entire deployment process, including, design, qualification and manufacturing phases. We have highly specialized field applications engineers in North America, Korea, Taiwan, China and Japan whose primary objective is to provide unsurpassed customer support and service. By providing a world-class level of support, we deliver greater value to our customers.

 

Process Technology, Manufacturing, Assembly and Testing

 

Process Technology

 

We design, develop, and manufacture RFIC’s using a variety of compound semiconductor substrates, including GaAs, GaN, and silicon CMOS, using numerous process technologies, including MESFET, pHEMT and HBT. Our patented InGaP-Plus technology combines InGaP HBT and pHEMT processes on a single substrate, enabling us to integrate several functions, including PAs, LNAs and RF switches on the same die. Additionally, we have developed a unique VCSEL process technology and test capabilities that can enable higher yields and greater die per wafer with enhanced uniformity. See “Risk Factors—Sources for certain components, materials, equipment and repair services are limited, which could result in delays or reductions in product shipments.”

 

We also use technologies, such as silicon CMOS, that we do not intend to manufacture in-house. We believe there will be adequate external Foundry capacity available to produce these components.

 

Manufacturing

 

We manufacture substantially all of our ICs in our six-inch diameter GaAs wafer fab in Warren, New Jersey. Our 150mm (six-inch diameter) GaAs wafer fab has been operational since 1999 and is certified as ISO9001:2008 and ISO14001:2004 compliant. We also have Foundry arrangements with several companies to supply alternate technologies and supplement our existing wafer fab capabilities. This structure provides us with access to unique technologies and flexible capacity without the requisite capital investment.

 

Assembly

 

Fabricated GaAs wafers are separated into individual units called die and shipped to contractors in Asia for assembly into our products. The die, other necessary components, and interconnects are mounted within a single package.

 

Final Test

 

After assembly, packaged ICs are tested prior to shipment to our customers. We outsource the majority of our production RF testing operations to companies that perform testing near our module assembly contractors in Asia. This adds considerable efficiencies to the device manufacturing process by reducing product cycle times, which allows customers to receive products more quickly and supports our initiative to reduce manufacturing costs and increase our profitability.

 

Raw Materials

 

GaAs wafers, HBT/pHEMT epitaxial wafers, passive components, other raw materials, and equipment used in the production of our ICs are available from a limited number of sources. See “Risk Factors—Sources for certain components, materials, equipment and repair services are limited, which could result in delays or reductions in product shipments.”

 

 

Research and Development

 

We have made significant investments in our unique processes and knowledge, including system architectures, product design, wafer fabrication, package design, and testing which we believe provide us with a competitive advantage. In 2014, we refocused our business on specific markets, such as Infrastructure for CATV, wireless and WiFi, where we believe we can provide the greatest value to our customers and achieve the best return on our investment. With this greater focus on infrastructure, we are able to both better serve these markets and reduce our research and development expenses, which were $19.7 million, $26.7 million and $38.6 million in 2015, 2014 and 2013, respectively.

 

Customers

 

Sales to Huawei Technologies, Richardson, and Alltek accounted for 21%, 17% and 12%, respectively, of total net sales during 2015. No other customer accounted for 10% or more of total net sales during 2015. See “Risk Factors—We depend on a few large customers for a significant portion of our revenue; a loss of a significant customer or a decrease in purchases and/or changes in purchasing or payment patterns by one of these customers could materially and adversely affect our revenues and our ability to forecast revenues.”

 

Employees

 

As of December 31, 2015, we had 258 employees. We believe our relations with our employees are generally positive.

 

Competition

 

We compete with U.S. and international semiconductor and IC manufacturers of all sizes. Our key competitors are Avago Technologies Limited, Qorvo, Inc. (formerly RF Micro Devices, Inc. and TriQuint Semiconductor, Inc), and Skyworks Solutions, Inc., as well as M/A-COM Technology Solutions Holdings, Inc. and MaxLinear, Inc. in select markets.

 

In select cases, our competitors have significantly greater financial, technical, manufacturing, and marketing resources than we do. Increased competition could adversely affect our revenue and profitability through price reductions or reduced demand for our products. See “Risk Factors—We face intense competition which could result in a decrease in our products’ prices and sales.”

 

Patents, Licenses and Proprietary Rights

 

It is our practice to seek U.S. patent and copyright protection for our products and developments where appropriate and to protect our valuable technology under U.S. laws affording protection for trade secrets and for semiconductor chip designs. As of December 31, 2015, we own 85 U.S. patents and have 15 pending U.S. patent applications. The U.S. patents were issued between 1998 and 2015 and will expire between 2016 and 2033.

 

We rely primarily upon trade secrets, technical know-how, and other unpatented proprietary information relating to our product development and manufacturing activities. To protect our trade secrets, technical know-how, and other proprietary information, our employees are required to enter into agreements providing for maintenance of confidentiality and the assignment to the Company of rights to inventions made by them while in our employ. We have also entered into non-disclosure agreements to protect our confidential information delivered to third parties in conjunction with possible corporate collaborations and for other purposes. See “Risk Factors—We may not be successful in protecting our intellectual property rights or in avoiding claims that we infringe on the intellectual property rights of others.”

 

Environmental Matters

 

Our operations are subject to international, federal, state, and local environmental laws, rules, regulations, and ordinances (“environmental laws”) that govern activities or operations that may have adverse effects on human health or the environment. These environmental laws may impose liability for the cost of remediating, and for certain damages resulting from, sites of past releases of hazardous materials. We believe that we currently conduct, and have conducted, our activities and operations in substantial compliance with applicable environmental laws and that costs arising from existing environmental laws will not have a material adverse effect on our results of operations. We cannot assure you, however, that such environmental laws will not become more stringent in the future or that we will not incur significant costs in the future in order to comply with these laws and regulations. See “Risk Factors—We are subject to stringent environmental laws and regulations both domestically and abroad.”

 

 

Available Information

 

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website (www.anadigics.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission. All SEC filings are also available at the SEC’s Web site at www.sec.gov.


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ITEM 1A. RISK FACTORS

 

OUR FUTURE PERFORMANCE IS SUBJECT TO A VARIETY OF RISKS, INCLUDING THOSE DESCRIBED BELOW. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED AND THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED IN THIS REPORT, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES.

 

We have experienced losses in the past and expect to experience losses in the future.

 

We have incurred substantial operating and net losses in the past, including in 2015, and we expect to continue to incur losses in 2016. If economic conditions worsen, or there is an abrupt change in our customers’ businesses or markets, our business, financial condition and results of operations will likely be materially and adversely affected.

 

Due to the cyclical nature of the semiconductor industry and our end markets our results of operations can vary significantly which could have a material and adverse affect on our business, financial condition and results of operations.                                   

 

The semiconductor industry and our end markets have been cyclical, seasonal and subject to significant downturns. Further, the industry can have limited visibility into customers’ forecasts and inventory levels. In past years, particularly within the mobile market, the industry has experienced periods marked by market weaknesses that created lower order demand, production overcapacity, high inventory levels, and accelerated declines in average selling prices for our products.

 

Our results of operations also may be subject to significant quarterly and annual fluctuations. These fluctuations are due to a number of factors, many of which are beyond our control, including, among others: (i) changes in end-user demand for the products manufactured with our products and sold by our customers; (ii) the effects of competitive pricing pressures, including decreases in average selling prices of our products; (iii) industry production capacity levels and fluctuations in industry manufacturing yields; (iv) levels of inventory in our end markets; (v) availability and cost of products from our suppliers; (vi) the gain or loss of significant customers; (vii) our ability to develop, introduce and market new products and technologies on a timely basis; (viii) new product and technology introductions by competitors; (ix) changes in the mix of products produced and sold; (x) market acceptance of our products and our customers; and (xi) intellectual property disputes.

 

These factors negatively affected our business, financial condition and results of operations during these periods and may negatively affect our business, financial condition and results of operations in the future.

 

 

We depend on a few large customers for a significant portion of our revenue; a loss of a significant customer or a decrease in purchases and/or changes in purchasing or payment patterns by one of these customers could materially and adversely affect our revenues and our ability to forecast revenues.          

 

We receive a significant portion of our revenues from a few significant customers and their subcontractors. Our financial condition and results of operations have been materially and adversely affected in the past by the failure of anticipated orders to be realized and by deferrals or cancellations of orders as a result of changes in customer requirements. If a customer encounters financial difficulties of its own as a result of a change in demand or for any other reason, the customer’s ability to make timely payments to us for non-returnable products could be impaired. If we were to lose any of our major customers, if sales to these customers were to decrease materially or our customers fail to make timely payments, our business, financial condition and results of operations could be materially and adversely affected.

 

If we fail to sell a sufficient volume of products relative to our manufacturing capacity and facility utilization, our operating results may be adversely affected.

 

Since June 2014, we have decreased capacity in our manufacturing facility; however, our manufacturing facility continues to be underutilized. In years in which we had excess capacity, this excess capacity meant we incurred higher fixed costs for our products relative to the revenues we generated. Because significant portions of our manufacturing costs are relatively fixed, our manufacturing volumes are critical to our operating results. If we fail to achieve and maintain acceptable manufacturing volumes or experience customer-driven product shipment delays, our results of operations could be harmed. During periods of decreased demand, our fixed manufacturing costs negatively affect our results of operations. If we are unable to improve utilization levels and manage capacity, the increased expense levels relative to revenue will have an adverse effect on our business, financial condition and results of operations. Further, we base our expense levels in part on our expectations of future orders and these expense levels are predominantly fixed. If we receive fewer customer orders than expected or if our customers delay or cancel orders, we may not be able to reduce our manufacturing costs, which would have an adverse effect on our business, financial condition and results of operations.

 

We face intense competition, which could result in a decrease in our products’ prices and sales.

 

The markets for our semiconductor products are intensely competitive and are characterized by rapid technological change. We compete with U.S. and international semiconductor and IC manufacturers of various sizes, some of whom have significantly greater financial, technical, manufacturing and marketing resources than we do. Our markets involve substantial competition and we expect that competitive pressures will remain high. Particularly in mobile markets, this competition has resulted in, and is expected to continue to result in, declining average selling prices for our products and increased challenges in maintaining or increasing market share. We believe that the principal competitive factors for suppliers in our markets include, among others: (i) time-to-market; (ii) timely new product innovation; (iii) product quality, reliability and performance; (iv) product price; (v) features available in products; (vi) compliance with industry standards; (vii) strategic relationships with leading reference design providers and customers; (viii) access to and protection of intellectual property; (ix) market acceptance; and (x) maintaining access to raw materials, supplies and services at a competitive cost.

 

Certain of our competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the development, promotion and sale of their products than we can.

 

Current and potential competitors have established, or may in the future establish, financial or strategic relationships among themselves or with customers, distributors, reference design providers or other third parties with whom we have or may in the future have relationships. If our competitors are able to strengthen existing, or establish new, relationships with these third parties they may rapidly acquire market share at our expense, which has occurred in the past when our capacity was constrained and we were unable to fully meet customer demand. We cannot assure you that we will be able to compete successfully against current and potential competitors. Further, increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our business, financial condition and results of operations.

