You
should carefully consider the following risk factors, as well as the other information in this report, before deciding whether to purchase, hold or sell shares of our common stock. The occurrence of any of the following risks could harm our
business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You
should consider all of the factors described when evaluating our business.
Risks Related to Our Business and Industry
Our operating results may fluctuate significantly and our future results are difficult to predict, which may cause us to fail to
meet the expectations of investors.
We operate in a highly dynamic industry and our future results could be subject to
significant fluctuations, particularly on a quarterly basis. Our quarterly net revenue and operating results have fluctuated significantly in the past and may continue to vary from quarter-to-quarter due to a number of factors, many of which are not
within our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. A significant percentage of our net revenue in each quarter is dependent on sales that are booked and shipped during that quarter,
typically attributable to a large number of orders placed through our distributors for diverse end users and markets. As a result, accurately forecasting our operating results, including our total net revenue and gross margins, in any quarter is
difficult. For example, it is difficult for us to forecast the demand for our products, in part because of the complex supply chain between us and the end users of our products. We have limited visibility into future module manufacturer, OEM,
distributor, and contract manufacturer demand and the product mix that they will require, which could adversely affect our net revenue forecasts and operating margins.
In addition, our failure to accurately forecast demand can lead to product shortages that can impede production by the module manufacturers and OEMs, and harm our relationships with them and the
distributors of our products. Conversely, our failure to forecast declining demand or shifts in product mix can result in excess or obsolete inventory. The rapid pace of innovation in our industry could also render significant portions of our
inventory obsolete. Excess or obsolete inventory levels could result in
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unexpected expenses or increases in our reserves that could adversely affect our business, operating results, and financial condition. In contrast, if we were to underestimate demand or if
sufficient manufacturing capacity were unavailable, we could forego net revenue opportunities, potentially lose market share, and damage our relationships with parties that use or distribute our products.
Additional factors that can contribute to fluctuations in our operating results include:
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the rescheduling, increase, reduction, or cancellation of significant orders from module manufacturers, OEMs, distributors, or contract manufacturers;
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our ability to develop, introduce, and ship in a timely manner new products and product enhancements that meet the requirements of module
manufacturers, OEMs, or end users of our products, including performance, functionality, reliability, form factor, and cost requirements;
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the rate at which module manufacturers, OEMs, and end users adopt our technologies in our target end markets;
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the timing and success of the introduction of new products and technologies by us and our competitors, and the acceptance of our new products by module
manufacturers, OEMs, and end users;
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our gain or loss of a key module manufacturer, OEM, distributor, or contract manufacturer;
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the availability, cost, and quality of materials and components that we purchase from third-party foundries and any problems or delays in the
fabrication, wafer preparation, assembly, testing, or delivery of our products;
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fluctuations in manufacturing yields associated with new product introductions or changes in process technologies;
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the quality of our products and any remediation costs, including costs associated with the return of previously sold products due to manufacturing
defects; and
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general economic conditions in our domestic and foreign markets.
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Due to these and other factors, quarter-to-quarter comparisons of our historical operating results should not be relied upon as accurate
indicators of our future performance.
We have incurred significant losses and may incur losses in the future.
As of September 29, 2012, we had an accumulated deficit of $226.6 million. We incurred a net loss of $9.7 million for the year ended
December 31, 2011. In 2012 we achieved profitability and generated a net income of $1.6 million for the nine month ended September 29, 2012. We expect to continue to make significant expenditures related to the development of our business.
These include expenditures to hire additional personnel related to the sales, marketing, and development of our products, and to maintain and expand our research and development facilities. We may not have sufficient net revenue growth to offset
increased expenses or to achieve or maintain profitability in future periods.
We may be unable to sustain our historical net revenue
growth rate and if net revenue growth falls short of our expectations, we may not be able to immediately reduce our operating expenses proportionately, which could eliminate our profitability.
Our net revenue has grown rapidly in recent years. Our net revenue grew from $38.2 million in 2006 to $53.4 million in 2007, and to $68.4
million in 2008. In 2009, our net revenue continued to grow to $70.5 million, but at a less rapid pace than the year prior. Over our history, we have experienced periods of relatively flat period-over-period growth, as well as periods of more rapid
growth. From 2007 through 2011, our annual net revenue has increased at a CAGR of 19%. Our net revenue in the year ended December 31, 2011 increased by 18% over the corresponding period in 2010. Our net revenue for the nine months ended
September 29, 2012 increased by 95% over the corresponding period in 2011. We believe that in planning our growth, it is prudent to take into account the cyclical nature of some of the end markets that we serve, as well as the longer term
historical patterns in the development of our business. Even if our net revenue increases to higher levels, we believe that a decline in the rate of growth of our net revenue is, to some extent, inevitable. Although we base our planned operating
expenses in large part on our expectations of future net revenue, a substantial portion of our expenses is relatively fixed, and cannot immediately be eliminated if our net revenue falls short of our expectations. Thus, if the rate in growth of our
net revenue in any quarter is substantially less than we had anticipated, we may be unable to reduce our operating expenses commensurately in that quarter, which could negatively affect our results of operations for that quarter. For instance, for
the quarter ended March 26, 2011, our net revenue declined to $21.2 million from $23.4 million for the quarter ended December 25, 2010. In addition, we experienced net losses of $3.0 million, $2.7 million, $4.5 million,
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$1.3 million, and $1.0 million for the quarters ended March 31, 2012, December 31, 2011, September 24, 2011, June 25, 2011, and March 26, 2011,
respectively, compared to net income of $4.7 million and $1.2 million for the quarters ended September 29, 2012 and December 25, 2010, respectively.
Changes in our product mix and in our manufacturing operations utilization may adversely affect our gross margins and operating results.
Our products have a wide range of gross margins, and our overall gross margin in any period is highly dependent on the percentage of our
net revenue attributable to higher or lower margin products in that period. The product mix that module manufacturers, OEMs, distributors, and contract manufacturers will require varies greatly from period-to-period and is difficult for us to
predict, and a shift in product mix in any given period to a greater percentage of lower margin products would adversely affect our gross margins and operating results. For example, for the three month periods ended September 29,
2012, June 30, 2012, March 31, 2012, December 31, 2011, September 24, 2011, June 25, 2011, March 26, 2011, and December 25, 2010, our gross margins were 41%, 37%, 31%, 30%, 27%, 40%,
43%, and 48%, respectively. As a result of changes in product mix, our operating results will vary from period-to-period and could be adversely affected.
In addition, we are generally faced with a decline in the utilization of our manufacturing operations during periods of reduced demand, as a certain portion of our manufacturing costs are relatively
fixed. During periods of reduced demand, these overhead costs are allocated over a smaller number of units, which will result in increased product cost. Reduced market demand in the future may adversely affect our utilization and consequently result
in lower gross margins for our products. Fluctuations in our gross margins for our products could have a material negative impact on our business, financial condition and results of operations.
We rely on a small number of customers for a significant percentage of our net revenue, and the loss of, or a reduction in, orders from these
customers could result in a significant decline in net revenue.
Although we have shipped our products to a large
number of customers, we have historically depended on a small number of customers for a significant percentage of our annual net revenue. The composition of this group can change from year to year. Net revenue derived from our three largest direct
customers as a percentage of our net revenue was 87% and 70% for the three months ended September 29, 2012 and September 24, 2011, respectively, and 84% and 62% for the nine months ended September 29, 2012 and September 24, 2011,
respectively. Included in these percentages for our three largest direct customers are sales to two of our distributors. Based on records from our distributors of shipments to their customers, net revenue derived from our three largest end customers
as a percentage of net revenue was 80% and 55% for the three months ended September 29, 2012 and September 24, 2011, respectively, and 72% and 43% for the nine months ended September 29, 2012 and September 24, 2011, respectively.
Sales through our distributor Macnica to module manufacturer Murata represented 76% of our net revenue for the three months ended September 29, 2012 and 67% of our net revenue for the nine months ended September 29, 2012, and we believe
substantially all of the products sold by Murata are to a limited number of mobile handset manufacturers. Any decrease in mobile handset sales by such manufacturers could have a material negative impact on our business, financial condition and
results of operations. While the composition of our top customers varies from year to year, we expect that shipments to a limited number of customers will continue to account for a significant percentage of our net revenue for the foreseeable
future. As a result of our customer concentration, our financial performance may fluctuate significantly from period to period based on the device release cycles and seasonal sales patterns of the mobile handset manufacturers and the success of
their products.
With the exception of a supply and prepayment agreement with Murata, substantially all of our business,
including that from our largest customers, is conducted through standard purchase orders, which provide no contractual guarantees beyond the purchase order itself. It is possible that any of our major customers could terminate its purchasing
relationship with us or significantly reduce or delay the amount of our products that it orders, purchase products from our competitors, or develop its own products internally. The loss of, or a reduction in, orders from any major customer could
cause a decline in net revenue and adversely affect our results of operations. To date, we have not experienced significant risk with respect to customer credit risk, but this could change as we expand our business in size and into new geographies
in the future.
