Attached files

file filename
EX-10.7 - INTEL SIDE LETTER - APACHE DESIGN SOLUTIONS INCdex107.htm
EX-10.6 - AMENDMENT NO. 1 TO PURCHASE AGREEMENT - APACHE DESIGN SOLUTIONS INCdex106.htm
EX-10.5 - PURCHASE AGREEMENT - APACHE DESIGN SOLUTIONS INCdex105.htm
EX-23.1 - CONSENT OF KPMG LLP - APACHE DESIGN SOLUTIONS INCdex231.htm
EX-10.8 - DEVELOPMENT, MARKETING & LICENSE AGREEMENT - APACHE DESIGN SOLUTIONS INCdex108.htm
Table of Contents

As filed with the Securities and Exchange Commission on May 27, 2011

Registration Number 333-172804

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 3

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

APACHE DESIGN SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7372   94-3385111
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

 

2645 Zanker Road

San Jose, California 95134

(408) 457-2000

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

 

 

Andrew T. Yang, Ph.D.

Chief Executive Officer

Apache Design Solutions, Inc.

2645 Zanker Road

San Jose, California 95134

(408) 457-2000

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

 

 

With copies to:

 

Warren T. Lazarow, Esq.

Brian E. Covotta, Esq.

Scott A. Graziano, Esq.

O’Melveny & Myers LLP

2765 Sand Hill Road

Menlo Park, California 94025

Telephone: (650) 473-2600

Fax: (650) 473-2601

 

Robert P. Latta, Esq.

Robert G. Day, Esq.

Rezwan D. Pavri, Esq.

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

Telephone: (650) 493-9300

Fax: (650) 493-6811

 

 

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

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

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

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

 

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

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, Dated May 27, 2011

Apache Design Solutions, Inc.

LOGO

             Shares

Common Stock

This is the initial public offering of Apache Design Solutions, Inc. We are offering                    shares of our common stock. Selling stockholders are offering an additional                  shares of our common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. We anticipate that the initial public offering price will be between $         and $         per share. We have applied to list our common stock on the Nasdaq Global Market under the symbol “APAD.”

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 11.

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

 

     Per Share        Total  

Public offering price

   $                      $                

Underwriting discounts and commissions

   $           $     

Proceeds, before expenses, to Apache Design Solutions, Inc.

   $           $     

Proceeds, before expenses, to the selling stockholders

   $           $     

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

Deutsche Bank Securities

Needham & Company, LLC

 

Canaccord Genuity   ThinkEquity LLC   D.A. Davidson & Co.

The date of this prospectus is                     , 2011.


Table of Contents

LOGO

 

Advancing Low-Power Innovation

Software solutions enabling power-efficient,

high-performance, noise-immune electronic designs


Table of Contents

PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors” and our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Unless otherwise noted or indicated by the context, the term “Apache” refers to Apache Design Solutions, Inc., and “we,” “us,” and “our” refer to Apache and its consolidated subsidiaries.

Our Company

Overview

We are a leading provider of innovative power analysis and optimization software solutions that enable the design of power-efficient, high-performance, noise-immune integrated circuits, or ICs, and electronic systems. Our solutions consist of a suite of software tools and methodologies that enable design engineers to reduce power consumption, ensure reliable delivery of power to ICs and electronic system components, and mitigate power-induced signal interference, or noise. We believe our solutions are critical to the design of our customers’ products and allow our customers to deliver power-efficient ICs and electronic systems that are resistant to the impact of noise, or noise-immune, at lower costs and with a faster time to market than with alternative solutions.

Our singular focus on power analysis and optimization enables us to address growing market demand for more power-efficient and noise-immune ICs and electronic systems. This demand is being driven primarily by the proliferation of high-performance mobile devices, miniaturization and wireless connectivity of these devices, and the rising costs of electricity for data centers.

Our solutions address the challenges posed by increasing design complexity, smaller geometries for ICs, and the integration of various components of an electronic system onto a single IC. The accuracy, efficiency, capacity, and comprehensiveness of our solutions provide design engineers with the confidence in their analyses to progress a design to the next phase in the process, which is known as sign-off. Highly accurate and reliable sign-off solutions are critical to engineers due to the costly and highly visible consequences of design flaws that can lead to product failures and recalls. We believe that our RedHawk platform is the sign-off solution of choice for the analysis of reliable delivery of power to ICs.

We generate substantially all of our revenue through the sale of time-based software licenses. Our customers include all of the top 20 semiconductor companies as measured by revenue in 2010 according to iSuppli, as well as leading electronic system companies serving a broad range of end markets. These customers include, among others, ARM Limited, Broadcom Corporation, Intel Corporation, Hynix Semiconductor Inc., LSI Corporation, MediaTek Inc., QUALCOMM Incorporated, Samsung Electronics Co., Ltd., Sony Corporation, STMicroelectronics N.V., Texas Instruments Incorporated, and Toshiba Corporation. All of our top 20 customers in each of 2008, 2009, and 2010 remain our customers today.

Our revenue was $25.7 million, $34.6 million, and $44.0 million in 2008, 2009, and 2010, respectively. In the same periods, we had net income of $3.2 million, $3.3 million, and $3.3 million, respectively, and non-GAAP net income of $4.7 million, $5.0 million, and $5.4 million,

 

 

1


Table of Contents

respectively. Our revenue was $10.4 million and $12.2 million for the three months ended March 31, 2010 and 2011, respectively. In the same periods, we had net income of $1.0 million and $1.3 million, respectively, and non-GAAP net income of $1.5 million and $1.8 million, respectively. For a discussion of non-GAAP net income and a reconciliation of GAAP net income to non-GAAP net income, see note 1 to “Summary Consolidated Financial and Other Data.” For a discussion of factors that impacted our profitability, see “Risk Factors—We may be unable to sustain our recent revenue growth or increase our operating income or net income, which could have a negative impact on our stock price.”

Our Industry

Several factors are driving the growing demand for more power-efficient and noise-immune ICs and electronic systems, including:

 

   

the proliferation of high-performance mobile and other electronic devices with increased functionality, which is requiring manufacturers to develop more power-efficient electronic components to extend battery life;

 

   

the trend towards smaller electronic systems, which constrains the size of batteries and cooling systems, requiring engineers to design ICs that consume less power while satisfying higher performance requirements;

 

   

the explosion in system-to-system wireless communication that is amplifying the amount of noise within and between ICs, causing systems to sometimes malfunction or fail; and

 

   

rising power consumption and electricity costs for information technology, or IT, infrastructure, such as data centers, compelling operators to seek more power-efficient products that consume less energy.

Meeting this growing demand for more power-efficient and noise-immune ICs and electronic systems poses significant challenges for design engineers. These engineers must create designs that meet increasingly stringent power specification limits, or power budgets, while reliably and consistently delivering power to all components of ICs and electronic systems. They must also create designs that mitigate adverse effects caused by power-induced noise to prevent failures or performance degradation.

To solve these challenges, design engineers use a collection of third-party products and internally developed tools. However, many of these tools only address power analysis for specific phases of the design flow, and lack the ability to share data between the various teams working on separate design phases. Further, many of these tools also lack the capability to efficiently simulate the interaction of an IC with its entire electronic system, which adversely affects the quality and accuracy of the analysis.

Our Solutions

We offer a suite of software tools and methodologies that provide innovative power analysis and optimization capabilities throughout various phases of the design process, from initial prototyping to full electronic system design completion. We have introduced several products that have been first to market in various aspects of power and noise analysis. We believe our solutions deliver the following benefits:

Accuracy

Our solutions analyze design models and provide results that are closely correlated to power and noise measurements of the manufactured ICs and electronic systems. We believe

 

 

2


Table of Contents

our solutions deliver predictable, consistent, and reliable analysis results that help our customers reduce costs and meet increasingly stringent power budget requirements.

Capacity

Our solutions can simultaneously analyze an entire IC and electronic system design to model the interactions inside an IC and between the various ICs in an electronic system. Our approach contrasts with the “divide-and-conquer” approach of other solutions, whereby a design is partitioned into sub-blocks and these sub-blocks are analyzed separately, which can result in overlooked design errors.

Efficiency

Our solutions deliver rapid analyses and increase engineering team productivity. We believe our solutions are able to complete analyses significantly faster than many alternative power analysis tools, if these alternative tools are able to complete the analyses at all.

Comprehensiveness

Our solutions enable power analyses at various phases of the design of ICs and electronic systems and allow the sharing of data across design process phases. As a result, our solutions reduce the likelihood of costly design errors and development delays that can be caused by the use of incompatible analysis tools and methodologies by engineering teams working on different components of an electronic system.

Our Strengths

Our core competitive strengths include:

Exclusive focus on power

We focus exclusively on providing solutions that enable high-performance, power-efficient, and noise-immune IC and electronic system designs. This focus has enabled us to develop what we believe are the most advanced, effective power analysis solutions available on the market.

Diverse and growing blue chip customer base

Our customers include all of the top 20 semiconductor companies as measured by revenue in 2010 according to iSuppli, as well as leading electronic system companies serving market segments such as mobile devices, high-performance computing and networking, consumer electronics, and automotive and medical electronics. All of our top 20 customers in each of 2008, 2009, and 2010 remain our customers today. From January 1, 2008 to March 31, 2011, we grew our customer base by over 122%, from 53 customers at the beginning of 2008 to 118 customers as of March 31, 2011.

Critical solution for power sign-off

We believe that our flagship product, RedHawk, is the sign-off solution of choice for the analysis of reliable delivery of power to ICs. Sign-off solutions often enjoy significant competitive advantages, such as product longevity, structural barriers to entry, and substantial market share.

Comprehensive power analysis solutions

We provide engineers with a unified environment to address the challenges associated with power efficiency and noise immunity throughout various phases of the IC and electronic system design process. Additionally, by generating compact, user-friendly models, our solutions

 

 

3


Table of Contents

facilitate effective coordination among the multiple engineering teams that work on the design of ICs and complex electronic systems.

Power-focused global customer support team

Our customer support team consists of application engineers who typically have significant and relevant industry experience and are exclusively focused on helping our customers with their power-efficiency and noise-immunity design challenges.

Our Strategy

Our goal is to enhance our leadership position as a provider of software tools and methodologies that enable power-efficient, noise-immune IC and electronic system designs. Key components of our strategy include:

Extend our core technology leadership

We have established ourselves as a market and technology leader for power analysis in the design of ICs and electronic systems. We believe that our RedHawk product is the sign-off tool of choice for the analysis of reliable delivery of power to ICs. We plan to continue to invest in research and development to maintain and extend our technology leadership position.

Increase deployment of our products to existing customers

As the demand for lower power and higher performance electronic systems continues to rise, and as our customers continue to increase their focus on delivering power-efficient solutions, we plan to increase the number of licenses and products we sell to our existing customer base.

Broaden our customer base

We plan to continue to increase our market share among leading IC and electronic system companies. Our ability to acquire new customers is an important element of our growth strategy, and our sales organization expends a considerable portion of its efforts on expanding our customer base. We intend to leverage our brand, technology leadership, and customer support to add new customers.

Leverage existing partnerships with market leaders to penetrate their customers

We plan to leverage our relationships with leading semiconductor customers to expand our sales to their end customers and thus improve their ability to collaborate with their end customers to deliver more power-efficient and noise-immune ICs and electronic systems.

Expand our addressable market with new products and enter new markets

We plan to develop new products that target adjacent and related markets in which we can leverage our strong brand and our core underlying technologies in power analysis to deliver an even broader suite of software tools and methodologies. We may also extend our product offering through selective strategic acquisitions.

Risks Associated with Our Business

Our business, financial condition, results of operations, and prospects are subject to numerous risks. These risks include, among others, that:

 

   

we rely on a small number of customers for a significant portion of our revenue;

 

   

we depend on the continued financial strength of our customers;

 

 

4


Table of Contents
   

we could lose customers to ongoing industry consolidation;

 

   

we rely on a small number of products for substantially all of our revenue;

 

   

our addressable market is limited because we rely exclusively on solutions addressing power-efficient and noise-immune design analysis and optimization;

 

   

we may fail to develop, commercialize or acquire new and enhanced products;

 

   

we must continue making significant investments in research and development efforts that may be unsuccessful;

 

   

the markets in which we operate are highly competitive and competitive pressures may prevent us from obtaining new customers and gaining market share, may require us to reduce our pricing or cause us to lose existing customers;

 

   

we rely on our senior management and other key employees, and may not be able to retain such personnel or attract new personnel;

 

   

our senior management does not have experience in managing a public reporting company; and

 

   

we have a small internal accounting and finance staff which does not have significant experience in complying with the reporting obligations of a public company, which could negatively impact the timely and accurate reporting of our financial results.

 

If we are unable to adequately address these and other risks we face, our business, financial condition, results of operations, and prospects may be materially and adversely affected. In addition, there are additional risks related to an investment in our common stock.

Following this offering, our executive officers, directors, and other key employees will beneficially own, collectively,     % of our outstanding common stock, or     % if the underwriters exercise in full their option to purchase additional shares of our common stock. These stockholders will have significant influence in determining the outcome of any corporate transaction or any other matter submitted for approval to our stockholders.

You should carefully read “Risk Factors” beginning on page 11 for an explanation of the foregoing risks before investing in our common stock.

Our Corporate Information

We were incorporated in Delaware in 2001. Our principal executive offices are located at 2645 Zanker Road, San Jose, California 95134. The telephone number of our principal executive offices is (408) 457-2000, and our main corporate website is www.apache-da.com. The information on, or that can be accessed through, our website is not part of this prospectus.

We have rights to a number of marks used in this prospectus that are important to our business, including, without limitation, Apache, Apache Design Solutions, RedHawk, Sentinel, PowerArtist, Totem, and PathFinder. We have omitted the ® and ™ designations, as applicable, for the trademarks we name in this prospectus.

 

 

5


Table of Contents

The Offering

 

Common stock offered by us

                 shares

 

Common stock offered by selling stockholders

                 shares

 

Common stock to be outstanding after this offering

                 shares

 

Over-allotment option

We have granted the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an additional              shares of common stock to cover over-allotments.

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $         million (or approximately $             million if the underwriters exercise their over-allotment option in full), after deducting the estimated underwriting discounts and commissions and our estimated offering expenses, assuming the shares are offered at $             per share, the midpoint of the estimated offering range set forth on the cover page of this prospectus. We will not receive any of the proceeds from shares sold by the selling stockholders.

 

  We intend to use the net proceeds from our sale of shares of common stock in this offering for working capital and other general corporate purposes, which may include hiring additional personnel and investing in sales, marketing, and research and development. In addition, we may use a portion of the proceeds received by us from this offering for acquisitions of complementary businesses, technologies or other assets. We have no agreements with respect to any acquisitions at this time.

 

  Pending the use of the proceeds from this offering as described above, we plan to invest the net proceeds in short-term, investment grade, interest-bearing securities.

 

Dividends

We have never paid cash dividends on our common stock. We currently intend to retain any future earnings to fund business development and growth, and we do not anticipate paying any cash dividends for the foreseeable future.

 

Proposed Nasdaq Global Market symbol

“APAD”

 

 

6


Table of Contents

 

Unless otherwise noted, the number of shares of common stock to be outstanding after this offering used in this prospectus is based on 17,217,798 shares of common stock outstanding as of April 30, 2011, excluding:

 

   

3,117,454 shares of common stock subject to options outstanding as of April 30, 2011, at a weighted-average exercise price of $3.75 per share issued under our 2001 Stock Option/Stock Issuance Plan;

 

   

2,400,000 shares of common stock reserved for issuance pursuant to our 2011 Equity Incentive Plan, and 600,000 shares of common stock reserved for issuance pursuant to our 2011 Employee Stock Purchase Plan; and

 

   

         shares of common stock issuable upon the exercise of the underwriters’ over-allotment option.

Unless otherwise expressly stated or the context otherwise requires, all information contained in this prospectus assumes that the amendment of our amended and restated certificate of incorporation and amended and restated bylaws, and the conversion of all outstanding shares of preferred stock into shares of common stock, all of which are expected to occur immediately prior to or upon the closing of this offering, have occurred.

 

 

7


Table of Contents

Summary Consolidated Financial and Other Data

The following table sets forth our summary consolidated financial and other data for the years ended December 31, 2008, 2009, and 2010. The summary consolidated financial data for the years ended December 31, 2008, 2009, and 2010 were derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2010 and 2011 and the consolidated balance sheet data as of March 31, 2011 are derived from our unaudited interim consolidated financial statements included in this prospectus. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the financial information set forth in those statements. The historical results presented below are not necessarily indicative of future operating results, and the results for the first three months of 2011 are not necessarily indicative of operating results to be expected for the full year or any other period. You should read this summary consolidated financial data in conjunction with “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2008      2009      2010      2010      2011  
                          (unaudited)  
     (in thousands, except per share data)  

Consolidated Statements of Operations:

              

Revenue

   $ 25,695       $ 34,601       $ 44,047       $ 10,417       $ 12,180   

Cost of revenue

     5,812         6,662         8,999         2,099         2,392   
                                            

Gross profit

     19,883         27,939         35,048         8,318         9,788   

Operating expenses:

              

Sales and marketing

     9,529         9,794         12,930         2,827         2,862   

Research and development

     7,797         8,588         11,516         2,688         3,289   

General and administrative

     2,903         3,573         4,926         962         1,543   
                                            

Total operating expenses

     20,229         21,955         29,372         6,477         7,694   
                                            

Operating income (loss)

     (346      5,984         5,676         1,841         2,094   

Other income (expense)

     13         (93      366         (18      (25
                                            

Income (loss) before income tax

     (333      5,891         6,042         1,823         2,069   

Provision (benefit) for income tax

     (3,507      2,622         2,738         862         799   
                                            

Net income

   $ 3,174       $ 3,269       $ 3,304       $ 961       $ 1,270   
                                            

Net income per share:

              

Basic

   $ 0.29       $ 0.30       $ 0.30       $ 0.09       $ 0.11   
                                            

Diluted

   $ 0.18       $ 0.19       $ 0.19       $ 0.06       $ 0.07   
                                            

Weighted average common shares outstanding:

              

Basic

     10,882         10,930         11,016         10,973         11,202   
                                            

Diluted

     17,253         17,237         17,631         17,346         18,352   
                                            

Other Consolidated Financial Data (Unaudited):

              

Non-GAAP net income (1)

   $ 4,735       $ 4,971       $ 5,372       $ 1,495       $ 1,807   
                                            

 

 

8


Table of Contents
     As of March 31, 2011  
     Actual      Pro Forma (2)      Pro Forma
As Adjusted (3)
 
    

(unaudited)

     (unaudited)      (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 29,398       $ 29,398       $     

Working capital

     7,032         7,032      

Total assets

     51,143         51,143      

Long-term debt obligations

                       

Redeemable convertible preferred stock

     5,996                   

Total stockholders’ equity

     6,527         12,523      

 

 

(1) Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. We define non-GAAP net income as GAAP net income plus amortization of intangible assets and stock-based compensation expense, and giving effect to the tax impact of these adjustments to GAAP net income.

We believe that non-GAAP net income is useful to investors and other users of our financial information in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that:

 

   

non-GAAP net income provides investors and other users of our financial information consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations, and facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and

 

   

adding back certain non-cash charges, such as amortization of intangible assets and stock-based compensation expense, to net income is useful because these non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations, and these non-cash expenses can vary significantly between periods as a result of full amortization of previously acquired intangible assets and the timing of new stock-based awards.

Non-GAAP net income is adjusted by the tax impact of excluding amortization of intangible assets and stock-based compensation from our GAAP net income results, using a blended tax rate of 40%. During the periods presented, there was no tax impact from stock-based compensation expense on our GAAP net income or our non-GAAP net income because of the tax attributes of our historical equity awards. However, we expect that in future periods there may be a tax impact depending on the tax attributes of the equity awards we issue in the future.

We use non-GAAP net income in conjunction with traditional GAAP measures as part of our overall assessment of our performance, for planning purposes, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance.

We do not, and you should not, place undue reliance on non-GAAP net income as our only measure of operating performance. You should not consider non-GAAP net income as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do. We compensate for the inherent limitations associated with using non-GAAP net income through disclosure of these limitations, presentation of our financial statements in accordance with GAAP, and reconciliation of non-GAAP net income to the most directly comparable GAAP measure, net income.

The following provides a reconciliation of GAAP net income to non-GAAP net income:

 

     Year Ended December 31,      Three Months
Ended March 31,
 
     2008      2009      2010      2010      2011  
     (in thousands)         

GAAP net income

   $ 3,174       $ 3,269       $ 3,304       $ 961       $ 1,270   

Amortization of intangible assets

     1,083         1,470         2,244         561         561   

Stock-based compensation expense

     911         819         720         197         228   

Tax impact adjustments

     (433      (587      (896      (224      (252
                                            

Non-GAAP net income

   $ 4,735       $ 4,971       $ 5,372       $ 1,495       $ 1,807   
                                            

 

 

9


Table of Contents
(2) The unaudited pro forma data as of March 31, 2011 assumes the conversion of all of our outstanding shares of preferred stock into common stock.

 

(3) The unaudited pro forma as adjusted data gives effect to the conversion referred to in note 2 above and to the sale of          shares of common stock by us in this offering at an assumed initial offering price to the public of $         per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) cash and cash equivalents, working capital, total assets, and total stockholders’ equity by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

10


Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. The risks and uncertainties described below are the risks and uncertainties that we consider material of which we are currently aware.

If any of the following risks occur, our business, financial condition, and operating results could be materially and adversely affected. In that case, the market price of our common stock could decline, and you could lose some or all of your investment.

Risks Related to Our Business

We rely on a small number of customers for a significant portion of our revenue, and our revenue could decline if customers terminate their licenses, delay orders or fail to renew licenses, if we are unable to maintain or expand relationships with our major customers, or if we are unable to develop relationships with new customers.

A significant portion of our revenue and the strength of our business depends on sales to a small number of customers, and our customers often have significant bargaining power in negotiations with us. In 2008, 2009, and 2010, our largest customer, which was a different customer in each year, accounted for 8%, 12%, and 11%, respectively, of our revenue, and our ten largest customers accounted for more than 62%, 68%, and 59%, respectively, of our revenue. For the three months ended March 31, 2011, our largest customer accounted for 10% of our revenue, and our ten largest customers accounted for more than 59% of our revenue. We expect that we will continue depending upon a relatively small number of customers for a substantial portion of our revenue for the foreseeable future. Substantially all of our licenses are time-based licenses with 12 to 36 month terms that automatically expire at the end of their term unless the customer renews the license with us by executing a new time-based license agreement. Most of our customer licenses may be terminated by a customer without penalty on 30 days’ notice. If our customers terminate their licenses, do not renew their licenses or renew their licenses with shorter terms or in smaller quantities, or we are unable to collect under these licenses, we may not generate additional revenue, our revenue may decline, and we may have reduced ability to forecast our revenue. We also rely on developing relationships with potential customers to increase our revenue. If we fail to maintain or expand our relationships with existing customers, or if we fail to develop relationships with new customers, our business, financial condition, and revenue would be materially and adversely affected.

A deterioration in the financial condition of any of our key customers or their end-user customers, or the perceived or actual financial deterioration of our business could adversely affect our business, financial condition, and operating results.

We currently depend on a small number of customers, and expect to continue to depend on a small number of customers for the foreseeable future, and any material deterioration in the business or financial condition of our customers or their end-user customers could have a material and adverse effect on our business, financial condition, and results of operations. Previously, some of our customers have gone out of business or become unable to pay for the licenses or services we have provided them or were to provide to them. Moreover, existing customers may seek to renegotiate pre-existing contractual commitments due to adverse changes in their own businesses or for other reasons. One or more of our customers going out of business or otherwise being unable to pay for the license or services we provide them could have a material adverse effect on our business, financial condition, and operating results. Conversely, if

 

11


Table of Contents

our customers believe that we are not financially sound, or if we suffer an actual deterioration in our financial condition, our customers may choose to stop doing business with us, which would materially adversely affect our business, financial condition, and operating results.

Consolidation among our customers could lead to a reduction in selling prices and license sales, and customer loss, which would harm our business, financial condition, operating margins, and operating results.

Our reliance on a small number of customers for a significant portion of our revenue, combined with our limited addressable market, makes us particularly vulnerable to the effects of customer consolidation. Consolidation in the industries in which our customers operate occurs frequently, and we believe it has been increasing in recent years. Customer consolidation could lead to the loss of customers and reduced license purchases, and a reduction in our addressable market. In addition, customer consolidation could increase our existing and potential customers’ bargaining power, requiring us to reduce the price of our products and offer more attractive sales terms. Ongoing consolidation could therefore harm our business, financial condition, operating margins, and operating results.

We generate our revenue from a limited number of products that focus exclusively on power-efficient and noise-immune solutions, and we are highly susceptible to changes in demand for our products and to any decline in the size of our addressable market.

We generate our revenue from a limited number of products that focus exclusively on power-efficient and noise-immune design solutions for integrated circuits, or ICs, and electronic systems. We expect these existing products to continue accounting for a large percentage of our revenue in the foreseeable future. We currently offer four platforms that focus exclusively on power-efficient and noise-immune solutions. Our flagship platform, RedHawk, accounted for a majority of our revenue in 2008, 2009, and 2010 and for the three months ended March 31, 2011. Our dependence on RedHawk and our limited number of platforms make us highly susceptible to changes in demand for our solutions and also to changes in demand within our addressable market. Continued market acceptance of, and demand for, RedHawk in particular are critical to our future operating results. If our competitors introduce new products or offer aggressive pricing or terms on products that compete with our RedHawk platform or any of our other products, our revenue could decline materially and our business, financial condition, and operating results could be materially harmed. Any factors adversely affecting the overall demand for our products, including competition or technological change, could cause our revenue to decline materially and our business to suffer significantly.

We may fail to effectively develop and commercialize or acquire new and enhanced products, which would materially and adversely affect our business, financial condition, and operating results.

The markets in which our customers and their end-user customers compete tend to be rapidly developing, with constantly evolving technology trends. This results in frequent new product introductions, relatively short product life cycles, and significant price competition. Consequently, our ability to compete in these markets depends in part on our ability to maintain our technological advantage, anticipate technology development trends, and identify, develop, and commercialize or acquire new and enhanced products and technologies that customers demand in a timely and cost-effective manner. New products have contributed significantly to our revenue growth in the past, and may continue to do so in the future. We expect the markets in which we operate to continue evolving toward newer and more advanced products. We may not have the financial resources necessary to fund all required future innovations. Expanding into new technologies or extending our product lines into areas we have not previously

 

12


Table of Contents

addressed may be more costly or difficult than we presently anticipate. For example, our Sahara product, which extended into a new area, failed to gain market acceptance, and we decided to discontinue its sale. Also, any revenue that we receive from enhancements or new generations of our software products may be less than the costs that we incur to develop or acquire those technologies and products. Even if we successfully develop or acquire new and enhanced products, it may take an extended period of time for our new products to gain market acceptance, if at all. If we fail to develop or acquire and market new and enhanced products in a timely manner, or if new products do not meet performance features as marketed, our reputation, business, and results of operations could suffer. To effectively develop and commercialize new and enhanced products, we must, among other things:

 

   

accurately assess technology trends and our customer and their end-customer needs and meet market demands;

 

   

develop and deliver products that sufficiently address technical advances and the increasing complexity of our customers’ integrated circuits, or ICs, including as a result of smaller geometries in ICs and electronic systems;

 

   

optimize our development processes;

 

   

develop and deliver products in a timely and cost-effective manner;

 

   

develop products offering both a high level of integration into a comprehensive platform and a high level of individual product performance;

 

   

increase customer awareness and acceptance of our products;

 

   

price our products competitively;

 

   

effectively integrate customer feedback into our research and development planning; and

 

   

create and maintain interoperability with our competitors’ products.