 

 

We need to keep pace with rapid product and process development and technological changes as well as product cost reductions to be competitive.

 

The markets for our products are characterized by rapid changes in both product and process technologies based on the continuous demand for product enhancements, including greater performance, higher levels of integration, and smaller form factors. Particularly within the mobile markets, because the continuous evolution of these technologies and frequent introduction of new products and enhancements have generally resulted in short product life cycles for products, we believe that our future success in that market will depend, in part, upon our ability to continue to improve the efficiency of our products and process technologies and rapidly develop new products and process technologies. The successful development of our products is highly complex and depends on numerous factors, including our ability to anticipate customer and market requirements and changes in technology and industry standards, our ability to differentiate our products from offerings of our competitors, and our ability to protect, develop or otherwise obtain adequate intellectual property for our new products. The development and/or implementation of new and emerging technology may require us to modify the manufacturing process for our products, design new products to more stringent standards, and redesign some existing products, which may prove difficult for us and result in sub-optimal manufacturing yields, delays in product deliveries and increased expenses. We may need to make substantial investments to develop these enhancements and technologies, and we cannot assure you that we will have funds available for these investments or that these enhancements and technologies will be successful. Although we have reduced product costs through cost negotiation and reduction, improved yields, packaging and test applications and die size reduction, we may not be able to do so in the future. We must achieve yield improvements and other cost reductions for existing products, and introduce new products that can be manufactured at lower costs. If a new technology emerges that is, or is perceived to be, superior to our existing technology and we are unable to develop and/or implement the new technology successfully or to develop and implement a competitive and economically acceptable alternative technology, our business, financial condition and results of operations could be materially and adversely affected.

 

Investments in researching and developing emerging technologies may not result in returns on such investments and may pose risks that could materially and adversely affect our business, financial condition and results of operations.

 

The market for semiconductors products is ever evolving and demands us to be innovative and forward-looking. To remain competitive and profitable, we need to identify emerging technologies and invest in research and development of products which utilize such emerging technologies. There can be no assurance that we will have visibility into emerging technologies or sufficient resources to research and develop products incorporating such emerging technologies. Even if we are successful, we may not sell any such new products and therefore fail to achieve any return on our investment in the research and development of such new products. Further, there may be potential risks associated with the development and commercialization of new products, including unforeseen health risks or regulatory actions. If we fail to identify emerging technologies, research and develop new products and/or experience unforeseen hazards relating to such development, our business, financial condition and results of operations could be materially and adversely affected.

 

If we fail to expand our market share within the infrastructure market our business, financial condition and results of operations could be materially and adversely affected.

 

We currently expect a larger portion of our revenue to derive from infrastructure markets. However, delays in the development of new technologies used in infrastructure applications or in the advancement of technologies used in infrastructure applications could reduce purchases of our products by manufacturers in these markets and, as a result, could have an adverse effect on our business, revenue, operating results, and financial condition.

 

Within the infrastructure market, our future success depends on the continued advancement of the communications industry and, in particular, the continued expansion of global information networks, especially those directly or indirectly dependent upon CATV infrastructure.

 

We rely on increasing demand for voice, video and other data delivered over high-bandwidth network systems as well as commitments by network systems vendors to invest in the expansion of the global information network. As network usage and bandwidth demand increase, so does the need for advanced wired CATV subsystems and components. Therefore, our future growth as a manufacturer of these products is dependent on the expansion in these networks. In the event that global information networks do not grow as expected, our business, financial condition and results of operations will likely be materially and adversely affected.

 

 

We expect a significant portion of our profitability in future periods to derive from the demand for DOCSIS3.1. The transition from DOCSIS3.0 to DOCSIS3.1 has begun to take hold in Europe. The transition is expected to occur in the United States in 2016, with demand for CATV infrastructure products anticipated to increase in 2016. If the transition from DOCSIS3.0 to DOCSIS3.1 does not take place or is substantially delayed in either Europe or the United States, our business, financial condition and results of operations will likely be materially and adversely affected.

 

We have implemented cost restructuring programs in the past and may need to again in the future.

 

We implemented cost restructuring programs in each of the past three years and may need to implement such programs again in the future. Such restructuring programs are costly to implement and may inadequately address the operating environment. No assurance can be given that the implementation of cost reduction programs will generate the anticipated cost savings and other benefits or that future or additional measures may be required. If we incorrectly anticipate the extent and term of a market decline or weak demand for our products and services, we may be forced to restructure further or may incur future operating charges due to poor business conditions and our business, financial condition and results of operations would likely be materially and adversely affected.

 

Short product life cycles, particularly within the mobile markets, and the nature of semiconductor production, including the potential for order cancellation and need to build product to a customer’s forecast may leave us with obsolete or excess inventories.

 

The life cycles of some of our products, particularly within the mobile market, depend heavily upon the life cycles of the end products into which our products are designed. Products with short life cycles require us to manage production and inventory levels closely. We are subject to increased inventory risks and costs because in certain cases we build our products based on forecasts provided by customers before receiving purchase orders for the products. As a result we incur inventory and manufacturing costs in advance of anticipated sales. Unanticipated changes in the estimated total demand for our products and/or the estimated life cycles of the end products into which our products are designed can result in obsolete or excess inventories, requiring a write off or a reduction in the inventory value. Such charges could have an adverse effect on our business, operating results and financial condition.

 

If equipment manufacturers and designers of infrastructure and mobile communications products do not design our products into their equipment, we will have difficulty selling those products.

 

Our products are not sold directly to the end-user, but are components or subsystems of other products. As a result, we rely on equipment manufacturers and designers of infrastructure and mobile communications products to select our products from among alternative offerings to be designed into their equipment. Without these “design wins,” we would have difficulty selling our products. If a manufacturer designs another supplier’s product into one of its product platforms, it is more difficult for us to achieve future design wins with that platform because changing suppliers involves significant cost, time, effort and risk on the part of that manufacturer. We may not continue to achieve design wins, and failure to do so could materially and adversely affect our business, financial condition and operating results.

 

A design win from a customer does not guarantee future sales to that customer. 

 

Achieving a design win with a customer does not ensure that we will receive significant revenues from that customer. Even after a design win, the customer is not obligated to purchase our products and can choose at any time to reduce or cease use of our products, including for example, if its own products are not commercially successful. Failure to convert design wins into actual sales could materially and adversely affect our business, financial condition and results of operations.

 

 

Lengthy product development and sales cycles associated with many of our products may result in significant expenditures before generating any revenues related to those products. 

 

After our product has been developed, tested and manufactured, our customers may need several quarters to integrate, test and evaluate our product and several additional quarters to begin volume production of their device that incorporates our product. This lengthy cycle time increases the possibility that a customer may decide to cancel or change product plans, which could reduce or eliminate our sales to that customer. As a result of this lengthy sales cycle, we may incur significant research and development expenses, and selling and administrative expenses, before we generate the related revenues for these products. Furthermore, we may never generate the anticipated revenues from a product after incurring such expenses if our customer cancels or changes its product plans and as a result our business, financial condition and results of operations could be materially and adversely affected.

 

Uncertainties involving the ordering and shipment of our products could adversely affect our business. 

 

Our sales are typically made pursuant to individual purchase orders and not under long-term supply arrangements with our customers. Our customers may cancel orders before shipment. Additionally, we sell a portion of our products through distributors, some of whom have certain rights to return unsold products. We may purchase and manufacture inventory based on estimates of customer demand for our products, which is difficult to predict. This difficulty may be compounded when we sell to equipment manufacturers or designers indirectly through distributors or contract manufacturers, or both, as our forecasts of demand will then be based on estimates provided by multiple parties. In addition, our customers may change their inventory practices on short notice for any reason. The cancellation or deferral of product orders, the return of previously sold products, or overproduction due to a change in anticipated order volumes could result in us holding excess or obsolete inventory, which could result in inventory write-downs or write-offs. In addition, shortened customer order lead times and opportunistic orders may not be filled timely due to a lack of, or inadequate level of uncommitted inventory resulting in lower revenues than possible. Further, shortened customer order lead times may make it difficult to forecast revenues. Each of these uncertainties relating to the ordering and shipment of our products could result in a material and adverse affect on our business, financial condition and results of operations.

 

We face risks from failures in our manufacturing processes and the processes of our subcontractors.

 

The fabrication of ICs, particularly those made of GaAs, is a highly complex and precise process. Our ICs are primarily manufactured on wafers made of GaAs requiring multiple process steps. It requires production in a highly controlled, clean environment. Minor impurities, contamination of the clean room environment, errors in any step of the fabrication process, defects in the masks used to print circuits on a wafer, defects in equipment or materials, downtime on equipment, human error, interruptions in electrical supply, among other factors can cause a substantial interruption in our manufacturing processes. Moreover, our manufacturing process is subject to fluctuations in our demand and fab utilization. In order to satisfy increasing customer demand by significantly increasing manufacturing output and adding personnel, we may also incur manufacturing disruptions limiting supply to customers.

 

Additionally, our operations may be affected by lengthy or recurring disruptions of operations at our production facility or those of our subcontractors. Due to the highly specialized nature of the GaAs IC manufacturing process, in the event of a disruption at the Warren, New Jersey semiconductor wafer fab, alternative GaAs production capacity for certain processes would not be readily available from third-party sources. Disruptions may include electrical power outages, fire, earthquakes, flooding, international conflicts, war, acts of terrorism, or other natural or man-made disasters. Disruptions of our manufacturing operations could cause significant delays in our shipments unless and until we are able to shift the manufacturing of such products from an affected facility to another facility or the disruption is remedied.

 

Many of our customers require that they qualify a new manufacturing source before they will accept products from such source. This qualification process may be expensive and time consuming. In the event of such delays, we cannot assure you that the required alternative capacity would be available on a timely basis or at all. Even if alternative manufacturing capacity or assembly and test capacity is available, we may not be able to obtain it on favorable terms, which could result in higher costs and/or a loss of customers. We may be unable to obtain sufficient manufacturing capacity to meet demand, either at our own facilities or through external manufacturing. In the event we are unable to supply our customers with products on a timely basis, such customers may seek alternative suppliers.

 

 

If we experience disruptions or failures in our manufacturing processes or the processes of our subcontractors, our business, financial condition and results of operations will likely be materially and adversely affected.

 

We may not be able to meet customer quality, performance and reliability standards.

 

Our customers specify quality, performance and reliability standards that we must meet. If our products do not meet these standards, we may be required to rework or replace the products. Our products may contain undetected defects or failures that only become evident after we commence volume shipments, which we may experience from time to time. Other defects or failures may also occur in the future. If such failures or defects occur, we could: (i) lose revenues; (ii) incur increased costs such as warranty expense and costs associated with customer support; (iii) experience delays, cancellations or rescheduling of orders for our products; (iv) experience increased product returns or discounts; or (v) damage our reputation which could make it difficult for us to sell our products to existing and prospective customers. We also depend on certain vendors for components, equipment and services. We maintain stringent policies regarding qualification of these vendors. However, these vendors’ processes may vary in reliability or quality, which could negatively affect our products. If we fail to meet customer standards for any reason, our business, financial condition and results of operations may be materially and adversely affected.