If we fail to develop new or enhanced products that achieve market acceptance in a cost-effective and timely manner, our
operating results could be adversely affected.
The markets for our products are characterized by frequent new product
introductions and changes in product and process technologies. The future success of our business will depend on our ability to develop new products for existing and new markets,
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introduce these products in a cost-effective and timely manner, have our products designed into the products of leading module manufacturers and OEMs, and have our products gain broad adoption by
end users. The development of new high performance RFICs is highly complex, and from time-to-time we may experience delays in completing the development and introduction of new products or fail to efficiently manufacture such products in the early
production phase. Our ability to successfully develop, introduce, and deliver new high performance RFICs will depend on various factors, including our ability to:
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complete and introduce new product designs;
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achieve design wins with module manufacturers and OEMs, and broad adoption by end users;
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meet the time pressures associated with the demands of the module manufacturers and OEMs to which we sell through our distributors and contract
manufacturers;
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accurately understand market requirements;
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attract and retain skilled engineering, operations, and manufacturing personnel;
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obtain adequate supplies of materials and components that meet our quality requirements; and
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achieve adequate manufacturing yields and maintain sufficient supply through our third-party foundry relationships.
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We believe that our UltraCMOS platform gives us a competitive advantage because it enables us to develop new products that integrate RF,
analog, digital, and other functions on a single chip. However, if demand for integrated components in the future is smaller than anticipated, our competitive advantage would be diminished and our business could be adversely affected.
Our failure to continue to keep pace with new or improved semiconductor process technologies could impair our competitive position.
The semiconductor industry has historically been characterized by advancing technology through smaller geometries and
larger wafer sizes, as well as through other proprietary and non-proprietary techniques. Although we have certain proprietary semiconductor processes, such as the application of silicon on a sapphire substrate in our UltraCMOS process, we constantly
seek to develop new and improved techniques and methods internally and with the assistance of our suppliers. For example, we are currently working with numerous suppliers with respect to our next generation technologies. There can be no assurance
that our efforts with these suppliers will ultimately be successful or result in next generation technologies that enable us to cost effectively produce our products in the future. For example, higher costs associated with the introduction and start
up of new technologies could negatively impact our gross margins if the selling prices for our products based on new technologies do not sufficiently offset our higher costs for these technologies. For instance, we implemented new manufacturing
processes in 2011 which resulted in low yields of certain wafers. As such, we recorded reductions to the carrying value of inventory as a result of a lower of cost or market valuation. Gross margins declined in our third and fourth quarter of fiscal
2011 as a result. Our future success depends in part upon our ability to continue to improve our semiconductor process technologies in order to adapt to emerging module manufacturer and OEM requirements and to competitive market conditions. If we
fail for any reason to remain abreast of new and improved semiconductor process technologies as they emerge, we may lose market share which could adversely affect our operating results.
Standard CMOS is the semiconductor industrys most broadly used manufacturing process technology and the semiconductor industry has
committed significantly greater resources to standard CMOS, SOI, and gallium arsenide, or GaAs, process technologies, as compared to our technology. Therefore, with the resources available to competitors using those technologies, they may more
quickly adapt to emerging module manufacturer and OEM requirements and competitive market conditions than we can.
The segment of the
semiconductor industry in which we participate is intensely competitive, and our inability to compete effectively could adversely affect our business.
The markets for our products are extremely competitive, and are characterized by rapid technological advances, frequent new product introductions, evolving industry standards, price erosion, and the
continuously evolving requirements of module manufacturers and OEMs. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, and failure to increase, or the loss of, market share,
any of which could adversely affect our business. We compete primarily with other suppliers of high performance RFICs. We currently compete in the mobile wireless device and wireless infrastructure markets with Avago Technologies Limited, Hittite
Microwave Corporation, Infineon Technologies A6, M/A-COM Technology Solutions Inc., NEC Corporation, Renesas Electronics Corporation, RF Micro Devices, Inc., Skyworks, Sony Corporation, Texas Instruments Incorporated, Toshiba Corporation, TriQuint
Semiconductor, Inc., and others. In the broadband, test and measurement equipment, and industrial markets, we principally compete with Hittite, M/A-COM, Renesas, Skyworks, and others. Our principal competitors in the aerospace and defense markets
include Analog Devices, Inc., Hittite, Intersil Corporation, M/A-COM, and others. We expect increased competition from other established and emerging companies if our market continues to develop and expand. For example, current or potential
competitors have established or may establish financial and strategic relationships with each other or with existing or potential customers or other third parties to increase the ability of their products to address the needs of our prospective
customers. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share, which would adversely affect our business. In addition, a competitor could acquire a partner to
which we have licensed certain rights to sell products using our technology. In addition, we expect increased competition from companies using SOI
technologies or competitors using technologies based on standard CMOS. There can be no
assurance that we will be able to compete successfully against current or potential competitors, or that competition will not have a material adverse effect on our business, financial condition, and results of operations.
In addition, we may face competition because of the potential risks customers associate with purchasing products from sole sources.
Because our products are manufactured using a proprietary technology, customers may be reluctant to purchase our products because they may view us as a sole source supplier for certain of their component parts. Customers generally prefer to
incorporate components into their products that can be sourced from multiple suppliers.
If the manufacturing yields that we realize in
our production of integrated circuits, or ICs, were to decrease, our operating results could be adversely affected.
The manufacture and assembly of ICs, particularly high performance RFICs that we supply, is a highly complex process that is sensitive to
a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used, and the performance of the fabrication equipment. As is typical in the semiconductor industry, we have from time to
time experienced lower than anticipated manufacturing yields. In particular, we have in the past and may experience in the future lower manufacturing yields with respect to the introduction of new products, migration to smaller geometries, or the
installation and start up of new process technologies. Our operating results could be adversely affected if we were unable to maintain current manufacturing yields through our third-party foundry relationships. For example, for the quarter ended
September 25, 2011, we experienced lower than anticipated yields on certain wafers due to the implementation of new manufacturing processes and recorded an inventory write-down of $3.1 million as a result of a lower of cost or market valuation.
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We depend on LAPIS Semiconductor Co., Ltd., MagnaChip Semiconductor Ltd., Silanna Semiconductor Pty
Ltd., and other outside semiconductor foundries to manufacture our products and implement our fabrication processes, and any failure to maintain sufficient foundry capacity could significantly delay our ability to ship our products, damage our
relationships with module manufacturers, OEMs, distributors, and contract manufacturers, reduce our sales, and increase our expenses.
We do not own or operate any fabrication facilities and instead outsource fabrication of our products to independent foundries. Prior to June 2008, we owned and operated a manufacturing facility in
Sydney, Australia. In June 2008, after achieving volume outsourced production of our UltraCMOS products, we sold our ownership interest in this manufacturing operation to Silanna Foundries Pty. Ltd. and entered into an outsourced manufacturing
arrangement with this company. Silanna Foundries and its wafer manufacturing subsidiary are referred to in this prospectus as Silanna Semiconductor. LAPIS Semiconductor, MagnaChip Semiconductor, and Silanna Semiconductor manufactured 100% of the
wafers used in our products for the three and nine months ended September 29, 2012 and September 24, 2011.
We place
our purchase orders with foundries based on sales forecasts for our products. If any third-party foundry does not provide competitive pricing or is not able to meet our required capacity for any reason, or if our business relationship with LAPIS
Semiconductor, MagnaChip Semiconductor, Silanna Semiconductor, or any other semiconductor foundry deteriorates, we may not be able to obtain the required capacity and would have to seek alternative foundries, which may not be available on
commercially reasonable terms, or at all. The process for qualifying a new foundry is time consuming, difficult, and may not be successful, particularly if we cannot promptly integrate our proprietary process technology with the process used by the
new foundry. Using a foundry with which we have no established relationship could expose us to potentially unfavorable pricing, unsatisfactory quality, or insufficient capacity allocation.
We face a number of other significant risks associated with outsourcing fabrication, including:
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limited control over delivery schedules, quality assurance and control, and production costs;
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discretion of foundries to reduce deliveries to us on short notice, allocate capacity to other customers that may be larger or have long-term customer
or preferential arrangements with foundries we use;
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inability of foundries to adequately allocate additional capacity to us based upon an increase in demand for our products;
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unavailability of, or potential delays in accessing, key process technologies;
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damage to equipment and facilities, power outages, equipment, or materials shortages that could limit manufacturing yields and capacity at the
foundries;
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potential unauthorized disclosure or misappropriation of IP, including use of our technology by the foundries to make products for our competitors;
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financial difficulties and insolvency of foundries;
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acquisition of foundries by third parties; and
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lack of long-term manufacturing commitments by the foundries.
