MINDSPEED TECHNOLOGIES, INC - FORM 8-K/A - EX-99.1 - AUDITED FINANCIAL STATEMENTS

Attached files

file	filename
8-K/A - FORM 8-K AMENDMENT NO. 1 - MINDSPEED TECHNOLOGIES, INC	d336722d8ka.htm
EX-23.1 - CONSENT OF INDEPENDENT AUDITORS - MINDSPEED TECHNOLOGIES, INC	d336722dex231.htm
EX-99.2 - UNAUDITED PRO FORMA FINANCIAL INFORMATION - MINDSPEED TECHNOLOGIES, INC	d336722dex992.htm

Exhibit 99.1

PICOCHIP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Report of Independent Auditor		F-2

Consolidated Balance Sheets		F-3

Consolidated Statements of Operations		F-4

Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit		F-5

Consolidated Statements of Cash Flows		F-6

Notes to the Consolidated Financial Statements		F-7

F-1

REPORT OF INDEPENDENT AUDITOR

The Board of Directors

picoChip, Inc.

We have audited the accompanying consolidated balance sheets of picoChip, Inc. (the “Company”), as of December 31, 2010 and 2009 and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years ended December 31, 2010 and 2009, in conformity with accounting principles generally accepted in the United States of America.

As described in Note 14, the Company was acquired by Mindspeed Technologies, Inc. on February 6, 2012.

/s/ Deloitte & Touche LLP

San Jose, California

April 18, 2012

F-2

PICOCHIP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)


	September 30, 2011			December 31, 2010			December 31, 2009
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	1,195		$	8,164		$	2,280
Accounts receivable, net of allowance for doubtful accounts of $109 at September 30, 2011, $611 at December 31, 2010 and none at December 31, 2009		1,832			3,246			2,738
Inventories		1,696			2,834			1,734
Research and development grants receivable		2,768			3,524			3,658
Prepaid expenses and other current assets		1,196			1,432			772

Total current assets		8,687			19,200			11,182
Property and equipment, net		3,084			3,493			1,307
Licensed and purchased intangibles, net		2,305			1,321			664
Other assets		39			156			445

Total assets	$	14,115		$	24,170		$	13,598

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable	$	2,195		$	2,990		$	1,860
Accrued compensation and benefits		371			443			471
Deferred revenue		1,441			2,134			4,139
Other current liabilities		4,548			4,684			2,768
Capital lease obligation, current portion		108			104			29
Current portion of loans		3,160			6,824			2,762
Convertible loan notes		9,483			—			1,424

Total current liabilities		21,306			17,179			13,453
Preferred stock warrants liability		367			192			25
Loans, long-term		—			—			2,282
Capital lease obligation		138			198			5
Deferred revenue, long-term		8,131			7,294			6,334
Other long-term liabilities		1,410			1,780			2,083

Total liabilities		31,352			26,643			24,182

Commitments and contingencies (Note 11)
Redeemable Convertible Preferred Stock
Redeemable convertible preferred stock, $0.0001 par value, 28,018 (unaudited), 21,843 and 11,243 shares authorized at September 30, 2011 and December 31, 2010 and 2009; 21,143 (unaudited), 21,143, and 10,913 shares issued and outstanding at September 30, 2011 and December 31, 2010 and 2009		80,925			80,925			61,641

Stockholders’ Deficit
Series E-1 convertible preferred stock , $0.0001 par value, 3,665 shares authorized at September 30, 2011 (unaudited), and December 31, 2010 and 3,561 at December 31, 2009; 3,552 issued and outstanding shares at September 30, 2011 (unaudited), and December 31, 2010 and 2009		225			225			225
Series F-1 convertible preferred stock, $0.0001 par value, 500 shares authorized at September 30, 2011 (unaudited) and December 31, 2010, and none at December 31, 2009; 438 issued and outstanding shares at September 30, 2011 (unaudited) and December 31, 2010 and none at December 31, 2009		44			44			—
Common stock, $0.0001 par value, 45,000 shares authorized at September 30, 2011 (unaudited) and December 31, 2010 and 24,000 at December 31, 2009; 2,206 (unaudited), 1,925, and 1,913 issued and outstanding shares at September 30, 2011 and December 31, 2010 and 2009		—			—			—
Additional paid-in capital		12,220			11,945			11,395
Accumulated deficit		(110,651	)		(95,612	)		(83,845	)

Total stockholders’ deficit		(98,162	)		(83,398	)		(72,225	)

Total liabilities, redeemable convertible preferred stock and stockholders’ deficit	$	14,115		$	24,170		$	13,598

See accompanying notes to the consolidated financial statements.

F-3

PICOCHIP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)


	Nine Months Ended September 30,						Year Ended December 31,
	2011			2010			2010			2009
	(unaudited)
Revenue:
Products	$	9,368		$	14,457		$	21,078		$	13,815
Software and maintenance		1,195			3,043			3,466			3,421

Total revenue		10,563			17,500			24,544			17,236
Costs and operating expenses:
Cost of products sold		4,417			6,985			10,561			5,674
Research and development		8,926			7,747			10,869			10,233
Selling, general and administrative		11,187			10,689			13,957			11,582

Total costs and operating expenses		24,530			25,421			35,387			27,489

Loss from operations		(13,967	)		(7,921	)		(10,843	)		(10,253	)
Interest expense		(856	)		(1,033	)		(873	)		(1,138	)
Other income/(expense), net		112			157			135			153

Loss before income taxes		(14,711	)		(8,797	)		(11,581	)		(11,238	)
Provision for income taxes		(328	)		(30	)		(186	)		(52	)

Net loss	$	(15,039	)	$	(8,827	)	$	(11,767	)	$	(11,290	)

See accompanying notes to the consolidated financial statements.

F-4

PICOCHIP, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(in thousands)


	Redeemable Convertible Preferred Stock						Convertible Preferred Stock				Common Stock				Additional Paid-In Capital		Accumulated Deficit			Total Stockholders’ Deficit
	Shares			Amount			Shares		Amount		Shares		Amount		Additional Paid-In Capital		Accumulated Deficit			Total Stockholders’ Deficit
Balance at January 1, 2009		6,775		$	54,751			—	$	—		100	$	—	$	1,083	$	(72,555	)	$	(71,472	)
Net loss		—			—			—		—		—		—		—		(11,290	)		(11,290	)
Issuance of common stock from the exercise of stock options		—			—			—		—		5		—		3		—			3
Issuance of common stock		—			—			—		—		537		—		17		—			17
Preferred stock converted to common stock under pay to play		(1,271	)		(9,682	)		—		—		1,271		—		9,682		—			9,682
Issuance of Series E preferred stock, net of issuance costs of $186		3,747			11,421			—		—		—		—		—		—			—
Issuance of Series E preferred stock upon conversion of convertible loan notes		1,662			5,151			—		—		—		—		—		—			—
Issuance of Series E-1 preferred stock		—			—			3,552		225		—		—		—		—			225
Stock-based compensation		—			—			—		—		—		—		610		—			610