 

Our dependence on external semiconductor component suppliers, assembly and test operations subcontractors could lead to delays in or reductions of product shipments.          

 

Our products contain numerous component parts, substrates, GaAs, GaN and silicon-based products, obtained from external suppliers. The use of external suppliers involves a number of risks, including the possibility of material disruptions in the supply of key components and the lack of control over delivery schedules, capacity constraints, manufacturing yields, quality, fabrication costs, warranty issues and protection of intellectual property. We do not assemble or test all of our ICs or multi-chip modules. Instead, we provide the IC die and, in some cases, packaging and other components to assemble and test to external subcontractors, located primarily in Asia. If these vendors’ processes vary in reliability or quality, they could negatively affect our products. If we are unable to obtain sufficient high quality and timely component parts, assembly or test service, if we experience delays in transferring or requalifying our production between suppliers, assembly or test locations or if means of transportation to or from these locations are interrupted, we would experience increased costs, delays or reductions in product shipment, and/or reduced product yields, which could materially and adversely affect our business, financial condition and results of operations.

 

Sources for certain components, materials, equipment and repair services are limited, which could result in delays or reductions in product shipments.

 

We do not manufacture any of the starting epitaxial wafers, packaging or passive components used in the production of our GaAs ICs. Such wafers, packaging and passive components are available from a limited number of sources. To the extent that we or our subcontractors are unable to obtain these wafers, packaging or passive components in the required quantities, as has occurred from time to time in the past, we could experience delays or reductions in product shipments, which could materially and adversely affect our business, financial condition and results of operations.

 

We depend on a limited number of vendors to supply, service, maintain, and repair the equipment used in our manufacturing processes. Should timely repair services be unavailable, we could experience substantial delays in production. When demand for semiconductor manufacturing equipment is high, lead times for delivery of such equipment can be substantial. We cannot assure you that we would not lose potential sales if required manufacturing equipment is unavailable and, as a result, we are unable to maintain or increase our production levels. A delay for any reason in increasing capacity would limit our ability to increase sales volumes, which would harm our relationships with customers and our business, financial condition and results of operations would likely be materially and adversely affected.

 

The variability of our manufacturing yields may affect our gross margins.

 

Our manufacturing yields vary significantly among products, depending on the complexity of a particular IC’s design and our experience in manufacturing that type of IC. We have experienced difficulties in achieving planned yields in the past, particularly in pre-production and upon initial commencement of full production volumes, which have adversely affected our gross margins.

 

 

Regardless of the process technology used, the fabrication of ICs is a highly complex and precise process. Problems in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous ICs on each wafer to be nonfunctional, thereby reducing yields. These difficulties can include: (i) defects in masks, which are used to transfer circuit patterns onto our wafers; (ii) impurities in the materials used; (iii) operator errors; (iv) contamination of the manufacturing environment; (v) equipment failure; and (vi) interruptions in electrical supply.

 

Many of our manufacturing costs are fixed and average selling prices for our products are unlikely to rise, and may decline over time. Therefore, it is critical for us, particularly within mobile markets, to increase the number of shippable ICs per wafer and increase the production volume of wafers in order to maintain or improve our results of operations. Yield decreases can result in substantially higher unit costs, which could materially and adversely affect our financial condition and results of operations and have done so in the past. We cannot assure you that we will not suffer periodic yield problems, particularly during the early production of new products or introduction of new process technologies. If any new yield problems were to arise, our business, financial condition and results of operations could be materially and adversely affected.

 

Unfavorable general economic conditions in individual or world markets could negatively impact our financial performance.                              

 

Unfavorable general economic conditions, such as a recession or economic slowdown in the United States or in one or more of our other major markets, could result in lower demand for some of our products, longer sales cycles or increased price competition. Our customer base includes equipment manufacturers and designers that are reliant on consumer demand, particularly in mobile markets. In times of economic downturn, consumers may seek to reduce discretionary spending, which could soften demand for our customers’ products and could negatively affect our business, financial condition and results of operations.

 

Our GaAs semiconductors may cease to be competitive with silicon alternatives.

 

Within our product portfolio, we manufacture and sell GaAs semiconductor devices and components, which tend to be more expensive than their silicon counterparts. The cost differential between our devices and components and those that are silicon based is due to higher costs of raw materials and higher unit costs associated with smaller sized wafers and lower production volumes. We expect the cost of producing GaAs devices to continue to exceed the cost of producing their silicon counterparts for the foreseeable future. In addition, silicon semiconductor technologies are widely-used process technologies for certain ICs and these technologies continue to improve in performance. Therefore, to remain competitive, we must offer GaAs products that provide superior performance over their silicon-based counterparts. If we do not continue to offer products that provide sufficiently superior performance to justify their higher cost, our business, financial condition and results of operations could be materially and adversely affected.

 

Further, we cannot assure you that there will continue to be products and markets that require the performance attributes of GaAs solutions and if demand for such products or in such markets were to decline our business, financial condition and results of operations would likely be materially and adversely affected.

 

We may not be successful in protecting our intellectual property rights or in avoiding claims that we infringe on the intellectual property rights of others.

 

Our success depends in part on our ability to obtain patents and copyrights. Despite our efforts to protect our intellectual property, unauthorized third parties may violate our patents or copyrights. In addition to intellectual property that we have patented and copyrighted, we also rely on trade secrets, technical know-how and other non-patented proprietary information relating to our product development and manufacturing activities, which we seek to protect, in part, by entering into confidentiality agreements with our collaborators and employees. We cannot assure you that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others.

 

  

We seek to operate without infringing on the intellectual property rights of third parties. As is typical in the semiconductor industry, we have been notified, and may be notified in the future, that we may be infringing on certain patents and/or other intellectual property rights of other parties. We cannot assure you that we will not be subject to litigation to defend our products or processes against claims of patent infringement or other intellectual property claims. Any such litigation could result in substantial costs and diversion of our resources. If we infringe on the intellectual property rights of others, we cannot assure investors that we would be able to obtain any required licenses on commercially reasonable terms and we may be required to pay substantial damages, including treble damages, and cease production of our work product or use of one or more manufacturing processes. Even if we are ultimately successful, patent litigation can be time consuming, disruptive to management and expensive. If any of the foregoing were to occur, our business, financial condition and results of operations could be materially and adversely affected.

 

We face a risk that capital needed for our business will not be available when we need it.

 

Historically, we have operated at a loss and have not consistently generated sufficient cash from operations to cover our operating and other cash expenses. In mid-2014, we implemented a strategic restructuring plan that we believed would place increased emphasis on infrastructure markets, lower operating costs and position the business for improved operating results. By the three months ended April 4, 2015 our infrastructure revenue improved, costs were lowered and operating losses were reduced in keeping with the strategic restructuring plan. However, subsequent to that date, unexpected declines in revenues resulted in an increase in operating losses. Therefore, the delayed improvement in infrastructure revenue is forecasted to result in operating losses into 2016, larger than those foreseen under the strategic restructuring plan. Additionally, in future periods, we did not maintain compliance with certain covenants under its revolving credit facility with Silicon Valley Bank (SVB Loan Agreement) which resulted in repayment of outstanding borrowings, the termination of the SVB Loan Agreement, and the establishment of a credit facility with II-VI Incorporated, in conjunction with the Merger Agreement (as defined below). The combination of these factors raises substantial doubt about our ability to continue as a going concern in 2016. During 2015, we explored potential avenues for raising capital through debt or equity, but the limited options that were available would have required us to accept unfavorable terms that were costly and highly dilutive to the Company's stockholders. Our operating losses, declining cash balance and corresponding need for funding were among the key reasons that the our Board of Directors decided to explore the possible sale of the Company in conjunction with its plans to overcome these difficulties. On January 15, 2016, we entered into an Agreement and Plan of Merger that was amended on February 1, 2016 and February 26, 2016 (as so amended, the “Merger Agreement”) with II-VI Incorporated, a Delaware corporation (“II-VI”), and Regulus Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary of II-VI (the “Purchaser”). In conjunction with the Merger Agreement, we were able to obtain a loan from II-VI to address our deteriorating liquidity position. There can be no assurance that a transaction will be consummated or that II-VI will not propose any adjustments to the Merger Agreement. In the event that the transactions contemplated by the Merger Agreement are not consummated, we will continue to aggressively pursue available sales opportunities, work with distributors and end users to grow future sales, and continue to control costs. The ability to continue as a going concern in 2016 is dependent upon increasing infrastructure revenue, continuing to control costs to meet obligations and repay liabilities arising from normal business operations when they come due. If we are unable to execute our operating plan, increase our infrastructure revenue, continue to control costs and raise additional capital, we will not have adequate capital to satisfy operational needs and anticipated capital needs for the next twelve months.

  

Our success depends on our ability to attract, retain and motivate qualified personnel and the loss of a key executive could have a material and adverse effect on our business.

 

A small number of key executive officers manage our business. Their departure could have a material and adverse effect on our operations. We believe that our future success will also depend in large part on our continued ability to attract and retain highly qualified personnel, technical sales and marketing personnel, design and application engineers, as well as senior management. We believe that there is, and will continue to be, intense competition for qualified personnel in the semiconductor industry as the wired and wireless communications markets continue to evolve. We cannot be sure that we will be successful in retaining our key personnel or in attracting and retaining highly qualified personnel, especially during periods of poor operating performance and/or weak performance of our common stock. Further, we do not presently maintain key-man life insurance for any of our key executive officers. The loss of the services of one or more of our key employees or our inability to attract, retain and motivate qualified personnel could have a material effect on our ability to operate our business, to implement our business strategy and to respond to the rapidly changing market conditions in which we operate and therefore our business, financial condition and results of operations could be materially and adversely affected.

 

 

We may pursue selective investments, acquisitions and alliances; the management and integration of additional operations could be expensive and divert management time; and acquisitions may dilute the ownership of our stockholders.                              

 

Although we have invested in the past, and intend to continue to invest, significant resources in internal research and development activities, the complexity and rapidity of technological changes and the significant expense of internal research and development make it impractical for us to pursue development of all technological solutions on our own. On an ongoing basis, we review investment, alliance and acquisition prospects that would complement our product offerings, augment our market coverage or enhance our technological capabilities. Our ability to complete acquisitions or alliances is dependent upon, and may be limited to, the availability of suitable candidates and capital. In addition, acquisitions and alliances involve risks that could materially and adversely affect our financial condition and results of operations, including the management time that may be diverted from operations in order to pursue and complete such transactions and difficulties in integrating and managing the additional operations and personnel of acquired companies.

 

We cannot assure you that we will be able to obtain the capital necessary to consummate acquisitions or alliances on satisfactory terms, if at all. Further, any businesses that we acquire will likely have their own capital needs, which may be significant, and which we could be called upon to satisfy independent of the acquisition price. Future acquisitions or alliances could result in the incurrence of debt, costs and contingent liabilities which could subject us to substantial and burdensome covenants, all of which could materially and adversely affect our business, financial condition and results of operations.

 

The growth that may result from future acquisitions or alliances may place significant strains on our resources, systems and management. If we are unable to effectively manage such growth by implementing systems, expanding our infrastructure and hiring, training and managing employees, our business, financial condition and results of operations could be materially and adversely affected.