Furthermore, our competitors may develop or acquire new products or technologies that have the potential to replace our existing or new product offerings. The introduction of these new or additional products by competitors may cause potential customers to defer purchases of our products or decide against purchasing our products, and may cause our existing customers to choose to terminate or not to renew licenses to use our products. If we fail to effectively develop and commercialize or acquire new or enhanced products, our business, financial condition, and operating results will be materially and adversely harmed.

Our research and development expenditures have increased in recent years, and we may be unable to develop new products or enhance existing products unless we continue making significant investments in research and development, which could negatively impact our business, financial condition, and operating results.

Developing our technology for current, enhanced, and new products and integrating acquired technology and products into existing platforms is expensive, and these investments often require a long time to generate returns. We make significant investments developing new products and enhancing our existing products, conducting product testing and quality assurance testing, improving our core technology, and strengthening our technological expertise in markets in which we operate. We believe that we must continue investing significant resources to our research and development efforts to maintain and improve our technological advantage and competitive position. Our research and development expenditures in 2008, 2009, and 2010 were $7.8 million, $8.6 million, and $11.5 million, respectively. Our research and development expenditures for the three months ended March 31, 2010 and 2011 were $2.7 million and $3.3 million, respectively. If we decide to invest significantly greater

 

13


Table of Contents

resources than currently anticipated in research and development efforts, our operating expenses would increase. Our increased investments in research and development may not result in a corresponding increase in revenue. Conversely, if we decrease our research and development investments, this could result in corresponding or larger revenue decreases due to decreased product enhancement and development and eroding competitive position. Further, research and development expenses are likely to fluctuate over time, and these investments may be independent of our revenue, which could negatively affect our business, financial condition, and operating results.

The markets in which we operate are highly competitive, and these competitive pressures may prevent us from obtaining new customers and gaining market share, may require us to reduce our product and services pricing or cause us to lose existing customers, which could materially harm our business, financial condition, and operating results.

We currently compete with companies that hold dominant shares in the markets in which we operate, such as ANSYS, Inc., Cadence Design Systems, Inc., Magma Design Automation, Inc., Mentor Graphics Corporation, and Synopsys, Inc. Each of these companies has, among other things:

 

   

a longer operating history;

 

   

significantly greater financial, managerial, engineering, technical, sales, and marketing resources;

 

   

greater name recognition;

 

   

a stronger relationship with many of our top customers and our customers’ procurement decision-makers;

 

   

products that we must maintain interoperability with to successfully compete in our target markets; and

 

   

a larger installed customer base.

Our competitors’ and potential competitors’ advantages may allow them to, among other things:

 

   

adopt our business model and devote greater resources than we can to developing and promoting offerings similar to or better than our own;

 

   

incorporate key functionality of our products into their products, giving them the ability to provide similar functionality with a superior user experience;

 

   

modify their products’ interfaces, output file formats or input file formats, resulting in our product development team devoting significant time and resources to maintaining interoperability with our competitors’ products;

 

   

engage in more extensive research and development;

 

   

offer more and a broader range of products and services;

 

   

bundle other products and services as part of their overall sales processes;

 

   

adopt more aggressive pricing policies;

 

   

undertake more far-reaching marketing campaigns;

 

   

offer services that achieve greater market acceptance than ours; and

 

   

make more attractive offers to our existing and potential employees, suppliers, customers, and strategic partners and acquisition targets.

 

14


Table of Contents

Competition and corresponding pricing pressures among vendors or other factors could cause the overall market for products in the markets in which we operate to have low growth rates, remain relatively flat or even decrease in terms of overall dollars. If our competitors offer deep discounts on certain products in an effort to recapture or gain market segment share or to sell other products, we may then need to lower our prices or offer other favorable terms to compete. Any such changes would likely reduce our profit margins and could adversely affect our operating results. Any substantial changes to our prices and pricing policies could cause sales and software license revenue to decline or be delayed as our sales force implements and our customers adjust to the new pricing policies. Further, some of our competitors offer or provide free or lifetime licenses. These practices could, over time, significantly constrain the prices that we can charge for our products and reduce our operating margins. If we cannot offset price reductions with a corresponding increase in sales or with lower spending, then the reduced license revenue resulting from lower prices could have an adverse effect on our operating results. In addition, there are generally low barriers to entry into the markets in which we operate, and a variety of privately held companies continue to emerge, developing and introducing new products that compete or may continue to compete with our products and services and offer better functions and speed. One or more of these companies are or could become significant competitors.

We compete principally on the basis of technology leadership, product quality and features (including ease-of-use), license terms, post-contract customer support, interoperability with our products and other vendors’ products, and price and payment terms. Many of our competitors also offer a more comprehensive product range, and, if our competitors introduce power analysis products that they bundle with their other products, and our customers consider these bundled power analysis products sufficient to satisfy their needs, our customers may choose to no longer purchase our product licenses. Similarly, if our customers seek to concentrate their software product purchases with a few large providers, we may be at a disadvantage. In addition, our competitors may introduce power analysis products and services that our customers consider superior to our own. In any such event, we would likely lose business, which would result in lost revenue and would harm our business, financial condition, and operating results. If we fail to successfully compete or fail to address new competitive forces, our business, financial condition, and operating results will be materially harmed.

We may be unable to retain or attract and train the necessary non-management personnel for our business, particularly engineering, applications support, and technical sales staff, and any inability to do so could adversely affect our ability to compete, reduce our operating margins, and harm our business and operating results.

Competition in our industry for qualified engineering, applications support, and technical sales and other key personnel is intense, particularly in the Silicon Valley area where our headquarters are located, and in India, China, and Taiwan, where we have significant international operations. Our business and operating results depend in part on our ability to identify, hire, train, and retain qualified engineering personnel with experience in IC or electronic system design. Specifically, we need to continue attracting and retaining field application engineers to work with our direct sales force to qualify new sales opportunities technically and perform design work to demonstrate our products’ capabilities to customers during their evaluation process. We may lose engineers and other employees to our competitors and to companies outside the markets in which we operate that are larger, more established and well-financed, have greater name recognition, and/or can offer more attractive compensation packages.

Our software requires sophisticated sales efforts by experienced and knowledgeable personnel. Competition for these individuals is intense due to the limited number of persons

 

15


Table of Contents

with the necessary sales experience and technical understanding. Hiring customer service and support personnel in our industry is also very competitive due to the limited number of persons with the necessary technical skills. These talented support personnel also tend to form loyal relationships over time with our top tier customers. In addition, designing an effective incentive compensation structure for our sales and support personnel is critical to our future operating results. We have experimented, and continue to experiment, with different methods of sales and support personnel compensation. If our incentives are not well designed, we may lose the services of a significant number of our employees or key employees, be unable to hire additional employees of the same caliber, be unable to retain our customers, and be unable to increase our sales or implement or maintain our growth strategy. The high costs associated with losing trained employees and attracting and training new employees could harm product development, our sales and support efforts, and our ability to compete, and reduce our operating margins and harm our operating results.

We depend on our senior executives and other key management personnel, and any failure to retain such personnel could harm our business and results of operations.

We depend on our senior executives and other key management personnel who are critical to our business. The equity securities held by many of our senior executives and other key management employees are substantially fully vested. As such, the equity-based compensation that is currently in place for our senior management and other key management employees may not be sufficient to retain them, and they may be able to obtain superior compensation arrangements from our competitors or other employers. In addition, our cash compensation, which is comprised of salary, bonus and, in some cases, commissions, may not be adequate to retain the services of our senior executives and other key management employees. Our larger competitors and other companies may be able to offer more generous compensation packages to senior executives and other key management employees, and therefore we risk losing key personnel to those competitors and other companies. We expect that our employee compensation expenses will increase significantly in the near term. However, these expenditures may fail to maintain or improve our employee retention rates and may not enhance our ability to attract qualified employees. If we lose the services of any of our senior executives or other key management personnel, our management, product development processes, and sales efforts could be harmed. Attracting and integrating new personnel could be expensive and disrupt our ongoing operations.

Our ability to effectively use equity compensation to help attract and retain qualified personnel may be limited by our stockholders, and equity compensation arrangements may negatively impact our operating results.

We intend to issue stock options and restricted stock units and maintain an employee stock purchase plan as key components of our overall compensation and employee attraction and retention efforts. We may face pressure from stockholders, who must approve any increases in our equity compensation pool, to limit the use of equity-based compensation so as to minimize its dilutive effect on stockholders. In addition, we are required under GAAP to recognize compensation expense in our operating results for employee share-based equity compensation under our equity grants and our employee stock purchase plan, which may negatively impact our operating results and may increase the pressure to limit share-based compensation. These factors may make it more difficult or unlikely for us to continue granting attractive equity-based compensation packages to our employees, which could adversely impact our ability to attract and retain key employees. If we lose any senior executive or other key employee, our business and operating results could be materially and adversely affected.

 

16


Table of Contents

Our executive officers and other key employees lack experience managing a public reporting company, which could result in their diverting attention from operating our business and thereby harm our business, financial condition, and operating results.

None of our current executive officers or other key employees has been involved in the management of a public reporting company. For example, none of our current executive officers has management experience with respect to Securities and Exchange Commission reporting obligations, compliance with Securities and Exchange Commission and Nasdaq Global Market rules and regulations, and experience in interacting with institutional investors or research analysts. This lack of experience could result in their diverting attention from operating our business and this could materially harm our business, financial condition, and operating results.

We have a small internal accounting and finance staff with limited public reporting company experience that we must expand, which will increase our operating costs and could negatively impact timely and accurate reporting of financial results and could harm our business.

We have a small internal accounting and finance staff with limited experience in public reporting. We also do not have any internal finance personnel located outside of our California headquarters. We must therefore attract and retain additional internal finance staff, which will increase our operating costs. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources, and systems for the foreseeable future. This lack of experience and personnel could make it difficult for us to timely and accurately report our financial results, which could harm our business.

Our operating results have fluctuated from quarter-to-quarter and may continue doing so, which may cause our business and operating results to be materially and adversely affected and the market price of our common stock to decline or be volatile.

Our revenue, expenses, and operating results have fluctuated from quarter-to-quarter and may continue doing so. Reasons for the past and potential ongoing fluctuations include:

 

   

the timing of new customer acquisitions, existing customer renewals, and the related timing of delivery of licenses to our customers, which impacts when we can begin to recognize revenue in accordance with our revenue recognition policies;

 

   

fluctuations in demand for our products, including as a result of economic downturns or cyclicality in our served markets, particularly in the semiconductor and electronics industries;

 

   

our dependence on a small number of customers for a large portion of our revenue;

 

   

customer consolidation, which could lead to customer loss;

 

   

changes in competitive and economic conditions generally or in our customers’ markets;

 

   

our lengthy and unpredictable sales cycle and the large size of some orders;

 

   

order cancellations and product rescheduling;

 

   

changes in product mix;

 

   

product development delays;

 

   

the introduction of new products, and whether such products are adopted by our customers;

 

   

foreign exchange risk as we incur substantial costs in foreign currencies while we recognize revenue principally in U.S. dollars;

 

17


Table of Contents
   

competitive factors, including actions by our competitors, such as discounting, free licensing, offering a flat rate for an unlimited number of licenses, lifetime licenses or product bundling, and entry of new competitors into our markets;

 

   

our ability to innovate, introduce, and support new products, services, and markets, or effectively integrate and support products and technologies that we acquire;

 

   

pricing volatility, particularly internationally;

 

   

costs associated with retention of employees, including salary, equity compensation, and bonuses;

 

   

costs associated with the expansion of our business, including capital expenditures and expenses related to the hiring of new employees;

 

   

the occurrence of catastrophic events, including major natural disasters, telecommunications failures, cyber-attacks, civil unrest, acts of war, and terrorist attacks;

 

   

costs associated with, and the outcomes of, any intellectual property or other litigation to which we may become a party; and

 

   

the impact of taxes, particularly Accounting Standards Codification, or ASC, Topic ASC 740-10, Accounting for Uncertainty in Income Taxes, which requires us to establish reserves for uncertain tax positions and accrue potential tax penalties and interest.

Due to the factors noted above and other risks discussed in this section, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful. You should not rely on our results for one quarter as a future performance indicator. Quarterly variations in our operations could have a material and adverse effect on our business and operating results. These variations could make the market price of our common stock volatile, and the price of our common stock might fall below the initial public offering price or could fluctuate, perhaps significantly. In one or more future quarters, it is likely that our operating results will be below securities analyst or investor expectations. If this occurs, the market price of our common stock will likely decrease.

We may be unable to sustain our recent revenue growth or increase our operating income or net income, which could have a negative impact on our stock price.

We experienced significant growth from 2006 to 2010. Our revenue increased from $14.7 million in 2006 to $44.0 million in 2010. Our net income increased from $0.5 million to $3.3 million over that same period. However, we had a net loss of $1.2 million in 2007, our operating income decreased from $6.0 million in 2009 to $5.7 million in 2010, and our net income was relatively flat during the last three years, at $3.2 million in 2008 and $3.3 million in each of 2009 and 2010. In addition, in 2008, we had an operating loss prior to recognizing certain tax benefits, which recognition resulted in our achieving net income for the year. We may be unable to sustain our recent revenue growth or increase or maintain our operating income or net income unless we develop and sell licenses for new and enhanced products, increase our revenue with existing customers, develop new customers, and undertake acquisitions. We also need to manage our operating expenses. Even if we do these things, they may be insufficient to allow us to maintain our historical revenue growth rates or operating income or net income, and our revenue, operating income, and net income could decline or our net income could become a net loss, which could have a negative impact on our stock price.

Continued consolidation among our competitors and potential competitors may harm our business, financial condition, operating margins, and operating results.

The markets in which we operate have been subject to increased consolidation in recent years. We expect this trend will continue as our competitors and potential competitors attempt

 

18


Table of Contents

to increase or maintain market share by complementing or expanding product offerings, or as companies are acquired or are unable to continue operations. Ongoing consolidation would result in stronger competition from companies that are better able than us to compete as single source vendors and could lead to increased price pressure. Stronger competition for customers would make it difficult to attract new customers and retain existing customers, and could lead to losses of customers.

Lack of growth in new IC design starts and other potential long-term trends may continue to adversely affect the markets in which we operate, including demand for our products and services harming our business, financial condition, and operating results.

New IC design projects drive demand for our products. The demand from semiconductor and electronic systems companies is uncertain and difficult to predict. The increasing complexities of ICs and systems-on-a-chip and customer concerns about managing costs and risks have produced long-term negative trends, including:

 

   

the number of IC design starts has declined and may continue to decline, which may reduce demand for our products;

 

   

increased globalization and the recent global economic downturn, which have made cost controls among our customers more permanent and aggressive and have adversely impacted our customers’ software tools spending; and

 

   

the cost and complexity of IC design, which may be leading some companies to limit their design activity or to focus only on discrete phases of the design process while outsourcing other design aspects to companies using our competitors’ products.

These trends, if sustained, could continue adversely affecting the markets in which we operate, including demand for our products and services, which in turn would materially harm our business, financial condition, and operating results.

If the industries into which we and our customers sell our products experience a downturn or other cyclical effects affecting our customers’ budgets, our revenue would likely grow more slowly than anticipated or decline.

The primary customers for our products are companies in the mobile devices, high-performance computing and networking, consumer electronics, and automotive and medical electronics industries. A downturn in our customers’ markets or in general economic conditions that results in the cutback of research and development budgets or the delay of software purchases would likely result in lower demand for our products and services and could harm our business, financial condition, and operating results. If the global economy weakens or the economies in the countries into which we sell licenses to our products decline, existing customers may decrease their purchases of our products or delay their implementation of our software products, and prospective customers may decide not to adopt our products, any of which could negatively impact our business, financial condition, and operating results. Growth in the IC design software industry typically lags the semiconductor industry. Our revenue may be adversely impacted if the expected recovery is muted for the semiconductor industry or in general.

 

19


Table of Contents

Structural barriers and our customers’ internal capabilities make gaining market share difficult, and our failure to establish or maintain a leadership position in the markets in which we compete would harm our business, financial condition, and operating results.

The markets in which we operate are characterized by companies with very strong leadership positions in specific market segments. For example, one company may have a large percentage of sales in the physical verification segment of the market while another may have a similarly strong position in the mixed-signal simulation market. Gaining market share in the markets in which we operate is difficult because it often takes years for a customer to move from a competitor. The products our competitors offer are generally difficult to master. This difficulty often results in customers being disinclined to make changes once their employees, as well as others in the industry, have developed familiarity with a particular product. Many of our competitors, such as ANSYS, Inc., Cadence Design Systems, Inc., Magma Design Automation, Inc., Mentor Graphics Corporation, and Synopsys, Inc., have established relationships with our current and potential customers and can devote substantial resources aimed at preventing us from establishing or enhancing our customer relationships. Many of our competitors currently sell products that our customers and potential customers have broadly adopted, providing them a substantial advantage when they sell products that perform functions substantially similar to some of our products. These structural barriers may prevent us from obtaining new customers and gaining market share, may require us to reduce product pricing and cause us to lose existing customers, which could harm our business and operating results. To execute our business strategy, we must maintain and increase our leadership position in power analysis for ICs and electronic systems, continue our efforts to increase global sales, and seek to expand areas of market leadership. If we fail to do so in a timely manner or at all, we may be unable to gain market share and our business, financial condition, and operating results would suffer.

We also compete with the internal IC design automation development groups of our existing and potential customers. Therefore, these customers may not require, or may be reluctant to purchase, products offered by independent vendors such as us.

We currently sell licenses to products that focus exclusively on power-efficiency and noise-immunity, and therefore the size of our addressable market is limited.

Our current solutions consist exclusively of a suite of software tools and methodologies that enable IC and electronic systems design engineers to manage and reduce power consumption, deliver reliable and consistent power to circuit and system components, and help mitigate power-induced noise. As such, our addressable market is limited by the scope of our products and methodologies. In order to sustain our revenue or increase our revenue, we may need to enter new markets in which we have limited or no prior experience. If we are unable to develop new products or extend the use of our current products into new markets, this could adversely affect our business, revenue, and results of operations.

Technological innovations could significantly reduce or eliminate demand for our products, which would have a material adverse effect on our business, financial condition, and operating results.

IC and package foundries are continuously developing new technologies and new fabrication processes. Technological innovations could reduce or eliminate our customers’ need for our products. For example, the development of very low-power designs or very low-noise power delivery networks within the IC could significantly reduce or eliminate demand for our products, which would have a material adverse effect on our business, financial condition, and operating results.

 

20


Table of Contents

If other software companies, including competitors, do not cooperate in working with us to interface our products with their design flows, or IC and electronic system designers and manufacturers do not integrate our software into existing design flows, demand for our products may decrease and our business, financial condition, and operating results will suffer.

To implement our business strategy, we must provide products that interface with other companies’ software. Our competitors may not support efforts by us or by our customers to integrate our products into their existing design flows. For example, some of our competitors have in the past refused, and may in the future refuse, to design their products to allow interoperability with our products. We must develop cooperative relationships with our competitors so that they will work with us to integrate our software into customers’ design flows. Currently, our software is designed to interface with certain of the existing software of ANSYS, Inc., Cadence Design Systems, Inc., Magma Design Automation, Inc., Synopsys, Inc., and others. In the event that our competitors refuse to design their products to allow interoperability with our products, we may need to redesign our products to allow our customers to successfully operate our solutions in a manner that is compatible with the solutions of our competitors. Such redesigns could be costly to us, may be rejected by our customers, and may subject us to the risk that our competitors could seek to invalidate our efforts to achieve interoperability with their products through litigation or other means. Further, if we are unable to persuade customers to adopt our software products for power analysis instead of those of competitors (including competitors offering a broader set of products), or if we are unable to persuade other software companies to work with us to interface our software to meet the demands of IC designers and manufacturers, demand for our products may decrease and our business, financial condition, and operating results will suffer.

Our operating results may be harmed if our customers do not adopt, or are slow to adopt, smaller geometries for the design of ICs and electronic systems.

Our customers are currently working on a range of design geometries, including 90-nanometer, 65-nanometer, 45-nanometer, and 22-nanometer designs. We continue to work toward developing and enhancing our product lines in anticipation of increased customer demand for smaller design geometries. Customers may fail to adopt, or may face technical difficulties in adopting, these geometries on a large scale and we may be unable to persuade our customers to purchase our products. Accordingly, any revenue we receive from enhancements to our products, new products or acquired products and technologies may be less than their development or acquisition costs. If customers fail to adopt or delay the adoption of smaller design geometries on a large scale, our business, financial condition, and operating results may be harmed. In addition, if customers are not able to generate profits as they adopt smaller geometries, future demand for our products may be adversely affected, and our business, financial condition, and operating results may be harmed.

Our lengthy and unpredictable sales cycle requires us to incur substantial efforts and expense that may not result in revenue and could harm our operating results and our stock price.

Potential customers for our software products typically commit significant resources to evaluate available software. Our sales cycle typically ranges between three and nine months but can be longer. The complexity of our products requires us to spend substantial time and effort to assist potential customers in evaluating our software and in benchmarking our products against those of our competitors. As our products’ complexity increases, we expect our sales cycle to lengthen. In addition, potential customers may be limited in their current spending by existing time-based licenses with their legacy vendors. In these cases, customers typically delay a significant new commitment to our software until the existing license term expires. It is

 

21


Table of Contents

common in some markets in which we operate for customers to own perpetual licenses of our competitors’ products. These customers pay a proportionally small annual fee or no fee for continued license support and maintenance, making it difficult for us to displace these perpetual or free licenses. Also, because our products require our customers to invest significant time and incur significant costs, we must target those individuals within our customers’ organizations who are able to make these decisions on behalf of their companies. These individuals tend to be senior management in an organization, typically at the vice president level. We have faced and continue facing difficulty identifying and establishing contact with such individuals. Even after those individuals decide to purchase our products, the negotiation and documentation processes have been and are likely to continue being lengthy and can lead the decision-maker to reconsider the purchase. Consequently, we may continue to incur substantial expense and devote significant management time and effort to develop potential relationships that do not result in agreements or revenue and that may also prevent us from pursuing other opportunities. Any failure to achieve revenue after expending substantial efforts and expense could harm our operating results and stock price.

We may be unable to effectively manage our recent and anticipated growth, which has placed and will continue to place significant strain on our management personnel, systems, and resources and could materially harm our business, financial condition, and operating results.

Our revenue increased from $14.7 million in 2006 to $44.0 million in 2010, and our headcount has increased from 92 at the end of 2006 to 257 at the end of 2010. For the three months ended March 31, 2011, our revenue was $12.2 million, and our headcount on March 31, 2011 was 269 full-time employees. We have also completed two acquisitions since the beginning of 2007 and currently have operations and employees in ten countries. Our rapid growth has placed and will continue to place significant demands on our management and our administrative, operational, and financial infrastructure. Among the numerous challenges we continue to face are:

 

   

implementing, adapting, and modifying our business model and strategy;

 

   

developing and improving our internal administrative infrastructure, particularly our financial, operational, human resources, communications, and other internal systems, procedures, disclosure controls, and controls over financial reporting;

 

   

managing a larger number of employees and customers in a greater number of industries and locations;

 

   

implementing and maintaining effective oversight of personnel and offices;

 

   

attracting, training, developing, and retaining sufficient skilled technical, sales, and management personnel;

 

   

continuing to sell our products and provide high quality services to our customers; and

 

   

integrating new personnel and expanded operations while preserving our culture and values.

We intend to introduce new products and enter new markets which will present us with new risks and challenges that could harm our business, financial condition, and operating results.

As we introduce new products and enter new markets, we will face new market, technological, and operational risks and challenges with which we are unfamiliar. New product introductions and entering new markets require substantial management efforts and skills to mitigate these risks and challenges. Management’s lack of experience with certain new products and new markets may result in new product failures and unsuccessful new market entries. As a result of any of these challenges and potential problems associated with our growth, our business, financial condition, and operating results could be materially harmed.

 

22


Table of Contents

Forecasting our tax rates is complex and subject to uncertainty, and changes in our tax provisions or additional income tax liability exposure could negatively affect our business, financial condition, and operating results.

Our management must make significant assumptions, judgments, and estimates to determine our current provision for income taxes, deferred tax assets and liabilities, and any valuation allowance that may be recorded against our deferred tax assets. These assumptions, judgments, and estimates are difficult to make due to their complexity, and the relevant tax law is often changing. Our future effective tax rates could be adversely affected by several factors, including the following:

 

   

non-tax deductible expense increases, including stock-based compensation and acquisition costs in connection with a business combination;

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

changes in our mix of pre-tax profits and losses in jurisdictions with differing statutory tax rates;

 

   

additional tax assessments resulting from federal, state or foreign tax examinations;

 

   

changes in tax laws or interpretations of such tax laws, especially tax laws related to foreign operations and imposition of withholding taxes and the lapse of availability of tax credits; or

 

   

ownership changes that may limit certain asset realizations.

In addition, our operations are subject to income and transaction taxes in the United States and in numerous foreign jurisdictions. Changes to tax laws in the jurisdictions in which we do business, such as an increase in tax rates or an adverse change in the treatment of an item of income or expense, could result in a material increase in our tax expense. Currently, a substantial portion of our revenue is generated from customers located outside the United States, and a significant number of our employees, are located outside the United States. United States income taxes and foreign withholding taxes have not been provided on undistributed earnings for certain non-United States subsidiaries to the extent such earnings are considered to be indefinitely reinvested in the operations of those subsidiaries. The President of the United States and the U.S. Treasury Department have proposed changing certain U.S. tax rules for U.S. corporations doing business outside the United States, and these U.S. tax law changes could increase our future U.S. income tax liability.

We exercise judgment in determining our provision for taxes in the United States and internationally that are subject to tax authority audit review that could result in additional tax liability and potential penalties that would negatively affect our net income.

We are subject to taxes in the United States and numerous foreign jurisdictions. The amounts we record in intercompany transactions for services, licenses, funding, and other items affects our tax liabilities. Tax authorities may disagree with our intercompany charges or other matters and seek to assess additional taxes and penalties.

Our tax filings are subject to review or audit by the U.S. Internal Revenue Service and state, local, and foreign taxing authorities. We exercise judgment in determining our worldwide provision for income and other taxes and, in the ordinary course of our business, there may be transactions and calculations where the ultimate tax determination is uncertain. For example, we accrue withholding tax liability in foreign jurisdictions based on our best estimates, which may be insufficient compared to any withholding tax determinations made by tax authorities in those jurisdictions and could result in significant tax expense. Examinations of our tax returns

 

23


Table of Contents

could result in significant proposed adjustments. An assessment of additional taxes could adversely affect our tax provision and net income in the period or periods for which that determination is made.

Unanticipated changes in our tax provisions or additional tax liability exposure could negatively affect our business, financial condition, and operating results.

Our limited operating history and the rapidly evolving nature of the markets in which we operate may make it difficult for you to evaluate our business.

We were incorporated in 2001, and since that time have been developing products to meet the rapidly evolving demands of customers in the markets in which we operate. We shipped our initial product, RedHawk, in 2002, released two other platforms, Sentinel and Totem, in 2007 and 2009, respectively, acquired PowerArtist in 2009, and introduced our newest product, PathFinder, in 2010. This limited operating history makes financial forecasting and evaluation of our business difficult. Furthermore, because we depend in part on our development, and industry acceptance, of our products, it is difficult to evaluate trends that may affect our business. We have limited historic financial data, and we operate in a rapidly evolving market, and, as such, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market.

We have high customer engagement and support costs, and our gross margins may decrease if we incur higher than expected customer support services costs or if we reduce prices.

The complexity of our products requires us to incur high field application engineering support costs to engage new customers and assist them in evaluating our products and to support our existing customers. If we fail to manage our customer engagement and support costs, our operating results could suffer. In addition, our gross margins may decrease if we are unable to manage support costs associated with the license revenue we generate or if we reduce prices.