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Any of the foregoing risks could delay shipment of our products, result in higher expenses and reduced net revenue, damage our
relationships with module manufacturers, OEMs, distributors, and contract manufacturers, and otherwise adversely affect our operating results.
We depend on limited sources of supply for some of the key components and materials in our products, and a limited number of suppliers for wafer
preparation, which makes us susceptible to shortages, price fluctuations, and quality risks that could adversely affect our operating results.
We purchase a number of key components and materials used in our products from limited source suppliers. For example, we currently obtain synthetic sapphire substrates from three third-party suppliers,
including Kyocera Corporation, Rubicon Technology, Inc., and Maintech Japan Corporation. Our current consumption levels of synthetic sapphire represent less than approximately two percent of worldwide synthetic sapphire production. We believe that
our suppliers currently have manufacturing capacity adequate to meet our foreseeable requirements. However, if competition for capacity were to increase, our suppliers could increase the lead times required to deliver materials to us or could seek
to increase the prices of materials we purchase from them. For example, competition for synthetic sapphire wafer capacity has increased significantly in recent years due to the use of sapphire as a
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substrate for blue and white light-emitting diodes, or LEDs. This increasing demand for synthetic sapphire for use in LEDs has resulted in substantial increases in the cost of sapphire substrates
and could adversely impact our manufacturing costs as well as the availability of sapphire substrate supply. In addition, we and our outside foundries use a limited number of suppliers for wafer preparation. For example, we currently obtain bonded
SOS substrate from Soitec USA, Inc.
If our limited source suppliers and suppliers for wafer preparation were to experience
difficulties that affected their manufacturing yields or the quality of the materials they supply to us, our cost of net revenue could be adversely affected. Longer lead times and quality problems experienced by our suppliers could also prevent us
from fulfilling the demands of the module manufacturers, OEMs, distributors, and contract manufacturers for our products on a timely basis, and thus adversely affect our net revenue. The ability of our suppliers to meet our requirements could be
impaired or interrupted by factors beyond their control, such as earthquakes or other natural phenomena, labor strikes or shortages, or political unrest. In the event one of our suppliers is unable to deliver products to us or is unwilling to sell
materials or components to us, our operations may be adversely affected. We might also experience difficulty identifying alternative sources of supply for the materials or components used in our products or products we obtain through outsourcing. We
could experience delays if we were required to test and evaluate products of potential alternative suppliers or products we obtain through outsourcing. Furthermore, financial or other difficulties faced by our suppliers, or significant changes in
demand for the components or materials they use in the products they supply to us, could limit the availability of those products, components, or materials to us. Any of these occurrences could negatively impact our operating results and adversely
affect our business.
If our principal end markets fail to grow or experience declines, our net revenue may decrease.
Although our products are used in a variety of end markets, our future growth depends to a significant extent on the
success of our principal end markets. The rate at which these markets will grow is difficult to predict. These markets may fail to grow or decline for many reasons, including insufficient consumer demand, decreased demand for bandwidth, lack of
access to capital, changes in the U.S. defense budget and procurement processes, and changes in regulatory environments. If demand for high performance RFICs or devices in which our products are incorporated declines, fails to grow, or grows more
slowly than we anticipate, purchases of our products may be reduced, and our net revenue could decline.
In particular, a
significant portion of our products are incorporated into mobile wireless devices. Accordingly, demand for our products is dependent on the ability of mobile wireless device manufacturers to successfully sell wireless devices that incorporate our
products. We cannot be certain whether these manufacturers will be able to create or sustain demand for their wireless devices that contain our products or how long they will remain competitive in their business, if at all. The markets for these
manufacturers are intensely competitive and are characterized by rapid technological change. These changes result in frequent product introductions and short product life cycles. The success of these mobile wireless device manufacturers and the
demand for their wireless devices can be affected by a number of factors, including:
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market acceptance of their mobile wireless devices that contain our products;
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the impact of slowdowns or declines in sales of mobile wireless devices in general;
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their ability to design products with features that meet the evolving tastes and preferences of consumers;
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fluctuations in foreign currency;
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relationships with wireless carriers in particular markets;
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the implementation of, or changes to, mobile wireless device certification standards and programs;
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technological advancements in the functionality and capabilities of mobile wireless devices;
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the imposition of restrictions, tariffs, duties, or regulations by foreign governments on mobile wireless device manufacturers;
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failure to comply with governmental restrictions or regulations;
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cost and availability of components for their products; and
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inventory levels in the sales channels into which mobile wireless device manufacturers sell their products.
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Our future net revenue growth depends on demand for bandwidth for many of our relevant markets, including mobile wireless device,
wireless infrastructure, and aerospace and defense. However, such bandwidth demands are subject to market changes and the evolving requirements of end users and therefore may not occur.
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If we fail to penetrate key players in our existing markets or fail to penetrate new markets, our net
revenue, net revenue growth rate, if any, and financial condition could be materially and adversely affected.
We
currently sell most of our products into the aerospace and defense, broadband, industrial, mobile wireless device, test and measurement equipment, and wireless infrastructure markets. Our net revenue growth, if any, will depend in part on our
ability to penetrate key customers in these target markets and to continue to develop and broaden our relationships with key players in the wireless ecosystem including wireless network operators, leading device and equipment OEMs, and reference
design partners. Each of the markets we serve presents distinct and substantial risks. If any of these markets does not develop as we currently anticipate or if we are unable to penetrate them successfully, it could materially and adversely affect
our net revenue and net revenue growth rate, if any.
In addition, the markets for certain of our products, such as DC-DC
converters and DTCs, are new, still developing and relatively small. We have sold or provided samples of limited quantities of our products into these markets and cannot predict how or to what extent demand for our products in these markets will
develop. If we fail to penetrate these or other new markets upon which we target our resources, our net revenue and net revenue growth rate, if any, likely will decrease over time and our financial condition could suffer.
If module manufacturers or OEMs do not design our RFICs into their product offerings, or if such module manufacturers or OEMs product
offerings are not commercially successful, we would have difficulty selling our RFICs and our business could be adversely affected.
Our products are sold directly and through our distributors and contract manufacturers to module manufacturers who include our RFICs in the products they supply to OEMs, and to OEMs who include our RFICs
in their products. Our RFICs are generally incorporated into the module manufacturers and OEMs products at the design stage. As a result, we rely on module manufacturers and OEMs to design our RFICs into the products they sell. Without
these design wins, our business would be materially and adversely affected. We often incur significant expenditures on the development of a new RFIC without any assurance that a module manufacturer or OEM will select our RFIC for design into its own
product. Once a module manufacturer or OEM designs a competitors semiconductor into its product offering, it becomes significantly more difficult for us to sell our RFICs directly or indirectly to that module manufacturer or OEM because
changing suppliers involves significant cost, time, effort, and risk for the module manufacturer or OEM. Furthermore, even if a module manufacturer or OEM designs one of our RFICs into its product offering, we cannot be assured that its product will
be commercially successful and that we will receive any net revenue from that product. If the module manufacturers or OEMs products incorporating our RFICs fail to meet the demands of their customers or otherwise fail to achieve market
acceptance, we will be unable to achieve broad adoption of our UltraCMOS technology. As a result, our net revenue and business would be adversely affected.
We design custom RFICs to meet specific requirements of the module manufacturers and OEMs. The amount and timing of net revenue from such products can cause fluctuations in our quarterly operating
results.
The design and sales cycle for our custom RFICs, from initial contact by our sales force to the commencement
of shipments of those products in commercial quantities, is lengthy and can range from six months to as long as two years or more. As part of this process, our sales and application engineers work closely with either the module manufacturer or OEM
to analyze their respective product requirements and establish a technical specification for the custom RFIC. We then evaluate test wafers and components, and establish assembly and test procedures before manufacturing in commercial quantities can
begin. The length of this cycle is influenced by many factors, including the difficulty of the technical specification, the novelty and complexity of the design and the module manufacturers or OEMs procurement processes. Module
manufacturers and OEMs typically do not commit to purchase significant quantities of a custom RFIC until they are ready to commence volume shipment of their own products, and volume purchases of our custom RFICs by module manufacturers or OEMs
generally do not occur until they have successfully introduced the modules or products incorporating our RFICs. Our receipt of substantial net revenue from sales of a custom RFIC depends on the module manufacturers or OEMs commercial
success in manufacturing and selling its product incorporating our custom RFIC. As a result, a significant period may elapse between our investment of time and resources in a custom RFIC and our receipt of substantial net revenue from sales of that
product.