 

Finally, if we issue equity securities in order to acquire another business, our stockholders’ interest in us, or the combined company, could be materially diluted. Further, in periods following an acquisition, we will be required to evaluate goodwill and acquisition-related intangible assets for impairment. When such assets are found to be impaired, they will be written down to estimated fair value, with a charge against earnings which could materially and adversely affect our business, financial condition and results of operations.

 

The market for our common stock and the volume of trading in such stock could be adversely affected if the stock is delisted from the NASDAQ exchange.

 

Our common stock currently trades on the NASDAQ Capital Market. We transferred our common stock from the NASDAQ Global Market to the NASDAQ Capital Market effective December 17, 2015.

 

On June 18, 2015, we received a letter from the staff of NASDAQ informing us that for the previous 30 consecutive business days, the bid price for our common stock had closed below $1.00, a requirement for listing on NASDAQ. We had until December 15, 2015 to regain compliance which would be satisfied if our common stock closed at $1.00 per share or more for a minimum of 10 consecutive business days. By transferring our common stock listing from the NASDAQ Global Market to the NASDAQ Capital Market, we received an additional 180 calendar compliance days, or until June 13, 2016, to regain compliance.

 

If we do not regain compliance by June 13, 2016, and the NASDAQ staff could deem that we will not be able to cure the deficiency, or if we are otherwise not eligible, the NASDAQ staff would notify us that our securities would then be subject to delisting. In the event of such notification, we may appeal the NASDAQ staff’s determination to delist our securities. Should this occur, the market for our common stock and the volume of trading in such stock could be adversely affected.

  

Because our results of operations can vary significantly, the price of our common stock can fluctuate.

 

As a result of the variability of our results of operation, we may experience substantial period-to-period fluctuations in future operating results. Investors should not rely on our results of operations for any previous period as an indicator of what results may be for any future period. Failure of our operating results to meet the expectations of analysts or investors could materially and adversely affect the price of our common stock.

  

 

We have had significant volatility in our stock price which may continue in the future, and, therefore, you may be unable to sell shares of our common stock at or above the price you paid for such shares.

 

The trading price of our common stock has and may continue to fluctuate significantly. Such fluctuations may be influenced by many factors, including: (i) our operating results and prospects; (ii) the operating results and prospects of our major customers; (iii) announcements by our competitors; (iv) the depth and liquidity of the market for our common stock; (v) investor perception of us and the industry in which we operate; (vi) changes in our earnings estimates or buy/sell recommendations by analysts covering our stock; (vii) general financial and other market conditions; and (viii) domestic and international economic conditions.

 

Further, public stock markets have experienced extreme price and trading volume volatility, particularly in the technology sectors of the market. This volatility disproportionately affected and may in the future affect the market prices of securities of many technology companies, including our Company, for reasons frequently unrelated to the operating performance of these companies. In addition, fluctuations in our stock price and our valuation multiples may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterly basis. Such market volatility may materially and adversely affect the market price of our common stock. Stockholders may be unable to sell shares of our common stock at or above the price paid for such shares.

 

We are subject to stringent environmental laws and regulations both domestically and abroad.

 

We are subject to a variety of federal, state, local and foreign laws and regulations governing the protection of the environment. These environmental laws and regulations include those related to the use, storage, handling, discharge and disposal of toxic or otherwise hazardous materials used in or resulting from our manufacturing processes. Failure to comply with environmental laws and regulations could subject us to substantial liability or force us to significantly change our manufacturing operations. In addition, under some of these laws and regulations, we could be held financially responsible for remedial measures if our properties are contaminated, even if we did not cause the contamination. Although we are aware of contamination resulting from historical third-party operations at one of our facilities, a prior owner of such facility has been performing and paying for the costs associated with remediation of this property pursuant to an agreement with the State of New Jersey environmental regulatory authority. However, we cannot assure you that such prior owner will continue to do so or that we will not incur any material costs or liabilities associated with compliance with environmental laws in the future. In the event that the prior owner fails to execute the remediation or that we incur material costs or liabilities resulting from compliance with these laws, our business, financial condition and results of operations could be materially and adversely affected.

 

Compliance with regulations regarding the use of “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.

 

Regulations in the United States require that we determine whether certain materials used in our products, referred to as conflict minerals, originated in the Democratic Republic of the Congo or adjoining countries, or were from recycled or scrap sources. The verification and reporting requirements, in addition to customer demands for conflict-free sourcing, could adversely affect the sourcing, availability, and pricing of minerals that are used in the manufacture of our products. We have incurred costs and expect to incur additional costs associated with complying with these requirements. Additionally, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins of all minerals used in our products through the due diligence procedures that we implement. We may also face challenges with government regulators and our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are conflict free.

 

Certain provisions in our governing documents and of Delaware law could deter, delay or prevent a third party from acquiring us and that could deprive shareholders of an opportunity to obtain a takeover premium for our common stock.               

 

Our amended and restated certificate of incorporation, our amended and restated bylaws, and Delaware law contain provisions that could have the effect of making it more difficult for a third party to acquire us, or of discouraging a third party from attempting to acquire control of us. Together, our amended and restated certificate of incorporation, our amended and restated by-laws, and certain provisions of Delaware law may discourage transactions that otherwise could provide for the payment of a premium over prevailing market prices for our common stock and could also limit the price that investors may be willing to pay in the future for our common stock. 

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2. PROPERTIES.

 

Our executive offices and primary fabrication facility are located at 141 Mt. Bethel Road, Warren, New Jersey 07059. We currently lease space in several buildings in Warren, New Jersey, located within the industrial complex. Approximately 150,000 square feet of manufacturing and office space is occupied in a building located at 141 Mt. Bethel Road in Warren, New Jersey under a twenty-year lease expiring on December 31, 2016, which is renewable pursuant to its terms.

 

We also lease approximately 18,900 square feet in aggregate of office space in the following locations: Tyngsboro, Massachusetts; Taipei, Taiwan; China; South Korea; and Japan under lease agreements with remaining terms ranging from six months to three years that can be extended, at our option.

 

ITEM 3. LEGAL PROCEEDINGS.

 

For information on our legal proceedings see Note 13 Legal Proceedings to the Company’s Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data in this Form 10-K.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

 Our $0.01 par value Common Stock, (“Common Stock”) has quoted on the NASDAQ Global Market under the symbol "ANAD" since the commencement of trading on April 21, 1995 following our initial public offering of our Common Stock. Effective, December 17, 2015, the Company transferred its common stock from the NASDAQ Global Market to the NASDAQ Capital Market.

 

The following table sets forth for the periods indicated the high and low sale prices for our Common Stock.

 

   

High

   

Low

 

Calendar 2015

               

Fourth Quarter

  $ 0.64     $ 0.21  

Third Quarter

    0.77       0.19  

Second Quarter

    1.55       0.61  

First Quarter

    1.45       0.75  
                 

Calendar 2014

               

Fourth Quarter

  $ 0.86     $ 0.55  

Third Quarter

    0.93       0.57  

Second Quarter

    1.76       0.79  

First Quarter

    2.17       1.66  

    

 

As of December 31, 2015, there were 89,675,630 shares of Common Stock outstanding (excluding shares held in Treasury) and 175 holders of record.

 

We have never paid cash dividends on our capital stock. We currently anticipate that we will retain available funds for use in the operation and expansion of our business, and do not anticipate paying any cash dividends in the foreseeable future.

 

See also “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” under Part III, Item 12 of this report.

 

 

ITEM 6. SELECTED FINANCIAL DATA.

 

The selected financial data set forth below should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and our financial statements, related notes and other financial information included herein. The selected consolidated financial data set forth below as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 have been derived from our audited financial statements included herein. The selected consolidated financial data set forth below as of December 31, 2013, 2012 and 2011 and for the years ended December 31, 2012 and 2011 have been derived from our audited financial statements that are not included herein or incorporated by reference herein. Our historical results are not necessarily indicative of the results that may be expected for any future period.

 

(amounts in thousands, except for per share amounts)

 

2015

   

2014

   

2013

   

2012

   

2011

 

RESULTS OF OPERATIONS

                                       

Net sales

  $ 58,652     $ 86,282     $ 134,242     $ 112,643     $ 152,827  

Gross profit (loss)

    10,673       9,489       8,320       (1,226

)

    31,103  

Operating loss

    (23,027

)

    (40,411

)

    (55,993

)

    (71,745

)

    (50,119

)

Net loss

    (23,490

)

    (38,890

)

    (53,979

)

    (69,853

)

    (49,323

)

                                         

Loss per share:

                                       

Basic and diluted

  $ (0.27

)

  $ (0.45

)

  $ (0.67

)

  $ (0.99

)

  $ (0.73

)

                                         

BALANCE SHEET DATA:

                                       

Total cash and marketable securities

  $ 6,966     $ 18,430     $ 24,394     $ 51,510     $ 93,578  

Total assets

    31,836       58,016       97,681       126,881       188,801  

Total stockholders’ equity

    22,447       42,658       78,409       106,025       166,525  

 

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

OVERVIEW

 

We are innovators in the technology, design, and manufacturing of RF semiconductor solutions for infrastructure and mobile communications and data transmission markets. Our product portfolio includes line amplifiers, reverse path amplifiers, PAs, and FEICs. Our Foundry offering provides the capacity for large scale VCSEL wafer processing and testing. Our CATV solutions include line amplifiers, reverse path amplifiers, and other RF products that enable CATV infrastructure communications networks, as well as CPE devices, such as set-top boxes and cable modems. Our WiFi infrastructure products include PAs and FEICs that provide wireless connectivity for infrastructure and multimedia applications, including access points, routers, media gateways, and set-top boxes. Our wireless infrastructure solutions include PAs that are crucial components in 3G and 4G Small-Cell base stations, including picocells, enterprise-class femtocells, and CPE devices that help carriers expand broadband network coverage and support greater levels of data transmission. Our PAs are used in a variety of 3G and 4G IoT applications, including automotive, M2M, and industrial devices.

 

Our WiFi mobile products include FEICs and PAs that are designed to enable WiFi connectivity in drones, smartphones, tablets, notebooks, and gaming systems. Supporting the latest 802.11 standards, our FEICs ensure optimal WiFi performance. Our cellular products include PAs that enable 3G and 4G wireless connectivity in mobile handsets, smartphones, tablets, and notebooks. We believe our offerings are well positioned to address these market opportunities by delivering exceptional performance and value in the infrastructure and mobile markets, as well as cost-effective, high-volume foundry capabilities for the sensing markets.

 

Our strategy is focused on manufacturing and delivering RF products that offer greater performance, reliability, and integration to enable high-speed data communications and transmissions, as well as a compelling Foundry offering that provide designers with scalability and greater value. We are a customer-centric organization that works closely with leading equipment designers and manufacturers to improve data transmission quality and system capacity. We also collaborate with industry-leading chipset providers where our functionality enhances their reference designs. These relationships enable us to target emerging trends in the market and help our customers achieve their performance, integration, and manufacturing goals.