We have a limited ability to quickly and significantly reduce our operating costs, making us particularly vulnerable to the cyclical nature of the semiconductor industry and other industries we or our customers serve, and economic deterioration generally.

We operate with a relatively small headcount, and a significant portion of our operating costs are fixed and significant, which makes it difficult for us to quickly and significantly reduce our costs. We are therefore highly vulnerable if the semiconductor or other industries we or our customers serve or economic conditions generally deteriorate, which would have a material adverse effect on our business, financial condition, and operating results.

We make many operational and strategic decisions based upon revenue forecasts. Our longer-term forecasts are subject to significant estimation and are impacted by many external factors, including global economic conditions and our customers’ demands. A variation in actual revenue from that forecasted could cause us to plan or to budget incorrectly and, therefore, could adversely affect our business, financial condition, and operating results. Current global economic conditions may increase the likelihood or the magnitude of variations between actual revenue and our forecasts. Our failure to properly plan for shifts in customer demand and changes in economic conditions could adversely affect our business, financial condition, and operating results.

 

24


Table of Contents

We will incur significant legal, accounting and other costs as a result of being a public company and complying with Nasdaq Global Market listing and other requirements, and our failure to comply with Nasdaq Global Market listing requirements would subject us to delisting.

As a public company, we will incur significant legal, accounting, and other expenses. In addition, Sarbanes-Oxley, as well as rules subsequently implemented by the Securities and Exchange Commission, the Nasdaq Global Market, and Dodd-Frank, require public company corporate governance practices that will substantially increase our legal and financial compliance costs. We have recently added internal resources and have utilized additional outside legal, accounting, and advisory services, which have increased and will continue increasing our operating expenses. If we do not comply with Nasdaq Global Market listing requirements, we could be delisted.

We will incur significant IT costs as we upgrade our internal resources and systems in connection with becoming a public company, which could impact our compliance efforts and obligations and materially and adversely impact our business, financial condition, and operating results.

We will incur administrative and information technology, or IT, expenses relating to compliance with Section 404 of Sarbanes-Oxley, which requires that we implement and maintain an effective system of internal control over financial reporting and annual certification of our compliance by our independent registered public accounting firm. We currently maintain our accounts using a combination of QuickBooks, other off-the-shelf software, and manual entry. We must therefore significantly upgrade our finance and accounting systems which could significantly increase our operating expenses and impact our ability or prevent us from timely reporting our operating results, timely filing required reports with the Securities and Exchange Commission, and complying with Section 404 of Sarbanes-Oxley. This upgrade may be complicated by the broad geographical reach of our operations. These additional costs and burdens could materially and adversely impact our business, financial condition, and operating results.

An inability to establish and maintain effective internal control over financial reporting and related systems and procedures could adversely affect the market price of our common stock, cause us to delay filing our public reports, and lead to delisting by the Nasdaq Global Market.

Pursuant to Section 404 of Sarbanes-Oxley, we will be required to report on, and our independent registered public accounting firm will be required to attest to, the effectiveness of our internal control over financial reporting. Following the completion of this offering, we expect that we will need to conduct an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2012. In addition, our independent registered public accounting firm must deliver an attestation report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal controls are not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may disagree and may decline to attest to the effectiveness of our internal control over financial reporting or may issue an adverse opinion.

During our 2007 audit, our limited resources in our accounting and finance department were identified as a material weakness. During our 2008 and 2009 audits, our lack of adequate resources to address certain financial reporting issues and accounting for certain complex transactions was identified as a significant deficiency. We may identify control deficiencies or weaknesses as a result of the assessment process we will undertake to comply with Section 404 of Sarbanes-Oxley. We may be unable to remediate control deficiencies or weaknesses identified in time to meet the deadline imposed by Section 404 of Sarbanes-Oxley.

 

25


Table of Contents

Effective internal control over financial reporting and related systems and procedures are necessary for us to provide timely and reliable financial reports. Establishing and maintaining effective internal control over financial reporting and related systems and procedures will continue to strain our management and may inhibit their ability to adequately focus on our day-to-day operations. Failure to do so could lead to a loss of investor confidence in the reliability of our reporting processes, which could adversely affect the market price of our common stock. A failure to comply with Section 404 of Sarbanes-Oxley could also cause us to delay filing our public reports, potentially resulting in delisting by the Nasdaq Global Market.

Our disclosure controls and procedures and our internal control over financial reporting may fail to adequately allow us to report information accurately to investors or to detect and prevent errors or fraud, and any failure of such control and procedures could damage investor confidence in us, cause the market price of our common stock to decline, and materially and adversely impact our business, financial condition, and operating results.

We cannot assure you that our disclosure controls and procedures, or our internal control over financial reporting, will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of meeting control system objectives. The design of a control system must also reflect applicable resource constraints, and we must consider the control system benefits relative to their costs. As a result of these inherent limitations, no evaluation of controls can provide absolute assurance that we have identified or will identify or prevent all control issues and instances of errors or fraud, if any, within our company. The failure of our control systems to allow us to accurately report information or detect or prevent error or fraud could damage investor confidence in us, cause the market price of our common stock to decline, and materially adversely impact our business, financial condition, and operating results.

We may not obtain sufficient patent protection, which could harm our competitive position and increase our expenses.

Our ability to compete depends in part upon the protection for our software and other technology. Our intellectual property portfolio includes 32 issued U.S. patents, one issued non-U.S. patent, two pending U.S. patent applications, and one pending non-U.S. patent application. We believe that these numbers are relatively small in comparison to many of our competitors. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Given the costs, effort, risks, and downside of obtaining patent protection, including the requirement to ultimately disclose the invention to the public, we may choose not to seek patent protection for certain innovations; however, such patent protection could later prove to be important to our business.

Further, patents afford only limited protection for our technology. Our patent applications may not issue as granted patents, and the scope of patent protection gained may be insufficient, and issued patents may be deemed invalid or unenforceable. Competitors may design around our present or future issued patents or may develop competing non-infringing technologies. We also cannot assure you that any of our present or future patents will not lapse or be invalidated, challenged or abandoned, or that any of our pending or future patents will have the coverage originally sought. In addition, our patent rights may not be enforced in jurisdictions where legal protection may be weak. We may also be unable to assert our patents against potential competitors or to settle current or future disputes because of our relationships with third parties. For business reasons, we may also agree not to assert our patents against certain customers and other third parties. For example, we have agreed not to assert our patents against one of our largest customers.

 

26


Table of Contents

In addition, issuance of a patent does not guarantee that we have an absolute right to practice the patented invention because one or more third parties may have dominant patent rights covering certain aspects of the invention. Patent applications in the U.S. are typically not published until 18 months after filing, or in some cases not at all until issuance, and publications of discoveries in industry-related literature lag behind actual discoveries. We cannot be certain that we were the first to make the inventions claimed in our issued patents or pending patent applications or otherwise used in our products, that we were the first to file for protection in our patent applications or that third parties do not have blocking patents that could be used to prevent us from making, marketing, selling or otherwise practicing our patented products or technology. Moreover, rights that may be granted under any patent application that may be issued in the future may not provide competitive advantages to us because of limitations to the scope of our patent claims or the rate of improvements or developments made to the technology since patent protection was initially sought by us. Further, patent protection in foreign jurisdictions where we may need this protection may be limited or unavailable.

We believe the patent portfolios of many of our competitors are significantly larger than ours, and this may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses.

We might be required to spend significant resources to monitor for potential infringement of our patents by our competitors and others. We may initiate claims or litigation against third parties for infringement of our patents to establish the validity of our patents, or to determine the validity or scope of the patents of third parties. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may adversely affect our business, operating results, and financial condition.

In addition to patents, we rely on trademark, copyright, and trade secret laws and contractual rights to protect our intellectual property, and the failure to sufficiently protect our intellectual property could harm our ability to compete and grow our business.

In addition to patents, we continue to rely on a combination of trademark, copyright, and trade secret laws and contractual rights, such as confidentiality agreements and licenses, to establish and protect our intellectual property rights. We seek or may seek to protect our proprietary algorithms and source code for our software, documentation, and other written materials primarily under trade secret and copyright laws. We license our software pursuant to agreements that impose limitations and restrictions on the licensees’ ability to utilize the software. We also seek to avoid disclosure of certain of our trade secrets and other confidential information by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently develop trade secrets and confidential information that are equivalent to our trade secrets and confidential information, and in these cases we may not be able to assert the relevant trade secret rights against those parties. Our intellectual property rights may be inadequate for numerous reasons, including:

 

   

laws and contractual restrictions in the U.S. and internationally may not prevent misappropriation, or unauthorized use or disclosure of our technologies or deter others from developing technologies similar to our own;

 

   

competitors may independently develop similar technologies and software;

 

27


Table of Contents
   

federal U.S. trademark protection may be unavailable to us for some of our marks, should we choose to seek such protection for our marks;

 

   

our trademarks may not be protected, able to be registered, or otherwise able to be protected in some foreign jurisdictions, should we choose to seek such protection; and

 

   

policing infringement and misappropriation of our intellectual property and intellectual property rights is difficult, expensive, and time consuming, and we may be unable to determine the extent of any unauthorized use.

Costly and time-consuming litigation could be necessary to enforce and determine the scope of our intellectual property rights, and failure to obtain or maintain trade secret and other intellectual property protection could adversely affect our ability to compete and grow our business.

In order to protect our trade secrets and other confidential information, we rely in part on confidentiality agreements with our employees, consultants, and third parties with whom we have relationships. These agreements may not effectively prevent disclosure of trade secrets and other confidential information and may not provide an adequate remedy in the event of misappropriation of trade secrets or any unauthorized disclosure of trade secrets and other confidential information. In addition, others may independently discover trade secrets and confidential information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our trade secret rights and related confidentiality and nondisclosure provisions, and failure to obtain or maintain trade secret protection, or our competitors being able to obtain our trade secrets or to independently develop unpatented technology similar to ours or competing technologies, could harm our business, financial condition, and operating results.

Our use of open source software could negatively impact the value of our proprietary software and our ability to sell our products.

The products, services or technologies we acquire, license, provide or develop may incorporate or use open source software. The use of certain open source software may be subject to license terms requiring us to grant reciprocal licenses, disclose or distribute our proprietary software in source code form, license our proprietary software for the purpose of making modifications and derivative works or make our proprietary software available at no or minimal charge. While we monitor our use of open source software in an effort to avoid the imposition of these consequences, there are very few or no legal precedents for interpreting the terms of some of these open source licenses, and we cannot be certain that our programmers have not incorporated open source software into our proprietary products and technologies or that they will not do so in the future. If portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, and may otherwise be subject to unanticipated obligations regarding our products that incorporate open source software. Each of these could reduce or eliminate the value of our technologies and software and materially and adversely affect our business, financial condition, and operating results. In addition, disclosing the content of our source code could limit the intellectual property protection we can obtain or maintain for that source code or the products containing that source code and could facilitate intellectual property infringement claims against us.

 

28


Table of Contents

Some of our products incorporate technology we license from third parties, and if we do not maintain these licenses, if a licensor terminates our license to use its technology, or if a licensor has difficulties keeping up with technological changes or stops supporting our products, our ability to develop and license our products could be materially delayed, reduced or prevented.

Some of our products incorporate technology that we license from third parties. While we do not presently place material reliance on such third parties, our reliance could change as a result of acquisitions or otherwise. This exposes us to risks over which we may have little or no control. For example, if we fail to maintain these licenses, the licensor terminates our license to use its technology, or a licensor has difficulties keeping up with technological changes or stops supporting its products, our ability to develop and sell licenses to our products could be materially delayed, reduced or prevented, as we seek to develop or acquire rights to alternative technologies, if they exist. Any of these events could harm our business, financial conditions, and operating results.

We may face intellectual property infringement claims or other litigation, which can be costly to defend, can take the time of our management and employees away from day-to-day operations and could result in our losing important rights and paying significant damages.

Participants in the markets in which we operate have been highly litigious with other competitors in these markets. Many of our competitors have litigated with other competitors over intellectual property infringement or misappropriation claims. This litigation is typically very expensive to defend and time consuming, often taking several years to resolve. Parties may assert intellectual property infringement claims against us or our customers. While we have not received formal written notice of our infringement of the rights of any third party, we cannot assure you that we are not infringing or violating any third-party intellectual property rights, nor that we have not done so in the past. Questions of infringement in the semiconductor and software fields involve highly technical analyses. Litigation or proceedings before the U.S. Patent and Trademark Office or other governmental authorities and administrative bodies in the United States and abroad may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity, and we may not prevail in any litigation. In addition, we may have acquired or may acquire software products and other technology through acquisitions, and we could be subject to claims that the acquired software products and other technology infringe third-party intellectual property rights. We also license technology, including software, from third parties and could be subject to claims that the licensed technology infringes the rights of others. We could also be threatened with or face commercial litigation unrelated to intellectual property infringement claims such as labor litigation and contract claims, and we may acquire companies that could be threatened with or are actively engaged in similar litigation.

Our products may be found to infringe third-party intellectual property rights, including third-party patents. In addition, most of our contracts contain provisions in which we agree to indemnify our customers and distributors against third-party intellectual property infringement claims that are brought against them based on their use or distribution of our products. Also, we may be unaware of filed patent applications that relate to our software products or other technology that we use. We believe that the patent portfolios of our competitors generally are larger than ours. This disparity between our patent portfolio and the patent portfolios of our competitors may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. Additionally, patent litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue, and therefore our own issued and pending

 

29


Table of Contents

patents may provide little or no deterrence to these patent owners in bringing intellectual property rights claims against us. We cannot assure you that we are not infringing or violating any third-party intellectual property rights.

The outcome of intellectual property litigation and other types of litigation could result in our loss of critical intellectual property rights and unexpected operating costs and substantial monetary damages. Intellectual property litigation and other types of litigation are expensive and time-consuming and could divert our management’s attention from our business. If there is a successful claim against us for infringement, we may be ordered to pay substantial monetary damages, including punitive damages, be prevented from distributing all or some of our products and be required to develop non-infringing technology or enter into royalty or license agreements, which may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license any required intellectual property rights on a timely basis could harm our business, financial condition, and operating results.

We expect that acquisitions will continue to be an important part of our strategy. If we are unable to effectively complete and integrate acquisitions, this could materially and adversely affect our business, financial condition, and results of operations.

A significant part of our growth strategy is to continue to pursue acquisitions. We have made four acquisitions to date, two of which involved technology and personnel acquisitions but not product acquisitions, and two of which involved product, technology, customer, and personnel acquisitions. The environment for acquisitions in the markets in which we operate is very competitive, acquisition candidate purchase prices will likely exceed what we would prefer to pay, but may choose to pay in order to make an acquisition. Achieving the anticipated benefits of past and possible future acquisitions will depend in part upon whether we can integrate acquired operations, products, and technology in a timely and cost-effective manner. The acquisition and integration process is complex, expensive, and time consuming, and may cause an interruption of, or loss of momentum in, product development and sales activities and operations of both companies. In addition, if we use earnout arrangements to consummate an acquisition, pursuant to which we agree to pay additional amounts of contingent consideration based on the achievement of certain revenue, bookings or product development or other milestones, our integration efforts can become more complicated. We may not find suitable acquisition candidates, and acquisitions we complete may be unsuccessful. We may not consummate any particular transaction, but may nonetheless incur significant management time and effort and acquisition-related costs, as has occurred with two relatively recent unsuccessful acquisition attempts. If we consummate a transaction, we may be unable to integrate and manage acquired products and businesses effectively. Assimilating previously acquired companies or companies we may seek to acquire, involves numerous risks, including but not limited to:

 

   

adverse effects on existing customer relationships, such as order cancellations or key customer losses;

 

   

adverse effects on existing licensor or supplier relationships, such as license terminations;

 

   

difficulties in integrating or retaining acquired company key employees;

 

   

potential downward pressure on operating margins due to lower operating margins of acquired businesses, increased headcount costs, and other expenses associated with adding and supporting new products;

 

   

difficulties in integrating acquired company operations, such as IT resources, manufacturing processes, and financial and operational data;

 

30


Table of Contents
   

difficulties in integrating acquired company technologies into our products;

 

   

difficulties managing different revenue models;

 

   

diversion of our management’s attention from day-to-day business when evaluating and negotiating these transactions and integrating an acquired business;

 

   

potential incompatibility of business cultures;

 

   

difficulties managing different business models;

 

   

post-acquisition discovery of previously unknown liabilities assumed with the acquired business;

 

   

marketplace confusion regarding acquired products that may be competitive with our existing products;

 

   

the failure to understand and compete in markets where we have limited experience;

 

   

unanticipated litigation in connection with or as a result of an acquisition;

 

   

the potentially negative impact on our earnings per share;

 

   

the risk that earnouts based on revenue will prove difficult to administer due to accounting complexities;

 

   

the risk that actions incentivized by earnout provisions will ultimately not to be in our best interests if our interests change;

 

   

potential dilution to existing stockholders if we issue equity securities to finance acquisitions and potential increased debt either assumed in the acquisition or used to finance the acquisition; and

 

   

additional expenses associated with the amortization of intangible assets and its impact on our operating results.

If we are unable to effectively execute acquisitions, our business, financial condition, and operating results could be adversely affected.

We rely on our international operations for a significant portion of our revenue and revenue growth, and international operations and expansion involve numerous risks that could adversely impact our business, financial condition, and operating results.

In 2008, 2009, and 2010, we generated 40%, 40%, and 43%, respectively, of our revenue from sales outside the United States, based on the regions to which we shipped our products. For the three months ended March 31, 2010 and 2011, we generated 44% and 42%, respectively, of our revenue from sales outside the United States, based on the regions to which we shipped our products. We anticipate that international operations will account for a significant portion of our revenue in the foreseeable future. Our business and operating results therefore significantly depend upon our international operations and our ability to continue expanding in our existing international markets and enter into new international markets. In expanding our business internationally, we have entered and intend to continue to enter markets in which we have limited or no experience and in which our brand may be less recognized. We may fail to anticipate competitive conditions in new markets that are different from those in our existing markets. These competitive conditions may make it difficult or impossible for us to effectively operate in these markets. If our expansion efforts in existing and new markets are unsuccessful, our business, financial condition, and operating results would be materially and adversely affected.

 

31


Table of Contents

We have been and continue to be exposed to other risks associated with international operations, including:

 

   

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

 

   

changes in currency exchange rates and controls;

 

   

potentially higher tax rates or additional tax liabilities;

 

   

uncertainty regarding tax and regulatory requirements in multiple jurisdictions;

 

   

the lack of financial and political stability in foreign countries, preventing overseas sales growth;

 

   

our ability to comply with customs, import/export, and other trade compliance regulations of the countries in which we do business, together with any unexpected changes in such regulations;

 

   

language and cultural barriers;

 

   

longer payment cycles;

 

   

greater difficulty in accounts receivable collection;

 

   

limitations on repatriation of earnings or on the conversion of foreign currencies;

 

   

ineffective or non-existent legal protection of our intellectual property rights;

 

   

greater risk of business interruption as a result of terrorist acts or military conflicts;

 

   

inadequate local infrastructure that could result in business disruptions; and

 

   

any related conflicts or similar events worldwide.

In addition, our global operations are subject to numerous U.S. and foreign laws and regulations, including those related to anti-corruption, tax, corporate governance, imports and exports, financial and other disclosures, privacy, and labor relations. These laws and regulations are complex and may have differing or conflicting legal standards, making compliance difficult and costly. If we violate these laws and regulations, we could be subject to fines, penalties or criminal sanctions, and may be prohibited from conducting business in one or more countries. Any violation could have a material adverse effect on our business, financial condition, and operating results.

Policy changes by the United States or foreign governments could negatively affect our operating results due to increased duties, increased regulatory requirements, higher taxation, currency conversion limitations, restrictions on the transfer of funds, the imposition of or increase in tariffs, and limitations on imports or exports. Also, we could be negatively affected if our host countries revise their policies away from encouraging foreign investment or foreign trade, including tax holidays. Any difficulties experienced in connection with international operations could materially and adversely affect our business, financial condition, and operating results.

We are subject to risks associated with changes in foreign currency exchange rates, foreign currency exchange controls, and related currency matters that may impact our financial condition and results of operations.

While most of our international sales to date have been denominated in U.S. dollars, a substantial majority of our international operating expenses have been denominated in foreign currencies. As a result, a decrease in the value of the U.S. dollar relative to such foreign currencies could increase the relative costs of our overseas operations, which could reduce our operating margins. This exposure is primarily and currently related to a portion of revenue in

 

32


Table of Contents

Japan and operating expenses in Europe, Israel, Japan, and Asia-Pacific, which are denominated in the respective local currencies. As of December 31, 2010, we had $8.5 million of cash and money market funds in foreign currencies, and as of March 31, 2011, we had $7.8 million of cash and money market funds in foreign currencies. We have not previously used financial instruments to hedge our exposure to foreign currency exchange rates. While we assess the need to utilize financial instruments to hedge currency exposures, our assessments may prove incorrect. Therefore, movements in exchange rates could negatively impact our business, operating results, and financial condition.

Operations in foreign countries also present risks associated with currency exchange and convertibility, inflation, and repatriation of earnings. In some countries, economic and monetary conditions and other factors could affect our ability to convert our cash distributions into U.S. dollars or other freely convertible currencies, or to move funds to our accounts in these countries. Furthermore, the central bank of any of these countries may have the authority to suspend, restrict or otherwise impose conditions on foreign exchange transactions or to approve distributions to foreign investors. Our exposure to the risks associated with foreign exchange could materially and adversely affect our financial condition and results of operations.

Failure to obtain export licenses or our failure to comply with U.S. export laws could harm our business by preventing us from licensing or transferring our technology outside of the United States.

We are required to comply with U.S. Department of Commerce regulations when shipping our software products and/or transferring our technology outside of the United States or to certain foreign nationals. These regulations are subject to change, and future difficulties in obtaining export licenses for current products or future developed and acquired products and technology, or any failure by us to comply with such requirements, could harm our business, financial condition, and operating results.

We structure most of our license agreements such that customers pay us in installments over the license period. In addition, in some of our license agreements, payments are weighted toward the latter part of the contract term, potentially exposing us to the increased likelihood that our customers will default on their payment obligations, which could materially and adversely affect our business, financial condition, and operating results.

We structure most of our license agreements such that customers pay us in installments over the license period. In addition, in some of our license agreements, payments are weighted toward the latter part of the license term which create additional credit risk. These payment terms could increase the likelihood that our customers will default on their payment obligations to us, which could materially adversely affect our business, financial condition, and operating results.

In addition, for those license agreements where payments are weighted toward the latter part of the contract term, we do not recognize revenue evenly over the contract term, but recognize the lesser of the cumulative amounts due and payable or ratably. Revenue recognized under these arrangements will be higher in the latter part of the contract term, may place our future revenue recognition at greater risk of our customers’ continued credit-worthiness.

If our security measures are perceived or deemed insufficient or are breached and an unauthorized party obtains access to customer data, we may face civil liability and customers may curtail or stop using our products and services.

Our products and services may involve the collection, storage, and transmission of customers’ confidential information, and other information that we are required to protect. Breaches of our security measures that protect such information could expose us to substantial

 

33


Table of Contents

liability from the misuse of this information, including litigation. Our customers may also require us to agree that in the event of a security breach, they would have the right to terminate their existing agreements with us. Some of our key customers may also require us to maintain specified security measures. Because techniques used to obtain unauthorized access or to sabotage information systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security measures occurs, the market perception of the effectiveness of our security measures could be harmed, we could lose existing customers and our ability to obtain new customers, and in the event of an actual breach, we could be exposed to significant liability.

Product errors or defects could expose us to liability and harm our reputation and we could lose market share.

Despite extensive testing prior to releasing our products, software products frequently contain errors or defects, especially when first introduced, when new versions are released or when integrated with technologies developed by acquired companies. Product errors could affect the performance or interoperability of our products, could delay the development or release of new products or new versions of products, and could adversely affect market acceptance or perception of our products. In addition, allegations of IC manufacturability issues resulting from use of our products could, even if untrue, adversely affect our reputation and our customers’ willingness to license products from us. Any such errors or delays in releasing new products or new versions of products or allegations of unsatisfactory performance could:

 

   

cause us to lose customers;

 

   

increase our service costs;

 

   

subject us to liability for damages;

 

   

divert our resources from other tasks;

 

   

delay license sales; and

 

   

cause us to fail to attract new customers or achieve market acceptance.

Any of the above could materially and adversely affect our business, financial condition, and operating results.

Moreover, because our software is used in connection with other vendors’ products that are used to design complex nanometer-scale semiconductors, significant liability claims may be asserted against us if our software does not work properly individually or with other vendors’ products. Our agreements with customers typically contain provisions intended to limit our exposure to liability claims. However, these limitations may be unenforceable and may not preclude or limit all potential claims. Regardless of their merit, liability claims could require us to spend significant time and expense in litigation and divert management’s attention from other business pursuits. If successful, a product liability claim could require us to pay significant damages. Any claims, whether or not successful, could seriously damage our reputation and our business.

 

34


Table of Contents

We may be unable to make payments to satisfy our indemnification obligations or in the event of improper use or disclosure of confidential information, which would harm our customer relationships and our business.

We enter into license agreements and non-disclosure agreements in the ordinary course of business. Pursuant to these agreements, we typically agree to indemnify our customers and strategic partners for losses suffered or incurred by them as a result of any patent, copyright or other third-party intellectual property infringement claim with respect to our products, and we agree to confidentiality provisions that restrict our use and disclosure of our customers’ confidential information. In some of our customer agreements, we agree to additional indemnification obligations, such as indemnifying the customer for losses suffered or incurred by the customer as a result of our breach of certain warranties regarding our products. These indemnification and confidentiality obligations typically have perpetual terms and are unlimited in amount. Many of our customer agreements do not limit our indemnification obligations, so we may be required to make indemnification payments that greatly exceed the amount received from the customer. Similarly, many of our customer agreements do not limit our liability for improper use or disclosure by our employees of our customers’ confidential information. If an indemnification event were to occur, we may have insufficient funds to pay our indemnification obligations. If we are held to have improperly used or disclosed confidential information, we may have insufficient funds to pay any damages and other amounts that may be awarded. Further, any material indemnification payment or material liability for improper use or disclosure of confidential information could have a material adverse effect on our financial condition and our results of operations. Any claim or judgment that we improperly used or disclosed confidential information, in addition to involving significant financial obligations, could hurt our relations with our customers and strategic partners and hurt our reputation, each of which could have a material adverse effect on our financial condition and our results of our operations.

We have entered into certain indemnification agreements whereby we indemnify certain of our and our subsidiaries’ executive officers and all of our directors for certain events or occurrences while the executive officer or director is, or was, serving at our request in such capacity. The maximum potential future payments we could be required to make under these indemnification agreements is unlimited. We have not recorded any liabilities for these agreements. Therefore, if an indemnification event occurs, we may have insufficient funds to pay our indemnification obligations. Further, any material indemnification payment could have a material adverse effect on our business, financial condition, and operating results.

Accounting principles, standards or guidance changes, specifically changes affecting software revenue recognition, could cause unexpected adverse revenue fluctuations for us, negatively impacting our business, operating results, and stock price.

We prepare our consolidated financial statements in conformity with U.S. GAAP. These principles are subject to interpretation by the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting principles, standards, and guidance. A change in or a difference in interpretation of these principles, standards or guidance could have a significant effect on our reported operating results and may retroactively affect our previously reported operating results. Additional proposed accounting standards could have a significant impact on our operational processes, revenue, and expenses, and could cause unexpected financial reporting fluctuations and make comparability between periods less meaningful or not at all.

Accounting standards changes and related interpretations, specifically those changes affecting software revenue recognition, could require us to change our revenue recognition

 

35


Table of Contents

methods. Specifically, in June 2010, the Financial Accounting Standards Board proposed new accounting standard Revenue from Contracts with Customers. These changes could result in deferral of revenue recognized in current periods to subsequent periods or in accelerated recognition of deferred revenue to current periods, each of which could negatively impact our business and operating results, cause us to fail to meet investors and securities analysts expectations, and negatively impact our stock price.