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The length of this process increases the risk that such module manufacturer or OEM will
decide to cancel or change its product plans. Such a cancellation or change in plans by the module manufacturer or OEM could cause us to lose anticipated sales. In addition, our financial condition and results of operations would be adversely
affected if a significant module manufacturer or OEM curtails, reduces, or delays orders during our sales cycle, chooses not to release equipment that contains our custom RFICs, or are themselves not successful in the sale and marketing of their
products that incorporate our custom RFICs. Additionally, a module manufacturer or OEM occasionally requests that we create custom RFICs and they agree to purchase such products only if we provide periods of exclusivity during which we will provide
those custom RFICs only to that customer. These exclusivity periods restrict our ability to generate sales of these products with other customers and may cause us to lose significant sales to other module manufacturers and OEMs. Finally, if we fail
to achieve initial design wins in the module manufacturers or OEMs qualification process, we may lose the opportunity for significant sales to that module manufacturer or OEM for a lengthy period of time because the module manufacturer
or OEM may be unlikely to change its source for those products in the future due to the significant costs associated with qualifying a new supplier and potentially redesigning its product.
The average selling prices of RFICs in our markets have historically decreased over time and will likely do so in the future, which could adversely impact our net revenue and gross profits.
Average selling prices of RFICs in the markets we serve have historically decreased over time and we expect such
declines to continue to occur. Our gross profits and financial results will suffer if we are unable to offset reductions in our average selling prices by reducing our costs, developing new or enhanced RFICs on a timely basis with higher selling
prices or gross profits, or increasing our sales volumes. Additionally, because we do not operate our own manufacturing, assembly, or testing facilities, we may not be able to reduce our costs as rapidly as companies that operate their own
facilities, and our costs may even increase, which could also reduce our margins. In the past, we have reduced the prices of our RFICs in anticipation of future competitive pricing pressures, new product introductions by us or our competitors, and
other factors. We expect that we will have to continue to do so in the future.
Our financial results are exposed to the cyclicality of
the semiconductor industry, and as a result, we may experience reduced net revenue or operating income during any future semiconductor industry downturn.
The semiconductor industry is highly cyclical and has historically experienced significant fluctuations in demand, resulting in product overcapacity, high inventory levels, and accelerated erosion of
average selling prices. These conditions have sometimes lasted for extended periods of time. Downturns in our target markets have in the past contributed to weak demand for semiconductor products. We experienced slower growth during periods of weak
demand in the past, and our operating results may be adversely impacted by any downturns in the future. Future downturns in the semiconductor industry could adversely impact our net revenue and adversely affect our business, financial condition, and
results of operations.
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We rely substantially on distributors for the sale of our products, and if we fail to retain or find
additional distributors, or if these parties fail to perform as expected, it could reduce our future net revenue.
A
significant portion of our net revenue is derived from a limited number of distributors, in particular, Macnica and Richardson. Our distributor sales to Macnica are primarily flow-through sales to Murata, since the vast majority of the sales of our
products by Macnica are to Murata. For the three months ended September 29, 2012, approximately 78% and 7% of our net revenue was derived from Macnica and Richardson, respectively, and for the nine months ended September 29, 2012, Macnica
and Richardson accounted for 71% and 11% of our net revenue, respectively. We anticipate that we will continue to be dependent upon a limited number of distributors, including a limited number of end customers purchasing from Macnica, for a
significant portion of our net revenue in the foreseeable future. The portion of our net revenue attributable to certain distributors may also fluctuate in the future since we are unable to predict the extent to which these distributors will be
successful in marketing and selling our products. Furthermore, termination of a relationship with a major distributor, either by us or by the distributor, could result in a temporary or permanent loss of net revenue. We may not be successful in
finding suitable alternative distributors on satisfactory terms, or at all, and this could adversely affect our ability to sell in certain geographical locations or to certain end customers. Additionally, if we terminate our relationship with a
major distributor, we may be obligated to repurchase unsold products, which could be difficult or impossible to sell to other end customers. Furthermore, distributors we do business with may face issues obtaining credit, which could impair their
ability to make timely payments to us.
In addition to distribution and sales activities, some of our distributors provide
technical sales support to module manufacturers and OEMs. The activities of our distributors are not within our direct control. Our failure to manage our relationships with these distributors could impair the effectiveness of our sales, marketing,
and support activities. A reduction in the sales efforts, technical capabilities, or financial viability of these parties, a misalignment of interest between us and them, or a termination of our relationship with our distributors could have a
negative effect on our sales, financial results, and ability to support the OEMs and module manufacturers who purchase our products. We generally engage our distributors under short-term contracts, which typically may be terminated by either party
upon 90 days notice. It generally takes approximately three months for a distributor to become educated about our products and capable of providing quality sales and technical support to the module manufacturers and OEMs. Recruiting and
retaining qualified distributors and training them in our technology and product offerings requires significant time and resources. However, it may be difficult to terminate foreign distributors if they are not performing as expected. If our
relationship with one of our other distributors were terminated for any reason, shipments to current and prospective module manufacturers and OEMs could be disrupted or delayed, and we could experience a diversion of substantial time and resources
as we seek to identify, contract with, and train a replacement, all of which could adversely affect our operating results.
Defects and
poor performance in our products could result in loss of module manufacturers and OEMs purchasing our products, decreased net revenue, unexpected expenses, and loss of market share, and we may face warranty and product liability claims arising from
defective products.
Our products are complex and must meet stringent quality requirements. Products as complex as
ours may contain undetected errors or defects, especially when first introduced or when new versions are released. Errors, defects, or poor performance can arise due to design flaws, defects in raw materials or components, or manufacturing
difficulties, which can affect both the quality and the yield of the product. As our products become more complex, we face higher risk of undetected defects, because our testing protocols may not be able to fully test the products under all possible
operating conditions. Any actual or perceived errors, defects, or poor performance in our products could result in the replacement or recall of our products, shipment delays, rejection of our products, damage to our reputation, lost net revenue,
diversion of our engineering personnel from our product development efforts in order to address or remedy any defects, and increases in module manufacturer and OEM customer service and support costs, all of which could have a material adverse effect
on our operations.
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Furthermore, defective, inefficient, or poorly performing products may give rise to warranty
and product liability claims against us that exceed any net revenue or profit we receive from the affected products. We could incur significant costs and liabilities if we are sued and if damages are awarded against us. Our agreements with the
module manufacturers and OEMs who purchase our products through our distributors typically contain provisions designed to limit our exposure to potential product liability claims. However, the limitation of liability provisions contained in these
agreements may still result in a significant financial exposure and may also not be effective as a result of federal, state, local, or foreign laws, or ordinances or unfavorable judicial decisions in the U.S. or other countries. In addition, even if
ultimately unsuccessful, such claims against us could result in costly litigation, divert our managements time and resources, and damage our relationships with the module manufacturers, OEMs, and distributors. Costs or payments we may make in
connection with warranty and product liability claims or product recalls may adversely affect our financial condition and results of operations.
Our international sales and operations subject us to additional risks that can adversely affect our operating results.
The percentage of our net revenue attributable to customers based outside North America was 86% and 73% for the three months ended
September 29, 2012 and September 24, 2011, respectively, and 82% and 65% for the nine months ended September 29, 2012 and September 24, 2011, respectively. We expect that net revenue derived from customers outside North America
will continue to account for a significant portion of our net revenue. Currently, we maintain international sales offices in Europe and Asia, and we rely on a network of third-party sales representatives and distributors to sell our products
internationally. Moreover, we have in the past relied on, and expect to continue to rely on, suppliers, manufacturers, and subcontractors located in countries other than the U.S., including Australia, Japan and South Korea. For example, we have
agreements with LAPIS Semiconductor, MagnaChip Semiconductor, and Silanna Semiconductor concerning the fabrication of certain of our semiconductor products. The LAPIS Semiconductor fabrication facility is located in Miyazaki, Japan, and the
MagnaChip Semiconductor fabrication facility is located in Cheongju, South Korea. We also have an agreement with Silanna Semiconductor concerning the fabrication of certain of our semiconductor products at Silanna Semiconductors fabrication
facility in Sydney, Australia. Accordingly, we are subject to several risks and challenges related to our international sales and operations, any of which could adversely affect our financial results. These risks and challenges include:
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difficulties and costs of staffing and managing international operations across different geographic areas and cultures;
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compliance with a wide variety of domestic and foreign laws and regulations, including anti-bribery laws and laws relating to the import or export of
semiconductor products;
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legal uncertainties regarding taxes, tariffs, quotas, export controls, export licenses, and other trade barriers;
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seasonal reductions in business activities;
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our ability to receive timely payment and collect our accounts receivable;
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political, legal, and economic instability, foreign conflicts, and the impact of regional and global infectious illnesses in the countries in which we
and the module manufacturers, OEMs, distributors, contract manufacturers, suppliers, manufacturers, and subcontractors with whom we do business are located;
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legal uncertainties regarding protection for contractual and intellectual property rights in some countries, which increase the risk of unauthorized
and uncompensated use of our products or technologies;
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fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities we
undertake; and
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fluctuations in freight rates and transportation disruptions.