Balance at December 31, 2009		10,913			61,641			3,552		225		1,913		—		11,395		(83,845	)		(72,225	)
Net loss		—			—			—		—		—		—		—		(11,767	)		(11,767	)
Issuance of common stock from the exercise of stock options		—			—			—		—		12		—		—		—			—
Issuance of common stock		—			—			—		—		—		—		—		—			—
Issuance of Series F preferred stock, net of issuance costs of $209		8,420			15,834			—		—		—		—		—		—			—
Issuance of Series F preferred stock upon conversion of convertible loan notes		1,810			3,450			—		—		—		—		—		—			—
Issuance of Series F-1 preferred stock		—			—			438		44		—		—		—		—			44
Stock-based compensation		—			—			—		—		—		—		550		—			550

Balance at December 31, 2010		21,143			80,925			3,990		269		1,925		—		11,945		(95,612	)		(83,398	)
Net loss (unaudited)		—			—			—		—		—		—		—		(15,039	)		(15,039	)
Issuance of common stock from the exercise of stock options (unaudited)		—			—			—		—		281		—		9		—			9
Stock-based compensation (unaudited)		—			—			—		—		—		—		266		—			266

Balance at September 30, 2011 (unaudited)		21,143		$	80,925			3,990	$	269		2,206	$	—	$	12,220	$	(110,651	)	$	(98,162	)

See accompanying notes to the consolidated financial statements.

F-5

PICOCHIP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine Months Ended September 30,						Year Ended December 31,
	2011			2010			2010			2009
	(unaudited)
Cash Flows From Operating Activities
Net loss	$	(15,039	)	$	(8,827	)	$	(11,767	)	$	(11,290	)
Adjustments required to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,620			921			1,392			1,297
Provision for bad debts		341			104			679			141
Stock-based compensation		266			444			550			610
Loss on disposal of property, plant and equipment and intangibles		—			—			63			6
Non-cash interest expense		288			408			475			133
Change in fair value of preferred stock warrants		175			106			75			(214	)
Loss on extinguishment of put option		—			234			234			—
Change in fair value of derivative instruments		(271	)		(511	)		(511	)		87
Changes in assets and liabilities:
Accounts receivable		1,073			(3,543	)		(1,187	)		791
Inventories		1,138			(695	)		(1,100	)		(142	)
Research and development grants receivable		756			1,013			134			(989	)
Prepaid expenses and other current assets		236			(742	)		(660	)		(17	)
Other assets		117			217			289			(445	)
Accounts payable		(795	)		1,115			1,130			475
Accrued compensation and benefits		(72	)		(55	)		(28	)		35
Deferred revenue		144			(1,735	)		(1,045	)		(2,103	)
Other liabilities		(1,041	)		2,556			1,884			1,746

Net cash used in operating activities		(11,064	)		(8,990	)		(9,393	)		(9,879	)

Cash Flows From Investing Activities
Purchases of property and equipment		(593	)		(1,438	)		(2,641	)		(640	)
Purchases of intangible assets		(1,602	)		(1,283	)		(1,343	)		(344	)

Net cash used in investing activities		(2,195	)		(2,721	)		(3,984	)		(984	)

Cash Flows From Financing Activities
Proceeds from issuance of debt		—			—			6,749			—
Proceeds from issuance of convertible loan notes		10,000			1,668			1,668			1,668
Payments made on debt		(3,663	)		(1,502	)		(4,945	)		(3,219	)
Payments made on capital lease obligations		(56	)		(25	)		(45	)		(25	)
Proceeds from issuance of preferred stock, net of issuance costs		—			15,834			15,834			11,421
Proceeds from issuance of common stock		—			—			—			17
Proceeds on stock options exercised		9			—			—			3

Net cash provided by financing activities		6,290			15,975			19,261			9,865

Net (decrease)/increase in cash and cash equivalents		(6,969	)		4,264			5,884			(998	)
Cash and cash equivalents at beginning of period		8,164			2,280			2,280			3,278

Cash and cash equivalents at end of period	$	1,195		$	6,544		$	8,164		$	2,280

See accompanying notes to the consolidated financial statements.

F-6

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.	The Company

picoChip, Inc. (the Company or Picochip) is a privately owned company incorporated in the state of Delaware, in the United States, on January 7, 2004. The Company has two wholly-owned subsidiaries, Picochip UK and Picochip (Beijing) Technology Company Ltd (Picochip China). The Company is a supplier of integrated system-on-chip solutions for small cell base stations.

The Company affected a 1:20 reverse stock split on October 7, 2009. There was no corresponding change in the par value per share of $0.0001 of the common stock or the preferred stock. The amount of share capital was adjusted to the number of shares outstanding post-stock split at their nominal value and the excess was transferred to Additional Paid-in capital. The effect of the reverse stock-split has been presented retrospectively in the consolidated financial statements and throughout the notes to the consolidated financial statements.

2.	Summary of Significant Accounting Policies

Basis of Presentation

The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP), and include the accounts of picoChip, Inc. and its wholly owned subsidiaries. All inter-company balances and transactions between the Company and its subsidiaries have been eliminated.

The Company has incurred recurring operating losses since inception and has an accumulated deficit of $110.7 million, negative working capital of $12.6 million, and a total stockholders’ deficit of $98.2 million as of September 30, 2011. As discussed in Note 14, the Company has been acquired by Mindspeed Technologies, Inc. (“Mindspeed”) on February 6, 2012 for a purchase price that comprises $26.7 million in cash, 5.2 million shares of Mindspeed common stock and contingent consideration of up to $25.0 million.

The accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

Unaudited Interim Financial Statements

The unaudited interim consolidated balance sheet as of September 30, 2011, the consolidated statements of operations and cash flows for the nine months ended September 30, 2011 and 2010, and the consolidated statement of redeemable convertible preferred stock and stockholders’ deficit for the nine months ended September 30, 2011 are unaudited. Certain information and footnote disclosures normally included in financial statements prepared under US GAAP have been condensed or omitted from the interim statements. The unaudited interim financial statements, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, 2011 and its results of operations and cash flows for the nine months ended September 30, 2011 and 2010. The financial data and the other financial information disclosed in these notes to the financial statements related to the nine-month periods are also unaudited. The results of operations for the nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the year ended December 31, 2011 or for any other future annual or interim period.