Future capital needs may require us to seek debt financing or additional equity funding that, if not available on acceptable terms or at all, could cause our financial condition to deteriorate and materially harm our business.

Our liquidity and capital requirements depend in part on numerous factors, including:

 

   

the costs and timing of product development efforts and their relative success;

 

   

the costs of retaining management and key employees;

 

   

the costs and timing of international expansion;

 

   

the costs and timing of future acquisitions, if any;

 

   

economic conditions generally and the markets that our customers serve in particular;

 

   

technological and market developments; and

 

   

the costs of pursuing, maintaining, and enforcing intellectual property rights and defending against any intellectual property infringement claims.

We do not currently maintain any revolving lines of credit. We may therefore be unable to acquire debt financing if and when needed or desired on acceptable terms or at all. In addition, we may be unable to complete an equity funding on acceptable terms or at all. Our inability to obtain additional funds through debt financing or equity funding could cause our financial condition to deteriorate and materially harm our outlook.

If we become subject to unfair hiring claims, we could be prevented from hiring needed employees, incur liability for damages, and incur substantial costs in defending ourselves.

Companies in our industry that lose employees to competitors frequently claim that these competitors have engaged in unfair hiring practices or that the employment of these persons would involve the disclosure or use of trade secrets. If we become subject to unfair hiring claims or misappropriation of trade secret claims, we may be prevented from hiring or retaining needed employees. We could also incur substantial costs in defending ourselves or our employees against these claims, regardless of their merits. Defending ourselves from these claims could also divert management’s attention from our operations, and an adverse determination of any such claims could result in our incurring substantial liability for damages.

Catastrophic events may disrupt our business and harm our operating results.

We rely on our network infrastructure and enterprise applications, and technology systems for our development, marketing, operations, support, and sales activities. A disruption or failure of these systems in the event of a major natural disaster, telecommunications failure, cyber-attack, civil unrest in various parts of the world, acts of war, terrorist attack or other catastrophic event could cause system interruptions, delays in our product development and loss of critical data and could prevent us from fulfilling our customers’ orders. Our corporate headquarters, a significant portion of our research and development activities, our data centers, and certain

 

36


Table of Contents

other critical business operations are located in California, near major earthquake faults. A catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or IT systems would severely affect our ability to conduct normal business operations and, as a result, our operating results would be adversely affected.

Risks Related to our Common Stock and this Offering

An active trading market for our common stock may not develop and the market price for our common stock may decline below the initial public offering price.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that market may become. If an active public market for our common stock does not develop, the market price and liquidity of our common stock may be adversely affected. The initial public offering price for our common stock will be determined by negotiation among us, our selling stockholders, and the underwriters based upon several factors, and may not be indicative of prices that will prevail in the open market after this offering. Consequently, you may be unable to sell your shares of our common stock at prices equal to or greater than the price you paid for them.

Market prices of technology-related companies have fluctuated widely in recent years, and the market price of our common stock is likely to be volatile, which could result in substantial losses to investors and litigation.

The market price of our common stock is likely to be volatile and could fluctuate widely in response to factors beyond our control. In particular, the market prices for shares of technology-related companies often reach levels that may bear no established relationship to the past operating performance of these companies. The market prices of technology-related companies have been especially volatile. These broad market and industry factors may significantly affect the market price of our common stock regardless of our actual operating performance. In addition to market and industry factors, the market price and trading volume for our common stock may be highly volatile for specific business reasons. Factors that could cause the market price of our common stock to fluctuate significantly include:

 

   

our operating and financial performance and prospects;

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

   

conditions that impact demand for our products and services;

 

   

the public’s reaction to our press releases, other public announcements, and filings with the Securities and Exchange Commission;

 

   

changes in earnings estimates or recommendations by securities or research analysts who track our common stock;

 

   

market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

   

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

   

changes in government and other regulations;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

arrival and departure of key personnel;

 

37


Table of Contents
   

the number of shares to be publicly traded after this offering;

 

   

sales of common stock by us, our investors or members of our management team; and

 

   

changes in general market, economic, and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, telecommunications failure, cyber attack, civil unrest in various parts of the world, acts of war, terrorist attacks or other catastrophic events.

Any of these factors may result in large and sudden changes in the trading volume and market price of our common stock, and may prevent you from being able to sell your shares at or above the price you paid for your shares of our common stock. Following periods of volatility in the market price of a company’s securities, stockholders often institute securities class action litigation against that company. Our involvement in a class action suit could divert our senior management’s attention and, if adversely determined, could have a material adverse effect on our business, financial condition, and results of operations.

The sale or availability for sale of substantial amounts of our common stock could adversely affect its market price.

Sales of substantial amounts of shares of our common stock in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our common stock and could materially impair our future ability to raise capital through common stock offerings.

We will have          shares of common stock outstanding immediately after this offering, or          shares of common stock if the underwriters exercise their option to purchase additional shares of common stock in full. All of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, unless held by our “affiliates” as that term is defined in Rule 144 under the Securities Act. The 17,217,798 shares of common stock outstanding as of April 30, 2011, assuming the conversion of all shares of our preferred stock into shares of our common stock, will be eligible for resale under Rule 144 or Rule 701 of the Securities Act, subject to volume limitations and applicable holding period requirements. We have also provided registration rights to holders of 9,953,885 shares of our common stock.

In addition, as of April 30, 2011, there were 3,117,454 outstanding options to purchase shares of our common stock, all of which are immediately exercisable. Immediately following this offering, we intend to file a registration statement registering the shares issuable upon the exercise of these existing options, and for the 2,400,000 shares reserved for issuance under our 2011 Equity Incentive Plan and 600,000 shares reserved for issuance under our 2011 Employee Stock Purchase Plan. Assuming effectiveness of the registration statement on Form S-8, these shares will be freely tradable, although they will be subject to the lock-up arrangements we describe below and elsewhere in this prospectus and vesting limitations.

In connection with this offering, we, our directors and officers, and substantially all of our stockholders and holders of options to purchase our stock, have agreed, subject to certain limited exceptions, not to offer, sell, contract to sell or otherwise dispose of, or enter into, any transaction that is designed to, or could be expected to, result in the disposition of any shares of our common stock or other securities convertible into or exchangeable or exercisable for shares of our common stock for 180 days after the date of this prospectus without the written consent of Deutsche Bank Securities Inc. However, Deutsche Bank Securities Inc. may release these securities from these restrictions at any time without notice. We cannot predict what effect, if

 

38


Table of Contents

any, market sales of securities held by our stockholders or the availability of these securities for future sale will have on the market price of our common stock. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

We may also issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions and investments.

Our executive officers, directors, and other key employees will significantly influence our activities, and their interests may differ from your interests as a stockholder.

Following this offering, our executive officers, directors, and other key employees will beneficially own, collectively,     % of our outstanding common stock, or     % if the underwriters exercise in full their option to purchase additional shares of our common stock.

Accordingly, these stockholders have had, and will continue to have, significant influence in determining the outcome of any corporate transaction or any other matter submitted for approval to our stockholders, including mergers, consolidations, and the sale of our assets, director elections, and other significant corporate actions. They will also have significant influence in preventing or causing a change in control of our company. In addition, without the consent of these stockholders, we could be prevented from entering into transactions that could be beneficial to us. The interests of these stockholders may differ from your interests as a stockholder.

The initial public offering price for shares of our common stock is substantially higher than the pro forma net tangible book value per share, and, as such, you will incur immediate and substantial dilution.

If you purchase common stock in this offering, you will pay more for your common stock than the amount paid by existing stockholders for their common stock. As a result, you will experience immediate and substantial dilution of approximately $         per share of common stock, assuming no exercise of outstanding options to acquire common stock, representing the difference between our pro forma net tangible book value per share of common stock of $        , after giving effect to this offering and the assumed initial public offering price per share of common stock of $        , the midpoint of the estimated offering range set forth on the cover page of this prospectus. In addition, you may experience further dilution to the extent that our common stock is issued upon the exercise of stock options. All of the shares of common stock issuable upon the exercise of currently outstanding stock options will be issued at a purchase price that is less than the initial public offering price per share in this offering. See “Dilution” for a more complete description of how the value of your investment in our common stock will be diluted upon the completion of this offering.

Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect at or upon consummation of this offering, and Delaware corporate law as well as certain of our contracts contain provisions which could delay or prevent a change in control even if the change in control would be beneficial to our stockholders.

Delaware law, as well as our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect at or upon consummation of this offering,

 

39


Table of Contents

contains anti-takeover provisions that could delay or prevent a change in control of our company, even if the change in control would be beneficial to the stockholders. These provisions could lower the price that future investors might be willing to pay for shares of our common stock. These anti-takeover provisions:

 

   

authorize our board of directors to create and issue, without stockholder approval, preferred stock that can be issued, increasing the number of outstanding shares and deter or prevent a takeover attempt;

 

   

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

 

   

establish a three-tiered classified board of directors requiring that not all members of the board be elected at one time;

 

   

prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

 

   

establish limitations on the removal of directors;

 

   

empower the board of directors to fill any vacancy on the board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;

 

   

provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;

 

   

provide that our directors will be elected by a plurality of the votes cast in the election of directors;

 

   

establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and

 

   

limit the ability of stockholders to call special meetings of stockholders.

Section 203 of the Delaware General Corporation Law, the terms of our stock incentive plans, and other contractual provisions also may discourage, delay or prevent a change in control of our company. Section 203 generally prohibits a Delaware corporation from engaging in a business combination with an interested stockholder for three years after the date the stockholder became an interested stockholder. Our stock incentive plans include change-in-control provisions that allow us to grant options or stock purchase rights that may become vested immediately upon a change in control. We may also enter into contractual restrictions with third parties, the terms of which may discourage a change in control of our company. For example, we have agreed with one of our largest customers that, under certain circumstances, if we divest or assign any of our patents, then the customer will be entitled to an irrevocable, worldwide, nonexclusive license to such patents to make or have made such customer’s products.

Together, these charter, statutory, and contractual provisions could make the removal of management and directors more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock. Furthermore, the existence of the foregoing provisions, as well as the significant common stock beneficially owned by our executive officers, key non-executive officer employees, and members of our board of directors, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

 

40


Table of Contents

Our board of directors also has the power to adopt a stockholder rights plan that could delay or prevent a change in control of us even if the change in control is generally beneficial to our stockholders. These plans, sometimes called “poison pills,” are oftentimes criticized by institutional investors or their advisors and could affect our rating by such investors or advisors. If our board of directors adopts such a plan, it might have the effect of reducing the price that new investors are willing to pay for shares of our common stock.

We have not determined a specific use for a portion of the net proceeds from this offering and we may use these proceeds in ways with which you may not agree.

We have not determined a specific use for the net proceeds of this offering. Our management will have considerable discretion in the application of these proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our profitability or increase our common stock price. The net proceeds from this offering may also be placed in investments that do not produce income or that lose value.

We have never paid cash dividends and do not anticipate paying any cash dividends on our common stock.

We currently intend to retain any earnings to finance our operations and growth. The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including but not limited to factors such as our financial condition, operating results, capital requirements, business conditions, and covenants under any applicable contractual arrangements. Because we have never paid cash dividends and do not anticipate paying any cash dividends on our common stock in the foreseeable future, any short-term return on your investment will depend on the market price of our common stock.

If equity research analysts do not publish research or reports about our business, or if they issue unfavorable commentary or downgrade our common stock, the market price of our common stock will likely decline.

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The market price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue unfavorable commentary or cease publishing reports about us or our business.

 

41


Table of Contents

FORWARD-LOOKING STATEMENTS AND

STATISTICAL DATA AND MARKET INFORMATION

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws, which involve substantial risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “projects,” “might,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions that concern our strategy, plans or intentions. All statements we make in this prospectus relating to our estimated and projected revenue, margins, costs, expenditures, cash flows, growth rates, financial results, and prospects are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those we expect. We derive many of our forward-looking statements from our operating budgets and forecasts, which we base upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.

We disclose important factors that could cause actual results to differ materially from our expectations under “Risk Factors” and elsewhere in this prospectus, including, without limitation, in conjunction with the forward-looking statements included in this prospectus. Some of the factors that we believe could affect our revenue, margins, costs, expenditures, cash flows, growth rates, financial results, business, condition, and prospects include:

 

   

our dependence on a small number of customers for a significant portion of our revenue;

 

   

if customers terminate their licenses, delay orders or fail to renew licenses;

 

   

a deterioration in the financial condition of any of our key customers or their end-user customers;

 

   

customer consolidation, which could lead to reduced selling prices and license sales and customer loss;

 

   

our reliance on a limited number of products that focus exclusively on power-efficient and noise-immune solutions;

 

   

our ability to effectively develop and commercialize or acquire new and enhanced products;

 

   

our ability to maintain and expand relationships with existing customers and develop relationships with new customers;

 

   

our need to continue to make significant research and development investments;

 

   

competition in the markets in which we operate;

 

   

our ability to attract, retain, and train necessary personnel;

 

   

our dependence on and ability to retain our senior executives and other key personnel;

 

   

the lack of experience our senior executives have in managing a public reporting company;

 

   

continued consolidation among our competitors and potential customers;

 

   

lack of growth in new IC design starts and industry consolidation;

 

42


Table of Contents
   

industry-wide downturns and other cyclical effects that have affected or affecting our customers’ research and development budgets;

 

   

structural barriers and our customers’ internal capabilities, which make gaining market share difficult;

 

   

the limited size of our addressable market;

 

   

technological innovations that could reduce or eliminate demand for our products;

 

   

if IC designers and manufacturers do not integrate our software into existing or future design flows;

 

   

if software companies, including competitors, do not cooperate in working with us to interface our products with their design flows;

 

   

if our customers do not adopt, or are slow to adopt smaller design geometries on a large scale;

 

   

our lengthy and unpredictable sales cycle;

 

   

our ability to effectively manage our recent and anticipated growth;

 

   

changes in tax provisions or additional tax liability;

 

   

our limited operating history and the rapidly evolving nature of the markets in which we operate;

 

   

the high costs of customer engagement and support;

 

   

our limited ability to quickly and significantly reduce our operating costs;

 

   

the significant legal, accounting, and other costs of both becoming and being a public company;

 

   

the significant IT costs of, and potential impact on compliance efforts and obligations from, our upgrading of our internal resources and systems;

 

   

the ability of our disclosure controls and procedures and our internal control over financial reporting to adequately allow us to report information accurately to investors or to detect and prevent errors or fraud, and the costs associated with implementing and maintaining these controls and procedures;

 

   

any failures by our disclosure controls and procedures and internal control over financial reporting;

 

   

our ability to obtain sufficient patent protection and protect our other proprietary rights;

 

   

our reliance on certain third parties and open source software for technology incorporated into our products;

 

   

the costs associated with, and the outcomes of, any intellectual property or other claims and litigation;

 

   

whether we undertake any acquisitions and our ability to integrate any acquired operations, products, and technology;

 

   

the risks associated with our reliance on international operations, including foreign exchange risk;

 

   

our exposure to customer credit risk;

 

   

our failure to obtain export licenses or to comply with U.S. export laws;

 

   

insufficient security measures or security breaches;

 

43


Table of Contents
   

our liability exposures from product errors or defects;

 

   

our potential indemnification obligations;

 

   

any accounting principles, standards or guidance changes;

 

   

our ability to satisfy future capital needs;

 

   

if we become subject to unfair hiring claims; and

 

   

the effect of local and national economic, credit, and capital market conditions on the economy in general, and the markets that our customers serve in particular.

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this prospectus may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.

This prospectus also contains statistical data, estimates, and forecasts that we obtained from industry publications and reports generated by third-party market research firms, including iSuppli Corporation, or iSuppli, Gartner, Inc., or Gartner, International Technology Roadmap for Semiconductors, or ITRS, and International Data Corporation, or IDC. Although we believe that these third-party sources are reliable, neither we nor the underwriters have independently verified the data provided by these third parties. While we are not aware of any misstatements regarding any third-party data presented in this prospectus, their estimates, in particular as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under “Risk Factors.”

The Gartner Report described herein, “What to Consider When Designing Next-Generation Data Centers,” David Cappucio, September 10, 2010, or the Gartner Report, represents data, research, opinion or viewpoints published as part of a syndicated subscription service by Gartner, and are not representations of fact. The Gartner Report speaks as of its original publication date and not as of the date of this filing, and the opinions expressed in the Gartner Report are subject to change without notice.

The iSuppli report described herein is a press release dated April 19, 2011 entitled “Samsung Closes in on Intel for Semiconductor Market Leadership in 2010.”

The IDC reports described herein are Worldwide Quarterly Media Tablet and eReader Tracker, December 2010, and Worldwide Smartphone 2010-2014 Forecast Update: December 2010, IDC #226107.

 

44


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the common stock that we are offering will be approximately $        million, based on an assumed initial public offering price of $        per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Our net proceeds will increase by approximately $        million if the underwriters exercise in full their option to purchase additional shares from us. Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us of this offering by approximately $        million, assuming the number of shares offered by us, as listed on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital, create a public market for our common stock, and to facilitate our future access to the public equity markets.

As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us of this offering. However, we currently intend to use the net proceeds from our sale of shares of common stock in this offering for working capital and other general corporate purposes, which may include hiring additional personnel and investing in sales, marketing, and research and development. In addition, we may use a portion of the proceeds received by us from this offering for acquisitions of complementary businesses, technologies or other assets. We have no agreements with respect to any acquisitions at this time.

The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our product development efforts, potential acquisitions, sales and marketing activities, technological changes, amount of cash generated or used by our operations, and competition. We will have broad discretion over the uses of the net proceeds in this offering.

Pending the use of the proceeds from this offering as described above, we plan to invest the net proceeds in short-term, investment grade, interest-bearing securities. We will not receive any of the proceeds from shares sold by the selling stockholders.

 

45


Table of Contents

DIVIDEND POLICY

We have never paid cash dividends on our capital stock. We currently intend to retain any future earnings to fund business development and growth, and we do not anticipate paying cash dividends in the foreseeable future.

 

46


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the automatic conversion of all of our preferred stock into common stock; and

 

   

on a pro forma as adjusted basis to reflect the conversion referred to above and the sale of        shares of common stock by us in this offering at an assumed initial public offering price of $        per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and our estimated offering expenses.

You should read this table in conjunction with our consolidated financial statements and related notes and the sections entitled “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds,” and “Description of Capital Stock” appearing elsewhere in this prospectus.

 

    As of March 31, 2011  
    Actual     Pro forma     Pro forma as
adjusted
 
          (unaudited)     (unaudited)  
    (in thousands, except share data)  

Cash and cash equivalents

  $ 29,398      $ 29,398      $     
                       

Long-term debt, including current portion

  $      $      $   

Redeemable and convertible preferred stock

     

Preferred stock Series A, $0.0001 par value; 3,633,665 shares authorized and 3,633,665 shares outstanding, actual; no shares outstanding, pro forma and pro forma as adjusted

    1,741                 

Preferred stock Series B, $0.0001 par value; 2,300,000 shares authorized and 2,300,000 shares outstanding, actual; no shares outstanding, pro forma and pro forma as adjusted

    4,255                 

Preferred stock, $0.0001 par value; no shares authorized and outstanding, actual; 5,000,000 shares authorized, no shares outstanding, pro forma and pro forma as adjusted

                    
                       
    5,996                 

Stockholders’ equity:

     

Common stock, $0.0001 par value; 21,000,000 shares authorized and 11,273,508 shares issued and outstanding, actual; 21,000,000 shares authorized and 17,207,173 shares issued and outstanding, pro forma; 100,000,000 shares authorized and                  shares outstanding, pro forma as adjusted

    1        2     

Additional paid-in capital

    1,405        7,400     

Stock compensation

    3,804        3,804        3,804   

Accumulated other comprehensive income

   
(114

    (114     (114

Retained earnings

    1,431        1,431        1,431   
                       

Total stockholders’ equity

    6,527        12,523     
                       

Total capitalization

  $ 12,523      $ 12,523      $     
                       

 

47


Table of Contents

Our capitalization information presented above excludes:

 

   

3,131,310 shares of common stock subject to options outstanding as of March 31, 2011 issued under our 2001 Stock Option/Stock Issuance Plan;

 

   

2,400,000 shares of common stock reserved for issuance pursuant to our 2011 Equity Incentive Plan and 600,000 shares of common stock reserved for issuance pursuant to our 2011 Employee Stock Purchase Plan; and

 

   

         shares of common stock issuable upon the exercise of the underwriters’ over-allotment option.

 

48


Table of Contents

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of common stock you pay and the as adjusted net tangible book value per share of our common stock after this offering. Our net tangible book value as of March 31, 2011 was $3.5 million, or $0.21 per share of common stock. We calculate net tangible book value per share by calculating the total assets less goodwill and other intangible assets and total liabilities, and dividing by the number of shares of common stock outstanding and assuming the conversion of all of our outstanding shares of preferred stock into shares of common stock in connection with this offering.

Net tangible book value dilution per share represents the difference between the amount per share paid by new investors who purchase shares from us in this offering and the as adjusted net tangible book value per share of common stock immediately after completion of this offering. As of March 31, 2011, after giving effect to this offering, our as adjusted net tangible book value would have been $        million, or $         per share, assuming that the shares offered under this prospectus are sold at a public offering price of $        per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus. This represents an immediate increase in net tangible book value of $        per share to existing stockholders, and an immediate dilution in net tangible book value of $        per share to new investors in the offering. The table below illustrates this per share dilution as of March 31, 2011:

 

          Per Share  

Assumed initial public offering price per share

    $                

Net tangible book value per share of common stock as of March 31, 2011

  $ 0.21     

Increase in net tangible book value per share attributable to new investors

   
         

As adjusted net tangible book value per share after this offering

   
         

Dilution in net tangible book value per share to new investors

    $     
         

A $1.00 increase (decrease) in the assumed public offering price of $        per share would increase (decrease) our as adjusted net tangible book value per share after this offering by $        , and the dilution to new investors by $        per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, our as adjusted net tangible book value will increase to $        per share, representing an increase to existing holders of $        per share, and there will be an immediate dilution of $         per share to new investors.

 

49


Table of Contents

The following table sets forth, on an as adjusted basis as of March 31, 2011, the number of shares of common stock purchased or to be purchased from us, the total consideration paid or to be paid and the average price per share paid or to be paid by existing holders of common stock and by new investors, at an assumed initial public offering price of $        per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price

Per
Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     17,207,173                $ 7,342,197                $ 0.43   

New investors

            
                                          

Total

               $                  $     
                                          

The above table excludes:

 

   

3,131,310 shares of common stock subject to options outstanding as of March 31, 2011 issued under our 2001 Stock Option/Stock Issuance Plan;

 

   

2,400,000 shares of common stock reserved for issuance pursuant to our 2011 Equity Incentive Plan and 600,000 shares of common stock reserved for issuance pursuant to our 2011 Employee Stock Purchase Plan; and

 

   

             shares of common stock issuable upon the exercise of the underwriters’ over-allotment option.

To the extent any of options to purchase shares of common stock are granted or exercised, or the underwriters’ exercise their over-allotment option, there will be further dilution to new investors.

 

50


Table of Contents

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following table sets forth our selected consolidated financial and other data for the years ended December 31, 2006, 2007, 2008, 2009, and 2010 and the three month periods ended March 31, 2010 and 2011. The selected consolidated financial data for the years ended December 31, 2008, 2009, and 2010 were derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data for the periods ended December 31, 2006 and December 31, 2007 were derived from our audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2010 and 2011 and the consolidated balance sheet data as of March 31, 2011 are derived from our unaudited interim consolidated financial statements included in this prospectus. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the financial information set forth in those statements. The historical results presented below are not necessarily indicative of future operating results, and the results for the first three months of 2011 are not necessarily indicative of operating results to be expected for the full year or any other period. In November 2007, we acquired all of the outstanding shares of Optimal Corporation and, in September 2009, we acquired certain assets and foreign subsidiaries of Sequence Design, Inc. Our selected consolidated financial data include the results of operations of the acquired companies commencing on their respective acquisition dates.

You should read the financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2006     2007     2008     2009     2010     2010     2011  
    (in thousands, except per share data)              

Consolidated Statements of Operations:

     

Revenue

  $ 14,652      $ 18,733      $ 25,695      $ 34,601      $ 44,047      $ 10,417      $ 12,180   

Cost of revenue

    2,241        3,609        5,812        6,662        8,999        2,099        2,392   
                                                       

Gross profit

    12,411        15,124        19,883        27,939        35,048        8,318        9,788   

Operating expenses:

             

Sales and marketing

    6,087        8,312        9,529        9,794        12,930        2,827        2,862   

Research and development

    3,839        5,203        7,797        8,588        11,516        2,688        3,289   

General and administrative

    1,242        2,019        2,903        3,573        4,926        962        1,543   
                                                       

Total operating expenses

    11,168        15,534        20,229        21,955        29,372        6,477        7,694   
                                                       

Operating income (loss)

    1,243        (410     (346     5,984        5,676        1,841        2,094   

Other income (expense)

    (129     18        13        (93     366        (18     (25
                                                       

Income (loss) before income tax

    1,114        (392     (333     5,891        6,042        1,823        2,069   

Provision (benefit) for income tax

    565        843        (3,507     2,622        2,738        862        799   
                                                       

Net income (loss)

  $ 549      $ (1,235   $ 3,174      $ 3,269      $ 3,304      $ 961      $ 1,270   
                                                       

Net income (loss) per share:

             

Basic

  $ 0.06      $ (0.12   $ 0.29      $ 0.30      $ 0.30      $ 0.09      $ 0.11   
                                                       

Diluted

  $ 0.03      $ (0.12   $ 0.18      $ 0.19      $ 0.19      $ 0.06      $ 0.07   
                                                       

Weighted average common shares outstanding:

             

Basic

    9,738        10,480        10,882        10,930        11,016        10,973        11,202   
                                                       

Diluted

    16,606        10,480        17,253        17,237        17,631        17,346        18,352   
                                                       

Other Consolidated Financial Data (Unaudited):

             

Non-GAAP net income (loss) (1)

  $ 938      $ (338   $ 4,735      $ 4,971      $ 5,372      $ 1,495      $ 1,807   
                                                       

 

51


Table of Contents
     December 31,      March 31,  
     2006     2007     2008     2009     2010      2011  
                                    (unaudited)  

Consolidated Balance Sheet Data:

             

Cash and cash equivalents

   $ 5,829      $ 3,158      $ 8,681      $ 16,957      $ 26,175       $ 29,398   

Working capital (deficit)

     (290     (3,490     (882     (2,924     4,646         7,032   

Total assets

     10,948        23,319        32,157        44,069        52,711         51,143   

Long-term debt obligations

                                           

Redeemable convertible preferred stock

     5,996        5,996        5,996        5,996        5,996         5,996   

Total stockholders’ equity (deficit)

     (7,195     (7,598     (3,462     728        4,871         6,527   

 

(1) Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. We define non-GAAP net income (loss) as GAAP net income (loss) plus amortization of intangible assets and stock-based compensation expense, and giving effect to the tax impact of these adjustments to GAAP net income (loss).

We believe that non-GAAP net income (loss) is useful to investors and other users of our financial information in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that:

 

   

non-GAAP net income (loss) provides investors and other users of our financial information consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations, and facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and

 

   

adding back certain non-cash charges, such as amortization of intangible assets and stock-based compensation expense, to net income is useful because these non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations, and these non-cash expenses can vary significantly between periods as a result of full amortization of previously acquired intangible assets and the timing of new stock-based awards.