 

Leveraging a variety of advanced internal and external technologies and materials, including MESFET, InGaP-Plus™, CMOS, GaAs, and GaN, our solutions deliver exceptional performance and integration. We believe that when used in our customers’ data transmission and communication devices, our products cost-effectively enhance RF performance, reliability, and overall functionality.

 

Our six-inch diameter GaAs fab located at our corporate headquarters in Warren, New Jersey, has been operational since 1999. We also have Foundry arrangements with several companies to supply alternate technologies and supplement our existing wafer fab capabilities. This structure provides us with access to unique technologies and flexible capacity without the requisite capital investment.

 

In mid 2014, we implemented a strategic restructuring plan to better address growth opportunities in infrastructure markets and to lower our operating costs (“Strategic Restructuring”). Our Strategic Restructuring continued into 2015 and included expanding our presence in the infrastructure space and reducing the fixed costs associated with certain legacy mobile activities through a resizing of our staff and manufacturing capability.

 

On January 15, 2016, we entered into an Agreement and Plan of Merger that was amended on February 1, 2016 and February 26, 2016 (as so amended, the “Merger Agreement”) with II-VI Incorporated, a Pennsylvania corporation (“II-VI”), and Regulus Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary of II-VI (the “Purchaser”). Pursuant to the Merger Agreement, the Parent would acquire our Company for a purchase price of $0.85 per share pursuant to a tender offer by Purchaser that commenced on February 2, 2016 and expired on March 11, 2016, under which approximately 53% of our Company’s outstanding shares were tendered and purchased by Purchaser and which will be followed by a merger of the Purchaser into the Company. As a result of that merger, we will be a wholly-owned subsidiary of II-VI. If the transactions contemplated by the Merger Agreement are consummated, the Purchaser will have acquired all of our issued and outstanding shares of common stock at a purchase price of $0.85 per share and, after making the required filings with the Securities and Exchange Commission, we would cease to be a reporting company under the Securities Exchange Act of 1934, as amended. The boards of directors of the Company, II-VI and Purchaser approved the Merger Agreement and the transactions contemplated by the II-VI Merger Agreement. There can be no assurance that a transaction will be consummated or that II-VI will not propose any adjustments to the II-VI Merger Agreement.

 

 

 

We have only one reportable segment. For financial information related to such segment and certain geographic areas, see Note 3 to the accompanying consolidated financial statements.

 

CRITICAL ACCOUNTING POLICIES & SIGNIFICANT ESTIMATES

 

We believe the following accounting policies are critical to our business operations and the understanding of our results of operations. Such accounting policies may require management to exercise a higher degree of judgment and make estimates used in the preparation of our consolidated financial statements.

 

 

 

 

 

Effect if Actual Results Differ

Description

 

Judgments and Uncertainties

 

From Assumptions

 

 

 

 

 

Revenue Recognition        


Revenue from product sales is recognized when title to the products is transferred to the customer, which occurs upon shipment or delivery, depending upon the terms of the sales order.
We maintain revenue allowances for price protection and stock rotation for certain distributor sales. These allowances are recorded upon shipment and calculated based on distributors’ indicated intent, historical data, current economic conditions and contractual terms.

 


Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the value of future credits to customers for price protection and stock rotation. Our estimates of the amount and timing of the reserves is based primarily on distributors’ indicated intent, historical data, current economic conditions and contractual terms.

 


We have not made any material changes in our accounting methodology used to record revenue allowances for the years ended December 31, 2015, 2014 and 2013. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that would have a material impact to our consolidated financial statements.

         

Allowance for Doubtful Accounts

 

 

 

 


We maintain an allowance for doubtful accounts for estimated losses resulting from our customers’ failure to make payments. The reserve is based on historical experience and an analysis of credit risk.

 


Our allowance for doubtful accounts methodology contains uncertainties because it requires management to apply judgment to evaluate credit risk and collectability of aged accounts receivables based on historical experience and forward looking assumptions.

 


We have not made any material changes in our accounting methodology used to create and maintain the allowance for doubtful accounts for the years ended December 31, 2015, 2014 and 2013. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that would have a material impact to our consolidated financial statements.

         
Inventory Valuation        


We value our inventory at lower of cost or market (LCM), using the first-in, first-out method. We establish reserves for excess and obsolete inventory based upon a review of forecasted short-term demand in relation to on-hand inventory, salability, general market conditions, and product life cycles.

 


Our inventory reserves contain uncertainties because the calculation requires management to make assumptions and to apply judgment regarding historical experience, forecasted demand and technological obsolescence.

 


We have not made any material changes to our inventory reserve methodology for the years ended December 31, 2015, 2014 and 2013. We do not believe that significant changes will be made in future estimates or assumptions we use to calculate these reserves. However, if our estimates are inaccurate or technological changes affect consumer demand, we may be exposed to unforeseen gains or losses. A 10% difference in our inventory reserves at December 31, 2015 would affect our consolidated financial statements for the year then ended by approximately $0.6
million.

 

 

        Effect if Actual Results Differ
Description   Judgments and Uncertainties   From Assumptions

 

 

 

 

 

Warranty Costs        


We provide for potential warranty claims by recording a current charge to income. We estimate potential claims by examining current and historical returns, current economic conditions and contractual terms to provide for an amount which we believe will cover future warranty obligations for products sold.

 


Our warranty reserve methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the value of future product returns by customers. Our estimates of the amount and timing of the reserves is based primarily on historical experience and specific contractual arrangements.

 


We have not made any material changes to our warranty reserve methodology for the years ended December 31, 2015, 2014 and 2013. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that would have a material impact to our consolidated financial statements.

         

Stock-Based Compensation

 

 

 

 


We have a stock-based compensation plan which includes non-qualified stock options, share awards, and an employee stock purchase plan. See Note 10 of Item 8 for a discussion of our stock-based compensation programs. We determine the fair value of stock-based compensation for our non-qualified stock options and employee stock purchase plans at the date of grant using the Black Scholes options-pricing model. Market performance based awards are valued with the assistance of a valuation consultant using a Monte Carlo Simulation model and amortized over the performance period. Our determination of fair value of share-based payment awards on the date of grant contains assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the award, risk-free rate, the expected life and potential forfeitures of awards. Management periodically evaluates these assumptions and updates stock-based compensation expense accordingly.

 


Option-pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the future rates of volatility of our stock price, employee turnover and employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimate and stock based compensation recognized by the Company.

 


We have not made any material changes in the accounting methodology we used to calculate stock-based compensation for the years ended December 31, 2015, 2014 and 2013. We do not believe that there is a reasonable likelihood there will be a material change in future estimates or assumptions used to determine stock-based compensation expense.

 

 

        Effect if Actual Results Differ
Description   Judgments and Uncertainties   From Assumptions
         

Valuation of Long-Lived Assets

 

 

 

 


Long-lived assets is primarily comprised of fixed assets. We regularly review these assets for indicators of impairment and assess the carrying value of the assets against market values. When an impairment exists, we record an expense to the extent that the carrying value exceeds fair market value. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable.

 

 

Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate asset fair values, including estimating future cash flows, useful lives and selecting an appropriate discount rate that reflects the risk inherent in future cash flows.

 

 

We have not made any material changes in the accounting methodology we use to assess impairment loss for the years ended December 31, 2015, 2014 and 2013.

We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may record material losses.

 

 

 

 

 

Income Taxes        

 

We account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between tax and financial reporting. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

 

 

Management judgment is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. We maintain a full valuation allowance on our deferred tax assets. Accordingly, we have not recorded a benefit or provision for income taxes.

 

 

We have not made any material changes in the accounting methodology we used to measure our deferred tax asset valuation allowance for the years ended December 31, 2015, 2014 and 2013. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to record our valuation allowances for deferred tax assets. However, if actual results are not consistent with our estimates and assumptions used in estimating future taxable income, we may record material income tax benefits.

         

 

 

RESULTS OF OPERATIONS

 

The following table sets forth statements of operations data as a percentage of net sales for the periods indicated:

 

   

2015

   

2014

   

2013

 
                         

Net sales

    100.0

%

    100.0

%

    100.0

%

Cost of sales

    81.8       89.0       93.8  

Gross profit

    18.2

%

    11.0

%

    6.2

%

                         

Research and development expense

    33.5       30.9       28.8  

Selling and administrative expenses

    23.0       19.8       17.7  

Restructuring charges

    1.0       7.1       1.4  

Operating loss

    (39.3

%)

    (46.8

%)

    (41.7

%)

                         

Interest income

    -       -       0.2  

Interest expense

    (0.2

)

    (0.4

)

    (0.1

)

Other (expense) income, net

    (0.6

)

    2.1       1.4  
                         

Net loss

    (40.1

%)

    (45.1

%)

    (40.2

%)

 

2015 COMPARED TO 2014

 

NET SALES. Net sales for the year ended December 31, 2015 decreased 32.0% to $58.7 million, compared to net sales for the year ended December 31, 2014 of $86.3 million. The net sales decrease primarily resulted from a decrease in market demand for our Mobile products in line with our Strategic Restructuring toward Infrastructure, slightly offset by increased Infrastructure product sales.

 

Net sales for the year ended December 31, 2015 of the Company’s Infrastructure products increased 7.7% to $42.2 million compared to net sales for the year ended December 31, 2014 of $39.2 million. The increase in sales was primarily due to increased demand for our WiFi and small cell infrastructure products, which is in line with the Company expanding its focus in the infrastructure space. The increase in Infrastructure sales was partly offset with decreased demand for our products for Wimax applications.

 

Net sales for the year ended December 31, 2015 of the Company’s Mobile products decreased 65.0% to $16.5 million compared to net sales for the year ended December 31, 2014 of $47.1 million. The decrease in sales was primarily due to decreased demand for our cellular products used in mobile applications.

 

GROSS MARGIN. Gross margin for 2015 increased to 18.2% of net sales, compared with 11.0% of net sales in the prior year. The increase in gross margin was primarily due to manufacturing cost improvements achieved from restructuring and the increase in better margin Infrastructure product mix, despite the reduction in revenue.

 

RESEARCH & DEVELOPMENT. Company-sponsored Research and development (R&D) expenses decreased 26.4% during 2015 to $19.7 million from $26.7 million during 2014. The decrease was primarily due to cost savings achieved from our restructuring and improved spending focus on our key projects

 

SELLING AND ADMINISTRATIVE. Selling and administrative expenses decreased 21.1% during 2015 to $13.5 million from $17.1 million in 2014. The decrease was primarily due to savings achieved from our Strategic Restructuring and ongoing cost reduction actions.

 

RESTRUCTURING CHARGES. During 2015, we implemented a workforce reduction that eliminated approximately 25 positions throughout the Company and recorded a restructuring charge of $0.6 million for severance, related benefits and other costs. During 2014, we executed a Strategic Restructuring that included workforce reductions that eliminated approximately 150 positions throughout the Company and recorded related restructuring charges of $4.2 million, for severance, related benefits and other costs.

 

Restructuring charges in 2014 also included a net $1.9 million charge associated with fixed assets, consisting of a $4.2 million fixed assets restructuring charge recorded to write down certain surplus manufacturing assets to their current market value based on expected cash proceeds for the sale of these fixed assets, partially offset by a related $2.3 million gain realized on the sale of certain surplus manufacturing assets.