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Any of these factors could adversely affect both our ability to effectively operate our foreign offices and the ability of our foreign
suppliers to supply us with required materials or services. Any interruption or delay in the supply of our required components, products, materials, or services, or our inability to obtain these components, materials, products, or services from
alternate sources at acceptable prices and within a reasonable amount of time, could impair our ability to meet scheduled product deliveries to module manufacturers, OEMs, distributors, and contract manufacturers and could cause them to cancel
orders.
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Additionally, most of our foreign sales, as well as our purchases of material from
international suppliers, are denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive for international module manufacturers, OEMs, distributors, and contract
manufacturers to purchase, thus rendering the prices of our products less competitive. Conversely, a reduction in the value of the U.S. dollar relative to foreign currencies could increase our supply costs. At the present time, we do not have a
foreign currency hedging policy in place.
Unfavorable economic conditions may adversely affect our net revenue, margins, and
profitability.
Since 2008, the global economy has experienced significant financial turmoil and upheaval
characterized by volatility and declines in prices of securities and commodities, diminished credit availability, declining consumer and business confidence, inability to access capital markets, proliferation of bankruptcies, and rising unemployment
rates. It is not clear how long the uncertain economic conditions will continue, how quickly the economy and employment will recover, and how much adverse impact it will have on the global economy in general and, in particular, on the economies in
North America, Europe, Asia, and other regions where we market and sell our products. Uncertain economic conditions may cause module manufacturers, OEMs, distributors, and contract manufacturers to reduce demand for our products, resulting from
reduced demand of their customers, which would adversely affect our financial condition and results of operations.
Furthermore, consumer products that contain our RFIC products are discretionary purchases for consumers. Consumers are generally more
willing to make discretionary purchases during favorable economic conditions. As a result of unfavorable economic conditions, including higher consumer debt levels and lower availability of consumer credit, consumers purchases of discretionary
items may decline, which could adversely affect our net revenue.
If we lose key personnel or are unable to attract and retain personnel
on a cost-effective basis, our business could be adversely affected.
Our performance is substantially dependent on
the continued services and performance of our senior management and our highly qualified team of engineers, many of whom have numerous years of experience and specialized expertise in our business. Highly skilled RFIC design engineers, in
particular, are in short supply. We expect to continue to hire additional engineering personnel in 2012 as we expand our RFIC design and systemlevel engineering capabilities. If we are not successful in hiring and retaining highly qualified
engineers, we may not be able to extend or maintain our engineering expertise, and our future product development efforts could be adversely affected. Furthermore, the loss of members of our senior management could significantly delay or prevent the
achievement of our strategic objectives, which could adversely affect our operating results.
Our future success also depends
on our ability to identify, attract, hire, train, retain, and motivate highly skilled managerial, operations, sales, marketing, and customer service personnel. We have in the past maintained a rigorous, highly selective, and time-consuming hiring
process. We believe that our approach to hiring has significantly contributed to our success to date. However, our highly-selective hiring process has made it more difficult for us to hire a sufficient number of qualified employees, and, as we grow,
our hiring process may prevent us from hiring the personnel we need in a timely manner. Moreover, the cost of living in the San Diego area, where our corporate headquarters are located, has been an impediment to attracting new employees in the past,
and we expect that this will continue to impair our ability to attract and retain employees in the future. If we fail to attract, integrate, and retain the necessary personnel, our ability to maintain and grow our business could suffer
significantly.
We may not generate positive returns on our research and development investments.
Developing our products is expensive, and our investment in product development may involve a long payback cycle. In the three-month
period ended September 29, 2012 and September 24, 2011, our research and development expenses were $9.4 million, or approximately 15% of our total net revenue, and $6.0 million, or approximately 23% of our total net revenue, respectively.
In the nine-month period ended September 29, 2012 and September 24, 2011, our research and development expenses were $23.5 million, or approximately 17% of our total net revenue, and $16.3 million, or approximately 22% of our total net
revenue, respectively. Our future plans include significant investments in research and development and related product opportunities. In addition, having the majority of research and development in the U.S. creates a cost disadvantage as compared
to our competitors who may obtain significantly lower personnel and other costs by locating their research and development operations outside the U.S.
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We believe that we must continue to dedicate a significant amount of resources to our
research and development efforts to maintain our competitive position. However, our ability to generate positive returns on these investments may take several years, if we are able to do so at all.
If we fail to manage future growth effectively, our product quality, operations, and financial results could be adversely impacted.
We are experiencing a period of significant growth and expansion, which will continue to require the increased
efforts of our management and other resources. We will also need to expand our office and facilities space to accommodate our growth in employees and operations. As of September 29, 2012, we had 394 employees, up from 164 employees as of
December 31, 2005, and we shipped over 230 million RFICs in 2011, up from 14 million RFICs in 2005. This expansion has in the past required and may continue in the future to require substantial managerial and financial resources, and
our efforts in this regard may not be successful. Our current systems, procedures, offices, facilities, and controls may not be adequate to support our future operations. If we fail to adequately manage our growth, or to improve our operational,
financial, and management information systems, or fail to effectively hire, train, motivate, or manage our new and future employees, the quality of our products and the management of our operations could suffer, which could adversely affect our
operating results.
We may encounter difficulties in operating a newly implemented enterprise resource planning, or ERP, system, which
may adversely affect our operations and financial reporting.
We implemented a new ERP system in the third quarter of
fiscal 2010 as part of our ongoing efforts to improve and strengthen our operational and financial processes and our reporting systems. Any difficulties in the operation of our current ERP system could cause significant issues in the management of
our business. We may fail to meet, or incur higher costs to meet, customer demand for our products, or we could be delayed in our ability to meet our financial reporting obligations as a result of ERP system errors, any of which could materially
adversely affect our results of operations.
We may engage in future acquisitions or dispositions that could disrupt our business, cause
dilution to our stockholders, or adversely impact our financial condition and operating results.
In the future we may
acquire companies or assets or dispose of portions of our business in order to enhance our market position or strategic strengths. We are not currently a party to any agreements or commitments and we have no understandings with respect to any such
acquisitions or dispositions. Our ability as an organization to make acquisitions is unproven. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions or dispositions on favorable terms, if at all,
even after devoting substantial resources to them. If we do complete acquisitions or dispositions, we cannot be sure that they will ultimately strengthen our competitive position or that they will not be viewed negatively by customers, financial
markets, or investors. In addition, any acquisitions that we make could lead to difficulties in integrating personnel and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. Acquisitions or
dispositions may disrupt our ongoing operations, divert management from day-to-day responsibilities, increase our expenses, and adversely impact our operating results or financial condition. Future acquisitions may reduce our cash available for
operations and other uses and could result in an increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities, or the incurrence of debt, any of which could adversely effect our
financial condition and operating results.
Global or regional political and social conditions could adversely affect our operating
results.
External factors such as geopolitical and social turmoil, terrorist attacks, and acts of war in those parts
of the world that serve as markets for our products, such as North America, Europe, Asia, or elsewhere, could significantly adversely affect our business and operating results in ways that cannot be predicted. These uncertainties could make it
difficult for the module manufacturers, OEMs, distributors, and contract manufacturers who purchase our products and for us to accurately plan future business activities. The occurrence of any of these events or circumstances could adversely affect
our operating results.
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We conduct substantially all of our design, marketing, and back-end test operations at our corporate
headquarters in San Diego, California, and any fire, earthquakes, or other unanticipated events affecting our corporate headquarters could adversely impact our business, results of operations, or financial condition.
We conduct substantially all of our design, marketing, and back-end test operations at our corporate headquarters in San Diego,
California. Our headquarters are subject to the risk of catastrophic loss due to unanticipated events such as fires or earthquakes. This facility and the equipment that we use there would be difficult to repair or replace and could require
substantial lead time to do so. Any disruption or other unanticipated events affecting our corporate headquarters, and therefore our design, marketing, and back-end test operations, as well as administrative activities, would adversely impact our
business, results of operations, and financial condition.
Our global business operations could be significantly impacted by natural
disasters or global epidemics, or by interruptions resulting from manmade problems such as computer viruses or terrorism.