Non-GAAP net income (loss) is adjusted by the tax impact of excluding amortization of intangible assets and stock-based compensation from our GAAP net income (loss) results, using a blended tax rate of 40%. During the periods presented, there was no tax impact from stock-based compensation expense on our GAAP net income (loss) or our non-GAAP net income (loss) because of the tax attributes of our historical equity awards. However, we expect that in future periods there may be a tax impact depending on the tax attributes of the equity awards we issue in the future.

We use non-GAAP net income (loss) in conjunction with traditional GAAP measures as part of our overall assessment of our performance, for planning purposes, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance.

We do not, and you should not, place undue reliance on non-GAAP net income (loss) as our only measure of operating performance. You should not consider non-GAAP net income (loss) as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do. We compensate for the inherent limitations associated with using non-GAAP net income (loss) through disclosure of these limitations, presentation of our financial statements in accordance with GAAP, and reconciliation of non-GAAP net income (loss) to the most directly comparable GAAP measure, net income (loss).

The following provides a reconciliation of GAAP net income (loss) to non-GAAP net income (loss):

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2006      2007      2008      2009      2010      2010      2011  
     (in thousands)         

GAAP net income (loss)

   $ 549       $ (1,235    $ 3,174       $ 3,269       $ 3,304       $ 961       $ 1,270   

Amortization of intangible assets

             431         1,083         1,470         2,244         561         561   

Stock-based compensation expense

     389         638         911         819         720         197         228   

Tax impact adjustments

             (172      (433      (587      (896      (224      (252
                                                              

Non-GAAP net income (loss)

   $ 938       $ (338    $ 4,735       $ 4,971       $ 5,372       $ 1,495       $ 1,807   
                                                              

 

52


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with “Selected Consolidated Financial and Other Data” and our consolidated financial statements and notes thereto appearing elsewhere in this prospectus. This discussion and analysis of our business, financial condition, and results of operations includes forward-looking statements based upon current expectations that involve substantial risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements for many reasons, including those set forth under the caption “Risk Factors” or in other parts of this prospectus.

Overview

We are a leading provider of innovative power analysis and optimization software solutions that enable the design of power-efficient, high-performance, noise-immune integrated circuits, or ICs, and electronic systems. Our solutions consist of a suite of software tools and methodologies that enable design engineers to reduce power consumption, ensure reliable delivery of power to ICs and electronic system components, and mitigate power-induced signal interference, or noise. We believe our solutions are critical to the design of our customers’ products and allow our customers to deliver power-efficient ICs and electronic systems that are resistant to the impact of noise, or noise-immune, at lower costs and with a faster time to market than with alternative solutions.

We were founded in 2001 with the vision of solving critical power analysis and optimization challenges encountered by designers of ICs and electronic systems. Following intensive research and development, we introduced our RedHawk platform in 2002, which we believe was the first dynamic power and noise analysis platform for the design of complex ICs. Since releasing our RedHawk platform, we have added three new platforms and have continued to expand our suite of solutions, developing several first-to-market products for various aspects of power and noise analysis. We introduced our Sentinel platform in 2007, our Totem platform in 2009, and our PathFinder product in 2010. In addition, we have expanded our product portfolio through strategic acquisitions. In 2007, we acquired Optimal Corporation, through which we obtained certain products and technologies used in our Sentinel platform, and in 2009, we acquired the assets and certain foreign subsidiaries of Sequence Design, Inc., through which we obtained our PowerArtist platform.

We depend upon the sales of licenses to a limited number of products for substantially all of our revenue, and expect that a limited number of products will continue to account for a large percentage of our revenue in the foreseeable future. We currently offer four platforms that focus exclusively on solutions for the design of power-efficient and noise-immune ICs and electronic systems, and our flagship platform, RedHawk, has accounted and continues to account for a majority of our revenue. Our dependence on RedHawk, and our limited platforms, make us highly susceptible to changes in demand.

We generate substantially all of our revenue through the sale of time-based software licenses, typically ranging from one to three years. Assuming all other revenue recognition criteria are met, we recognize revenue at the lesser of the pro rata portion of the license fee for the applicable period, or as payments from the customer become due. As of December 31, 2010, the average length of our time-based licenses was two and one half years.

A significant portion of our revenue depends on sales to a small number of customers. In 2008, 2009, and 2010, our largest customers, which was a different customer in each year,

 

53


Table of Contents

accounted for 8%, 12%, and 11%, respectively, of our revenue, and our ten largest customers accounted for more than 62%, 68%, and 59%, respectively, of our revenue. For the three months ended March 31, 2011, our largest customer accounted for 10% of our revenue, and our ten largest customers accounted for more than 59% of our revenue. We expect that we will continue to depend upon a relatively small number of customers for a substantial portion of our revenue for the foreseeable future.

In 2010, we sold licenses to 125 companies globally and we frequently sell licenses to multiple business units within these companies. Our customers include all of the top 20 semiconductor companies as measured by revenue in 2010 according to iSuppli. Our customers also include leading electronic system companies serving market segments such as mobile devices, high-performance computing and networking, consumer electronics, and automotive and medical electronics. These customers include, among others, ARM Limited, Broadcom Corporation, Hynix Semiconductor Inc., Intel Corporation, LSI Corporation, MediaTek Inc., QUALCOMM Incorporated, Samsung Electronics Co., Ltd., Sony Corporation, STMicroelectronics N.V., Texas Instruments Incorporated, and Toshiba Corporation.

We sell licenses primarily through a direct sales and support organization located in our customers’ key international regions. We intend to continue leveraging our sales force’s domain expertise to further penetrate our existing customer base, and sell solutions to our customers’ customers. We will also continue to focus on expanding our customer base.

We conduct our research and development activities primarily through our team of engineers and developers with expertise and degrees in computer science, semiconductor physics, electrical engineering, and other engineering disciplines. As of March 31, 2011, we had 137 employees engaged in research and development activities. Our research and development expense was $7.8 million, $8.6 million, and $11.5 million in 2008, 2009, and 2010, respectively, and $2.7 million and $3.3 million for the three months ended March 31, 2010 and 2011, respectively, and we plan to continue investing in research and development activities to further enhance our core technologies and expand our product offerings.

Our revenue was $25.7 million, $34.6 million, and $44.0 million in 2008, 2009, and 2010 respectively. In the same periods, we had net income of $3.2 million, $3.3 million, and $3.3 million, respectively. Also in the same periods, we had non-GAAP net income of $4.7 million, $5.0 million, and $5.4 million, respectively. Our revenue was $10.4 million and $12.2 million for the three months ended March 31, 2010 and 2011, respectively. In the same periods, we had net income of $1.0 million and $1.3 million, respectively, and non-GAAP net income of $1.5 million and $1.8 million, respectively. For a discussion of non-GAAP net income and a reconciliation of GAAP net income to non-GAAP net income, see note 1 to “Selected Consolidated Financial and Other Data.”

We expect that the demand for our solutions will continue to grow with the proliferation of increasingly complex high-performance mobile devices, miniaturization and increased wireless connectivity of these devices, and the rising costs of electricity for data centers.

Key Business Indicators

In addition to financial measures set forth in our consolidated financial statements, we monitor our operating performance using the following key business indicators:

Customer retention.    Retaining our customers is one of the keys to the success of our business. One of the primary drivers of our revenue growth is license renewals and increased license purchases by existing customers. We remain actively engaged with our customers

 

54


Table of Contents

throughout their license terms and seek to secure license renewals and increase the number of licenses our customers purchase significantly in advance of license expiration. All of our top 20 customers in each of 2008, 2009, and 2010 remain our customers today.

Existing customer license growth.    Increasing license sales to existing customers is a significant driver of our revenue growth. We often initially sell licenses for a single platform to a single business unit, and then expand the sale of licenses to additional business units and for additional platforms. We monitor and continuously seek to expand the number of business units to which we sell within each of our customers and the number of licenses and platforms we could potentially sell to them.

New customer revenue growth.    We view our ability to acquire new customers as an important element of our growth strategy, and our sales organization expends a considerable portion of its efforts on expanding our customer base and generating revenue from new customers. We seek to leverage our brand, technology leadership, and customer support to add new customers and expand our revenue base. From January 1, 2008 to March 31, 2011, we grew our customer base by over 122%, from 53 customers at the beginning of 2008 to 118 customers as of March 31, 2011. These new customers contributed additional revenue to our business.

Non-GAAP net income.    In addition to GAAP financial measures, we also use non-GAAP net income as an important indicator of our operating performance. We define non-GAAP net income as GAAP net income plus amortization of intangible assets and stock-based compensation expense, and giving effect to the tax impact of these adjustments. We believe that the use of non-GAAP net income provides useful information to gain an overall understanding of our current financial performance and prospects for the future because it excludes certain non-cash expenses which may not reflect the underlying performance of our business operations. For a discussion of non-GAAP net income and a reconciliation of GAAP net income to non-GAAP net income, see note 1 to “Selected Consolidated Financial and Other Data.”

Acquisitions

Between 2007 and 2010, we completed two acquisitions for total cash consideration of $12.8 million. These acquisitions have contributed additional product offerings to our existing product line. In November 2007, we acquired all of the outstanding equity of Optimal Corporation for total cash consideration of $7.5 million. In September 2009, we acquired the assets and certain foreign subsidiaries of Sequence Design, Inc. for total cash consideration of $5.3 million, plus certain assumed liabilities. We recorded the acquired assets and liabilities for each of these acquisitions at fair value, and recorded the excess of the purchase price over the fair value of the acquired net assets as goodwill. We are amortizing the acquired intangible assets on a straight-line basis over their estimated useful lives, which range between two to seven years. The amortization expense of the acquired intangible assets from these acquisitions was $1.1 million, $1.5 million, and $2.2 million for 2008, 2009, and 2010, respectively, and $0.6 million for both the three months ended March 31, 2010 and 2011.

We accounted for each of these acquisitions as a purchase transaction, and therefore our consolidated financial statements include the results of operations of the acquired companies commencing on their respective acquisition dates. Following each acquisition, we integrated the combined companies by bundling acquired products with our existing products and cross selling products to our customers and to the customers of the acquired companies. We have sought to reduce the costs associated with the operation of the acquired businesses by consolidating sales and marketing efforts, eliminating redundant administrative resources, and rationalizing research and development expense. As a result of the foregoing, we cannot separately quantify the impact of these acquisitions on our consolidated financial statements.

 

55


Table of Contents

We acquired certain assets of Sequence Design primarily for the PowerArtist platform. Although we continue to sell and support certain other Sequence Design products, we do not consider these other products to be a core element of our solutions. At the time we completed the acquisition of assets from Sequence Design, we observed that the sales of many of Sequence Design’s products, other than PowerArtist, were declining. While we cannot specifically isolate the impact Sequence Design had to our revenue growth following the acquisition for the reasons described in the preceding paragraph, we have observed that sales of Sequence Design’s products that are not bundled with other products, other than sales of PowerArtist, have steadily decreased since the acquisition. The decrease in unbundled sales of these products was partially offset by bundling certain of Sequence Design’s products, primarily PowerArtist, with our existing products, which enhanced our ability to sell these bundled product offerings to our customer base and has positively impacted the overall revenue we have generated from such arrangements. We expect that the sale of Sequence Design’s products that are not bundled with our other products, other than sales of PowerArtist, will continue to decline.

Components of Results of Operations

Revenue

We derive substantially all of our revenue from licensing our solutions and generate substantially all of our sales through our direct sales force. Customers typically purchase our solutions under time-based licenses, or TBLs. A TBL is a license valid for a finite term, generally one to three years, where the license expires at the end of the term. The software licenses are generally bundled with post-contract customer support, which we refer to as maintenance, for the license term. Assuming all other revenue recognition criteria are met, we recognize revenue at the lesser of the pro rata portion of the license fee for the applicable period or as the payment from the customer becomes due. See “—Critical Accounting Policies.”

Costs and Expenses

Cost of revenue. Cost of revenue includes costs associated with licensing our solutions, and consists primarily of employee compensation, benefits, and other employee-related costs for our customer support personnel, as well as the amortization of acquired intangibles, the cost of technical documentation, and royalty payments to third-party vendors.

Sales and marketing expense. Sales and marketing expense consists primarily of compensation, commissions, benefits, and other employee-related costs for sales and marketing personnel, as well as expenses related to trade shows, promotion, travel, and allocated facilities costs. We expect our sales and marketing expense to continue to increase as we intend to hire additional sales and support personnel for our global sales and support organization, particularly in the Asia Pacific region.

Research and development expense. Research and development expense consists primarily of compensation, benefits, and other employee-related costs for our engineers engaged in product design and development, as well as allocated facilities costs. We expect to continue to incur significant research and development expenses.

General and administrative expense. General and administrative expense consists primarily of compensation, benefits, and other employee-related costs for executive management, finance, human resources, and other administrative personnel, including third-party professional fees, and allocated facilities costs. We anticipate that in 2011, general and

 

56


Table of Contents

administrative expense will continue to increase significantly as we continue to incur the costs associated with becoming a public company, including related personnel increases, third-party professional services fees, director compensation increases due to our larger board of directors, directors and officers liability insurance, and investor relations.

Other income (expense). Other income (expense) consists primarily of interest income (expense), foreign currency gains (losses), and other miscellaneous items.

Provision (benefit) for income taxes. Provision (benefit) for income taxes is comprised of U.S. federal, state, and foreign taxes. Our effective tax rate has varied and may continue varying year-to-year based on numerous factors, including our overall profitability, the geographical mix of income before taxes, the related tax rates in the jurisdictions where we operate and withholding taxes, and changes in valuation allowances, as well as discrete events.

Results of Operations

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010 (unaudited)

The following tables set forth our unaudited results of operations for the three months ended March 31, 2010 and March 31, 2011, respectively. The results of our operations for the interim periods presented are not necessarily indicative of operating results for the full fiscal year or any future interim period.

 

    Three Months
Ended March 31,
                Three Months Ended March 31,  
    2010     2011     $ Change     % Change     2010     2011  
    (in thousands)                 (percentage of revenue)  

Revenue

  $ 10,417      $ 12,180      $ 1,763        17     100     100

Cost of revenue

    2,099        2,392        293        14        20        20   
                                               

Gross profit

    8,318        9,788        1,470        18        80        80   

Operating expenses:

           

Sales and marketing

    2,827        2,862        35        1        27        23   

Research and development

    2,688        3,289        601        22        27        27   

General and administrative

    962        1,543        581        60        9        13   
                                               

Total operating expenses

    6,477        7,694        1,217        19        63        63   
                                               

Operating income

    1,841        2,094        253        14        17        17   

Other income (expense)

    (18     (25     (7     (39              
                                               

Income before income tax

    1,823        2,069        246        13        17        17   

Provision for income tax

    862        799        (63     (7     8        7   
                                               

Net income

  $ 961      $ 1,270      $ 309        32     9     10

Revenue.    Revenue increased $1.8 million, or 17%, from $10.4 million for the three months ended March 31, 2010 to $12.2 million in the three months ended March 31, 2011. The increase was primarily due to additional sales of our TBLs across our product platforms to existing customers.

 

57


Table of Contents

We market our products in four geographic regions: United States; Europe; the Middle East and Africa, or EMEA; Asia Pacific, excluding Japan; and Japan. Revenue based on the regions to which we shipped our products was as follows:

 

     Three Months Ended March 31,  

Percentage of revenue

   2010     2011     Percentage
Change
 

United States

     56     58     2

Europe, Middle East and Africa

     13        15        2   

Asia Pacific, excluding Japan

     13        16        3   

Japan

     18        11        (7
                  

Revenue

     100     100  
                  

Our revenue mix by geography varied for the three months ended March 31, 2011 as compared with the comparable period in 2010. All regions except for Japan experienced modest increases in revenue share, while Japan experienced a decrease. The decrease in the percentage of revenue contributed by Japan was primarily due to the impact of the timing of the delivery of licenses to a customer that resulted in an increased amount of revenue being recognized during the three months ended March 31, 2010 in accordance with our revenue recognition policy. The increased amount of revenue was due to the amounts from the prior three quarters being recognized during the three months ended March 31, 2010.

In March 2011, Japan experienced a significant earthquake and tsunami. These geological events and their aftereffects caused significant damage in that region and have adversely affected Japan’s infrastructure and economy. Some of our customers are located in Japan, and their operations may be negatively impacted by these events. To date, we have not experienced any material adverse effect on our business or results of operations, and we currently anticipate that our results of operations from Japan for the remainder of 2011 will not be materially adversely affected by these events. However, our customers that have been affected by these natural disasters and their aftereffects, including any rolling blackouts, could defer, delay, cancel or otherwise not place orders with us, which could negatively impact our business and results of operations. For these reasons, we continue to assess the impact of the earthquake, tsunami, and resulting events in Japan on our customer base.

Cost of revenue.    Cost of revenue increased $0.3 million, or 14%, from $2.1 million in the three months ended March 31, 2010 as compared to $2.4 million in the three months ended March 31, 2011. Cost of revenue increased primarily due to increased field engineer employee-related costs as a result of increased headcount required to service our growing customer base.

Sales and marketing expense.    Sales and marketing expense was flat for the three months ended March 31, 2011 as compared to the comparable period in the prior year.

Research and development expense.    Research and development expense increased $0.6 million, or 22%, from $2.7 million for the three months ended March 31, 2010 to $3.3 million in the three months ended March 31, 2011. Research and development expense increased primarily due to additional employee-related costs related to increased headcount engaged in research and development.

General and administrative expense.    General and administrative expense increased $0.6 million, or 60%, from $1.0 million in the three months ended March 31, 2010 to $1.6 million in the three months ended March 31, 2011. General and administrative expense increased primarily due to increased employee-related costs from additional headcount and increased legal, tax services, and audit services fees. These increases were primarily due to additional administrative, compliance and infrastructure expenditures related to becoming a public company.

 

58


Table of Contents

Provision for income taxes.    Provision for income taxes decreased $0.1 million and our effective tax rate decreased to 39% in the three months ended March 31, 2011, compared to 47% in the three months ended March 31, 2010. The decrease in the tax rate was due to our limitations in utilizing our foreign tax credit in 2010.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

The following tables set forth our results of operations for the years ended December 31, 2009 and December 31, 2010:

 

    Year Ended
December 31,
                Year Ended
December 31,
 
    2009     2010     $ Change     % Change     2009     2010  
    (in thousands)           (percentage of revenue)  

Revenue

  $ 34,601      $ 44,047      $ 9,446        27     100     100

Cost of revenue

    6,662        8,999        2,337        35        19        20   
                                               

Gross profit

    27,939        35,048        7,109        25        81        80   

Operating expenses:

           

Sales and marketing

    9,794        12,930        3,136        32        29        30   

Research and development

    8,588        11,516        2,928        34        25        26   

General and administrative

    3,573        4,926        1,353        38        10        11   
                                               

Total operating expenses

    21,955        29,372        7,417        34        64        67   
                                               

Operating income

    5,984        5,676        (308     (5     17        13   

Other income (expense)

    (93     366        459        N/A               1   
                                               

Income before income tax

    5,891        6,042        151        3        17        14   

Provision for income tax

    2,622        2,738        116        4        8        6   
                                               

Net income

  $ 3,269      $ 3,304      $ 35        1     9     8
                                               

Revenue.    Revenue increased $9.4 million, or 27%, from $34.6 million in 2009 to $44.0 million in 2010. The increase was due to increased sales of licenses to our products to existing customers and new customers, and includes the contribution of the Sequence acquisition. Of this increase in revenue, sales to new customers accounted for $1.0 million and sales to existing customers of either Apache or Sequence Design accounted for $8.4 million.

We believe that additional sales of our TBLs across our product platforms to existing customers, or upsales, are an important driver for future revenue growth. Upsales in 2009 and 2010 were significant factors in the 2010 revenue increase. In addition, we continued to add new customers during this period while customer terminations were minimal.

The acquisition of Sequence was also a contributing factor to the increase in revenue for 2010 because Sequence’s product platform gave us an additional product to sell to our existing customer base and added certain new Sequence customers to which we were successful in cross-selling our existing product platforms.

We acquired certain assets of Sequence Design primarily for the PowerArtist platform. Although we continue to sell and support certain other Sequence Design products, we do not consider these other products to be a core element of our solutions. At the time we completed the acquisition of assets from Sequence Design, we observed that the sales of many of Sequence Design’s products, other than PowerArtist, were declining. While we cannot specifically isolate the impact Sequence Design had to our revenue growth following the acquisition for the reasons described previously, we have observed that sales of Sequence

 

59


Table of Contents

Design’s products, including PowerArtist, that are not bundled with other historical Apache products, have steadily decreased since the acquisition. The amount of revenue recognized for Sequence Design’s products that are not bundled with other products, including PowerArtist, was $3.9 million in 2010 and $1.3 million for the period from September 4, 2009 to December 31, 2009 representing the portion of 2009 that Sequence Design was included in our consolidated results. The decrease in unbundled sales of Sequence Design products relative to sales of Sequence Design products prior to the acquisition was partially offset by bundling certain of Sequence Design’s products, primarily PowerArtist, with our existing products which enhanced our ability to sell these bundled product offerings to our customer base and positively impacted the overall revenue we have generated from such arrangements. We expect that the sale of Sequence Design’s products that are not bundled with other products, other than sales of PowerArtist, will continue to decline.

Additionally, we believe that the worldwide economic recovery contributed to upsales from existing customers and in acquiring new customers in 2010. We did not experience any significant price erosion in 2010.

Revenue based on the regions to which we shipped our products was as follows:

 

     Year Ended December 31,  
Percentage of revenue    2009     2010     Percentage
Change
 

United States

     60     57     (3 )% 

Europe, Middle East and Africa

     15        15          

Asia Pacific, excluding Japan

     15        14        (1

Japan

     10        14        4   
                  

Revenue

     100     100  
                  

Our percentage of revenue by geography was relatively stable in 2010 compared to 2009, with the exception of growth in Japan, which was primarily due to increased sales of licenses to existing customers. The modest decrease in the percentage of revenue from the United States in 2010 was due to sales in other geographies growing more quickly than in the United States.

Cost of revenue.    Cost of revenue increased $2.3 million, or 35%, from $6.7 million in 2009 to $9.0 million in 2010. Cost of revenue increased primarily due to increased employee-related costs of $1.4 million related to increased headcount required to service our growing customer base and additional headcount from the Sequence acquisition, increases in amortization of acquired intangible assets of $0.7 million, and royalty payments to third-party vendors of $0.2 million related to the Sequence acquisition. As a percentage of revenue, cost of revenue increased slightly, from 19% in 2009 to 20% in 2010.

Sales and marketing expense.    Sales and marketing expense increased $3.1 million, or 32%, from $9.8 million in 2009 to $12.9 million in 2010. Sales and marketing expense increased primarily due to increased employee-related costs of $2.5 million resulting from increased commissions and additional headcount, including from the Sequence acquisition, and increased travel-related expense of $0.3 million. As a percentage of revenue, sales and marketing expense increased slightly, from 29% in 2009 to 30% in 2010.

Research and development expense.    Research and development expense increased $2.9 million, or 34%, from $8.6 million in 2009 to $11.5 million in 2010. Research and development expense increased primarily due to increased employee-related costs of $2.8 million related to

 

60


Table of Contents

additional headcount, including from the Sequence acquisition. As a percentage of revenue, research and development expense increased slightly, from 25% in 2009 to 26% in 2010.

General and administrative expense.    General and administrative expense increased $1.3 million, or 38%, from $3.6 million in 2009 to $4.9 million in 2010. General and administrative expense increased primarily due to increased employee-related costs of $0.9 million, including additional headcount from the Sequence acquisition, and increased third-party professional service fees of $0.4 million. As a percentage of revenue, general and administrative expense increased slightly from 10% in 2009 to 11% in 2010.

Other income (expense).    Other income (expense) increased $0.5 million, from an expense of $0.1 million in 2009 to income of $0.4 million in 2010. The increase was primarily attributable to foreign currency exchange gains and interest income.

Provision for income taxes.    Provision for income taxes increased $0.1 million, from $2.6 million in 2009 to $2.7 million in 2010. Our effective tax rate was 45% in each of 2009 and 2010.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

The following tables set forth the results of operations for the years ended December 31, 2009 and December 31, 2008:

 

    Year Ended
December 31,
                Year Ended
December 31,
 
    2008     2009     $ Change     % Change     2008     2009  
    (in thousands)           (percentage of revenue)  

Revenue

  $ 25,695      $ 34,601      $ 8,906        35     100     100

Cost of revenue

    5,812        6,662        850        15        23        19   
                                               

Gross profit

    19,883        27,939        8,056        41        77        81   

Operating expenses:

           

Sales and marketing

    9,529        9,794        265        3        37        29   

Research and development

    7,797        8,588        791        10        30        25   

General and administrative

    2,903        3,573        670        23        11        10   
                                               

Total operating expenses

    20,229        21,955        1,726        9        78        64   
                                               

Operating income (loss)

    (346     5,984        6,330        N/A        (1     17   

Other income (expense)

    13        (93     (106     N/A                 
                                               

Income (loss) before income tax

    (333     5,891        6,224        N/A        (1     17   

Provision (benefit) for income tax

    (3,507     2,622        6,129        N/A        (13     8   
                                               

Net income

  $ 3,174      $ 3,269      $ 95        3     12     9
                                               

Revenue.    Revenue increased $8.9 million, or 35%, from $25.7 million in 2008 to $34.6 million in 2009. The increase was primarily due to growth from sales of licenses to an expanding customer base and increased use of our platforms by existing customers, as well as the impact of a partial year of financial contribution from the Sequence acquisition. Of this increase in revenue, sales to new customers accounted for $0.5 million and sales to existing customers of either Apache or Sequence Design accounted for $8.4 million.

We acquired certain assets of Sequence Design primarily for the PowerArtist platform. Although we continue to sell and support certain other Sequence Design products, we do not consider these other products to be a core element of our solutions. At the time we completed the

 

61


Table of Contents

acquisition of assets from Sequence Design, we observed that the sales of many of Sequence Design’s products, other than PowerArtist, were declining. While we cannot specifically isolate the impact Sequence Design had to our revenue growth following the acquisition for the reasons described previously, we have observed that sales of Sequence Design’s products that are not bundled with other products, other than PowerArtist, have steadily decreased since the acquisition. The amount of revenue recognized for Sequence Design’s products, including PowerArtist, that are not bundled with other historical Apache products was $1.3 million for the period from September 4, 2009 to December 31, 2009 representing the portion of 2009 that Sequence Design was included in our consolidated results. The decrease in unbundled sales of Sequence Design products relative to sales of Sequence Design products prior to the acquisition was partially offset by bundling certain of Sequence Design’s products, primarily PowerArtist, with our existing products which enhanced our ability to sell these bundled product offerings to our customer base and positively impacted the overall revenue we have generated from such arrangements. We expect that the sale of Sequence Design’s products, that are not bundled with other products, other than sales of PowerArtist, will continue to decline.

Revenue based on the regions to which we shipped our products was as follows:

 

     Year Ended
December 31,
       
Percentage of revenue      2008         2009       Percentage
Change
 

United States

     60     60    

Europe, Middle East and Africa

     13        15        2   

Asia Pacific, excluding Japan

     13        15        2   

Japan

     14        10        (4
                  

Revenue

     100     100  
                  

Our percentage of revenue by geography was relatively stable in 2009 compared to 2008, other than Japan, which decreased four percent in 2009 as a percentage of total revenue, primarily due to revenue from other geographies growing more quickly.

Cost of revenue.    Cost of revenue increased $0.9 million, or 15%, from $5.8 million in 2008 to $6.7 million in 2009. Cost of revenue increased in absolute dollars primarily due to the amortization of intangible assets of $0.4 million, and $0.3 million of additional headcount from the Sequence acquisition. As a percentage of revenue, costs of revenue decreased from 23% in 2008 to 19% in 2009, primarily due to lower growth in customer support personnel expense relative to revenue growth.