Use of Estimates

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Among the significant estimates affecting the Company’s consolidated financial statements are those relating to revenue recognition, inventory valuation, allowances for doubtful accounts, impairment of long-lived assets, fair value of preferred stock warrants, fair value of embedded derivatives, income taxes and valuation of equity instruments. Management regularly evaluates its estimates and assumptions based upon historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent that actual results differ from those estimates, the Company’s future results of operations may be affected.

F-7

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Revenue Recognition

The Company generates revenue from the sale of semi-conductor products, the sale and license of software and the sale of software maintenance contracts. Software is usually sold with maintenance in multiple-element transactions.

The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery occurs or services are rendered, the sales price or fee is fixed or determinable and collectability is reasonably assured.

For most product sales, revenue is recognized on products shipped directly to customers at the time they are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement, provided the four above-mentioned revenue recognition criteria are met.

The Company’s multiple-element sales arrangements usually include one or more software licenses (some of which may still be in development), and maintenance, and may also include specified software upgrades. Revenue is allocated to each element based on its relative fair value determined using vendor specific objective evidence (VSOE) of each element, provided VSOE exists for all elements in the arrangement. Where VSOE of fair value for an undelivered element cannot be determined, all revenue in the arrangement is deferred until the undelivered elements are delivered and all other revenue recognition criteria have been satisfied. Where the undelivered element is software maintenance, revenue is recognized straight-line over the contractual term of the maintenance service. In all periods presented, the Company did not have VSOE of fair value for any of its deliverables. Consequently, revenue in multiple element arrangements is deferred and included in deferred revenues when there are undelivered elements other than maintenance. Beginning on the date the last of the contracted software licenses or upgrades are delivered, revenue is recognized straight-line over the term of the maintenance service, usually twelve months.

On January 1, 2011, with respect to new or significantly modified revenue arrangements, the Company prospectively adopted the changes in the software revenue recognition rules contained in Accounting Standards Update (“ASU”) No. 2009-14, Certain Revenue Arrangements That Include Software Elements. This ASU removes tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of the software revenue recognition rules. The adoption did not have a significant impact on the Company’s revenue or results of operations for the nine months ended September 30, 2011, as most of the Company’s multiple element software transactions include only incidental tangible products.

Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents.

Inventories

Inventories include materials, labor and overheads and are stated at the lower of cost or market value. Cost is computed using the standard cost, which approximates actual costs, on a first-in, first-out basis. The valuation of inventories at the lower of cost or market value requires the use of estimates as to the amounts of current inventories that will be sold. These estimates are dependent on the Company’s assessment of current and expected orders from its customers, and orders generally are subject to cancellation with limited advance notice prior to shipment.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is three years for machinery and equipment. Amortization for leasehold improvements is computed using the straight-line method over the shorter of the term of the lease or estimated useful lives of the assets. Expenditures for repairs and maintenance are expensed as incurred.

The Company leases certain of its equipment under capital lease agreements. The assets and liabilities under capital leases are initially recorded at the fair value of the assets under lease. Amortization expense of assets acquired through capital leases is included in depreciation and amortization expense in the statements of operations.

Licensed and Purchased Intangibles

Intangible assets consist of licensed and purchased intellectual property and purchased patents. Intangible assets with finite useful lives are amortized over a three-year period using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed or, if that pattern cannot be reliably determined, using a straight-line amortization method.

F-8

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Leases

Certain operating lease agreements may entitle the Company to receive rent holidays or include periodic payment increases over the lease term. Accordingly, rent expense under operating leases is recognized on a straight-line basis over the original lease term, inclusive of predetermined minimum rent escalations or modifications and rent holidays.

Impairment of Long-lived Assets

The Company evaluates its long-lived assets, including property and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. The determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. When impairment is indicated for a long-lived asset, the amount of impairment loss is the excess of net book value over fair value. Fair value is determined based on quoted market prices, where available, or is estimated as the present value of the expected future cost flows from the asset or asset group discounted at a rate commensurate with the risk involved. There were no impairment charges taken in any of the periods presented.

Preferred Stock Warrant Liability

The Company accounts for freestanding warrants to purchase shares of its redeemable convertible preferred stock as a liability at fair value. The preferred stock warrants are recorded as a liability because the underlying shares of redeemable convertible preferred stock may obligate the Company to transfer assets at some point in the future. The warrants are subject to remeasurement to fair value at each balance sheet date and any change in fair value is recognized as a component of other income (expense), net, in the Consolidated Statements of Operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrants, the completion of a deemed liquidation event, conversion of redeemable convertible preferred stock into common stock, or until the holders of the redeemable convertible preferred stock can no longer trigger a deemed liquidation event. At that time, the preferred stock warrant liability will be reclassified to convertible preferred stock or to common stock in the event of conversion of redeemable convertible preferred stock into common stock.

Foreign Currency Translation

The Company’s foreign operations are subject to exchange rate fluctuations and foreign currency transaction costs. The functional currency of the Company and all of its foreign subsidiaries is the US dollar as this is the currency of the primary economic environment in which each of these entities operates. Gains and losses resulting from foreign currency transactions are recognized in earnings and have not been material for any period presented.

Capitalized Software Development Costs

The Company charges product development costs to expense as incurred until technological feasibility is attained and all other research and development activities for the product have been completed. Technological feasibility is attained when the planning, design and testing phase related to the development of the Company’s software has been completed and the software has been determined viable for its intended use. The time between the attainment of technological feasibility and the completion of software development has historically been relatively short with immaterial amounts of development costs incurred during this period. Accordingly, the Company has not capitalized any software development costs.

Research and Development

Research and development costs are expensed as incurred.

Offset against research and development expenditures are government grants received for research and development investment of $3.4 million and $3.5 million in the years ended December 31, 2010 and 2009, respectively. As the grant is paid without regard to taxable income, the credit has been netted against the research and development expenditures rather than with the tax provision. These grants are recognized when a legal right to the grant exists, there is reasonable assurance that both the terms and conditions associated with the grant will be fulfilled and the grant proceeds will be received.

F-9

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Advertising Expense

Advertising expenses are charged to expense when incurred and are included in selling, general and administrative expenses.

Stock-based Compensation

The Company accounts for all stock-based compensation transactions using a fair-value method and recognizes the fair value of each award as an expense over the service period. The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. The use of the Black-Scholes model requires a number of estimates, including the expected option term, the expected volatility in the price of the Company’s common stock, the risk-free rate of interest, the dividend yield on the Company’s common stock and the estimated fair value of the Company’s common stock at the date of the grant. The Company recognizes stock-based compensation expense using a straight-line method over the requisite service period of the individual grants, which generally equals the vesting period.

Judgment is required in estimating the number of stock-based awards that the Company expects will ultimately vest upon the fulfilment of service conditions (such as time-based vesting) or the achievement of specific performance conditions. The financial statements include amounts that are based on the Company’s best estimates and judgments.