A number of our facilities and those of our third-party fabrication facilities are located in areas with above average seismic activity. Our primary facility and headquarters are located in San Diego,
California, and we have an office in Tokyo, Japan for marketing and sales. We could suffer significant business disruption due to earthquakes, and the risk of an earthquake in Southern California or the Pacific Rim region is significant due to the
proximity of major earthquake fault lines. We are not currently covered by insurance against business disruption caused by earthquakes. Furthermore, if our third-party fabrication facilities operated by LAPIS Semiconductor in Miyazaki, Japan,
MagnaChip Semiconductor in Cheongju, South Korea, or Silanna Semiconductor in Sydney, Australia were to experience any problems or downtime, including those caused by fire, earthquake, floods, or other natural disasters, we would be unable to meet
our production targets and our business would be adversely affected. For example, although the LAPIS Semiconductor manufacturing facility was not directly impacted by the massive earthquake and tsunami that hit northeastern Japan on March 11,
2011, LAPIS Semiconductor or our other suppliers or customers located in Japan could have experienced serious production delays in the aftermath of the disaster resulting from supply disruptions, transportation difficulties in Japan, rationing of
electricity, or other reasons. In addition, if any piece of equipment were to break down or experience down-time, it could cause our production lines to go down. There is no assurance that we would be able to secure replacement wafer production
capacity on a timely basis or at all, or that if available, it could be obtained on favorable terms. In addition, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer
systems. In addition, acts of terrorism could cause disruptions in our business or the respective businesses of the module manufacturers, OEMs, distributors, and contract manufacturers, who purchase or sell our products, or the economy as a whole.
To the extent that such disruptions result in delays or cancellations of orders by the module manufacturers, OEMs, distributors, or contract manufacturers or delays the deployment of our products, our business, results of operations, and financial
condition could be adversely affected.
The occurrence of any of the foregoing or other natural or man-made disasters could
cause damage or disruption to us, our employees, operations, distribution channels, markets, and customers, which could result in significant delays in deliveries or substantial shortages of our products and adversely affect our business, results of
operations, financial condition, or prospects.
Our insurance may not cover all losses, including losses resulting from business
disruption or product liability claims.
We have limited product liability, general liability, or other business
insurance coverage for our operations. In addition, we do not have any business insurance coverage for our operations to cover losses that may be caused by some natural disasters. Any occurrence of uncovered loss could harm our results of operations
and financial condition.
Potential changes in our effective tax rate could harm our future operating results.
We are subject to income taxes in the U.S. and various foreign jurisdictions, and our domestic and international tax liabilities are
subject to the allocation of expenses in differing jurisdictions. Our tax rate is affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, research tax credits, certain non-deductible expenses including
those arising from the requirement to expense stock options, and the valuation of deferred tax assets and liabilities, including our ability to utilize our net operating loss, or NOL, carryforwards. Increases in our effective tax rate could
adversely impact our results of operations.
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Risks Related to Intellectual Property
We are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming, and, if resolved adversely, could have
a significant impact on our business, financial condition, or results of operations.
The semiconductor industry is
characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights. We are presently involved in two related patent infringement matters that we commenced, and we expect the number of patent and
other intellectual property matters, including claims that may be asserted against us, to increase.
On February 14,
2012, we filed a complaint with the ITC and a lawsuit in the U.S. District Court for the Central District of California, which on April 13, 2012 we moved to the U.S. District Court for the Southern District of California. Each of these actions
allege the infringement of five of our patents relating to RFICs and switching technology by RFMD and Motorola Mobility. On May 11, 2012, we also amended the ITC complaint and filed an additional lawsuit in the U.S. District Court for the
Southern District of California to add HTC to the previous actions. The complaints filed with the ITC claim that certain of RFMDs products and certain of Motorola Mobilitys and HTCs smartphones infringe our patents relating to SOI
design technology for RFICs and seeks, among other remedies, an exclusion order preventing the importation and sale of infringing products in the U.S. Separately, the suits we filed in the U.S. District Court allege infringement of the same patents
and seeks, in addition to damages, to permanently enjoin RFMD, Motorola Mobility, and HTC from further infringement. On April 16, 2012, RFMD filed a lawsuit against us in the U.S. District Court for the Middle District of North Carolina,
seeking a declaratory judgment that RFMD does not infringe the patents we have asserted in our actions against them or that these patents are invalid. The lawsuit filed by RFMD has been stayed pending the outcome of the ITC complaint. On
September 11, 2012, we filed a motion with the ITC to withdraw our complaints with the ITC in order to pursue relief in the U.S. District Court.
Prosecuting and defending intellectual property claims is costly and can impose a significant burden on management and employees, we may receive unfavorable preliminary or interim rulings in the course of
litigation, and there can be no assurance that favorable final outcomes will be obtained in all cases, if any. We may decide to settle any such lawsuits and disputes on terms that are unfavorable to us. Similarly, if any litigation to which we are a
party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed on appeal. The terms of such a settlement or judgment may require us to license our technology to third parties, cease some or all of our operations
or pay substantial amounts to a counterparty to such litigation. Furthermore, in an infringement proceeding, a court may decide that a patent of ours is invalid and unenforceable, or may refuse to stop the other party from using the technology at
issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation could put one or more of our patents at risk of being invalidated or interpreted narrowly. Our business, financial condition, or
results of operations could be adversely affected as a result.
Claims by others that we infringe their proprietary technology could
adversely affect our business.
In recent years there has been significant litigation involving intellectual property
rights in many technology-based industries, including the semiconductor industry. Although we have not in the past been subject to claims that any of our products infringe any patents or other proprietary rights of third parties, we could be subject
to such claims in the future. There can be no assurance that claims that may arise in the future can be amicably resolved, and it is possible that litigation could ensue. We do not know whether we would prevail in these proceedings given the complex
technical issues and inherent uncertainties in intellectual property litigation.
Claims that our products, processes, or
technology infringe third-party intellectual property rights, regardless of their merit or resolution, could be costly to defend or settle and could divert the efforts and attention of our management and technical personnel. If any pending or future
proceedings result in an adverse outcome, we could be required to:
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cease the manufacture, use, or sale of the infringing products, processes, or technology;
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pay substantial damages for infringement;
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expend significant resources to develop non-infringing products, processes, or technology;
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license technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms, or at all;
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cross-license our technology to a competitor to resolve an infringement claim, which could weaken our ability to compete with that competitor; or
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pay substantial damages to module manufacturers, OEMs, distributors, contract manufacturers, or end users to discontinue their use of or to replace
infringing technology sold to them with non-infringing technology.
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Any of the foregoing results could have
a material adverse effect on our business, financial condition, and results of operations.
We could be required to incur significant
costs to defend our intellectual property, which could have a negative impact on our business, financial condition, and results of operations.
We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary information, technologies and
processes, including our patent portfolio. Policing unauthorized use of our products, technologies and proprietary information is difficult and time consuming. We cannot be certain that the steps we have taken, or may take in the future, will
prevent the misappropriation or unauthorized use of our proprietary information and technologies, particularly in foreign countries where the laws may not protect our proprietary intellectual property rights as fully as U.S. laws. We cannot be
certain that the laws and policies of any country, including the United States, or the practices of any of the standard bodies, foreign or domestic, with respect to intellectual property enforcement or licensing or the adoption of standards, will
not be changed in a way detrimental to the sale or use of our products or technology.
A substantial portion of our patents
and patent applications relate to our UltraCMOS technology. We may need to litigate in the United States or elsewhere in the world to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of
proprietary rights of others. As a result of any such litigation, we could lose our ability to enforce one or more patents or incur substantial unexpected operating costs. Any action we take to enforce our intellectual property rights could be
costly and could absorb significant management time and attention, which, in turn, could negatively impact our operating results.
In addition, we license to certain of our foundry partners non-exclusive rights to manufacture and sell products using our technology in a particular field. In any potential dispute involving our patents
or other intellectual property, our licensees could also become the target of litigation. We are bound to indemnify certain licensees under the terms of certain license agreements, and we may agree to indemnify others in the future. Our
indemnification obligations could result in substantial expenses to us.
If we are unable to protect our intellectual property rights,
our competitive position could be adversely impacted, or we could be required to incur significant expenses to enforce our rights.
We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, and trademark laws and confidentiality agreements with employees and third parties, all of which offer only
limited protection. We had more than 130 U.S. and international patents issued or pending as of September 29, 2012 and have emphasized patents as a source of significant competitive advantage. Despite our efforts, the steps we have taken to
protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain,
particularly in certain foreign countries in which the laws may not protect our intellectual property rights to the same extent as they do in the U.S. We have not conducted an exhaustive search of existing patent rights; however, we are not aware of
any patent rights or other intellectual property held by others that could impact our ability to operate. With respect to patent rights, we do not know whether any of our pending patent applications will result in the issuance of patents or whether
the examination process will require us to narrow our claims, and even if patents are issued, they may be contested, circumvented, or invalidated. Moreover, the rights granted under any issued patents may not provide us with proprietary protection
or competitive advantages, and, as with any technology, competitors may be able to develop similar or superior technologies to our own now or in the future. Protecting against the unauthorized use of our products, trademarks, and other proprietary
rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary
rights of others. Such litigation could result in substantial costs and diversion of management resources. Many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual
property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
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Risks Related to Government Regulation
Our failure to comply with U.S. laws and regulations relating to the export and import of goods, technology, and software could subject us to penalties and other sanctions and restrict our ability
to sell and develop our products.