 

OTHER (EXPENSE) INCOME, NET. During 2015, Other expense of $0.4 million was recorded for financing and other merger related activities. During 2014, Other income of $1.8 million was primarily from redemption proceeds received on auction rate securities which were in excess of our amortized cost basis.

 

 

2014 COMPARED TO 2013

 

NET SALES. Net sales for the year ended December 31, 2014 decreased 35.7% to $86.3 million, compared to net sales for the year ended December 31, 2013 of $134.2 million. The net sales decrease primarily resulted from a decrease in demand for our Mobile products in line with our Strategic Restructuring toward Infrastructure, slightly offset by increased Infrastructure product sales.

 

Net sales for the year ended December 31, 2014 of the Company’s Infrastructure products increased 8.2% to $39.2 million compared to net sales for the year ended December 31, 2013 of $36.2 million. The increase in sales was primarily due to increased demand in CATV and small cell infrastructure markets.

 

Net sales for the year ended December 31, 2014 of the Company’s Mobile products decreased 51.9% to $47.1 million compared to net sales for the year ended December 31, 2013 of $98.0 million. The decrease in sales was primarily due to decreased demand for our cellular and WiFi products used in mobile applications.

 

GROSS MARGIN. Gross margin for 2014 increased to 11.0% of net sales, compared with 6.2% of net sales in the prior year. The increase in gross margin, despite the reduction in revenue, was primarily due to manufacturing cost improvements achieved from restructuring and the increase in Infrastructure product mix.

  

RESEARCH & DEVELOPMENT. Company-sponsored Research and development (R&D) expenses decreased 30.8% during 2014 to $26.7 million from $38.6 million during 2013. The decrease was primarily due to cost savings achieved from our Strategic Restructuring and focus on Infrastructure, while limiting activities in Mobile and our tight spending focus on key projects.

 

SELLING AND ADMINISTRATIVE. Selling and administrative expenses decreased 28.2% during 2014 to $17.1 million from $23.8 million in 2013. The decrease was primarily due to savings achieved from our Strategic Restructuring and ongoing cost reduction actions.

 

RESTRUCTURING CHARGES. During 2014, we executed a Strategic Restructuring that included workforce reductions that eliminated approximately 150 positions throughout the Company and recorded related restructuring charges of $4.2 million, for severance, related benefits and other costs. During 2013, we implemented a workforce reduction that eliminated approximately 25 positions throughout the Company and recorded a restructuring charge of $1.9 million, for severance, related benefits and other costs.

 

During 2014, Restructuring charges also included a net $1.9 million charge associated with fixed assets. During 2014, a $4.2 million fixed assets restructuring charge was recorded to write down certain surplus manufacturing assets to their current market value based on expected cash proceeds for the sale of these fixed assets. The $4.2 million charge has been reduced by a related $2.3 million gain realized on the sale of certain surplus manufacturing assets.

 

OTHER (EXPENSE) INCOME, NET. During 2014 and 2013, other income of $1.8 million and $1.9 million, respectively, was primarily from redemption proceeds received on auction rate securities which were in excess of our amortized cost basis. Our auction rate securities were fully-liquidated as of December 31, 2014.

 

LIQUIDITY AND SOURCES OF CAPITAL

 

At December 31, 2015, we had $7.0 million of cash, of which $2.5 million was drawn on our revolving credit facility.

 

Operations used $9.8 million in cash during 2015, primarily as a result of our operating results adjusted for non-cash expenses, as partly offset by $2.9 million in cash provided by working capital movements. Investing activities used $0.2 million of cash during 2015 consisting principally of purchases of fixed assets. Financing activities used $1.5 million of cash during 2015, primarily from net loan repayment on our working capital credit facility.

 

At December 31, 2015, the Company had unconditional purchase obligations of approximately $0.8 million.

 

 

Historically, we have operated at a loss and have not consistently generated sufficient cash from operations to cover our operating and other cash expenses. In mid-2014, we implemented a strategic restructuring plan that we believed would place increased emphasis on infrastructure markets, lower operating costs and position the business for improved operating results. However, unexpected declines in revenues resulted in an increase in operating losses. Therefore, the delayed improvement in infrastructure revenue is forecast to result in operating losses into 2016, larger than those foreseen under the strategic restructuring plan and a continued deterioration in the Company’s liquidity position. Additionally, the Company did not maintain compliance with certain covenants under our revolving credit facility which resulted in repayment of outstanding borrowings, the termination of the revolving credit facility and the establishment of a Credit Facility with II-VI Incorporated, in conjunction with the Merger Agreement with II-VI. These factors raise substantial doubt about the Company’s ability to continue as a going concern. During 2015 the Company explored potential avenues for raising capital through debt or equity, but the limited options that were available would have required the Company to accept unfavorable terms that were costly and highly dilutive to the Company's stockholders.  The Company's operating losses, declining cash balance and corresponding need for funding were among the key reasons that the Company's Board of Directors decided to explore the possible sale of the Company in conjunction with its plans to overcome these difficulties.  As a result the Company entered into the Merger Agreement. There can be no assurance that a transaction will be consummated or that II-VI will not propose any adjustments to the Merger Agreement.  The Company will continue to aggressively pursue available sales opportunities, work with distributors and end users to grow future sales, and continue to control costs. However, even after giving consideration to the Credit Facility with II-VI, the Company’s cash position may not be significant enough to support the Company’s daily operations.

 

The table below summarizes required cash payments as of December 31, 2015:

 

CONTRACTUAL OBLIGATIONS

 

PAYMENTS DUE BY PERIOD (in thousands)

 
   

Total

   

Less

than 1

year

   

1 – 3

years

   

4 – 5

years

   

After 5

years

 

Operating leases

    2,931       2,524       396       11       -  

Unconditional purchase obligations

    833       833       -       -       -  

Total contractual cash obligations

  $ 3,764     $ 3,357     $ 396     $ 11     $ -  

 

RECENTLY ADOPTED ACCOUNTING STANDARDS

 

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. The ASU became effective January 1, 2015. Adoption of this guidance did not impact our consolidated financial statements.

 

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

 

In July 2015, the FASB issued ASU 2015-11, Inventory. The guidance was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. This guidance is effective for reporting periods beginning after December 15, 2016. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The guidance states that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition. The guidance is effective for annual and interim periods beginning after December 15, 2015 and early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

  

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will replace most current revenue recognition guidance. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. It also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU permits the initial application to be applied either retrospectively to each prior reporting period presented, or retrospectively with a cumulative effect adjustment made at the date of initial application. The guidance is effective for annual and interim periods beginning after December 15, 2016. In July 2015, the FASB approved a one year deferral of the effective date of this standard to December 15, 2017 and early adoption of the standard, but not before the original effective date of December 15, 2016. We are evaluating the transition methods and the impact of the amended guidance on our consolidated financial statements.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

None.

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our cash and credit line borrowings are exposed to changes in short-term interest rates. We continually monitor our exposure to changes in interest rates.

 

On February 26, 2016, the Company entered into a Loan and Security Agreement with Parent (the “II-VI Loan Agreement”). The II-VI Loan Agreement provides the Company with a one-year credit facility of $10 million that expires on February 26, 2017, unless the maturity is accelerated due to the closing of the Merger or the termination of the Merger Agreement in a circumstance that requires payment of the Termination Fee. The II-VI Loan Agreement enables initial borrowings of $3.5 million and is secured by substantially all of the Company’s assets. The II-VI Loan Agreement requires compliance with certain covenants, in addition to certain capital expenditure limits. The interest rate on the outstanding balance under the II-VI Loan Agreement is 95% of the sum of (a) the Prime Rate plus (b) 0.5%.

 

Prior to the II-VI Loan Agreement, the Company maintained a Loan and Security Agreement with Silicon Valley Bank (the “SVB Loan Agreement”), which provides the Company with a revolving credit facility of $10 million that expired on October 24, 2016. The interest rate on the outstanding balance under the SVB Loan Agreement was Prime plus 0.5%. As of December 31, 2015, $2.5 million was outstanding under the SVB Loan Agreement. The Company was not in compliance with certain covenants under the SVB Loan Agreement as of December 31, 2015. On February 29, 2016, in conjunction with its entry into the II-VI Loan Agreement, the Company and Silicon Valley Bank (“SVB”) terminated the Loan and Security Agreement dated October 24, 2014 between the Company and SVB by mutual agreement and all outstanding amounts due under the SVB Loan Agreement were satisfied in full.

  

We maintain our cash primarily in business operating cash accounts and money market funds in order to protect principal, maintain liquidity as well as fund operations. An increase in interest rates would generate additional interest income for us from these low risk cash equivalents, which would partially offset the adverse impact of the additional interest expense. Fluctuations in interest rates can have an impact on our future cash interest streams and future earnings, but the impact of such fluctuations are not expected to be material.

 

We believe that the effects of changes in interest rates are limited and would not have a material impact on our financial condition or results of operations.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm

 

 

The Board of Directors and Stockholders

ANADIGICS, Inc.

 

 

We have audited the accompanying consolidated balance sheets of ANADIGICS, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ANADIGICS, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has experienced recurring losses from operations and a continued deterioration in its liquidity position that raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 1. The consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ANADIGICS, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 14, 2016 expressed an unqualified opinion thereon.

 

 

/s/ Ernst & Young LLP 

 

 

MetroPark, New Jersey 

March 14, 2016 

 

 

ANADIGICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

   

YEAR ENDED DECEMBER 31,

 
   

2015

   

2014

   

2013

 
                         

Net sales

  $ 58,652     $ 86,282     $ 134,242  

Cost of sales

    47,979       76,793       125,922  

Gross profit

    10,673       9,489       8,320  
                         

Research and development expenses

    19,658       26,708       38,585  

Selling and administrative expenses

    13,481       17,094       23,813  

Restructuring charges

    561       6,098       1,915  
      33,700       49,900       64,313  
                         

Operating loss

    (23,027

)

    (40,411

)

    (55,993

)

                         

Interest income

    -       7       237  

Interest expense

    (83

)

    (303

)

    (82

)

Other (expense) income, net

    (380

)

    1,817       1,859  
                         

Net loss

  $ (23,490

)

  $ (38,890

)

  $ (53,979

)

                         

Basic and diluted loss per share

  $ (0.27

)

  $ (0.45

)

  $ (0.67

)

                         

Weighted average basic and diluted common shares outstanding used in computing loss per share

    88,155       85,810       80,991  

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(AMOUNTS IN THOUSANDS)

 

   

Year Ended December 31,

 
   

2015

   

2014

   

2013

 

Net loss

  $ (23,490

)

  $ (38,890

)

  $ (53,979

)

Other comprehensive (loss) income:

                       

Unrealized gain on marketable securities

    -       81       1,371  

Foreign currency translation adjustment

    -       -       3  
                         

Reclassification adjustment:

                       

Net recognized gain on marketable securities previously included in other comprehensive (loss) income

    -       (1,728

)

    (1,779

)

Comprehensive loss

  $ (23,490

)

  $ (40,537

)

  $ (54,384

)

 

 

See accompanying notes.