Income Taxes

The Company accounts for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company records net deferred tax assets to the extent that it believes these assets will more likely than not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

The Company uses a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment of cash within one year. The Company recognizes interest and penalties related to unrecognized tax benefits in the tax provision, and they were immaterial in all periods presented.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of two components, net loss and other comprehensive income (loss). Through September 30, 2011, there was no other comprehensive income (loss) and, therefore, comprehensive income (loss) is equal to net loss.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. Deposits held with banks may exceed the amount of insurance provided on such deposits.

Credit risk with respect to accounts receivable is mitigated by the relatively short collection period. Collateral is not required for accounts receivable. The Company maintains an allowance for doubtful accounts receivable balances. The allowance is based upon historical loss patterns, the number of days that billings are past due, and an evaluation of the potential risk of loss associated with delinquent accounts.

F-10

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Embedded derivatives

A derivative embedded in a non-derivative hybrid contract is separated from the host contract when its risks and characteristics are not clearly and closely related to those of the host contract and the hybrid contract is not measured at fair value with changes in fair value recognized in profit or loss. An embedded derivative that is separated from its host contract is measured at fair value with changes in fair value recognized as a component of other income (expense), net, in the consolidated statements of operations.

The various issuances of convertible loan notes include a provision that in the event of a subsequent financing the holders may elect to convert the convertible loan notes into new issued shares. The number of conversion shares to be issued upon such conversion is equal to the quotient obtained by dividing the outstanding principal and unpaid accrued interest by a price that is discounted from the price paid per share by the investors in the new financing. This contingent redemption feature meets the definition of an embedded derivative (put option) that has been bifurcated and marked to market through the statement of operations.

3.	Supplemental Financial Statement Data

Inventories

Inventories consisted of the following (in thousands):


	September 30,		December 31,
	2011		2010		2009
	(unaudited)
Work-in-process	$	1,183	$	2,150	$	1,164
Finished goods		513		684		570

	$	1,696	$	2,834	$	1,734

Property and Equipment, Net

Property and equipment, net, consisted of the following (in thousands):


	September 30,			December 31,
	2011			2010			2009
	(unaudited)
Machinery and equipment	$	6,549		$	5,956		$	4,312
Leasehold improvements		1,031			1,030			76

		7,580			6,986			4,388
Accumulated depreciation and amortization		(4,496	)		(3,493	)		(3,081	)

Property and equipment, net	$	3,084		$	3,493		$	1,307

Property and equipment acquired under capital leases are as follows (in thousands):


	September 30,			December 31,
	2011			2010			2009
	(unaudited)
Machinery and equipment	$	382		$	382		$	68
Accumulated amortization		(181	)		(92	)		(36	)

Machinery and equipment, net	$	201		$	290		$	32

Depreciation and amortization expense for the nine months ended September 30, 2011 and 2010, and for the years ended December 31, 2010 and 2009 was $1.0 million (unaudited), $490,000 (unaudited), $725,000 and $813,000, respectively.

F-11

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Licensed and Purchased Intangibles, Net

Intangible assets consisted of the following (in thousands):


	September 30,		December 31,
	2011		2010		2009
	(unaudited)
Licensed and purchased intellectual property	$	4,611	$	3,009	$	2,012
Patents		—		—		52

		4,611		3,009		2,064

Licensed and purchased intangibles, net	$	2,305	$	1,321	$	664

Amortization expense recorded for the nine months ended September 30, 2011 and 2010, and for the years ended December 31, 2010 and 2009 was $618,000 (unaudited), $431,000 (unaudited), $667,000 and $484,000, respectively.

Amortization expense for the estimated useful life of the license and purchased intellectual property is as follows (in thousands):


	Amortization of Intangible Assets
Year Ending December 31,
2011	$	560
2012		530
2013		228
2014		3

Total	$	1,321

Other Current Liabilities

Other current liabilities consist of the following (in thousands):


	September 30,		December 31,
	2011		2010		2009
	(unaudited)
Rebate accrued	$	—	$	1,821	$	—
Settlement claim accrual		472		481		963
Embedded option in convertible loan notes		535		—		272
Other accrued expenses		3,541		2,382		1,533

Total	$	4,548	$	4,684	$	2,768

Other Long Term Liabilities

Other long term liabilities consist of the following (in thousands):


	September 30,		December 31,
	2011		2010		2009
	(unaudited)
Settlement claim accrual	$	1,346	$	1,717	$	2,035
Other		64		63		48

Total	$	1,410	$	1,780	$	2,083

F-12

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Supplemental Cash Flow Information


	Nine Months Ended September 30,				Year Ended December 31,
	2011		2010		2010		2009
	(unaudited)
	(in thousands)
Interest paid	$	214	$	288	$	334	$	553
Income taxes paid		328		30		186		52
Non-cash investing activities consisted of the following:
Purchase of property and equipment on account		384		349		502		68
Conversion of convertible loan notes into preferred stock		—		3,450		3,450		5,151
Purchase of property and equipment under capital leases		—		313		313		—

Customer Concentrations

The following customers accounted for 10% or more of net revenue in the periods presented:


	Nine Months Ended September 30,						Year Ended December 31,
	2011			2010			2010			2009
	(unaudited)
Customer A		*			25	%		24	%		37	%
Customer B		16	%		29	%		35	%		*
Customer C		*			12	%		10	%		*
Customer D		29	%		*			*			*

*	Less than 10%

The following customers accounted for 10% or more of total accounts receivable at each period-end:


	September 30,			December 31,
	2011			2010			2009
	(unaudited)
Customer A		*			18	%		26	%
Customer B		*			*			11	%
Customer C		15	%		37	%		10	%
Customer D		*			16	%		*
Customer E		*			10	%		*
Customer F		28	%		*			*
Customer G		17	%		*			*
Customer H		14	%		*			*

*	Less than 10%

4.	Fair Value Measurements

The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. Due to the short-term nature of cash equivalents, accounts receivable and accounts payable, the carrying value approximates fair value. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or non-recurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:

•

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2: Inputs reflect: Quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

•

Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The following table represents financial assets and liabilities that the Company measured at fair value:


	Fair Value Measurement Using
	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Fair values as of December 31, 2009
Liabilities:
Fair value of option to purchase Series E-1 convertible preferred stock	$	—	$	—	$	272	$	272
Preferred stock warrants		—		—		25		25

Total liabilities measured at fair value	$	—	$	—	$	297	$	297

Fair values as of December 31, 2010
Liabilities:
Preferred stock warrants	$	—	$	—	$	192	$	192

Total liabilities measured at fair value	$	—	$	—	$	192	$	192

Fair values as of September 30, 2011 (unaudited)
Liabilities:
Fair value of embedded option in convertible loan notes	$	—	$	—	$	535	$	535
Preferred stock warrants		—		—		367		367