We are obligated by law to comply with all U.S. laws and regulations governing the
export and import of goods, technology, and services, including ITAR, EAR, regulations administered by the Department of Treasurys Office of Foreign Assets Control, and regulations administered by the Bureau of Alcohol Tobacco Firearms and
Explosives governing the importation of items on the U.S. Munitions Import List. Pursuant to these regulations, we are responsible for determining the proper licensing jurisdiction and export classification of our products, and obtaining all
necessary licenses or other approvals, if required, for exports and imports of hardware, technical data, and software, or for the provision of technical assistance or other defense services to or on behalf of foreign persons. We are also required to
obtain export licenses, if required, before employing or otherwise utilizing foreign persons in the performance of our contracts if the foreign person will have access to export-controlled technical data or software. The violation of any of the
applicable laws and regulations could subject us to administrative, civil, and criminal penalties.
These regulations could
restrict our ability to sell existing products and develop new product lines. For example, as a result of ITAR requirements, we are unable to supply certain products to China satellite companies or end users, which comprise a significant part of the
overall satellite market. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our
products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or
scope of existing regulations, or change in the countries, persons, or technologies targeted by such regulations, could result in decreased use of our products by, or our ability to export or sell our products to, existing or potential customers
with international operations and decreased revenue. Additionally, failure to comply with these laws could result in sanctions by the U.S. government, including substantial monetary penalties, denial of export privileges, and debarment from
government contracts.
Additionally, in September 2008, we received a Commodity Jurisdiction ruling from the U.S. Department
of State that determined certain of our products sold in the aerospace and defense markets are subject to the ITAR rather than the EAR. Given this ruling, a number of past product shipments that we believed were subject to the EAR were exported
without the required ITAR license. We also transferred ITAR technical data to one foreign person employee with the belief such data was subject to the EAR rather than the ITAR. We have taken steps to mitigate the impact of these violations. In
December 2008, we submitted a voluntary disclosure to the U.S. Department of State to report the unlicensed exports. The U.S. Department of State encourages voluntary disclosures and generally affords parties mitigating credit under such
circumstances. In addition, to reduce the likelihood of violations in the future, we have strengthened our export-related controls and procedures. For example, we implemented export classification training for employees and annual export compliance
audits. As of the date of this prospectus, we have not received a response from the U.S. Department of State. Despite the steps we have taken, we could be subject to continued investigation and potential regulatory consequences related to these
violations ranging from a no-action letter, government oversight of facilities and export transactions, monetary penalties, and in extreme cases, debarment from government contracting, denial of export privileges and criminal penalties.
If we fail to comply with government contracting regulations, we could suffer a loss of net revenue or incur price adjustments or other penalties.
Some of our net revenue is derived from contracts with agencies of the U.S. government and subcontracts with its
prime contractors as well as contracts and grants with other governments. As a U.S. government contractor or subcontractor, we are subject to federal contracting regulations, including the Federal Acquisition Regulations, which govern the
allowability of costs incurred by us in the performance of U.S. government contracts. We must comply with these regulations in order to bid successfully for government contracts.
Additionally, the U.S. government is entitled after final payment on certain negotiated contracts to examine all of our cost records with
respect to such contracts and to seek a downward adjustment to the price of the contract if it determines that we failed to furnish complete, accurate, and current cost or pricing data in connection with the negotiation of the price of the contract.
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In connection with our U.S. and other government business, we are also subject to government
review and approval of our policies, procedures, and internal controls for compliance with procurement regulations and applicable laws. In certain circumstances in which a contractor has not complied with the terms of a contract or with regulations
or statutes, the contractor might be debarred or suspended from obtaining future contracts for a specified period of time, or could be subject to downward contract price adjustments, refund obligations or civil and criminal penalties. Any such
suspension or debarment or other sanction could have an adverse effect on our operating results.
Our U.S. and other
government contracts and subcontracts typically can be terminated by the government for its convenience. If a U.S. government contract is terminated for the convenience of the government, we may not be entitled to recover more than our costs
incurred or committed, settlement expenses, and profit on work completed prior to termination.
Under some of our government
subcontracts, we are required to maintain secure facilities and to obtain security clearances for personnel involved in performance of the contract, in compliance with applicable federal standards. If we were unable to comply with these
requirements, or if personnel critical to our performance of these contracts were to lose their security clearances, we might be unable to perform these contracts or compete for other projects of this nature, which could adversely affect our net
revenue.
If we fail to comply with environmental regulations we could be subject to substantial fines or be required to suspend
production, alter manufacturing processes, or cease operations.
We and our foundry partners are subject to a variety
of international, federal, state, and local governmental regulations relating to the storage, discharge, handling, generation, disposal, and labeling of toxic or other hazardous substances used to manufacture our products. If we and our foundry
partners fail to comply with these regulations, substantial fines could be imposed on us, and we could be required to suspend production, alter manufacturing processes, or cease operations, any of which could have a negative effect on our sales,
income, and business operations. Failure to comply with environmental regulations could subject us to civil or criminal sanctions and property damage or personal injury claims. Furthermore, environmental laws and regulations could become more
stringent over time, imposing even greater compliance costs and increasing risks and penalties associated with violations, which could seriously harm our financial condition and results of operations.
If we fail to comply with anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, or FCPA, we could be subject to civil and/or
criminal penalties.
As a result of our international operations we are subject to anti-bribery laws, including the
FCPA, which prohibits companies from making improper payments to foreign officials for the purpose of obtaining or keeping business. If we fail to comply with these laws, the U.S. Department of Justice, the Securities and Exchange Commission, or
SEC, or other U.S. or foreign governmental authorities could seek civil and/or criminal sanctions, including monetary fines and penalties against us or our employees, as well as additional changes to our business practices and compliance programs,
which could have a material adverse effect on our business, results of operations, or financial condition.
Risks Relating to Securities
Markets and Investment in Our Stock
The market price of our common stock may be volatile, which could result in substantial losses
for investors.
Fluctuations in market price and volume are particularly common among securities of technology
companies. The market price of our common stock may fluctuate significantly in response to the following factors, among others, some of which are beyond our control:
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general market conditions;
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domestic and international economic factors unrelated to our performance;
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actual or anticipated fluctuations in our quarterly operating results;
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changes in or failure to meet publicly disclosed expectations as to our future financial performance;
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changes in securities analysts estimates of our financial performance or lack of research and reports by industry analysts;
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changes in market valuations or earnings of similar companies;
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announcements by us or our competitors of significant products, contracts, acquisitions, or strategic partnerships;
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developments or disputes concerning patents or proprietary rights, including increases or decreases in litigation expenses associated with intellectual
property lawsuits we may initiate, or in which we may be named as defendants;
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failure to complete significant sales;
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any future sales of our common stock or other securities; and
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additions or departures of key personnel.
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Future sales of shares by existing stockholders could cause our stock price to decline.
Sales of substantial amounts of our common stock in the public market following our initial public offering, or the perception that these sales could occur, could cause the market price of our common
stock to decline.
Substantially all of the holders of our equity securities have entered into lock-up agreements that
restrict them from selling their shares for a period of at least 180 days from August 7, 2012, although the representatives of the underwriters may, in their sole discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. After the lock-up agreements pertaining to our initial public offering expire and based on shares outstanding as of September 29, 2012, an additional 26,488,732 shares will be eligible for sale in the
public market. In addition, shares underlying options that are either subject to the terms of our stockbased compensation plans or reserved for future issuance under our stock-based compensation plans will become eligible for sale in the public
market to the extent permitted by the provisions of various option agreements, the lock-up agreements, and Rules 144 and 701 under the Securities Act. As resale restrictions end, the market price of our common stock could decline if the holders of
those shares sell them or are perceived by the market as intending to sell them.
Holders of approximately 23,266,496 shares,
or 76%, of our common stock following our initial public offering have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we
may file for ourselves or other stockholders. We also haveregistered the offer and sale of 11,628,842 shares of common stock that we may issue under our stockbased compensation plans.
In addition, in the future, we may issue additional shares of common stock or other equity or debt securities convertible into common
stock in connection with a financing, acquisition, litigation settlement, employee arrangement, or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and could cause the trading price of our common stock
to decline.
If securities or industry analysts do not publish research or publish misleading or unfavorable research about our
business, our stock price and trading volume could decline.