 

 

ANADIGICS, INC.

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

   

December 31,

 
   

2015

   

2014

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 6,966     $ 18,430  

Accounts receivable, net of allowance for doubtful accounts of $100 and $172 at December 31, 2015 and December 31, 2014, respectively

    5,027       5,335  

Inventories

    7,227       13,844  

Prepaid expenses and other current assets

    2,286       2,721  

Assets held for sale

    -       335  
                 

Total current assets

    21,506       40,665  
                 

Plant and equipment

               

Equipment and furniture

    191,046       190,718  

Leasehold improvements

    46,887       46,850  

Projects in process

    1,447       1,415  
      239,380       238,983  

Less accumulated depreciation and amortization

    229,140       221,812  
      10,240       17,171  

Other assets

    90       180  
    $ 31,836     $ 58,016  

LIABILITIES AND STOCKHOLDERS EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 3,490     $ 5,913  

Accrued liabilities

    3,399       3,419  

Accrued restructuring costs

    -       904  

Bank borrowings

    2,500       4,000  

Total current liabilities

    9,389       14,236  
                 

Other long-term liabilities

    -       1,122  
                 

Commitments and contingencies

               
                 

Stockholders’ equity

               

Preferred stock, $0.01 par value, 5,000 shares authorized, none issued or outstanding

               

Common stock, convertible, non-voting, $0.01 par value, 1,000 shares authorized, none issued or outstanding

               

Common stock, $0.01 par value, 144,000 shares authorized at December 31, 2015 and 2014, and 89,799 and 86,878 issued at December 31, 2015 and 2014, respectively

    898       869  

Additional paid-in capital

    645,936       642,683  

Accumulated deficit

    (624,125

)

    (600,635

)

Treasury stock at cost: 123 and 115 shares at December 31, 2015 and 2014, respectively

    (262

)

    (259

)

Total stockholders’ equity

    22,447       42,658  
    $ 31,836     $ 58,016  

 

 

See accompanying notes.

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(AMOUNTS IN THOUSANDS)

 

   

Common Stock Shares

   

Common Stock Amount

   

Treasury Stock Shares

   

Treasury Stock Amount

   

Additional Paid-In Capital

   

Accumulated Deficit

   

Accumulated Other Comprehensive Income (loss)

   

Total Stockholders’ Equity

 
                                                                 

Balance, December 31, 2012

    71,853     $ 719       (115

)

  $ (259

)

  $ 611,279     $ (507,766

)

  $ 2,052     $ 106,025  
                                                                 

Issuance of common stock in public offering, net of expenses

    10,704       107       -       -       19,568       -       -       19,675  

Stock options exercised

    70       -                       132                       132  

Shares issued under employee stock purchase plan

    271       3                       442                       445  

Restricted stock activity, net of forfeitures

    1,539       15                       (15

)

                    -  

Amortization of stock-based compensation

                                    6,516                       6,516  

Other comprehensive income

                                                    (405

)

    (405

)

Net loss

                                            (53,979

)

            (53,979

)

                                                                 

Balance, December 31, 2013

    84,437     $ 844       (115

)

  $ (259

)

  $ 637,922     $ (561,745

)

  $ 1,647     $ 78,409  
                                                                 

Stock options exercised

    5       -                       10                       10  

Shares issued under employee stock purchase plan

    158       2                       102                       104  

Restricted stock activity, net of forfeitures

    2,278       23                       (23

)

                    -  

Amortization of stock-based compensation

                                    4,672                       4,672  

Other comprehensive income

                                                    (1,647

)

    (1,647

)

Net loss

                                            (38,890

)

            (38,890

)

                                                                 

Balance, December 31, 2014

    86,878     $ 869       (115

)

  $ (259

)

  $ 642,683     $ (600,635

)

  $ -     $ 42,658  
                                                                 

Shares issued under employee stock purchase plan

    140       1                       73                       74  

Treasury share purchase

                    (8 )     (3 )                             (3

)

Restricted stock activity, net of forfeitures

    2,781       28                       (28

)

                    -  

Amortization of stock-based compensation

                                    3,208                       3,208  

Net loss

                                            (23,490

)

            (23,490

)

                                                                 

Balance, December 31, 2015

    89,799     $ 898       (123

)

  $ (262

)

  $ 645,936     $ (624,125

)

  $ -     $ 22,447  

 

See accompanying notes.


 

 

ANADIGICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

 

   

YEAR ENDED DECEMBER 31,

 
   

2015

   

2014

   

2013

 
                         

CASH FLOWS FROM OPERATING ACTIVITIES

                       

Net loss

  $ (23,490

)

  $ (38,890

)

  $ (53,979

)

Adjustments to reconcile net loss to net cash used in operating activities:

                       

Depreciation

    7,577       11,317       14,510  

Amortization

    49       164       97  

Stock based compensation

    3,208       4,672       6,516  

Marketable securities recovery and accretion

    -       (1,728

)

    (1,779

)

(Gain) loss on disposal of equipment

    (23

)

    1,812       (177

)

Changes in operating assets and liabilities:

                       

Accounts receivable

    308       9,821       (2,923

)

Inventories

    6,617       7,270       (2,274

)

Prepaid expenses and other assets

    463       899       (433

)

Accounts payable

    (2,423

)

    (7,130

)

    (1,056

)

Accrued and other liabilities

    (2,046

)

    (784

)

    (525

)

Net cash used in operating activities

    (9,760

)

    (12,577

)

    (42,023

)

                         

CASH FLOWS FROM INVESTING ACTIVITIES

                       

Purchases of plant and equipment

    (258

)

    (850

)

    (6,464

)

Proceeds from sale of equipment

    42       3,343       3  

Purchases of marketable securities

    -       -       (8,130

)

Proceeds from sales and redemptions of marketable securities

    -       3,528       32,563  

Net cash (used in) provided by investing activities

    (216

)

    6,021       17,972  
                         

CASH FLOWS FROM FINANCING ACTIVITIES

                       

Issuances of common stock, net of related costs

    74       114       20,252  

Proceeds from bank borrowings

    14,300       19,582       -  

Repayments of bank borrowings

    (15,800

)

    (15,582

)

    -  

Payment for financing

    (59

)

    (75 )     (203

)

Treasury stock repurchase

    (3

)

    -       -  

Net cash (used in) provided by financing activities

    (1,488

)

    4,039       20,049  
                         

Net decrease in cash and cash equivalents

    (11,464

)

    (2,517

)

    (4,002

)

Cash and cash equivalents at beginning of period

    18,430       20,947       24,949  

Cash and cash equivalents at end of period

  $ 6,966     $ 18,430     $ 20,947  
                         

Supplemental disclosures of cash flow information:

                       

Net taxes paid

  $ 134     $ 144     $ 133  

Interest paid

    34       150       24  

 

 

See accompanying notes.

 

 

ANADIGICS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NATURE OF OPERATIONS AND BASIS OF PRESENTATION

  

ANADIGICS, Inc. (the “Company”) is an innovator in technology, design, and manufacturing of RF semiconductor solutions for infrastructure and mobile communications and data transmission markets. The Company’s product portfolio includes line amplifiers, reverse path amplifiers, PAs, and FEICs. CATV products provide the critical link within CATV infrastructure communications networks, as well as CPE devices, such as set-top boxes and cable modems. WiFi infrastructure products enable wireless connectivity for infrastructure and multimedia applications, including access points, routers, media gateways, and set-top boxes. Wireless infrastructure products are components in 3G and 4G Small-Cell base stations, including picocells, enterprise-class femtocells, and CPE devices that help carriers expand broadband network coverage and support greater levels of data transmission. Cellular infrastructure products are also used in 3G and 4G IoT applications, including automotive, M2M, and industrial devices. WiFi mobile products are designed to enable WiFi connectivity in smartphones, tablets, notebooks, and portable gaming systems. Cellular mobile products enable 3G and 4G wireless connectivity in mobile handsets, smartphones, tablets, and notebooks. Our Foundry offering provides capacity for large-scale VCSEL wafer processing and testing.

 

The Company designs, develops, and manufactures RFIC’s primarily using GaAs compound semiconductor substrates with various process technologies, including MESFET, pHEMT and HBT. The Company’s patented InGaP-Plus technology, combines InGaP HBT and pHEMT processes on a single substrate, enabling it to integrate the PA function and the RF active switch function on the same die. Additionally, the Company has VCSEL process technology and test capabilities that enable high yields with enhanced uniformity. The Company fabricates substantially all of its ICs in its six-inch diameter GaAs wafer fabrication facility.

 

On January 15, 2016, the Company entered into an Agreement and Plan of Merger that was amended on February 1, 2016 and February 26, 2016 (as so amended, the “Merger Agreement”) with II-VI Incorporated, a Pennsylvania corporation (“II-VI”), and Regulus Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary of II-VI (the “Purchaser”). Pursuant to the Merger Agreement, the Parent would acquire the Company for a purchase price of $0.85 per share pursuant to a tender offer by Purchaser that commenced on February 2, 2016 and expired on March 11, 2016, under which approximately 53% of the Company’s outstanding shares were tendered and purchased by Purchaser, and which will be followed by a merger of the Purchaser into the Company. As a result of that merger, the Company will be a wholly-owned subsidiary of II-VI.

 

If the transactions contemplated by the Merger Agreement are consummated, the Purchaser will have acquired all of our issued and outstanding shares of common stock at a purchase price of $0.85 per share and, after making the required filings with the Securities and Exchange Commission, we would cease to be a reporting company under the Securities Exchange Act of 1934, as amended. The boards of directors of the Company, II-VI and Purchaser approved the Merger Agreement and the transactions contemplated by the II-VI Merger Agreement. There can be no assurance that a transaction will be consummated or that II-VI will not propose any adjustments to the II-VI Merger Agreement.

 

 

 

The financial statements have been prepared assuming that the Company will continue as a going concern. The Company has historically operated at a loss and has not consistently generated sufficient cash flows from operations to cover its operating and other cash expenses. In mid-2014, the Company implemented a strategic restructuring plan (Note 2) that the Company believed would place increased emphasis on infrastructure markets, lower operating costs and position the business for improved operating results. However, unexpected declines in revenues resulted in an increase in operating losses. Therefore, the delayed improvement in infrastructure revenue is forecasted to result in operating losses into 2016, larger than those foreseen under the strategic restructuring plan and a continued deterioration in the Company’s liquidity position. Additionally, the Company did not maintain compliance with certain covenants under its revolving credit facility (Note 12). These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts or classification of liabilities that might be necessary in the event the Company cannot continue in existence. During 2015, the Company explored potential avenues for raising capital through debt or equity, but the limited options that were available would have required the Company to accept unfavorable terms that were costly and highly dilutive to the Company's stockholders. The Company's operating losses, declining cash balance and corresponding need for funding were among the key reasons that the Company's Board of Directors decided to explore the possible sale of the Company in conjunction with its plans to overcome these difficulties. As discussed in the paragraph above, the Company entered into a Merger Agreement with II-VI. In conjunction with the Merger Agreement, the Company was able to obtain a loan from II-VI to address the Company's deteriorating liquidity position (see Note 14). There can be no assurance that a transaction will be consummated or that II-VI will not propose any adjustments to the Merger Agreement. The Company will continue to aggressively pursue available sales opportunities, work with distributors and end users to grow future sales, and continue to control costs. However, even after giving consideration to the loan provided by II-VI, the Company’s cash position may not be significant enough to support the Company’s daily operations. Management believes the ability to continue as a going concern through January 1, 2017 is dependent upon increasing infrastructure revenue, continuing to control costs to meet obligations and repay liabilities arising from normal business operations when they come due. While the Company believes in the viability of its strategy to realize revenues, there can be no assurances to that effect.