Sales and marketing expense.    Sales and marketing expense increased $0.3 million, or 3%, from $9.5 million in 2008 to $9.8 million in 2009. Sales and marketing expense increased in absolute dollars primarily due to additional headcount from the Sequence acquisition. As a percentage of revenue, sales and marketing expense decreased from 37% in 2008 to 29% in 2009, primarily due to lower growth in customer support and sales and marketing personnel expense relative to revenue growth.

Research and development expense. Research and development expense increased $0.8 million, or 10%, from $7.8 million in 2008 to $8.6 million in 2009. Research and development expense increased in absolute dollars primarily due to increased additional headcount from the Sequence acquisition. As a percentage of revenue, research and development expense decreased from 30% in 2008 to 25% in 2009, primarily due to lower growth in research and development personnel expense relative to revenue growth.

 

62


Table of Contents

General and administrative expense.    General and administrative expense increased $0.7 million, or 23%, from $2.9 million in 2008 to $3.6 million in 2009. General and administrative expense increased in absolute dollars primarily due to increased third-party professional fees of $0.4 million. As a percentage of revenue, general and administrative expense decreased from 11% in 2008 to 10% in 2009.

Other income (expense).    Other income (expense) remained relatively flat from 2008 to 2009.

Provision (benefit) for income taxes.    Provision (benefit) for income taxes went from a benefit of $3.5 million in 2008 to an expense of $2.6 million in 2009. The increase in income taxes was primarily attributable to our conclusion in 2008 that it was more likely than not that substantially all of our deferred tax assets, except certain foreign tax credits, will be realized and as a result, a valuation allowance of $4.6 million was released during 2008, of which $4.1 million was recorded as a deferred tax benefit, and $0.5 million was recorded as a goodwill adjustment.

Quarterly Results (Unaudited)

The following table presents our unaudited quarterly consolidated statement of operations data for the eight quarters ended March 31, 2011. We have prepared our unaudited quarterly financial information on a consistent basis with our audited consolidated financial statements included in this prospectus, and the financial information reflects all normal, recurring adjustments that we consider necessary for a fair statement of such information in accordance with GAAP for the quarters presented. The results for any quarter are not necessarily indicative of future results.

 

    Three Months Ended  
    June 30,
2009
    Sept. 30,
2009
    Dec. 31,
2009
    Mar. 31,
2010
    June 30,
2010
    Sept. 30,
2010
    Dec. 31,
2010
    Mar. 31,
2011
 
   

(in thousands)

 

Revenue

  $ 8,880      $ 8,439      $ 9,176      $ 10,417      $ 10,723      $ 10,747      $ 12,160      $ 12,180   

Cost of revenue

    1,541        1,620        1,999        2,099        2,200        2,305        2,395        2,392   
                                                               

Gross profit

    7,339        6,819        7,177        8,318        8,523        8,442        9,765        9,788   

Operating expenses

               

Sales and marketing

    1,915        2,357        3,480        2,827        3,040        2,941        4,122        2,862   

Research and development

    1,954        2,058        2,545        2,688        2,798        2,972        3,058        3,289   

General and administrative

    783        983        1,204        962        979        1,510        1,475        1,543   
                                                               

Total operating expenses

    4,652        5,398        7,229        6,477        6,817        7,423        8,655        7,694   
                                                               

Operating income (loss)

    2,687        1,421        (52     1,841        1,706        1,019        1,110        2,094   

Other income (expense)

    (50     (58     85        (18     65        318        1        (25
                                                               

Income before income tax

    2,637        1,363        33        1,823        1,771        1,337        1,111        2,069   

Provision for income tax

    1,309        676        247        862        831        684        361        799   
                                                               

Net income (loss)

  $ 1,328      $ 687      $ (214   $ 961      $ 940      $ 653      $ 750        1,270   
                                                               

Revenue.    Historically, our revenue has fluctuated quarter-to-quarter due to the timing of new customer acquisitions, existing customer renewals, and the related timing of delivery of licenses to our customers, which impacts when we can begin to recognize revenue in accordance with our revenue recognition policies. License delivery timing has primarily been impacted by our customers’ project schedules and the timing of new and enhanced product releases by us. To date, we have not experienced any significant impact on our results of

 

63


Table of Contents

operations due to seasonality. See “Risk Factors—Risks Related to Our Business—Our operating results have fluctuated from quarter-to-quarter and may continue doing so, which may cause our business and operating results to be materially and adversely affected and the market price of our common stock to decline or be volatile.”

Cost of revenue.    Our cost of revenue has increased relatively steadily over the eight quarters reported above due to increasing employee-related expenses for increased headcount of customer support personnel and the amortization of acquired intangible assets. The increase in cost of revenue in the fourth quarter of 2009 was primarily due to the amortization of acquired intangible assets related to the Sequence acquisition in September 2009.

Sales and marketing expense.    Our sales and marketing expense has fluctuated quarter-to-quarter primarily due to marketing tradeshow expense and commission expense for our sales and support team. Our commission program is tiered such that achievement of certain sales thresholds during the year increases sales commission rates. As a result, our sales and marketing expense increased in the fourth quarters of 2009 and 2010 primarily due to higher commission expenses that were the result of members of our sales and support team exceeding their sales targets and reaching higher commission tiers.

General and administrative expense.    Our general and administrative expense has typically increased over the last eight quarters as we have grown our business. We experienced a larger than usual increase in our general and administrative expense during the third quarter of 2009 due primarily to the third-party professional services fees related to our acquisition of Sequence. Our general and administrative expense increased significantly in the third quarter and fourth quarter of 2010 and the first quarter of 2011 primarily due to an increase in third-party professional services fees.

Net income (loss).    Our net income (loss) has fluctuated over the eight quarters reported above primarily as a result of the factors described above.

Liquidity and Capital Resources

Our short-term and long-term liquidity requirements primarily arise from working capital requirements and capital expenditures, as well as acquisitions from time to time.

We believe that our cash on hand and anticipated cash flows from operations will provide sufficient liquidity to fund our current obligations, projected working capital requirements, and capital spending in the ordinary course of business for at least the next 12 months.

Cash Flows for the Three Months Ended March 31, 2010 and 2011 (unaudited)

 

     March 31,
2010
    March 31,
2011
    Change  
    

(in thousands)

 

Net cash provided by operating activities

   $ 5,957      $ 2,408      $ (3,549

Net cash provided by (used in) investing activities

     (761     674        1,435   

Net cash provided by financing activities

     1        255        254   

Effect of exchange rates on cash and cash equivalents

            (114     (114

Net increase in cash and cash equivalents

   $ 5,197      $ 3,223      $ (1,974

 

64


Table of Contents

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2011, was $2.4 million. The net cash generated was due to net income as adjusted for non-cash expenses for depreciation and amortization and stock based compensation. Net cash generated for the three months ended March 31, 2010 was $6.0 million which was favorably impacted by a decrease in working capital requirements, which fluctuate quarter-to-quarter and are influenced by customers’ billing and payment patterns.

Investing Activities

Net cash provided by investing activities was $0.7 million for the three months ended March 31, 2011. Net cash was provided by the proceeds of a maturity of short term investments, partially offset by capital expenditures for the three month period ended March 31, 2011. Net cash was used to purchase short-term investments for the three month period ended March 31, 2010.

Financing Activities

Cash provided by financing activities during the three months ended March 31, 2011 was $0.3 million. The cash was provided by the issuance of common stock from the exercise of stock options. There was no corresponding financing activity for the three months ended March 31, 2010.

Cash Flows for the Years Ended December 31, 2008, 2009, and 2010

 

     December 31,
2008
    December 31,
2009
    Change     December 31,
2010
    Change  
     (in thousands)  

Net cash provided by operating activities

   $ 9,225      $ 9,248      $ 23      $ 10,996      $ 1,748   

Net cash provided by (used in) investing activities

     (3,751     953        4,704        (1,339     (2,292

Net cash provided by (used in) financing activities

     49        (1,925     (1,974     (439     1,486   
                                        

Net increase in cash and cash equivalents

   $ 5,523      $ 8,276      $ 2,753      $ 9,218      $ 942   
                                        

Operating Activities

Net cash provided by operating activities increased by $1.7 million in 2010 compared to 2009 primarily due to a decrease in the change in accounts receivable of $4.7 million and an increase in amortization and depreciation expense of $0.5 million, partially offset by an increase in the change in deferred revenue of $2.3 million and a decrease in the change in deferred tax assets of $0.9 million. Net cash provided by operating activities increased slightly in 2009 compared to 2008.

Significant cash was generated from operations during the years 2008, 2009, and 2010. Our cash generation was consistent with the upward trend in business conditions. Our cash generated from operations was driven by profitability and adjusted for non-cash expenses for stock-based compensation and depreciation and amortization and collections of contract billings

 

65


Table of Contents

in advance of revenue recognition. We generally invoice our customers annually in advance for customers’ annual contract value. For a description of our revenue recognition policies, please see “—Critical Accounting Policies—Revenue Recognition” below.

Investing Activities

Investing activities primarily include cash paid for acquisitions and cash invested in or proceeds from the sale of short-term investments. Net cash provided by (used in) investing activities was $(3.8) million, $1.0 million, and $(1.3) million in 2008, 2009, and 2010, respectively. Net cash paid for short-term investments accounted for $3.4 million and $1.1 million in 2008 and 2010, respectively. Cash paid for the Sequence acquisition accounted for $4.3 million of cash used for investing activities in 2009, offset by $6.0 million in net proceeds from short-term investments.

Financing Activities

Cash provided by (used in) financing activities consists of net proceeds from common stock purchases from option exercises and installment payments related to acquisitions. Net cash provided by (used in) financing activities was $49 thousand, $(1.9) million, and $(0.4) million in 2008, 2009, and 2010, respectively. Cash paid for purchase price holdbacks for the Sequence and Optimal acquisitions accounted for $2.0 million and $0.5 million in 2009 and 2010, respectively. No installment payments for acquisitions were made in 2008.

Indebtedness

We had no long-term indebtedness in 2008, 2009, 2010 or for the three months ended March 31, 2011. We do not maintain any lines of credit. See “Risk Factors—Risks Related to Our Business—Future capital needs may require us to seek debt financing or additional equity funding that, if not available on acceptable terms or at all, could cause our financial condition to deteriorate and materially harm our business.”

Contractual Commitments

Our cash flows from operations depend on several factors, including fluctuations in our operating results, accounts receivable collections, and the timing of payments. As a result, the impact of contractual obligations on our liquidity and capital resources in future periods should be analyzed in conjunction with such factors.

The following table sets forth our contractual commitments as of March 31, 2011 for the periods noted:

 

     Total      2011 (2)      2012-
2013
     2014-
2015
     Thereafter  
     (in thousands)  

Operating leases

   $ 985       $ 591       $ 372       $ 22       $   

Capital leases

     38         30         8                   

Royalty and license payment

     574         483         91                   

Long-term accrued income taxes (1)

     7,183                                   
                                            

Total

   $ 8,780       $ 1,104       $ 471       $ 22       $   

 

(1) Long-term accrued income taxes represent unrecognized tax benefits as of March 31, 2011. Currently, a reasonably reliable estimate of timing of payments in individual years beyond fiscal 2011 cannot be made due to uncertainties in the timing of the commencement and settlement of potential audits.
(2) Remainder of fiscal 2011.

 

66


Table of Contents

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements at December 31, 2010 or March 31, 2011, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the Securities and Exchange Commission. We do not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities. In addition, we have not entered into any synthetic leases.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an ongoing basis, including those related to our revenue, income taxes, asset impairments, and stock-based compensation. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates. Different assumptions or judgments, and the resulting estimates, would likely affect our consolidated financial statements.

We believe the following critical accounting policies are the most significant to the presentation of our consolidated financial statements and require difficult, subjective, and complex judgments.

Revenue recognition

We license our software products and solutions primarily under time-based licenses, or TBL, agreements. A TBL is a license valid for a finite term, generally one to three years, in which the license expires at the end of the term. The software licenses are generally bundled with post-contract customer support (maintenance) for the license term.

We recognize revenue when: (1) persuasive evidence of an arrangement exists, (2) delivery of software or services has occurred, (3) the fee for such software or services is fixed or determinable, and (4) collectability of the full license or service fee is probable. We apply these revenue recognition criteria as follows:

 

   

Persuasive evidence of an arrangement exists.    Prior to recognizing revenue on an arrangement, our customary policy is to have a purchase order from customers that have previously negotiated a master end user license arrangement or purchase agreement, signed by both the customer and us.

 

   

Delivery has occurred.    We deliver our products to our customers electronically, and the delivery occurs when we provide the customer access codes, or “license keys,” that allows the customer to access a fully functioning version of the software product.

Certain of our license agreements provide our customers the right to adjust their licenses to cover other specified software. Because these agreements provide access to a specified set of software products, we do not consider delivery to have occurred until access to at least one copy of each of the products specified in the agreement has been granted to the customer. We will begin to recognize revenue ratably over the remaining license term once delivery of all software products covered by a license agreement

 

67


Table of Contents

occurs. Differences in the timing of delivery of software licenses and the start of license terms have caused period-to-period fluctuations in our revenue and are expected to continue to do so.

 

   

Fee is Fixed or Determinable.    Our determination of whether an arrangement fee is fixed or determinable depends principally on the arrangement’s payment terms. We consider payment terms in excess of one year to be extended payment terms. We consider all payment terms in excess of one year to not be fixed and determinable. For multiple year arrangements, we typically are entitled to receive equal annual installments over the term of the arrangement. As this is our standard payment terms, we consider the fee in these arrangements to be fixed or determinable. In limited circumstances where we are not entitled to receive at least the annualized contract value, we consider these arrangements to have extended payment terms and therefore will recognize such arrangements at the lesser of the cumulative fee that is due and payable, or the cumulative fee that would be recognized under a straight-line method over the term of the license.

 

   

Collectability is probable.    We judge collectability of the arrangement fee on a customer by customer basis pursuant to our credit review policy. When we acquire a new customer, we evaluate the customer’s financial position and ability to pay prior to selling a TBL to that customer. We generally only sell additional licenses to, or enter into license renewals with, existing customers with which we have a history of successful collection.

We have analyzed all of the elements included in our multiple element software arrangements and determined that as of December 31, 2008, 2009, and 2010 and as of March 31, 2011, we did not have sufficient vendor specific objective evidence to allocate revenue to the maintenance components, as all current license arrangements come packaged with a combination of a term-based license and maintenance. Accordingly, assuming all other revenue recognition criteria are met, we recognize revenue ratably over the license term or as customer installments become due and payable, whichever is later.

We classify deferred revenue on our consolidated balance sheet as current and long term deferred revenue based upon whether we expect to recognize the revenue within the next 12 months or after the next 12 months.

Stock-based compensation

In connection with the grant of stock options to employees, we recorded stock-based compensation using the grant date fair value determined by the Black-Scholes-Merton option pricing model. Using the Black-Scholes-Merton option pricing model, we valued stock options taking into account the stock price at the grant date, exercise price, expected life of the option, expected dividend, and the risk free interest rate over the expected life of the option.

Option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. We estimated volatility by reference to the volatilities of comparable public companies. Judgment is also required in estimating the expected term of options and the number of stock-based awards that are expected to be forfeited. For stock-based compensation, the fair value of the stock is a significant factor in determining the amount of stock-based compensation expense. Prior to this offering, our shares have not been publicly traded and the fair value of our common stock has been determined by our board of directors. In determining the fair value of our common stock, our board of directors considers a number of factors, including:

 

   

contemporaneous studies of our common stock value performed by valuation specialists commencing in December 2006;

 

68


Table of Contents
   

key milestones achieved in our business, including forecasted revenue, expense and cash flows, product development, and market acceptance; and

 

   

comparable company trading multiples.

Our board of directors also considered a variety of other factors including the book value per share of our outstanding capital stock, the price at which shares of our outstanding capital stock had previously been issued by us, the liquidation rights and other preferences to which the holders of those shares were entitled, the liquidation rights and other preferences which we may be required to grant to subsequent purchasers of one or more series of our preferred stock, the lack of marketability of our common stock, our industry revenue multiplier, the value of our assets, our actual and potential future cash flows, risk factors impacting us, exit alternatives and valuations for companies in our industry, values of similar entities in the industry, our results of operations and the potential for success of our competitors in the market and the competitive landscape.

Determining the fair value of our stock requires making complex and subjective judgments and estimates. There is inherent uncertainty in making these judgments and estimates. Our board of directors reviewed external studies of our common stock value prepared in accordance with applicable elements of the practice aid issued by the American Institute of Certified Public Accountants entitled Valuation of Privately Held Company Equity Securities Issued as Compensation, primarily using a probability weighted expected return method which derives the per share value of common stock under four future outcomes. The enterprise fair values under the various scenarios rely on both an income approach and a market multiple approach.

The income approach involves applying appropriate discount rates to estimated cash flows that are based on forecasts of our revenue and costs. The projections used for each valuation date were based on our expected operating performance through the forecast periods. The assumptions underlying the estimates were consistent with our business plan. The future cash flows were determined by subtracting taxes, future capital spending and future changes in working capital and adding future depreciation and amortization to earnings before interest and taxes. The interim cash flows and resulting terminal value were then discounted at a rate based on the weighted average cost of capital of comparable companies, as adjusted for our specific risk profile.

The market multiple approach was based on our historical and projected revenue, projected earnings over a particular period, which amounts were multiplied by a range of appropriate risk-adjusted multiples. The market multiples were obtained through the market comparison method, where companies having their stock traded in the public market were selected for comparison purposes and used as a basis for choosing reasonable market multiples for us. Revenue and earnings multiples were derived from publicly traded companies deemed to be comparable to us.

After estimating our value based on the income and market approaches, the external studies of our common stock value then utilized a probability-weighted expected return method. Under the probability-weighted expected return method, the value of our common stock on a per share basis was estimated based upon an analysis of values for us assuming various outcomes, such as an initial public offering, merger or sale, liquidation or remaining private, and the estimated probability of each outcome on a per share basis. There is inherent uncertainty in these estimates. If different assumptions and estimates had been used, the valuations would have been different.

 

69


Table of Contents

Since the beginning of 2009, we granted options to purchase shares of our common stock as follows:

 

Date of Grant

   Number of
Shares
     Exercise Price
and Estimated
Fair Value
 

February 26, 2009

     36,000       $ 1.75   

May 18, 2009

     15,500         1.75   

August 26, 2009

     35,050         1.75   

December 2, 2009

     346,200         2.25   

January 27, 2010

     14,800         2.25   

April 8, 2010

     123,300         2.25   

August 23, 2010

     222,000         3.55   

November 16, 2010

     58,300         4.55   

February 3, 2011

     88,875         5.35   

March 7, 2011

     938,300         6.80   

May 2, 2011

     61,250         7.50   

Overall, we benefited from business conditions that were improving as compared to the severe downturn in the economy experienced in 2008-2009. We won several new customers during this period which contributed to increased revenue during the year. In addition, we were successful in increasing the annualized contract values upon renewal for existing customers. For example, we had numerous customers renew their software license arrangements with us at a substantially higher annualized contract value during the period. Because we have a ratable revenue recognition model, the full impact of these arrangements is not realized in the period that the new agreements are entered into but will be recognized over the entire license period. However, we believe that these new arrangements had a positive impact on our valuation.

We experienced continued strength in business conditions and market penetration for our products during this time period. Additionally, we benefited from continued momentum of the technology industry.

Finally, our valuation analyses during the second half of 2010 and early 2011 assumed a higher probability weighting for an initial public offering event which has a higher valuation than other potential events with lower valuations such as a sale or a liquidation event, which resulted in a higher overall per share value. During 2010, we began seriously exploring the feasibility of filing for an initial public offering. Specifically, during the three months ended September 30, 2010, we reviewed presentations from investment banks and selected Deutsche Bank Securities Inc. as the lead manager for this process. In addition, the studies on the valuation of our common stock also assumed decreases in the illiquidity discount during the second half of 2010 and early 2011 because we had increased progress towards a liquidity event. In March 2011, we filed our initial registration statement with the Securities and Exchange Commission with respect to an initial public offering of our common stock.

Our board of directors was regularly apprised that each valuation was being conducted, and considered the relevant objective and subjective factors deemed important by our board of directors in each valuation conducted. Our board of directors determined that the assumptions and inputs used in connection with these valuations reflected our board of directors’ best estimate of our business condition, operating performance, and prospects at each valuation date. The deemed fair value per common share underlying our stock option grants was determined by our board of directors with input from management at each grant date.

 

70


Table of Contents

On February 26, 2009, May 18, 2009, and August 26, 2009, we granted options to purchase an aggregate of 86,550 shares of our common stock with an exercise price of $1.75 per share. The fair value of our common stock was determined by our board of directors to be $1.75 per share based in part on an external study of our common stock value as of October 31, 2008, and on certain of the factors set forth above.

On December 2, 2009, January 27, 2010, and April 8, 2010, we granted options to purchase an aggregate of 484,300 shares of our common stock with an exercise price of $2.25 per share. The fair value of our common stock was determined by our board of directors to be $2.25 per share based in part on an external study of our common stock value as of September 4, 2009, and on certain of the factors set forth above. The increase in fair value from $1.75 per share in the October 31, 2008 valuation to $2.25 per share in the September 4, 2009 valuation was primarily the result of achieving our projected revenue growth, an increase in our revenue projections, as well as the following events during the intervening period:

 

   

we introduced two new RedHawk products. We also announced another new product, Sentinel-PI, which received the “Best New Product” award at the Design Automation Conference;

 

   

we secured significant new customers; and

 

   

we completed our acquisition of the assets and certain foreign subsidiaries of Sequence Design in September 2009 to expand our business into the register transfer level design-for-power solutions, secure broader customer reach, and secure a capable employee base as well as potential valuable synergies.

On August 23, 2010, we granted options to purchase an aggregate of 222,000 shares of our common stock with an exercise price of $3.55 per share. The fair value of our common stock was determined by our board of directors to be $3.55 per share, based in part on an external study of our common stock value as of June 30, 2010, and on certain of the factors set forth above. The increase in fair value from $2.25 per share in the September 4, 2009 valuation to $3.55 per share in the June 30, 2010 valuation was primarily the result of increased revenue, as well as the introduction of several new products, including PowerArtist, PathFinder, and a new substrate analysis capability option for the Totem platform.

On November 16, 2010, we granted options to purchase an aggregate of 58,300 shares of our common stock with an exercise price of $4.55 per share. The fair value of our common stock was determined by our board of directors to be $4.55 per share based in part on an external study of our common stock value as of September 30, 2010, and on certain of the factors set forth above. The increase in fair value from $3.55 per share in the June 30, 2010 valuation to $4.55 per share in the September 30, 2010 valuation was primarily the result of continued strong financial performance as well as our contemplating the possibility of an initial public offering of our common stock.

On February 3, 2011, we granted options to purchase an aggregate of 88,875 shares of our common stock with an exercise price of $5.35 per share. The fair value of our common stock was determined by our board of directors to be $5.35 per share based in part on an external study of our common stock value as of December 31, 2010, and on certain of the factors set forth above. The increase in fair value from $4.55 per share in the September 30, 2010 valuation to $5.35 per share in the December 31, 2010 valuation was primarily the result of the following events during the intervening period:

 

   

we released an enhanced application, RedHawk 10.2;

 

71


Table of Contents
   

we experienced positive results with respect to our research and development testing; and

 

   

our estimate that the possibility an initial public offering of our common stock had become more likely.

On March 7, 2011, we granted options to purchase an aggregate of 938,300 shares of our common stock with an exercise price of $6.80 per share. The fair value of our common stock was determined by our board of directors to be $6.80 per share based in part on an external study of our common stock value as of February 28, 2011. The increase in fair value from $5.35 per share in the December 31, 2010 valuation to $6.80 per share in the February 28, 2011 valuation was primarily the result of the following events during the intervening period:

 

   

the market for our RedHawk 10.2 product continued to develop;

 

   

we achieved research and development milestones; and

 

   

we continued our efforts toward completing an initial public offering.

On May 2, 2011, we granted options to purchase an aggregate of 61,250 shares of our common stock with an exercise price of $7.50 per share. The fair value of our common stock was determined by our board of directors to be $7.50 per share based in part on an external study of our common stock value as of April 15, 2011, and on certain of the factors set forth above. The increase in fair value from $6.80 per share in the February 28, 2011 valuation to $7.50 per share in the April 15, 2011 valuation was primarily the result of continued strong financial performance as well as continued efforts toward completing an initial public offering of our common stock.

The following table presents the intrinsic value of all options outstanding at                    , 2011, based on the assumed initial public offering price of $        per share, the midpoint of the estimated offering range set forth on the cover page of this prospectus.

 

     Number of Options
Outstanding
     Intrinsic
Value
 

Vested options

      $                

Unvested options

     

Total

     

In addition to the estimates for the value of our common stock price discussed above, the following are additional key assumptions used to determine the fair value of options granted using the Black-Scholes-Merton option pricing model:

Expected stock price volatility.    The computation of expected volatility is based on the volatility of comparable companies from a representative peer group based on industry and market capitalization data.

Expected term of option.    The expected term represents the period that stock-based awards are expected to be outstanding, giving consideration to the contractual terms of the stock-based awards, vesting schedules, and expectations of future employee behavior as influenced by changes to the terms of our stock-based awards. We determined the expected term in accordance with the “simplified method” for a “plain vanilla” employee stock option for which the value was estimated using a Black-Scholes-Merton formula. Under this approach, the expected term would be presumed to be the midpoint between the vesting date and the end of the contractual term. The use of this approach was permitted as we did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the fact that our equity shares have not been publicly traded.

 

72


Table of Contents

Expected dividend yield.    The dividend yield assumption is based on our history and expectation of dividend payouts. We use a dividend yield of zero, as we have never paid cash dividends and do not expect to pay cash dividends in the future.

Expected risk free interest rate.    The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.

Forfeiture rate.    The forfeiture rate is based on a review of recent forfeiture activity and expected future employee turnover.

Income Taxes

We provide for income taxes using the asset and liability method. We recognize deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates as income in the period that includes the enactment date. We provide a valuation allowance to reduce deferred tax assets to the amount of future tax benefits that we are more likely than not to realize.

We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. We measure recognized income tax positions at the largest amount that is greater than 50% likelihood of being sustained. We reflect changes in recognition or measurement in the period in which the change in judgment occurs.

The calculation of tax liabilities involves the inherent uncertainties associated with the application of complex tax laws. We are also subject to examination by various taxing authorities. We believe we have adequately provided in our financial statements for potential additional taxes related to unrecognized tax benefits. If we ultimately determine that these amounts are not owed, we would reverse the liability and recognize the tax benefit in the period in which we determine that the liability is no longer necessary. If an ultimate tax assessment exceeds our estimate of tax liabilities, we would record an additional charge to income.

Our assumptions, judgments, and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. Although we believe our assumptions, judgments, and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of the current and any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.

Our assumptions, judgments, and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as foreign source income. Specifically, during the year ended December 31, 2008, based on our historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, we believed that it was more likely than not that that all of our deferred tax assets except certain foreign tax credits and acquired net operating losses subject to limitations will be realized and as a result, valuation allowance of $4.6 million was released during the year, of which $4.1 million was recorded as deferred tax benefit, and $0.5 million was

 

73


Table of Contents

recorded as goodwill adjustment. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments, and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments, and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our business, financial condition, and operating results.

Goodwill and Intangible Assets

Goodwill represents the excess of the aggregate purchase price over the fair value of the tangible and identifiable intangible assets we acquire. We test the carrying amount of goodwill for impairment annually or more frequently if facts and circumstances warrant a review. A two-step evaluation process is conducted to assess whether an impairment charge related to goodwill is required. First, we compare the fair value of each reporting unit to its carrying value. If the fair value equals or exceeds the carrying value, we do not consider goodwill impaired, and we do not proceed to the second step. If the carrying value of any reporting unit exceeds its fair value, then we must determine the implied fair value of the reporting unit’s goodwill and compare this to the carrying value of its goodwill and other intangible assets. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, we record an impairment charge equal to the difference. In 2008, 2009, and 2010, we operated as one reporting unit and there were no impairments to goodwill. The fair value of our reporting unit exceeded the carrying value by a significant amount.