The trading market for our common stock will depend in
part on the research and reports that securities or industry analysts publish about us or our business. A small number of securities analysts commenced coverage of us after the closing of our IPO. If one or more of the analysts who covers us
downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for
our stock could decrease, which could cause our stock price or trading volume to decline.
Insiders have substantial control over us
which could limit your ability to influence corporate matters.
As of September 29, 2012, our directors and
executive officers and their affiliates beneficially owned, in the aggregate, approximately 30% of our outstanding common stock. As a result, these stockholders, if acting together, are able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to
influence corporate matters and may have the effect of delaying or preventing a third-party from acquiring control over us.
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Our actual operating results may differ significantly from our guidance and investor expectations,
causing our stock price to decline.
From time to time, we may release guidance in our earnings releases, earnings
conference calls or otherwise, regarding our future performance that represent our managements estimates as of the date of release. If given, this guidance, which will include forward-looking statements, will be based on projections prepared
by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of
which are beyond our control. The principal reason that we expect to release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. With or without our guidance, analysts and other investors
may publish expectations regarding our business, financial performance and results of operations. We do not accept any responsibility for any projections or reports published by any such third persons.
Guidance is necessarily speculative in nature and it can be expected that some or all of the assumptions of the guidance furnished by us
will not materialize or will vary significantly from actual results. If our actual performance does not meet or exceed our guidance or investor expectations, the trading price of our common stock is likely to decline.
We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which
could adversely affect our operating results.
As a public company we will incur significant legal, accounting, and
other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with corporate governance requirements, including requirements
under the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC or Nasdaq. In addition, our management team will also have to adapt to the requirements of being a public company. The expenses incurred by public companies generally
for reporting and corporate governance purposes have been increasing. We expect compliance with these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we
are unable to currently estimate these costs with any degree of certainty. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to
accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage than used to be available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our
board of directors or as our executive officers.
However, for as long as we remain an emerging growth company as
defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth
companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our
periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take
advantage of these reporting exemptions until we are no longer an emerging growth company.
Under the JOBS Act,
emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourself of this exemption from new or revised
accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We will remain an emerging growth company for up to
five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a large accelerated filer as defined in Rule 12b-2 under the Exchange Act,
which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1
billion in non-convertible debt during the preceding three year period.
After we are no longer an emerging growth
company, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, when applicable to us. In that regard, we
currently do not have an internal audit function, and we will need to hire additional accounting and financial staff with appropriate public company
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experience and technical accounting knowledge. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs. We
also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees, or as executive officers.
We will be required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, and any
adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to furnish a report by our management on our internal control over financial reporting at the later of the year
following our first annual report required to be filed with the SEC, or the date we are no longer an emerging growth company as defined in the JOBS Act. We will remain an emerging growth company for up to five years, or until
the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a large accelerated filer as defined in Rule 12b-2 under the Exchange Act, which would occur if
the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in
non-convertible debt during the preceding three year period. When required, such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year,
including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. If
we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price. Furthermore,
as a result of the extended time period afforded us as an emerging growth company, the effectiveness of our internal control over financial reporting may not be as transparent to our investors as they may otherwise expect of a public
reporting company, which could further impact investor confidence in the accuracy and completeness of our financial reports.
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over
financial reporting until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm
may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth
companies will make our common stock less attractive to investors.
We are an emerging growth company, as
defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not
being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from
the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we
will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
If we need additional capital in the future, it may not be available on favorable terms, or at all.
We have financed our operations primarily through the sale of convertible preferred stock, equipment term notes and leases, a credit
facility, and in fiscal 2010, by cash generated from operations. However, we may require additional capital from equity or debt financing in the future to fund our operations, respond to competitive pressures, or strategic opportunities. Our
continued growth is dependent upon increasing revenues and managing working capital to a level that is adequate to support our increased cost structure or obtaining adequate debt financing to fulfill our obligations as they become due. If we are
unable to successfully manage our working capital and require additional financing, we may not be able to secure timely additional financing on favorable terms, or at all. The terms of additional financing may place limits on our financial and
operating flexibility. If we raise additional funds through further issuances of equity, convertible debt securities, or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage
ownership of
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our company, and any new securities we issue could have rights, preferences, and privileges senior to those of holders of our common stock. In addition, the terms of any new debt financing may
include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to incur interest expense. If we are unable to obtain adequate financing or financing on terms satisfactory to
us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.
We could be the subject of securities class action litigation due to future stock price volatility, which could divert managements attention and adversely affect our results of operations.
The stock market in general, and market prices for the securities of technology companies like ours in particular,
have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. A certain degree of stock price volatility can be attributed to being a newly public company. These broad market
and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. In several recent situations where the market price of a stock has been volatile, holders of that stock have instituted
securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our
management and harm our operating results.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay,
or prevent a change in control of our company and may affect the trading price of our common stock.
We are a Delaware
corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three
years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws may
discourage, delay, or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws, which are in effect as of August 13,
2012:
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authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt;
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establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from
the time of election and qualification until the third annual meeting following their election;
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require that directors only be removed from office for cause;
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provide that vacancies on the board of directors, including newly-created directorships, may be filled only by a majority vote of directors then in
office;
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limit who may call special meetings of stockholders;
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prohibit stockholder action by written consent, thereby requiring all actions to be taken at a meeting of the stockholders; and
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require supermajority stockholder voting to effect certain amendments to our amended and restated certificate of incorporation and amended and restated
bylaws.
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Further significant changes in our stockholder composition may jeopardize our ability to use some or all of
our NOL and research tax credit carryforwards.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, or the
Code, annual use of our NOL and research tax credit carryforwards to offset future taxable income and tax, respectively, may be limited in the event of an ownership change as defined under Section 382 of the Code, which results from a
cumulative change in ownership of 50% of certain stockholders occurring within a three-year period.
We completed a study to
assess whether an ownership change has occurred since our formation through August 7, 2012, the date of our initial public offering. There were no significant transactions that would be expected to effect ownership changes from August 7,
2012 through our quarter ended September 29, 2012. Based on this study, we concluded that we incurred ownership changes on September 29, 2000, August 2, 2002, and October 20, 2004.
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As a result of these changes, we expect the following tax attributes to expire unused:
approximately $52.2 million in federal NOL carryforwards, approximately $17.5 million of state NOL carryforwards and approximately $3.0 million of federal research tax credit carryforwards. These tax attributes have been excluded from the U.S.
federal and state NOL carryforwards and federal and state research tax credit carryforwards. We have $156.6 million in federal NOL carryforwards available as of December 31, 2011, of which $136.0 million in losses were available for immediate
use and $1.6 million will be available each year from 2012 through 2024.
Our state NOL carryforwards consist of $73.4 million
for California and $32.3 million for various other states. Of our $73.4 million in California state NOL carryforwards available as of December 31, 2011, $62.3 million in losses were available for immediate use and $1.6 million will be available
each year from 2012 through 2018. The availability and timing of utilization of the losses are subject to tax law changes that have occurred or may occur. All of our $32.3 million in non-California state NOL carryforwards were available for
immediate use as of December 31, 2011, subject to any temporary deferrals due to state tax law changes.
Our initial
public offering may have resulted in another ownership change as defined under Section 382 of the Code. In addition, future sales of our shares by, or changes in ownership of our existing significant stockholders could cause us to undergo an
ownership change as defined under Section 382 of the Code in the future. Consequently, whether we undergo an ownership change which results in a limitation on our ability to utilize our NOL and tax credit carryforwards may be a matter beyond
our control.
If our income tax provisions taken in the U.S. and foreign countries are not sustained under examination by tax
authorities in these jurisdictions, our results of operations could be adversely affected.
We are subject to income
taxes in the U.S. and foreign countries, and are subject to routine corporate income tax audits in many of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities could challenge certain positions,
which may not be fully sustained. However, our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges.
Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgment and estimates. We believe that our provision for uncertain
tax positions, including related interest and penalties, is adequate based on information currently available to us. The amount ultimately paid upon resolution of audits could be materially different from the amounts previously included in income
tax expense and therefore could have a material impact on our tax provision, net income and cash flows. Our overall provision requirement could change due to the issuance of new regulations or new case law, negotiations with tax authorities,
resolution with respect to individual audit issues, or the entire audit, or the expiration of statutes of limitations.
We have never
declared or paid dividends on our capital stock and we do not intend to do so for the foreseeable future.
We have
never declared or paid dividends on our capital stock and we do not intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our loan facility with Silicon
Valley Bank restrict our ability to pay dividends. Therefore, investors in shares of our common stock will depend upon any future appreciation in our common stocks value. There is no guarantee that shares of our common stock will appreciate in
value or even maintain the price at which our stockholders have purchased their shares.
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