Total liabilities measured at fair value	$	—	$	—	$	902	$	902

The following table provides a roll-forward of the fair value of the preferred stock warrants, bifurcated embedded options on convertible loan notes and options to purchase Series E-1 and Series F-1 shares (which are collectively referred to as the options related to convertible loan notes). All these instruments are categorized as Level 3 for the years ended December 31, 2009 and 2010 and for the nine months ended September 30, 2011 (in thousands):


	Preferred stock warrants			Fair value of options related to convertible loan notes
Balance at December 31, 2008	$	239		$	143
Issuance of embedded option in convertible loan notes		—			267
Issuance of Series E-1 preferred stock on exercise of options		—			(225	)
Remeasurement losses/(gains) recognized in earnings		(214	)		87

Balance at December 31, 2009		25			272
Issuance of embedded option in convertible loan notes		—			283
Issuance of warrants in connection with loan and security agreement		92			—
Issuance of Series F-1 preferred stock on exercise of options		—			(44	)
Remeasurement losses/(gains) recognized in earnings		75			(511	)

Balance at December 31, 2010		192			—
Issuance of embedded option in convertible loan notes (unaudited)		—			806
Remeasurement losses/(gains) recognized in earnings (unaudited)		175			(271	)

Balance at September 30, 2011 (unaudited)	$	367		$	535

F-14

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company’s preferred stock warrants and the options related to convertible loan notes are categorized as Level 3. These instruments were classified as Level 3 because they were valued based on unobservable inputs and management’s judgment due to the absence of quoted market prices, inherent lack of liquidity and the nature of such financial instruments. The Company performs a fair value assessment of the preferred stock warrants, embedded options and options to purchase preferred stock at each reporting period when such instruments are outstanding. Inherent to such assessment are the assumptions that are subjective and involve significant management judgment.

The fair value of the preferred stock warrant liability was estimated using an option pricing method, factoring in the liquidation preferences and conversion rights of each warrant series. The option pricing model treats convertible preferred stock as call options on a business, with exercise prices based on the aggregate liquidation preferences of the convertible preferred stock. The option pricing model uses the Black-Scholes option pricing model to price the call option. The option pricing model is appropriate to use when the range of possible future outcomes is so difficult to predict that forecasts would be highly speculative. Any change in fair value is recognized as a component of the other income (expense), net, line item on the Consolidated Statements of Operations.

The Company estimates the fair value of the options related to convertible loan notes based on the expected intrinsic value of such options at the estimated notes conversion or extinguishment date, adjusted for the time value of money and the probability of events that would trigger the conversion. The embedded options in convertible loan notes are recorded at fair value upon issuance of the notes, with the remaining proceeds from issuance allocated to the loan notes. The embedded options’ initial fair value is recognised as a discount on the loan notes which is accreted to interest expense over the contractual term of the notes using the effective interest method. The embedded options, as well as options to purchase Series E-1 and Series F-1 convertible preferred stock, are carried as liabilities and are remeasured at each reporting period end to fair value. Any change in fair value is recognized as a component of the other income (expense), net, line item on the Consolidated Statements of Operations. The embedded options are included in other current liabilities on the balance sheets.

5.	Convertible Loan Notes

On October 15, 2008 the Company entered into a Note Purchase Agreement with certain existing investors and issued $5.0 million in convertible loan notes (the “Loan Notes”). Under the terms of the Note Purchase Agreement, the Loan Notes are convertible into either: i) the most senior current issued series of preferred share as requested by a majority of the Loan Note holders at a fixed conversion price; ii) the most senior current issued series of preferred share if there is a change in control at a fixed conversion price; or iii) the next series of preferred stock issued by the Company at a conversion price equivalent to 80% of the issue price of the next series. If not converted, at the option of the majority of the Loan Note holders the Loan Notes can be repaid inclusive of accumulated interest on or after June 30, 2009. The Loan Notes bear interest at 8% per annum, which will be added to the principal amount of the Loan Notes at the time of conversion. On December 16, 2008 the terms of the Note Purchase Agreement were amended to modify the conversion price in the case of subsequent financing (see iii above) from 80% to 100% of the next series issue price. Simultaneously, the Loan Note holders receive an option to purchase the number of shares of Series E-1 convertible preferred stock equal to 20% of the principal of such Loan Notes divided by the per share price of the Series E redeemable convertible preferred stock, at a purchase price of $0.0001. No gain or loss was recognized in connection with this modification, as the terms of the Loan Notes following the modification were not substantially different from those before the modification. (See Note 7 for description of the Series E redeemable convertible preferred stock and Series E-1 convertible preferred stock).

On February 4, 2009, the Company completed an issuance of Series E redeemable convertible preferred stock at $3.099 per share. The Loan Notes, including accumulated interest of $106,000, totalling $5.2 million, were converted into 1,662,000 shares of Series E redeemable convertible preferred stock. In addition, 326,000 shares of Series E-1 convertible preferred stock were issued at $0.0001 per share.

On December 4, 2009, the Company entered into another Note Purchase Agreement with certain existing investors to issue up to $3.9 million in convertible loan notes (the “Second Loan Notes”). On December 4, 2009 and February 2, 2010, the Company issued the Second Loan Notes with a principal value of $1.7 million on each date for an aggregate balance of $3.4 million. Under the terms of the Note Purchase Agreement, the Second Loan Notes are convertible into either: i) Series E redeemable convertible preferred stock at a fixed conversion price upon request by a majority of the Second Loan Note holders and two shares of Series E-1 convertible preferred stock for each Series E stock received; ii) Series E redeemable convertible preferred stock at a fixed conversion price and two shares of Series E-1 redeemable convertible preferred stock for each Series E stock received if requested by a majority of the Second Loan Note holders in case of a change in control; iii) repaid at par value, at the option of a majority of the Second Loan Note holders; or iv) the next series of preferred stock issued by the Company at a conversion price equivalent to 80% of the issue price of the new series. At the option of the

F-15

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

majority of Second Loan Note Holders the loan can be repaid inclusive of accumulated interest. The Second Loan Notes bear interest at 8% per annum, which will be added to the principal amount of the Second Loan Notes at the time of conversion. On June 15, 2010, the terms of the Note Purchase Agreement were amended to modify the conversion price in the case of a subsequent financing (see iii above) from 80% to 100% of next series issue price. Simultaneously, the Second Loan Note holders received an option to purchase the number of shares of Series F-1 convertible preferred stock equal to 25% of the principal of such notes divided by the per share price of the Series F redeemable convertible preferred stock, at a purchase price of $0.0001. (See Note 7 for description of Series F redeemable convertible preferred stock and Series F-1 convertible preferred stock).