Intangible assets consist of purchased technology, patent, customer relationships, and contract backlog. We amortize intangible assets on a straight line basis over their estimated useful lives, which range from two to seven years.

Recent Accounting Pronouncements

In October 2009, the FASB issued new standards for revenue recognition with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting for non-software transactions. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are required to be adopted in the first quarter of 2011. We adopted this guidance on a prospective basis effective the first quarter of fiscal 2011. Adoption of this guidance did not have a material impact on our consolidated financial statements.

In October 2009, the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. These new standards are required to be adopted in the first quarter of 2011. We adopted this guidance on a prospective basis effective the first quarter of fiscal 2011. Adoption of this guidance did not have a material impact on our consolidated financial statements.

Quantitative and Qualitative Disclosures About Market Risk

Currency Exchange Rates

We maintain operations and sell into various countries outside the United States and have subsidiaries that sell our products in various global markets. A majority of our revenue arrangements are denominated in U.S. dollars. However, we do enter into revenue

 

74


Table of Contents

arrangements in other currencies, primarily the Japanese Yen. Our foreign subsidiaries incur operating expenses in foreign currencies other than U.S. dollars. We incur expenses in numerous foreign currencies with the Japanese Yen being the most significant.

We also maintain foreign currency denominated cash and equivalents at our foreign subsidiaries. Cash held by our Japanese subsidiary in Japanese Yen is the most significant foreign currency cash and cash equivalent held by a foreign subsidiary.

We have reviewed the impact of changes in foreign currency exchange rates to our results of operations and financial position. We identified one foreign exchange market risk related to the Japanese Yen. At December 31, 2010 and March 31, 2011, a hypothetical 10% change in foreign currency would result in a $0.5 million change in the amount of our consolidated cash and cash equivalents.

Although we have not previously done so, to mitigate the exposures resulting from the changes in the exchange rates of foreign currencies, we may enter into foreign exchange forward contracts in the future.

 

75


Table of Contents

BUSINESS

Overview

We are a leading provider of innovative power analysis and optimization software solutions that enable the design of power-efficient, high-performance, noise-immune integrated circuits, or ICs, and electronic systems. Our solutions consist of a suite of software tools and methodologies that enable design engineers to reduce power consumption, ensure reliable delivery of power to ICs and electronic system components, and mitigate power-induced signal interference, or noise. We believe our solutions are critical to the design of our customers’ products and allow our customers to deliver power-efficient ICs and electronic systems that are resistant to the impact of noise, or noise-immune, at lower costs and with a faster time to market than with alternative solutions.

The demand for more power-efficient and noise-immune ICs and electronic systems is being driven primarily by the proliferation of high-performance mobile devices, miniaturization of these devices, and the rising costs of electricity for data centers. Developing these ICs and electronic systems, however, is increasingly difficult due to industry trends including growing design complexity, smaller geometries for ICs, and the increased integration of various components of an electronic system onto a single IC.

Our singular focus on power analysis and optimization, backed by our more than ten years of research and development exclusively dedicated to these areas, strongly positions us to address these market trends and design challenges. We have introduced several products that have been first to market in various aspects of power and noise analysis. Our products address power and noise challenges throughout various phases of the IC and electronic system design process, from initial prototyping to design completion. The accuracy, efficiency, capacity, and comprehensiveness of our solutions provide engineers with the confidence in their analyses to progress a design to the next phase in the process, which is known as sign-off. Highly accurate and reliable sign-off solutions are critical to engineers due to the costly and highly visible consequences of design flaws that can lead to product failures and recalls. We believe that our RedHawk platform is the sign-off solution of choice for the analysis of reliable delivery of power to ICs.

In 2010, we sold licenses to 125 companies globally and we frequently sell licenses to multiple business units within these companies. Our customers include all of the top 20 semiconductor companies as measured by revenue in 2010 according to iSuppli. Our customers also include leading electronic system companies serving market segments such as mobile devices, high-performance computing and networking, consumer electronics, and automotive and medical electronics. These customers include, among others, ARM Limited, Broadcom Corporation, Hynix Semiconductor Inc., Intel Corporation, LSI Corporation, MediaTek, Inc., QUALCOMM Incorporated, Samsung Electronics Co., Ltd., Sony Corporation, STMicroelectronics N.V., Texas Instruments Incorporated, and Toshiba Corporation.

We sell licenses primarily through a direct sales and support organization located in our customers’ key domestic and international regions. Our global support organization is comprised of application engineers who are specialists in power-efficient and noise-immune design and analysis methodologies. We view our support team as a competitive differentiator that, along with the compelling value delivered by our products, has driven our high software license renewal rate. All of our top 20 customers in each of 2008, 2009, and 2010 remain our customers today.

We generate substantially all of our revenue through the sale of time-based software licenses, typically ranging from one to three years. As of December 31, 2010, the average length

 

76


Table of Contents

of our time-based licenses was two and one half years. Our revenue was $25.7 million, $34.6 million, and $44.0 million in 2008, 2009, and 2010, respectively, and we were profitable in each of these years. Our revenue was $10.4 million and $12.2 million for the three months ended March 31, 2010 and 2011, respectively.

Our Industry

Design engineers use a variety of software tools for the development of power-efficient and noise-immune ICs and electronic systems. Increasing design complexity and enhanced IC and system functionality are making power-efficient, noise-immune design and analysis one of the most critical and complex challenges affecting the price, performance, reliability, and time to market of ICs and electronic systems. Highly-sophisticated software solutions are thus required to comprehensively address power efficiency and noise immunity for both the design of ICs and electronic systems.

Growth in Demand for More Power-Efficient and Noise-Immune ICs and Electronic Systems

Several factors are driving increasing demand for more power-efficient and noise-immune ICs and electronic systems, including:

High-Performance Mobile and Other Electronic Device Proliferation

The demand for high-performance mobile devices, such as smartphones and media tablets, is driving growth in the semiconductor industry. Media tablet and smartphone unit sales are projected to increase 163% and 44%, respectively, in 2011 over 2010, according to IDC. Consumers are using their mobile devices for a growing number of applications, for more hours every day, and are demanding extended battery life. IC and electronic system manufacturers are developing more power-efficient electronic components to meet this demand and have begun marketing extended battery life as a key differentiating product feature.

Device Miniaturization

The increased demand for smaller electronic systems, such as smartphones, media tablets, and digital cameras, along with the trend toward smaller geometries for ICs, has required semiconductor manufacturers to significantly increase circuit density and the number of transistors on ICs. When the space between circuits is reduced, power is condensed into a smaller area, which can cause overheating, impacting IC performance, reliability, and overall system efficiency. In addition, smaller devices constrain the size of cooling systems and batteries, which reduces available power. As a result, design engineers must develop products that consume less power in order to extend battery life and manage heat dissipation.

Increased Wireless Connectivity

The ubiquity of wireless protocols, including cellular, Wi-Fi, and Bluetooth, is enabling enhanced connectivity between a wide variety of electronic devices. For example, consumers are now using their smartphones to wirelessly connect to and control their televisions and home entertainment centers, printers, personal computers, thermostats, lighting and security systems, and even to monitor the energy output of solar panels on their roofs. This explosion in system-to-system wireless communication is amplifying the amount of noise within and between ICs, causing systems to sometimes malfunction or fail. IC and electronic system designs must be adapted to reduce the impact of noise in order to facilitate the ongoing trend towards increased wireless connectivity.

 

77


Table of Contents

IT Infrastructure Power Consumption and Electricity Costs

Reducing power consumption and electricity costs for information technology, or IT, infrastructure has become a high priority for enterprises and data centers. Gartner estimates that at current pricing, the energy expense to support a typical data center server will exceed the cost of that server within three years. As a result, data center operators are seeking solutions that reduce IT infrastructure power consumption and electricity costs while also enhancing performance.

The Challenges of Power-Efficient and Noise-Immune IC and Electronic System Design

To meet the rising demand for more power-efficient and noise-immune ICs and electronic systems, engineers require power analysis and optimization solutions to develop and test new designs. The design challenges that these solutions must address include:

Power Budgeting

Engineers who design ICs must meet power specification limits, or power budgets, that are dictated by the electronic system companies who buy their products. Demand for enhanced functionality and performance in ICs and electronic systems is rapidly increasing the amount of power required by these products. However, power budgets are expected to remain at current levels in order to meet extended battery life demands of end users. The combination of increasing power requirements and constant power budgets is creating a significant challenge for design engineers. According to the International Technology Roadmap for Semiconductors, or ITRS, the power consumption requirements of mobile devices will be approximately six times greater than their power budgets by 2015 and ten times greater by 2020 unless power-efficiency design, analysis, and optimization solutions are used in the design process.

Design engineers must meet power budgets for a wide variety of operating conditions. For example, an IC for a smartphone must be tested to ensure that it meets power budget requirements in active, standby, dormant, charging, and shutdown modes. A comprehensive power budgeting solution is required to accurately analyze power values in all operating modes and while running all potential applications of the system. If engineers fail to meet power budgets, their products may be rejected by electronic system designers, or the end product may experience reduced battery life or other detrimental performance issues.

Power Delivery Integrity

Power delivery integrity is the reliable delivery of power to all components of ICs and electronic systems while meeting power budgets. Power delivery integrity is analogous to the way in which an electric power grid operator ensures that electricity is delivered to end users reliably, consistently, and in adequate amounts while minimizing loss in the transmission network. ICs and electronic systems designed with inadequate power delivery integrity may experience large fluctuations in supply voltage and operating power that can cause system failure. These fluctuations particularly impact ICs used in mobile handsets and high-performance computers, where they may cause an application or program to freeze or crash. Ensuring power delivery integrity requires accurate modeling of multiple individual components that are designed by different engineering teams, as well as comprehensive analysis of the interactions between these components. Organizational boundaries between these engineering teams often prevent them from interacting effectively and sharing data, which can lead to design errors and development delays.

 

78


Table of Contents

Power-Induced Noise

The flow of electric current within an IC or electronic system can interfere with the operation of other components in the product, as well as with nearby systems. This interference is referred to as power-induced noise. Depending on its severity, this noise may cause products to fail and can prevent mobile devices, high-performance computing and networking equipment, consumer electronics, and automotive and medical electronics from meeting regulatory requirements or mission critical operational and safety requirements. Power-induced noise can also cause unpredictable fluctuations in the input/output data transfer rate in high-performance electronic systems, which may corrupt the data transfer and result in, for example, a digital video stream becoming pixilated. To satisfy regulatory requirements, and prevent failures or performance degradation caused by power-induced noise, early detection using comprehensive software simulation and modeling tools is required. The costs and complexity of resolving power-induced noise issues are significantly higher if these issues are not identified early in the design process at the IC, package, or printed circuit board, or PCB, level. This requires effective coordination across the design process to generate representative power and noise models of the ICs, packages, and PCBs that will be integrated into an electronic system.

Limitations of Alternative Solutions

Design engineers use power analysis to predict the power consumption in an IC or the fluctuations in the power supply in an electronic system. These predictions are used to make design change decisions that impact the performance, cost, and development time of ICs and electronic systems, and must be highly accurate. The accuracy of the power analysis results depends on the sophistication of the simulation models created by the power analysis software, as well as the ability of the power analysis software to model an IC in its entirety as well as its package, the PCB on which it is mounted, and in its interactions with other nearby ICs. These analyses must also be executed efficiently to enable rapid design cycles and time to market and must be comprehensive enough to cover the various phases of the design process and each component of the electronic system.

To achieve their design goals and meet requirements set by their customers, design engineers use a number of third party or internally developed tools. However, many of these tools only address power analysis needs of one or a few phases of the design process. These tools do not enable the efficient sharing of data and models between the various teams working on separate design phases. Also, because they lack the capability to efficiently simulate an entire IC, many of these tools adopt a “divide-and-conquer” approach whereby a design is partitioned into sub-blocks and those sub-blocks are analyzed separately. As a result, we believe the interactions that happen inside an IC, between an IC and its package and PCB, and between various ICs on the PCB are not captured and the analyses are often inaccurate. As a result of the foregoing, we believe design processes that use these third-party or internally-developed tools result in extended design cycles and are more at risk of design failure than if they used our solutions.

Benefits of Our Solutions

We offer a suite of software tools and methodologies that provide innovative power analysis and optimization capabilities through various phases of the design process, from initial prototyping to full electronic system design completion. Our solutions deliver the following benefits:

Accuracy.    Our solutions analyze design models and provide results that are closely correlated to power and noise measurements of the manufactured ICs and electronic systems.

 

79


Table of Contents

The predictability, consistency, and reliability of our analyses provide valuable input for engineering teams during various phases in the design process. Our tools help our customers meet increasingly stringent power budgets, and avoid costly over-designs.

Capacity.    Our solutions can simultaneously analyze an entire IC or electronic system, instead of using the traditional “divide-and-conquer” approach of partitioning a design or a system into its sub-blocks and analyzing those sub-blocks separately. Our tools can use techniques such as hierarchical modeling to simultaneously analyze an IC, package, and PCB design, whereas other power analysis tools need to analyze individual components separately. By analyzing an entire design, we can model the interactions inside an IC, between an IC and its package and PCB, and between the various ICs. This avoids the errors and inaccuracies that commonly occur when performing the analysis only at the sub-block level.

Efficiency.    Our solutions deliver rapid turnaround for power analysis. For example, our solutions are able to complete analyses significantly faster than many alternative power analysis tools, if these alternative tools are able to complete the analyses at all. This reduced turnaround time increases engineering team productivity, especially for those working on complex, power-sensitive designs. We believe that the efficiency of our tools delivers a higher return on computing resources, reduces time between, and the number of, design iterations, and helps our customers achieve lower costs and faster time to market than many alternative solutions.

Comprehensiveness.    Our solutions enable power analyses at the various phases of the design process for electronic systems, from the initial IC prototyping process to full electronic system design completion, leading to quicker design convergence. Engineering teams who work on the various components of ICs and electronic systems, or on the different phases in the design process, are often separated by organizational boundaries and may not interact or share data, which can lead to design errors or missed schedules. Our solutions create user-friendly, compact models that enable data sharing among these different design teams, such as between automotive or communications system companies and their IC suppliers.

Our Strengths

Our core competitive strengths include:

Exclusive focus on power.    We focus exclusively on providing solutions that enable high-performance, power-efficient, and noise-immune IC and electronic system designs. This focus has enabled us to dedicate significant resources towards developing what we believe are the most advanced, effective power analysis solutions available on the market. We believe we have more research and development personnel focused on solving power and noise challenges than any of our competitors. As ICs continue their migration to smaller geometries, the design and analysis challenges we address will evolve, and we believe that our exclusive focus on power will enable us to remain at the forefront of power analysis technology development.

Diverse and growing blue chip customer base.    Our customers include all of the top 20 semiconductor companies as measured by revenue in 2010 according to iSuppli. Our customers also include leading electronic system companies serving market segments such as mobile devices, high-performance computing and networking, consumer electronics, and automotive and medical electronics. Our customers include, among others, ARM Limited, Broadcom Corporation, Hynix Semiconductor Inc., Intel Corporation, LSI Corporation, MediaTek Inc., QUALCOMM Incorporated, Samsung Electronics Co., Ltd., Sony Corporation, STMicroelectronics N.V., Texas Instruments Incorporated, and Toshiba Corporation. All of our

 

80


Table of Contents

top 20 customers in each of 2008, 2009, and 2010 remain our customers today. From January 1, 2008 to March 31, 2011 we grew our customer base by over 122%, from 53 customers at the beginning of 2008 to 118 customers as of March 31, 2011.

Critical solution for power sign-off.    We believe that our flagship product, RedHawk, is the sign-off tool of choice for the analysis of reliable delivery of power to ICs. Software design and analysis solutions achieve sign-off status by becoming a highly trusted product for the problems they solve. As a result, sign-off solutions often enjoy significant competitive advantages such as product longevity, structural barriers to entry, and substantial market share.

Comprehensive power analysis solutions.    We provide engineers a unified environment to address the design challenges associated with power efficiency and noise immunity throughout various phases of the IC and electronic system design process. Additionally, by generating compact, user-friendly models, our solutions facilitate effective coordination among the multiple engineering teams that work on the design of ICs and complex electronic systems but are separated by organizational boundaries.

Power-focused global customer support team.    Our customer support team consists of application engineers who typically have significant and relevant industry experience who are exclusively focused on helping our customers with their power-efficiency and noise-immunity design challenges. Our support engineers analyze and resolve customer problems, gain technical insight that enables future product development, and enhances customer loyalty. We provide direct support to our customers and view our support team as a competitive differentiator that, along with the high value of our products, helps maintain our high license renewal rate.

Our Strategy

Our goal is to enhance our leadership position as a provider of software tools and methodologies that enable power-efficient, noise-immune IC and electronic system designs. Key components of our strategy include:

Extend our core technology leadership.    We have established ourselves as a market and technology leader for power analysis in the design of ICs and electronic systems. We believe that our RedHawk platform is the sign-off tool of choice for the analysis of reliable delivery of power to ICs. We plan to continue to invest in research and development to maintain and extend our core technology leadership position. For example, we recently introduced our newest product, PathFinder, which is a simulation-based electro-static discharge, or ESD, event analysis solution.

Increase deployment of our products to existing customers.    As the demand for lower power and higher performance electronic systems continues to rise, and as our customers continue to increase their focus on delivering power-efficient solutions, we plan to increase the number of licenses we sell to our existing customer base. We also plan to increase the number of products we sell to our existing customers.

Broaden our customer base.    We plan to continue to increase our market share among leading IC and electronic system companies. Our ability to acquire new customers is an important element of our growth strategy, and our sales organization expends a considerable portion of its efforts on expanding our customer base. We seek to leverage our brand, technology leadership, and customer support to add new customers. In addition to focusing on markets in which we currently have significant penetration, such as mobile devices and high-performance consumer electronics, we also intend to target additional market leaders in high-value IC and electronic systems markets, such as memory and automotive.

 

81


Table of Contents

Leverage existing partnerships with market leaders to penetrate their customers.    We plan to leverage our relationships with leading semiconductor customers to expand our sales to their end customers. Because each of our four platforms targets different parts of the IC and electronic system design process and generates models which can be shared with our other platforms, we can improve our customers’ ability to collaborate with their customers to deliver more power-efficient ICs and electronic systems.

Expand our addressable market with new products and enter new markets.    We plan to develop new products that target adjacent and related end markets where we can leverage our strong brand and our core underlying technology in power analysis to deliver an even broader suite of solutions. For example, in 2010, we introduced PathFinder, our ESD analysis product. We may also extend our product offering through selective strategic acquisitions. For example, in 2009, we acquired the assets and certain foreign subsidiaries of Sequence Design, Inc. through which we acquired PowerArtist, our platform for power analysis in the initial design stage of an IC.

Our Solutions

The IC and Electronic System Design and Analysis Process

The design process for an electronic system, which typically consists of multiple packaged ICs placed on one or more PCBs within a chassis, case or enclosure, follows a series of discrete steps starting from the initial concept definition to the design and development of individual components, leading to the final assembly of the integrated electronic system. Each component of an electronic system is separately analyzed and must receive sign-off at every design phase to ensure that it meets its power budget and power delivery integrity requirements. The specificity of the power analysis done at each design phase requires a simulation software platform that can address the requirements of that design phase.

During the initial design stage of an IC, the operation of the circuit as well as the interconnection of various inputs and outputs is typically described in a high-level format known as register transfer level, or RTL. Power analysis on this RTL description of the IC enables engineers to efficiently explore design changes that help them reduce the power consumption in their circuits and meet power budget requirements of the electronic system. During the physical design stage, the sub-blocks and the intellectual property, or IP, cores of the IC are designed first. These are integrated into an IC that is then placed inside a package and attached to a PCB. In some applications such as mobile phones, multiple ICs may be incorporated into a single package or stacked three dimensional IC configurations to save space. Accurate and comprehensive power analyses are required to ensure that the design of these sub-blocks, IP cores, IC, package, and PCB meet the prescribed power delivery integrity goals. Power-induced noise analysis is done on the electronic system to predict the interaction and coupling that occur between the components present in the system. This analysis helps to predict failures from effects such as electromagnetic emission or input/output signal transmission interference. To increase the comprehensiveness and accuracy of these analyses, representative models must be created at each phase of the design process and passed to the analysis done in the subsequent design phase.

Our Product Platforms

We organize our products into four broad platforms based on their application in the specific phase of the electronic system design process. These four product platforms span our customers’ IC and electronic system design processes, providing them with comprehensive

 

82


Table of Contents

power budgeting, power delivery integrity, and power-induced noise analysis capabilities that they need to design and deliver their complex electronic products.

PowerArtist.    This software platform, used on the RTL description of an IC, helps design engineers meet their power budget requirements through power analysis, power reduction, and design optimization early in the design cycle, when the flexibility to undertake design changes to increase the power-efficiency of the IC is highest.

Totem.    This software platform targets power budgeting and power delivery integrity analysis of memory components such as Flash and DRAM, input/output IPs such as HDMI and DDR circuits, and analog IPs such as power management circuits.

RedHawk.    This software platform is used for power budgeting, power delivery integrity, and power-induced noise analysis of digital logic circuits, system-on-a-chip designs, ASICs, and microprocessor designs.

Sentinel.    This software platform is used for power delivery integrity and power-induced noise analysis of an electronic system consisting of ICs, packages, and PCBs.

In addition to these four product platforms, we offer PathFinder, a simulation-based ESD event analysis solution. An ESD event results from the creation and discharge of a large amount of electrical energy. When this electrical energy is transferred to or from an IC, it severely impacts the critical wiring and logic circuitry of the IC. PathFinder analyzes ESD events for an entire IC, highlighting weaknesses in the design that can make it susceptible to failure from an ESD event. It operates with our RedHawk and Totem platforms to perform ESD-related verification for digital and analog designs.

The table below illustrates where our customers use each of our product platforms in the IC design process.

LOGO

Our Design Flows

Our solutions create user-friendly, compact models that enable data sharing among different design teams, such as between automotive or communications system companies and their IC suppliers. These models enable integrated design flows that link together disjointed design phases fostering closer collaboration among teams working on each of these design steps. These integrated design flows eliminate iterative and time-consuming design closure that results when these design steps are undertaken separately. The end result is faster design convergence and lower product costs.

 

83


Table of Contents

Our product platforms enable three key design flows:

RTL-to-silicon ultra-low-power design flow.    The combination of our PowerArtist and RedHawk platforms enables efficient data sharing, from the initial RTL description phase to the physical design state of the IC. Analysis performed by PowerArtist at the RTL stage results in information that enhances the quality and coverage of the analyses performed by RedHawk subsequently in the physical design process. This integrated ultra-low-power analysis flow helps design engineers meet power budget and power delivery integrity requirements by ensuring a consistent analysis methodology throughout the IC design process.

Analog-to-digital single-chip design flow.    The combination of our Totem and RedHawk platforms enables a consistent power analysis flow for complex ICs by enabling efficient data sharing between the design engineer of the sub-blocks or IPs and the IC design engineers. This data sharing mechanism, which is enabled through the creation of compact and accurate models of the sub-blocks or IPs, helps the IC design engineer analyze an entire IC efficiently and to model and predict the interactions between these sub-blocks and IPs that impact the power budget, power delivery integrity, and power-induced noise in the electronic system.

Chip-to-package/PCB design flow.    The combination of our RedHawk and Sentinel platforms provides a comprehensive chip-package-PCB/system, or CPS, analysis and optimization environment to meet power delivery, signal integrity, thermal cooling, and electromagnetic interference design goals. In this CPS design flow, compact models are created for all relevant components in an electronic system and then simulated concurrently for its different operating modes to ensure immunity from power-induced noise.

Our Customers

Our top 20 customers, based on 2010 revenue contribution, include 14 of the 20 largest semiconductor companies, as measured by 2010 semiconductor revenue according to iSuppli. All of the iSuppli top 20 semiconductor companies were our customers in 2010. Our customers also included leading electronic system companies serving market segments such as mobile devices, high-performance computing and networking, consumer electronics, and automotive and medical electronics. Our customers include, among others:

 

ARM Limited   

LSI Corporation

  

Sony Corporation

Broadcom Corporation    MediaTek Inc.    STMicroelectronics N.V.
Hynix Semiconductor Inc.    QUALCOMM Incorporated    Texas Instruments Incorporated
Intel Corporation    Samsung Electronics Co., Ltd.    Toshiba Corporation

These identified customers accounted for approximately 56% of our revenue for the fiscal year ended December 31, 2010. While our primary focus is on working with leading companies, we also focus significant effort on selling our products to emerging companies.

We had 127 active customers as of March 31, 2011. In 2009, two customers accounted for 10% or more of our revenue, with Texas Instruments Incorporated accounting for 12% of our revenue and QUALCOMM Incorporated accounting for 10% of our revenue. In 2010, only one customer accounted for over 10% of our revenue, with Intel Corporation accounting for 11% of our revenue. For the three months ended March 31, 2011, only one customer accounted for 10% or more of our revenue, with Intel Corporation accounting for 10% of our revenue.

Our customers are also broadly distributed across geographic and product sectors. Based on the regions to which we shipped our products, in 2010 the United States accounted for 57% of our revenue, Europe, Middle East and Africa accounted for 15% of our revenue, Asia Pacific, excluding Japan accounted for 14% of our revenue, and Japan accounted for 14% of our

 

84


Table of Contents

revenue. Based on the regions to which we shipped our products, for the three months ended March 31, 2011, the United States accounted for 58% of our revenue, Europe, Middle East and Africa accounted for 15% of our revenue, Asia Pacific, excluding Japan accounted for 16% of our revenue, and Japan accounted for 11% of our revenue.

Our customers often initially purchase licenses for a single location, department or division. Based upon the initial success of the products, many of our customers have expanded their use of our products into other parts of their organizations. We believe that we can sell our existing products more extensively within our existing customers and sell such customers new and enhanced products as we expand our product lines.

Backlog

Revenue backlog at December 31, 2009 and 2010 was $65.2 million and $84.6 million, respectively. We consider revenue backlog to be deferred revenue at the balance sheet date plus the future committed revenue that has not been invoiced to the customer under fully executed arrangements. However, backlog is not necessarily indicative of future revenue. In particular, customers may generally cancel orders on 30 days’ notice without penalty. Historically, we have not experienced significant cancellations, but we cannot predict whether we will experience significant cancellations in the future. In addition, backlog may not be a reliable predictor of our future sales as business conditions may change and technologies may evolve, and customers may seek to renegotiate their arrangements or default on their payment obligations. For these and other reasons, we may not be able to recognize revenue from backlog when anticipated or at all.

Our standard payment terms for multiple year arrangements are equal annual payments. We consider arrangements under which we are not entitled to receive at least the annualized contract value to contain extended payment terms, regardless of the amount that is deferred into future periods. As of December 31, 2010, our arrangements with eight of our customers contained extended payment terms in which the payments are greater in the future years than in the initial year. The proportion of the revenue backlog represented by these arrangements was approximately 30% of the total revenue backlog at December 31, 2010.

Sales and Marketing

We generate substantially all of our revenue through our direct sales force. Our direct sales force consists of sales personnel, product specialists, and application engineers. Application engineers primarily provide technical pre-sales and post-sales support. These engineers work with our sales team. The complexity of our products requires us to spend substantial time and effort to assist potential customers in evaluating our software and in benchmarking our products against those of our competitors. Therefore, our sales cycle typically ranges between three and nine months but can be longer. During the sales cycle, our direct sales force generally provides technical presentations, product demonstrations, and support for on-site customer evaluation of our platforms.

In the United States, we have sales offices located in Northern and Southern California and Texas and sales personnel in Washington. Internationally, we have sales offices located in China, France, Japan, South Korea, and Taiwan and sales personnel located in Germany and Israel.