  

The consolidated financial statements include the accounts of ANADIGICS, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

The Company has evaluated subsequent events and determined that, other than matters outlined in Note 14, there were no subsequent events to recognize or disclose in these consolidated financial statements.

 

USE OF ESTIMATES

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates. Significant estimates that affect the financial statements include, but are not limited to: allowance for doubtful accounts, recoverability and valuation of inventories, impairment of property and equipment, warranty reserve, valuation of stock-based compensation, reserves for distributor arrangements and returns, useful lives and amortization periods and recoverability of long-lived assets.

 

CONCENTRATION OF CREDIT RISK

 

The Company grants trade credit to its customers, who are primarily foreign manufacturers of wireless communication devices, cable and broadcast television receivers and fiber optic communication devices. The Company performs periodic credit evaluations of its customers and generally does not require collateral. Sales and accounts receivable from customers are denominated in U.S. dollars. The Company has not experienced significant losses related to receivables from these individual customers.

 

Net sales to individual customers and their affiliates who accounted for 10% or more of the Company’s total net sales and corresponding end application information are as follows:

 

   

YEAR ENDED DECEMBER 31

 
   

2015

   

2014

   

2013

 

Customer (primary application)

 

$

   

%

   

$

   

%

   

$

   

%

 

Huawei Technologies (Infrastructure / Mobile)

    12,077       21

%

    18,718       22

%

    15,731       12

%

Richardson-RFPD (Infrastructure)

    9,758       17

%

    <10

%

    <10

%

    <10

%

    <10

%

Alltek Technologies (Infrastructure / Mobile)

    7,314       12

%

    <10

%

    <10

%

    <10

%

    <10

%

Samsung Electronics (Mobile)

    <10

%

    <10

%

    22,479       26

%

    54,187       40

%

Murata (Mobile)

    <10

%

    <10

%

    <10

%

    <10

%

    14,274       11

%

 

 

Accounts receivable at December 31, 2015 and 2014 from the greater than 10% customers accounted for 41% and 66% of total accounts receivable, respectively.

 

REVENUE RECOGNITION

 

Revenue from product sales is recognized when title to the products is transferred to the customer, which occurs upon shipment or delivery, depending upon the terms of the sales order. The Company sells to certain distributors who are granted limited contractual rights of return and exchange and certain pre-negotiated individual product-customer price protection. Revenue from sales of products to distributors is recognized, net of allowances, upon shipment of the products to the distributors. At the time of shipment, title transfers to the distributors and payment from the distributors is due on our standard commercial terms; payment terms are not contingent upon resale of the products. Revenue is appropriately reduced for the portion of shipments subject to return, exchange or price protection. Allowances for the distributors are recorded upon shipment and calculated based on the distributors’ indicated intent, historical data, current economic conditions and contractual terms. The Company believes it can reasonably and reliably estimate allowances for credits to distributors in a timely manner. The Company charges customers for the costs of certain contractually-committed inventories that remain at the end of a product's life. Such amounts are recognized as cancellation revenue when cash is received. The value of the inventory related to cancellation revenue may, in some instances, have been reserved during prior periods in accordance with the Company’s inventory obsolescence policy.

 

ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

The Company establishes an allowance for doubtful accounts for estimated losses resulting from customers' failure to make payments, based upon historical experience.

 

WARRANTY COSTS

 

The Company provides, by a current charge to income, an amount it estimates, by examining historical returns and other information it deems critical, will be needed to cover future warranty obligations for products sold during the year. The liability for warranty costs is included in Accrued liabilities in the consolidated balance sheets.

 

PLANT AND EQUIPMENT

 

Plant and equipment are stated at cost. Depreciation of plant, furniture and equipment has been provided on the straight-line method over 3-7 years. Leasehold improvements are amortized and included in depreciation over the useful life of the leasehold or the life of the lease, whichever is shorter.

 

IMPAIRMENT OF LONG-LIVED ASSETS

 

Long-lived assets used in operations are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell.

 

INCOME TAXES

 

Deferred income taxes reflect the net effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the income tax basis of such assets and liabilities. The Company maintains a full valuation allowance on its deferred tax assets. Accordingly, the Company has not recorded a benefit or provision for income taxes. The Company recognizes interest and penalties related to the underpayment of income taxes in income tax expense. No unrecognized tax benefits, interest or penalties were accrued at December 31, 2015 and 2014. The Company’s U.S. federal net operating losses have occurred since 1998 and as such, tax years subject to potential tax examination could apply from that date because carrying-back net operating loss opens the relevant year to audit.

 

 

RESEARCH AND DEVELOPMENT COSTS

 

The Company charges all research and development costs associated with the development of new products to expense when incurred.

 

CASH EQUIVALENTS

 

The Company considers all highly liquid marketable securities with a maturity of three months or less when purchased to be cash equivalents.

 

INVENTORY

 

Inventories are valued at the lower of cost or market ("LCM"), using the first-in, first-out method. The Company capitalizes production overhead costs to inventory on the basis of normal capacity of its production facility and in periods of abnormally low utilization charges the related expenses as a period cost in the statement of operations. In addition to LCM limitations, the Company reserves against inventory items for estimated obsolescence or unmarketable inventory. The reserve for excess and obsolete inventory is primarily based upon forecasted short-term demand for the product. Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In the event the Company sells inventory that had been covered by a specific inventory reserve, the sale is recorded at the actual selling price and the related cost of goods sold at the full inventory cost, net of the reserve.

 

DEFERRED RENT

 

Aggregate rental expense is recognized on a straight-line basis over the lease terms of operating leases that contain predetermined increases in rentals payable during the lease term.

 

FOREIGN CURRENCY TRANSLATION

 

The financial statements of subsidiaries outside of the United States are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet dates. The resultant translation adjustments are included in other accumulated comprehensive income or loss. Income and expense items are translated at the average monthly rates of exchange. Gains and losses from foreign currency transactions of these subsidiaries are included in the determination of net income or loss.

 

EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised resulting in the issuance of common stock of the Company. Any dilution arising from the Company's outstanding stock awards will not be included where their effect is anti-dilutive.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value of each of the following instruments approximates their carrying value because of the short maturity of these instruments: cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities. See Note 4 for additional fair value disclosures. 

 

STOCK-BASED COMPENSATION

 

The Company has various stock-based compensation plans for employees and directors, which are described more fully in Note 10. The Company records stock compensation expense for all stock-based payment awards made to its employees and directors. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period which in most cases is the vesting period.

 

 

RECLASSIFICATIONS

 

Certain prior period amounts have been reclassified to conform to the current presentation.

 

RECENTLY ADOPTED ACCOUNTING STANDARDS

 

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. The ASU became effective January 1, 2015. Adoption of this guidance did not impact our consolidated financial statements.

 

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

 

In July 2015, the FASB issued ASU 2015-11, Inventory. The guidance was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. This guidance is effective for reporting periods beginning after December 15, 2016. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The guidance states that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition. The guidance is effective for annual and interim periods beginning after December 15, 2015 and early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will replace most current revenue recognition guidance. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. It also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU permits the initial application to be applied either retrospectively to each prior reporting period presented, or retrospectively with a cumulative effect adjustment made at the date of initial application. The guidance is effective for annual and interim periods beginning after December 15, 2016. In July 2015, the FASB approved a one year deferral of the effective date of this standard to December 15, 2017 and early adoption of the standard, but not before the original effective date of December 15, 2016. The Company is evaluating the transition methods and the impact of the amended guidance on its consolidated financial statements.

 

2. RESTRUCTURING AND OTHER CHARGES

 

RESTRUCTURING

 

During 2013, the Company implemented workforce reductions that eliminated approximately 25 positions, respectively, throughout the Company, resulting in restructuring charges of $1,915 for severance, related benefits and other costs.

 

During 2014, the Company implemented a strategic restructuring plan to better address growth opportunities in infrastructure markets and to lower operating costs. The strategy included expanding the Company’s presence in the infrastructure space and reducing fixed costs associated with certain legacy mobile activities through a resizing of staff and manufacturing capability. As a result, the Company implemented workforce reductions that eliminated approximately 150 positions throughout the Company resulting in restructuring charges of $4,199 for severance, related benefits and other costs.

 

 

During 2015, as an extension of its strategic shift to Infrastructure and migration of its business model, the Company implemented a workforce reduction that eliminated approximately 25 positions throughout the Company and recorded restructuring charges of $611 for severance, related benefits and other costs.

 

Activity and liability balances related to the restructurings were as follows:

 

   

Workforce-related

   

Lease-related

   

Total

 

December 31, 2013 balance

  $ 245     $ -     $ 245  

Restructuring expense

    4,002       197       4,199  

Payments

    (3,502 )     (38 )     (3,540 )

December 31, 2014 balance

  $ 745     $ 159     $ 904  

Restructuring expense

    611       -       611  

Payments

    (1,356 )     (159 )     (1,515 )

December 31, 2015 balance

  $ -     $ -     $ -  

 

As part of the strategic restructuring in 2014, the Company also reviewed and identified certain surplus manufacturing fixed assets and recorded a restructuring charge of $4,201 to write down certain assets to their current market value based on proceeds expected from their sale. During the second half of 2014, the Company subsequently recorded net proceeds of $3,256 on the sale of certain assets held for sale and offset their related $2,302 net gain against Restructuring charges. During the second quarter of 2015, the Company recorded a $50 gain on the sale of an asset classified as held for sale, which was offset against Restructuring charges. The remaining assets previously held for sale were re-classified to fixed assets during the second quarter of 2015, as it was determined that such assets would not be sold in the near future. There was no impact to the results of operations as a result of this re-classification for any period presented.

 

OTHER CHARGES

 

During the second quarter of 2014, the Company recorded a charge of $2,080 to Cost of sales for inventory write-downs on certain excess Mobile inventory. 

 

3. SEGMENTS

 

The Company has one reportable segment. Its ICs are primarily manufactured using common manufacturing facilities located in the same domestic geographic area. The method for determining what information to report is based on management’s use of financial information for the purposes of assessing performance and making operating decisions. All operating expenses and assets of the Company are combined and reviewed by the chief operating decision maker on an enterprise-wide basis, resulting in no additional discrete financial information or operating segment information. The Company’s business units share similar long term business models, research and development expenses and selling and administrative expenses. The Company has concluded at December 31, 2015 that it has only one reportable segment. The Company will re-assess its conclusions at least annually.

 

The Company classifies its revenues based upon the end application of the product in which its ICs are used. Net sales by end application are regularly reviewed by the chief operating decision maker and are as follows:

 

   

Year Ended December 31,