On June 15, 2010, the Company completed an issuance of Series F redeemable convertible preferred stock at $1.9054 per share. The Second Loan Notes, including accumulated interest of $113,000, totalling $3.5 million, were converted into 1,810,000 shares of Series F redeemable convertible preferred stock. In addition, 438,000 shares of Series F-1 convertible preferred stock were issued at $0.0001.

Conversion of the notes into preferred stock was accounted for as extinguishment due to bifurcation of the embedded options. Gains on conversion of the notes were $0.4 million, $0 and $0.4 million (unaudited) during the years ended December 31, 2010 and 2009, and the nine months ended September 30, 2010, respectively.

On March 31, 2011, the Company entered into a Note Purchase Agreement with certain existing investors and issued $5.0 million in convertible loan notes (the “Third Loan Notes”). On March 31, 2011 and June 24, 2011 the Company received $3.0 million and $2.0 million in proceeds from the Third Loan Notes, respectively. Under the terms of the Note Purchase Agreement, the Third Loan Notes are convertible into: i) the next series of preferred stock issued by the Company at a conversion price equivalent to 90% of the issue price of the next series; ii) shares of Series F redeemable convertible preferred stock at $1.9054 per share upon request by a majority of the Third Loan Notes holders; iii) Series F redeemable convertible preferred stock at a fixed conversion price upon request by a majority of the Third Loan Notes holders in case of a change in control; or iv) repaid at par value, at the option of a majority of the Third Loan Note holders. The Third Loan Notes bear interest at 6% per annum, which will be added to the Third Loan Note principal at the time of conversion. The Third Loan Notes are to be repaid on December 31, 2011 in the event such notes are not converted or repaid prior to that date.

On July 26, 2011, the Company entered into a Note Purchase Agreement with certain existing investors and issued $5.0 million in convertible loan notes (the “Fourth Loan Notes”). Under the terms of the Note Purchase Agreement, the Fourth Loan Notes are convertible into: i) the next series of preferred stock issued by the Company at a conversion price equivalent to 90% of the issue price of the next series; ii) shares of Series F redeemable convertible preferred stock at $1.9054 per share upon request by a majority of the Fourth Loan Notes holders; iii) Series F redeemable convertible preferred stock at a fixed conversion price upon request by a majority of the Fourth Loan Note holders in case of a change in control; or iv) repaid at par value, at the option of a majority of the Fourth Loan Note holders. The Fourth Loan Notes bear interest at 6% per annum, which will be added to the Fourth Loan Note principal at the time of conversion. The Fourth Loan Notes are to be repaid on December 31, 2012 in the event such notes are converted or repaid prior to that date.

Due to the short-term nature of the convertible loan notes, the carrying value approximates the fair value.

All of the outstanding convertible notes were converted to equity following the acquisition of the Company by Mindspeed as discussed in Note 14.

6.	Term Loans and Revolving Lines of Credit

On July 3, 2006 and May 4, 2008, the Company entered into loan and security agreements with ETV Capital SA (ETV) for term loans of $5.0 million and $7.5 million, respectively. On October 31, 2008 amounts then outstanding on the two loans were aggregated in the amount of approximately $8.9 million. The aggregated loan bears an interest rate of 12.25% and principal and interest is repayable over 30 equal instalments ending April 30, 2011.

On November 5, 2010, the Company entered into a loan and security agreement with Silicon Valley Bank (SVB) for a working capital facility of $9.0 million. The facility includes a $4.0 million term loan and a $5.0 million two-year revolving line of credit. The proceeds from the term loan were used to repay amounts due to ETV as of November 5, 2010 of approximately $3.0 million. The term loan bears an interest rate of 8.75% with thirty equal principal repayments of $133,000 per month commencing March 1, 2011 and ending August 1, 2013. A $22,000 arrangement fee has been capitalized and is being amortized over the term loan period using the effective interest method. As of December 31, 2010, $4.0 million of the term loan is outstanding and the entire balance is included in the ‘current portion of loans’ line in the accompanying balance sheet due to the covenant violations noted below.

F-16

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The two-year revolving line of credit is subject to availability against certain eligible accounts receivable, and any borrowings are for funding working capital and general business requirements. The revolving line of credit bears a variable interest rate of SVB Prime rate plus 2.5% to SVB Prime rate plus 3.0% depending on the cash collateral targets. The facility expires in November 2012. As of December 31, 2010, $2.9 million had been drawn down and is outstanding under the line of credit and the balance is included in the ‘current portion of loans’ line in the accompanying balance sheet.

The SVB facility is secured by a debenture dated November 5, 2010 providing a fixed and floating charge over all the assets of Picochip Ltd. The Company is guarantor to the loans. In connection with the loan and security agreement, SVB received a warrant to acquire 131,000 shares of Series F preferred stock at $1.9054 per share.

When warrants are issued in connection with a loan arrangement, the fair value of the warrant is determined first and the difference between the total proceeds received and fair value of the warrant is assigned to the loan. The discount on loan as a result of the allocation of proceeds is accreted over the term of the loan using the effective interest method. The $92,000 fair value of the warrant was recorded as a debt discount and is being amortized over the term of the financing arrangement as additional interest expense.

The loan and security agreement contains affirmative and negative covenants which, among other things, require the Company to maintain a minimum cash collateral and to deliver to SVB specified financial information, including annual, and monthly, financial information, and limit the Company’s ability to (or, in certain circumstances, to permit any subsidiaries to), subject to certain exceptions and limitations: (i) merge with or acquire other companies; (ii) create liens on its property; (iii) incur debt obligations; (iv) enter into transactions with affiliates, except on an arm’s length basis; (v) dispose of property; and (vi) issue dividends or make distributions.

In December 2010 and January 2011, the Company was in breach of a financial covenant relating to its long-term debt with SVB. On April 13, 2011, the Company and SVB agreed to a Loan Modification Agreement which included a reset of the financial covenant. Under the Loan Modification Agreement, SVB received a warrant to acquire an additional 79,000 shares of Series F redeemable convertible preferred stock at $1.9054 per share.

In July 2011, the Company was again in breach of its financial covenant with SVB. On July 24, 2011, the Company and SVB agreed to another Loan Modification Agreement which included a reset of the covenant.

The SVB term loan has been classified as current, due to a covenant breach in various periods in 2010, 2011 and in January 2012.

All of the outstanding debt was paid off following the acquisition by Mindspeed as discussed in Note 14.