We typically license our products under non-exclusive license agreements. The majority of our licenses allow a number of individual users to use our products. Substantially all of our licenses are time-based and typically range from one to three year terms.

 

85


Table of Contents

We focus our marketing efforts on creating and increasing product demand and brand awareness based on our products and technologies, and generating sales leads. Our strategy is to distinguish ourselves as an innovation leader by delivering products that solve mission-critical challenges and enable our customers to differentiate their products from their competitors. Our marketing programs promote and communicate our track record of first-in-class product introductions, our leading position in power analysis for the design of ICs and electronic systems, and our electronics ecosystem design flow initiatives.

We employ various marketing communications channels to inform existing and potential customers about our products. These channels include our website, quarterly newsletters, technology forums (live seminars), web-based seminars, on-site product training sessions, tradeshows, user workshops, whitepaper/conference papers, sponsored newsletters, blog postings, and other public relations initiatives, with an emphasis on user experience sharing and successes.

We have historically spent little on direct advertising.

Research and Development

We primarily conduct research and development on existing and new technologies within our research and development team. We have also used acquisitions to augment our own research and development efforts, such as our acquisition of Optimal Corporation in 2007 and our acquisition of the assets and certain foreign subsidiaries of Sequence Design, Inc. in 2009. We have received significant industry recognition for our research and development efforts, including being an EDN Innovation of the Year Awards recipient in 2003 and 2007, and a finalist for the award in 2005, 2009, and 2010.

We operate within sectors that typically combine rapid innovation with increasing design and manufacturing complexity. Our future performance depends in part on our ability to meet and exceed increasingly demanding productivity, quality, predictability, and cost requirements on a schedule that keeps pace with our customers’ technology developments and foundry process advancements. This requires us to make significant investments to further enhance our core technologies and expand our product offerings.

We actively recruit engineers and developers with expertise and degrees in computer science, semiconductor physics, electrical engineering, and other engineering disciplines. As of March 31, 2011, we had 137 employees engaged in research and development activities. Our research and development expenses were $7.8 million, $8.6 million, and $11.5 million in 2008, 2009, and 2010, respectively. Our research and development expenses were $2.7 million and $3.3 million for the three months ended March 31, 2010 and 2011, respectively.

Customer Support

We maintain direct customer support at various strategic locations throughout the world and provide support on initial analysis and design flow setup in the customer design environment, training on use of our products, tracking of issues, result qualification assistance, and silicon debug. Domestically we have application engineers based in Northern and Southern California, Colorado, Texas, and North Carolina. Internationally, we have direct customer support centers in China, France, India, Japan, South Korea, Taiwan, and customer support personnel in Israel, Germany, and the United Kingdom.

We hire application engineers and product specialists that typically have significant and relevant industry experience who can analyze customer needs and gain technical insight that

 

86


Table of Contents

enables future product development and enhancement. Our application engineers have deep cross-domain expertise enabling the sale and use of our products in our key design flows.

We continually seek to achieve total customer satisfaction on the use of all of our products in the entire design flow. Our application engineering team enables customers to successfully use our products not only for sign-off, but also for in-design optimization and for early prototyping and planning. The combination of deployment throughout the design chain and expanded use within each design step ensures continuous and robust use of our products in a customer design environment.

We also continually seek to enhance our customers’ success by assisting with their critical, time-sensitive projects through early planning and continuous tracking, by identifying and jointly solving complex, next-generation problems, and by enabling knowledge sharing and expertise build-up within and across organizations. By setting up and coordinating user groups that operate within a customer organization and across the industry, we help define standards on data sharing and analysis guidelines that in turn enable our customers to be successful in delivering products to their customers.

Competition

The markets in which we operate are highly competitive. We compete principally on the basis of technology leadership, product quality and features (including ease-of-use), license terms, post-contract customer support, interoperability with our products and other vendors’ products, and price and payment terms. Our competitors include ANSYS, Inc., Cadence Design Systems, Inc., Magma Design Automation Inc., Mentor Graphics Corp., and Synopsys, Inc. We also compete with many privately held companies.

Many of our competitors have, and future competitors may have, competitive advantages, including but not limited to closer integration with design implementation tools, greater resources that can be devoted to the development, promotion, and sale of their products, more established sales channels, greater development experience, larger intellectual property rights portfolios, and/or greater name recognition.

Gaining market share in the markets in which we operate is difficult because it often takes years for a customer to move from a competitor. The products our competitors offer are generally difficult to master. This difficulty often results in customers being disinclined to make changes once their employees, as well as others in the industry, have developed familiarity with a particular product. Many of our competitors have established relationships with our current and potential customers and can devote substantial resources aimed at preventing us from establishing or enhancing our customer relationships. Many of our competitors currently sell products that our customers and potential customers have broadly adopted, providing them a substantial advantage when they sell products that perform functions substantially similar to some of our products. These structural barriers may prevent us from obtaining new customers and gaining market share, may require us to reduce product pricing and cause us to lose existing customers, which could harm our business, financial condition, and operating results.

We also compete with the internal IC design automation development groups of our existing and potential customers. Therefore, these customers may not require, or may be reluctant to purchase, products offered by independent vendors such as us. See “Risk Factors—Risks Related to Our Business—The markets in which we operate are highly competitive, and these competitive pressures may prevent us from obtaining new customers and gaining market share, may require us to reduce our product and services pricing or cause us to lose existing customers, which could materially harm our business, financial condition, and operating results.”

 

87


Table of Contents

Intellectual Property

We rely upon a combination of copyright, patent, trademark and trade secret laws, license and nondisclosure agreements, and technical measures to establish and protect our intellectual property and our rights to such intellectual property. Our intellectual property portfolio includes 32 issued U.S. patents, one issued non-U.S. patent, two pending U.S. patent applications, and one pending non-U.S. patent application. Generally, the term of patent protection is 20 years from the earliest effective filing date of the patent application. Our issued patents are scheduled to expire at various times between 2017 and 2028, subject to any applicable patent term adjustments and our timely payment of applicable maintenance fees. Our patents generally relate to our products and the technology used in connection with our products.

While our patent portfolio is a significant component of our intellectual property strategy, patents afford only limited protection for our technology, may be difficult, expensive, and time consuming to enforce, and may not prevent our competitors from designing around our patents or developing competing non-infringing technologies. See “Risk Factors—Risks Related to Our Business—We may not obtain sufficient patent protection, which could harm our competitive position and increase our expenses.”

We currently have six registered trademarks in the United States, and one registered trademark in non-U.S. jurisdictions. We also have rights in other trademarks that are important to our business but that are not the subject of federal trademark registrations.

In addition to patents and trademarks, to protect our intellectual property rights, we rely significantly upon a combination of copyright laws, trade secret laws, non-disclosure agreements with our customers, employees, and suppliers, our internal security systems, confidentiality procedures, and employee/contractor confidentiality agreements. Although we take steps to protect our intellectual property, infringement and misappropriation may still occur. See “Risk Factors—Risks Related to Our Business—In addition to patents, we rely on trademark, copyright, and trade secret laws and contractual rights to protect our intellectual property, and the failure to sufficiently protect our intellectual property could harm our ability to compete and grow our business.”

We are also party to various license agreements with third parties which typically grant us the right to use certain technology in conjunction with our software products. This exposes us to risks over which we may have little or no control. See “Risk Factors—Risks Related to Our Business—Some of our products incorporate technology we license from third parties, and if we do not maintain these licenses, if a licensor terminates our license to use its technology, or if a licensor has difficulties keeping up with technological changes or stops supporting our products, our ability to develop and license our products could be materially delayed, reduced or prevented.”

Our industry is characterized by vigorous protection and pursuit of intellectual property rights or positions. There are numerous patents in the markets in which we operate and new patents are frequently issued rapidly. We expect that software suppliers and their customers will be subject to an increasing risk of intellectual property claims. Any such claims, with or without merit, could be time consuming, result in costly litigation, distract management and employees, cause product shipment delays, obligate us to indemnify our customers and resellers, or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us. See “Risk Factors—Risks Related to Our Business—We may face intellectual property infringement claims or other litigation, which can be costly to defend, can take the time of our management and employees away from day-to-day operations and could result in our losing important rights and paying significant damages.”

 

88


Table of Contents

We enter into standard license and non-disclosure agreements in the ordinary course of business. Pursuant to these agreements, we agree to indemnify our customers and resellers for losses suffered or incurred by them as a result of any patent, copyright or other third-party intellectual property infringement claim directly or indirectly caused by our products or for improper disclosures by our employees. These indemnification obligations typically have perpetual terms. Based upon our historical lack of product and patent infringement claims and improper disclosure claims, we have not recorded any such liabilities in our financial statements. See “Risk Factors—We may be unable to make payments to satisfy our indemnification obligations or in the event of improper use or disclosure of confidential information, which would harm our customer relationships and our business.”

We have also agreed with one of our largest customers not to assert our patents against such customer, and also agreed that, under certain circumstances, if we divest or assign any of our patents, then the customer will be entitled to an irrevocable, worldwide, nonexclusive license to such patents to make or have made such customer’s products. See “Certain Relationships and Related Party Transactions—Business Agreements with Intel Corporation.”

Employees

As of March 31, 2011, we had 269 full-time employees, including 137 in research and development, 110 in sales and marketing, and 22 in general and administrative. As of March 31, 2011, we had 100 employees located in the United States, 67 located in China, 56 located in India, 34 located in Asia, and 12 located in Europe. None of our employees are covered by collective bargaining agreements. We believe our employee relations are good and we have never experienced work stoppages.

Facilities

Our corporate headquarters are located in San Jose, California, where we occupy approximately 26,200 square feet under a lease expiring on October 31, 2015. In accordance with the lease, we will occupy an aggregate of 39,842 square feet by December 1, 2011 and an aggregate of 51,812 square feet by December 1, 2013. We expect our corporate headquarters will be adequate for our space requirements until the expiration of the lease. However, if we do require additional space, adequate space may be unavailable on commercially reasonable terms.

We maintain leased domestic sales and support offices occupying less than 1,200 square feet each in Southern California and Texas. Internationally, we maintain leased research and development and sales and application engineering support offices occupying less than 8,000 square feet each in China (Shanghai, Beijing, and Chengdu), France, India (Noida and Bangalore), Japan, South Korea, and Taiwan. Lease termination dates range from June 2011 to March 2016. We periodically evaluate the adequacy of our existing facilities and expect our current sales and support offices will be adequate for at least the next 12 months. However, if we require additional space, adequate space may be unavailable on commercially reasonable terms.

We also maintain three data centers and 26 remote locations where we provide support.

Legal

We are not currently a party to any legal proceedings. We are not aware of any threatened litigation, unasserted claims or assessments that could, if determined adversely to us, have a material adverse effect on our business, operating results or financial condition. We may be subject to various claims and legal actions arising in the ordinary course of business.

 

89


Table of Contents

MANAGEMENT

Executive Officers and Directors

The following sets forth information about our executive officers and directors as of May 4, 2011:

 

Name

   Age     

Position(s)

Andrew T. Yang, Ph.D.

     51       Co-Founder, Chief Executive Officer, Chair of the Board and Director

Emily Chang

     46       Chief Financial Officer

Dian Yang, Ph.D.

     51       General Manager of Asia and Senior Vice President of Product Management

Steven (Craig) Shirley

     47       Vice President of Worldwide Sales

Aveek Sarkar

     36       Vice President of Product Engineering and Support

Ping Yang, Ph.D.

     58       Director

Lori Holland

     53       Director

Bernie Aronson

     80       Director

Andrew T. Yang, Ph.D.    Andrew T. Yang co-founded our company in January 2001 and has served as the chair of our board of directors since our inception and as our chief executive officer since January 2002. Dr. Andrew Yang founded Anagram Design Inc. in 1993, a high-capacity simulation solutions provider for deep-submicron ICs. Anagram Design Inc. merged with Avant! Corp. in 1997, where he served as the Vice President of the Analysis Product Division responsible for all extraction and analysis products until 1998. Since 1998, Dr. Andrew Yang has been an investor and a director of several electronic design automation companies, including CadMOS Design Technology, Inc. (acquired by Cadence Design Systems, Inc.), Ultima Interconnect Technology, Inc. (acquired by Cadence Design Systems, Inc.), InnoLogic Systems, Inc. (acquired by Synopsys, Inc.), and Mojave Inc. (acquired by Magma Design Automation, Inc.). Dr. Andrew Yang received a B.S. in Electrical Engineering and Computer Science from the University of California, Berkeley, and M.S. and Ph.D. in Electrical Engineering from the University of Illinois, Urbana-Champaign, and was a tenured professor at the University of Washington from 1989 to 1996. As our co-founder and chief executive officer, Dr. Andrew Yang provides critical contributions to our board of directors reflecting his detailed knowledge of our company and the industry, our employees, our client base, our prospects, the strategic marketplace, and our competitors.

Emily Chang.    Emily Chang has served as our chief financial officer since July 2010. Ms. Chang served as our corporate controller from October 2004 to July 2010. From 2001 to 2004, Ms. Chang held numerous positions at Cadence Design Systems, Inc., where she performed various finance and Securities and Exchange reporting-related functions. From 1999 to 2001, she held numerous positions at Silicon Perspective Corporation (acquired by Cadence Design Systems, Inc.), where she performed various financial reporting and finance functions. Ms. Chang received a B.A. in Business from the University of California, Los Angeles.

Dian Yang, Ph.D.    Dian Yang has served as our senior vice president of product management and general manager of Asia since January 2008. From July 2005 to January 2008, Dr. Dian Yang was our general manager of Asia and senior vice president of business development. Prior to joining us in July 2005, Dr. Dian Yang co-founded InnoLogic Systems, Inc., a provider of formal verification solutions for full-custom designs, in August 1998. InnoLogic Systems, Inc. was acquired by Synopsys, Inc. in 2003, where he continued as a senior director in the implementation business unit from June 2003 to July 2005. Prior to InnoLogic, Dr. Dian Yang held various

 

90


Table of Contents

management positions at Silicon Graphics, Inc., LSI Corporation, and Avant! Corp. Dr. Dian Yang received a B.S. in Applied Mathematics from Shanghai University of Science and Technology and M.S. and Ph.D. in Computer Science from Stanford University.

Steven (Craig) Shirley.    Steven (Craig) Shirley has served as our vice president of worldwide sales since March 2006. From 2004 to 2006, Mr. Shirley was vice president of worldwide sales and support at Jasper Design Automation, Inc. From 2001 to 2004, Mr. Shirley was vice president of North American Sales at Verisity Design, Inc. (acquired by Cadence Design Systems, Inc.). Between 1987 and 2000, Mr. Shirley held various positions at Avant! Corp., Aspect Development, Inc., Quickturn Design Systems, Inc., Ready Systems Corporation, Verisity Design, Inc., and Viewlogic Systems, Inc. Mr. Shirley began his career at Intergraph Corporation, as an applications engineer. Mr. Shirley received a B.S. in Computer Engineering from Auburn University.

Aveek Sarkar.    Aveek Sarkar has served as our vice president, product engineering and support since July 2006. From March 2005 to June 2006, Mr. Sarkar was our director of product engineering. From October 2003 to February 2005, Mr. Sarkar was our senior product engineer. From December 1998 to October 2003, Mr. Sarkar was a member of the technical staff at Sun Microsystems, Inc., a company selling computers, computer components, computer software, and information technology services. From April 1998 to December 1998, Mr. Sarkar was a device engineer at Cadence Design Systems, Inc. Mr. Sarkar received a B.Tech from the Indian Institute of Technology, Kanpur, a M.S. in Electrical Engineering from Oregon State University, and a M.B.A. from Santa Clara University.

Ping Yang, Ph.D.    Ping Yang has served as one of our directors since April 2006 and as a member of the audit committee of the board of directors since February 2011. Dr. Ping Yang currently operates an independent consulting practice serving semiconductor companies, providing expertise in the areas of very large-scale integration, technology development and manufacturing, computer-aided design, circuits and systems, large-scale ICs, and solid-state electronics. Dr. Ping Yang served as Vice President of Research and Development at Taiwan Semiconductor Manufacturing Company (TSMC), a semiconductor manufacturer, from June 2001 to November 2005. Prior to joining TSMC, Dr. Ping Yang held various management positions at TSMC North America, Vanguard International, and Texas Instruments Incorporated. Dr. Ping Yang currently serves as a director of LTX-Credence Corporation and is a member of its compensation committee. Dr. Ping Yang also currently serves as a director, a member of the audit committee, and the chair of the nominating and corporate governance committee of Intervac, Inc. Dr. Ping Yang served as a director of Global Unichip Corporation and was a member of its audit committee from 2003 to 2007. Dr. Ping Yang is a fellow of the Institute of Electrical and Electronics Engineers and a recipient of the Institute’s Third Millennium Medal. Dr. Ping Yang received a B.S. in Physics from the National Taiwan University, and a M.S. and a Ph.D. in Electrical Engineering from the University of Illinois, Urbana-Champaign. Because of Dr. Ping Yang’s expertise in the areas of very-large-scale integration, or VLSI, technology development, computer-aided design, circuits and systems, large-scale integrated circuits, solid-state electronics and business management and his experience of serving as a member of the board of directors of many public companies, we believe that he is able to provide valuable input into our strategic and business affairs, as well as other matters.

Lori Holland.    Lori Holland has served as one of our directors and as the chair of the audit committee of our board of directors since February 2011. Ms. Holland has operated an independent financial consulting practice serving as an advisor to various technology companies, including startups since January 2001. From November 1999 to December 2000, Ms. Holland was the chief financial officer of Zaffire, Inc., a telecommunication company

 

91


Table of Contents

headquartered in California. Prior to that, Ms. Holland served as the chief financial officer of Read-Rite Corporation, a manufacturer of components to the disc drive industry, and NeoMagic Corporation, a fabless semiconductor company and supplier of low-power audio and video integrated circuits for mobile use. Ms. Holland also held senior financial posts at other technology start-ups including NeXT Computer, Inc. and Seagate Technology, Inc. From September 2004 to August 2008, Ms. Holland served as a director of Credence Systems Corporation. Following the merger of Credence Systems with LTX Corp. in 2008, she has served as a director and an audit committee member of LTX-Credence Corporation. From June 2005 to December 2006, Ms. Holland served on the board of directors and the chair of the audit committee of WiderThan Co., Ltd., a Korean company listed on the Nasdaq National Market. Ms. Holland served as a director and the chair of the audit committee of Bookham Technology plc from April 1999 until it was acquired by Avanex Corporation and became Oclaro, Inc. in 2009. Ms. Holland has served as a director and the chair of the audit committee of Oclaro, Inc. since the merger. Ms. Holland received a B.A. in Economics from California Polytechnic State University. We believe that Ms. Holland’s extensive industry knowledge and perspective and strong financial background are beneficial for the board of directors.

Bernie Aronson.    Bernie Aronson has served as one of our directors since April 2011. He also currently serves as an advisor to InPA Systems, Inc., a privately-held semiconductor company, where he has been providing services since 2010. From October 2004 to October 2008, Mr. Aronson was chief executive officer of Kilopass Technology Inc., a provider of embedded nonvolatile memory intellectual property. From July 1997 to October 2004, he was chief executive officer and president of Synplicity Inc., a semiconductor design software company. From February 1997 to July 1997, he served as senior vice president and co-general manager of the EPIC Technology Group of Synopsys, Inc., a semiconductor design software company, after the acquisition of EPIC Design Technology Inc. by Synopsys, Inc. From July 1991 to February 1997, he served as president of EPIC Design Technology Inc., a semiconductor design software company. From March 1990 to August 1991, he served as an executive vice president of Zoran Corporation, a semiconductor company. From 1976 to 1987, he served as president of Pico Design Inc., a design services company, which he founded and which was acquired by Motorola Inc. in 1979. Mr. Aronson currently serves on the board of directors of eASIC Corporation, a fabless semiconductor company. Mr. Aronson received a B.EE. from The City University of New York. Because of his extensive experience in our industry, Mr. Aronson is able to provide insights regarding our industry, our client base, our prospects, the strategic marketplace, and our competitors. He also brings valuable experience as an executive officer of two public companies in our industry in his career.

There are no family relationships among any of our directors or executive officers.

Code of Business Conduct and Ethics

Our board of directors has adopted a code of business conduct and ethics that applies to all of our officers, directors, and employees, including our principal executive officer and principal financial officer, and is intended to comply with the applicable rules and regulations of the Securities and Exchange Commission and the Nasdaq Global Market listing requirements. This code is designed to deter wrongdoing and to promote:

 

   

honesty and integrity, including the ethical handling of any actual or apparent conflict of interest between personal and professional relationships;

 

   

full, fair, accurate, timely, and understandable disclosure in the reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by our company;

 

92


Table of Contents
   

professional integrity in all aspects of our organization and eliminate barriers to responsible behavior, such as coercion, fear of reprisal or alienation from our company;

 

   

education of all members of our company about applicable laws, rules, and regulations and applicable stock exchange rules, relevant to the performance of their duties;

 

   

compliance with applicable governmental laws, rules, and regulations and applicable stock exchange rules;

 

   

prompt internal reporting of violations of the code of business conduct and ethics, including any violations of governmental laws, rules or regulations, and applicable stock exchange rules; and

 

   

ethical and honest behavior in the workplace.

Waivers of the policies set forth in the code of business conduct and ethics will be granted on a case-by-case basis and only in extraordinary circumstances. Any waiver of the policies may only be granted by the chief financial officer for employees other than executive officers. Any waiver of the policies for executive officers or directors requires approval of the board of directors or our audit committee and will be promptly disclosed to the public. Upon completion of this offering, our code of business conduct and ethics will be available on our website.

Board Composition

Our board of directors consists of four members. Our board of directors has determined that all of the members of our board of directors, except our chief executive officer, Andrew Yang, are “independent directors” as defined in applicable rules of the Securities and Exchange Commission and the Nasdaq Global Market. All directors are elected to hold office until their successors have been elected. Officers are elected and serve at the discretion of the board of directors.

Staggered Board

Pursuant to our amended and restated certificate of incorporation, our board of directors will be divided into three classes. The members of each class will serve for a staggered, three-year term. Upon the expiration of the term of a class of directors, a director in that class will be elected for three-year terms at the annual meeting of stockholders in the year in which their term expires. The classes will be composed as follows:

 

   

Lori Holland and Bernie Aronson will be Class I directors, whose terms will expire at the fiscal 2012 annual meeting of stockholders;

 

   

Ping Yang will be a Class II director, whose term will expire at the fiscal 2013 annual meeting of stockholders; and

 

   

Andrew Yang will be a Class III director, whose term will expire at the fiscal 2014 annual meeting of stockholders.

Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of our directors. This classification of our board of directors may have the effect of delaying or preventing changes in control of our company.

 

93


Table of Contents

Board Committees

Our board of directors has established the committees described below and may establish others from time to time. The charters for each of our committees will be available on our website once our company is public.

Audit Committee

Our audit committee is comprised of Ping Yang, Bernie Aronson, and Lori Holland, who is the chairperson of the committee. Our board of directors has determined that each member of the audit committee, is “independent” for audit committee purposes as that term is defined in the applicable rules of the Securities and Exchange Commission and the Nasdaq Global Market. Our board of directors has designated each member of the audit committee as an “audit committee financial expert,” as defined under the applicable rules of the Securities and Exchange Commission. The audit committee’s responsibilities will include:

 

   

appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;

 

   

pre-approving auditing and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm;

 

   

reviewing annually a report by the independent registered public accounting firm regarding the independent registered public accounting firm’s internal quality control procedures and various issues relating thereto;

 

   

reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures;

 

   

coordinating the oversight and reviewing the adequacy of our internal control over financial reporting with both management and the independent registered public accounting firm;

 

   

establishing policies and procedures for the receipt and retention of accounting related complaints and concerns, including a confidential, anonymous mechanism for the submission of concerns by employees;

 

   

periodically reviewing legal compliance matters, including securities trading policies, periodically reviewing significant accounting and other financial risks or exposures to our company, reviewing and, if appropriate, approving all transactions between our company or its subsidiaries and any related party (as described in Item 404 of Regulations S-K);

 

   

periodically reviewing our code of business conduct and ethics;

 

   

establishing policies for the hiring of employees and former employees of the independent registered public accounting firm; and

 

   

reviewing the audit committee report required by Securities and Exchange Commission rules to be included in our annual proxy statement.

The audit committee will also have the power to investigate any matter brought to its attention within the scope of its duties. It will also have the authority to retain counsel and advisors to fulfill its responsibilities and duties.

 

94


Table of Contents

Compensation Committee

Our compensation committee is comprised of Lori Holland and Ping Yang, who is the chairperson of the committee. Our board of directors has determined that each member of the compensation committee is an independent director for compensation committee purposes as that term is defined in the applicable rules of the Nasdaq Global Market, is a “non-employee director” within the meaning of Rule 16b-3(d)(3) promulgated under the Securities Exchange Act of 1934 and is an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code, as amended. The compensation committee’s responsibilities will include, among other things:

 

   

annually reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer;

 

   

annually evaluating the performance of our chief executive officer in light of such corporate goals and objectives and recommending the compensation of our chief executive officer to the independent members of the board of directors for approval;

 

   

annually reviewing and approving the compensation of our other executive officers;

 

   

annually reviewing our compensation, welfare, benefit and pension plans, and similar plans;

 

   

annually reviewing succession planning;

 

   

annually reviewing and making recommendations to the board of directors with respect to director compensation; and

 

   

reviewing for inclusion in our proxy statement the report of the compensation committee required by the Securities and Exchange Commission.

The compensation committee will also have the power to investigate any matter brought to its attention within the scope of its duties. It will also have the authority to retain counsel and advisors to fulfill its responsibilities and duties.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee, or nominating committee, is comprised of Lori Holland, Bernie Aronson, and Ping Yang, who is the interim chairperson of the committee. Our board has determined that each of the committee members is an independent director for nominating committee purposes as that term is defined in the applicable rules of the Nasdaq Global Market. The nominating committee’s responsibilities will include, among other things:

 

   

developing and recommending to the board of directors criteria for board of directors and committee membership;

 

   

identifying individuals qualified to become board of directors members;

 

   

recommending to the board of directors the persons to be nominated for election as directors and to each of the board of directors’ committees;

 

   

annually reviewing our corporate governance guidelines; and

 

   

monitoring and evaluating the performance of the board of directors and leading the board in an annual self-assessment of its practices and effectiveness.

The nominating and corporate governance committee will also have the power to investigate any matter brought to its attention within the scope of its duties. It will also have the authority to retain counsel and advisors to fulfill its responsibilities and duties.

 

95


Table of Contents

Director Compensation for 2010

The following table presents information regarding the compensation paid for 2010 to members of our board of directors in 2010 who were not also executive officers. The compensation paid to our director Dr. Andrew Yang, who is also our chief executive officer, for 2010 is presented below under “Compensation Discussion and Analysis” and the related explanatory tables. Dr. Andrew Yang is not entitled to receive additional compensation for his service as a director. Ms. Holland and Mr. Aronson were not members of the board of directors until 2011.

 

Name

   Fees
Earned or
Paid in
Cash
     Option
Awards (1)
     All Other
Compensation
     Total  

Shen Lin, Ph.D. (2)

                               

Ping Yang, Ph.D.

   $ 50,000                       $ 50,000   

 

(1) The following table presents the number of outstanding and unexercised option awards held by Dr. Lin and Dr. Ping Yang as of December 31, 2010. No equity awards were granted to our directors in 2010. In February 2011, Dr. Ping Yang was granted options to purchase 21,875 shares of our common stock at an exercise price of $5.35 per share, which is scheduled to vest in monthly installments over the one-year period after the grant date.

 

Name

   Number of Shares Subject to
Outstanding Options as of
December 31, 2010
 

Shen Lin, Ph.D.

     11,538</