7.	Preferred Stock

The Company has eight series of preferred stock: Series B, Series C, Series D, Series D-1, Series E, Series E-1, Series F and Series F-1. The preferred stock is convertible into common stock and, except for Series D-1, Series E-1 and Series F-1, is redeemable at the option of the holder. Redeemable convertible preferred stock was as follows:


	As of December 31, 2009
	Shares Authorized		Shares Issued and Outstanding		Carrying Value		Aggregate Liquidation Preference
	(in thousands)
Series B		371		360	$	2,734	$	2,734
Series C		2,277		2,176		15,523		16,526
Series D		2,968		2,968		26,812		26,975
Series E		5,627		5,409		16,572		16,763

		11,243		10,913	$	61,641	$	62,998

F-17

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


	As of December 31, 2010
	Shares Authorized		Shares Issued and Outstanding		Carrying Value		Aggregate Liquidation Preference
	(in thousands)
Series B		371		360	$	2,734	$	2,734
Series C		2,277		2,176		15,523		16,526
Series D		2,968		2,968		26,812		26,975
Series E		5,627		5,409		16,572		16,763
Series F		10,600		10,230		19,284		19,493

		21,843		21,143	$	80,925	$	82,491


	As of September 30, 2011
	Shares Authorized		Shares Issued and Outstanding		Carrying Value		Aggregate Liquidation Preference
	(in thousands)
Series B		371		360	$	2,734	$	2,734
Series C		2,277		2,176		15,523		16,526
Series D		2,968		2,968		26,812		26,975
Series E		5,627		5,409		16,572		16,763
Series F		10,600		10,230		19,284		19,493

		21,843		21,143	$	80,925	$	82,491

During the year ended December 31, 2009, the Company issued 3,747,000 shares of Series E for approximately $11.4 million of cash, excluding issuance costs of approximately $191,000, and 3,226,000 shares of Series E-1 for consideration of $0.001 per share. In addition, the principal and accrued interest on the First Loan Notes, aggregate balance of $5.2 million, were converted into 1,662,000 shares of Series E, and 326,000 shares of Series E-1 convertible preferred stock. During the year ended December 31, 2009, the Company issued shares of Series E at an issue price less than the Series D issue price. Certain preferred stockholders elected not to participate in the financing and, under provisions set out in the Company’s Restated Certificate of Incorporation, 471,000 shares of Series B, 777,000 shares of Series C and 23,000 shares of Series D were converted to 1,271,000 shares of common stock.

During the year ended December 31, 2010, the Company issued 8,420,000 shares of Series F for approximately $15.8 million in cash, excluding issuance costs of approximately $209,000, and 438, 000 shares of Series F-1 for consideration of $0.0001 per share. In addition, the principal and accrued interest on the Second Loan Notes, aggregate balance of $3.5 million, were converted into 1,810,000 shares of Series F.

Significant terms of the convertible preferred stock are as follows:

Voting Rights

Each holder of shares of preferred stock is entitled to the number of votes equal to the number of whole shares of common stock into which such shares of preferred stock could be converted in accordance with the terms of the conversion feature (described below) on the record date for any vote or the date such vote is taken or written consent of stockholders is solicited.

Dividends

The holders of shares of Series D, Series E and Series F are entitled to receive, when, as and if declared by the Board of Directors, non-cumulative dividends at the rate of $0.727, $0.248 and $0.171, per year on each outstanding share, respectively (as adjusted for any stock dividends, combinations or splits with respect to such shares). Series F preferred stock has preference in the payment of dividends and no dividends will be declared on Series D and E unless dividends in the full preferential amounts for Series F have been paid or declared and set apart.

Liquidation Preference

The holders of the preferred stock during a voluntary or involuntary liquidation, dissolution or winding up of the Company

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PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

will receive an aggregate amount equal to the original issue price pro rata according to the number of outstanding shares of preferred stock held by each holder. The holders of Series F will have preference followed by Series, D, Series C and Series B.

In the event that the holders of Series F would receive a total return less than 1.5 times the original issue price of each share, then each holder will be entitled to be paid an amount equal to 1.5 times the original issue price.

The Series D-1, E-1 and F-1 do not have any liquidation preferences. There are no outstanding shares of the Series D-1 preferred stock.

Conversion Rights

Each share of redeemable convertible preferred stock and convertible preferred stock is convertible, at the option of its holder, into the number of fully paid shares of common stock which result from dividing the applicable original issue price per share by the applicable conversion price per share at the time of conversion. The following table sets forth the original issue price (as adjusted for the 1:20 reverse stock split), conversion price and conversion rate per share in effect for each series of redeemable convertible preferred stock and convertible preferred stock as of December 31, 2010:


	Issue Price		Conversion Price		Conversion Rate
Series B	$	7.59	$	7.60		1.00
Series C	$	7.59	$	3.80		2.00
Series D	$	9.09	$	4.30		2.11
Series D-1		—		—		—
Series E	$	3.10	$	2.71		1.14
Series E-1	$	3.10	$	2.71		1.14
Series F	$	1.91	$	1.91		1.00
Series F-1	$	1.91	$	1.91		1.00

The conversion price of each series of redeemable convertible preferred stock, and convertible preferred stock which was initially set at an amount equal to the issue price, is subject to adjustment for stock dividends, stock splits, recapitalization and upon the occurrence of certain triggering events related to anti-dilution protection rights. The conversion prices for the Series C, Series D, Series E, Series D-1 and Series E-1 shares were reduced at the time the Series F was issued because the Series F shares were issued at a lower price than the Series C, Series D, Series E, Series D-1 and Series E-1 conversion prices that were applicable at the time of the Series F issuance.

Each share of redeemable convertible preferred stock shall automatically be converted into fully paid and non-assessable shares of common stock: (i) immediately prior to the closing of a firm commitment underwritten public offering pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, covering the offer and sale of common stock in which the aggregate public offering price equals or exceeds $75.0 million and the public offering price per share of which equals or exceeds $6.67 per share provided, however, that, if the Board of Directors determines that a non-US Listing is most appropriate, then each share of preferred stock shall automatically be converted into fully paid and non-assessable shares of common stock, as provided herein upon a listing of shares for sale on the London Stock Exchange in which the aggregate public offering price equals or exceeds $75.0 million and the public offering price per share of which equals or exceeds $6.67 per share; or (ii) upon the Company’s receipt of written consent of a majority of investors as defined by the Company’s Charter to the conversion of all then outstanding redeemable convertible preferred stock.

Redemption Rights

To the extent that any outstanding shares of Series B, Series C, Series D, Series E, and Series F (“Senior Preferred Stock”) have not been redeemed or converted into common stock prior to June 11, 2016, the Company shall upon receiving a written request at least 20 days prior to June 11, 2016 for the redemption of all shares of Senior Preferred Stock signed by a majority of the investors as defined by the Series F Preferred Stock Charter, at any time after March 11, 2016, redeem in three (3) annual instalments beginning on the date three (3) months following its receipt of such redemption notice, all of the shares of Senior Preferred Stock then outstanding and, on each successive anniversary thereof, redeem that number of shares of Senior Preferred Stock equal to the amount determined by dividing (A) the aggregate number of shares of Senior Preferred Stock outstanding immediately prior to the redemption date (on an as-converted to common stock basis) by (B) the number of remaining redemption dates (including the redemption date to which such calculation applies). The redemption price is equal to the original issue price of each series of the Senior Preferred Stock.

F-19

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

All series of redeemable convertible preferred stocks issued by the Company are redeemable only at the option of the holders and thus do not meet the definition of mandatorily redeemable instruments.

8.	Preferred Stock Warrants

In March 2004, the Company issued a warrant to purchase 1,000 shares of Series B to Pictet Private Equity Investors SA in connection with a loan and security agreement at an exercise price of $7.594 per share. The warrant is fully vested and exercisable at any time to January 3, 2012.

In July 2004, the Company issued a warrant to purchase 10,000 shares of Series B to ETV Capital SA (ETV) in connection with a loan and security agreement at an exercise price of $7.594 per share. The warrant is fully vested and exercisable at any time to July 29, 2014.

In July 2006, the Company issued a warrant to purchase 72,000 shares of Series C to ETV in connection with a loan and security agreement at an exercise price of $7.594 per share. The warrant is fully vested and exercisable at any time to July 21, 2016.

In April 2008, the Company issued a warrant to purchase 74,000 shares of Series D to ETV in connection with a loan and security agreement at an exercise price of $9.089 per share. The warrant is fully vested and exercisable at any time to April 28, 2018.

On February 4, 2009, the Company issued a warrant to purchase 46,000 shares of Series E to ETV in connection with the debt arrangement. The Series C and E warrants are fully vested and exercisable at any time to July 21, 2016.

In July 2007, the Company issued warrants to purchase in aggregate 275,000 shares of Series D-1 in connection with convertible loan notes issued to certain existing investors in December 2006 at an exercise price of $9.089 per share. The warrants are fully vested and exercisable at any time to April 28, 2018. In March 2010, the Company agreed upon a restructuring of the loan and security agreement entered into in November 2008 with ETV (See Note 6). In consideration of the restructuring, it was agreed that all of the Series D warrants issued to ETV would be cancelled and replaced, and at ETV’s election either: i) warrants to purchase 218,000 shares of Series E and 113,000 shares of Series E-1 at an exercise price of $3.099 and $0.0001 per share respectively; or ii) warrants to purchase 264,000 shares of Series E and 136,000 shares of Series E-1 at an exercise price of $3.099 and $0.0001 per share respectively plus an additional return of $141,000 was offered as replacement option. On June 15, 2010 ETV elected option i) and the Company issued a warrant to purchase 76,000 shares of Series F and 18,000 shares of Series F-1 at an exercise price of $1.905 and $0.0001, respectively, in addition to warrants to purchase Series E and Series E-1. The Series E, E-1, F and F-1 warrants are fully vested and exercisable at any time to May 7, 2018.

In November 2010, the Company issued a warrant to purchase 131,000 shares of Series F to SVB in connection with a loan and security agreement at an exercise price of $1.905 per share. The warrant is fully vested and exercisable at any time to November 5, 2020. In April 2011 and July 2011, the Company issued additional warrants (aggregate of 79,000) to Silicon Valley Bank in connection with resetting of debt covenants.

The Company records the preferred stock warrants as a liability at the initial grant date fair value and thereafter records gains and losses arising from the change in the fair value of the preferred stock warrants as a component of other income (expense), in the Consolidated Statements of Operations. The fair value of the warrants was determined using the option pricing model method to allocate the equity value of the Company to the various securities in the capital structure. The Company recorded a loss of $175,000 (unaudited), a loss of $167,000, and a gain of $213,000 for the nine months ended September 30, 2011, and the years ended December 31, 2010 and 2009, respectively.

F-20

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

A summary of preferred stock warrants outstanding is as follows (in thousands, except per share amounts):


				Number of shares as of						Fair Value as of
Preferred Stock Warrants	Expiration Date	Exercise Price		September 30, 2011		December 31,				September 30,		December 31,
				September 30, 2011		2010		2009		2011		2010		2009
				(unaudited)						(unaudited)
Series B	July 20, 2014	$	7.59		11		11		11	$	—	$	—	$	—
Series C	July 20, 2016	$	7.59		101		101		101		3		—		4
Series D	May 7, 2018	$	9.09		—		—		74		—		—		2
Series D-1	December 15, 2013	$	9.09		275		275		275		4		3		8
Series E/E-1	May 7, 2018	$	3.10		331		331		46		95		42		11
Series F/F-1	November 5, 2020	$	1.91		226		226		—		265		147		—

					944		944		507	$	367	$	192	$	25

All warrants set out in the table above may be exercised on a net issuance basis whereby the warrant holder will receive consideration to the extent proceeds exceed the exercise price stated above.

9.	Common Stock

Each share of common stock has the right to one vote per share. The holders of common stock are also entitled to receive dividends as and when declared by the Board of Directors of the Company, whenever funds are legally available. These rights are subordinate to the dividend rights of holders of all classes of stock outstanding at the time.

10.

Stock-based Compensation Plans

In March 2004, the Board of Directors of the Company adopted the 2004 Enterprise Incentive Plan, as amended (the “Plan”). The Plan provides for the issuance of incentive and non-statutory options to employees of the Company and its subsidiaries. The Plan is administered by the remuneration committee of the Board of Directors of the Company (the “Plan Administrator”).

The Plan Administrator determines various terms and conditions of option and restricted stock grants, including option expiration dates (generally ten years from the date of grant), vesting terms (generally over a four-year period, with 25% vesting at the end of the first year and the balance vesting rateably on a monthly basis over the remaining period), and payment terms. The Plan provides for stock option grants at an exercise price no less than 85% of fair market value as determined by the Plan Administrator, but, in the case of incentive stock options, no less than 100% of the current value of the common stock subject to the option on the date of grant.

Given the absence of a public trading market, the Company’s Board of Directors considered numerous objective and subjective factors to determine the fair value of its common stock at each meeting at which stock option grants were approved. These factors included, but were not limited to: (i) contemporaneous valuations of common stock; (ii) the rights and preferences of redeemable convertible preferred stock relative to common stock; (iii) the lack of marketability of common stock; (iv) developments in the business; (v) recent issuances of redeemable convertible preferred stock; and (vi) the likelihood of achieving a liquidity event, such as an initial public offering, or sale of the Company, given prevailing market conditions. These determinations of fair market value were used for the purpose of determining the Black-Scholes fair value of the Company’s stock option awards and related stock-based compensation expense.

The Plan was amended in 2007 to provide the Company a right of rescission to acquire common shares acquired through the exercise of stock options at fair value for a period up to six months from the exercise date. Through September 30, 2011, the Company has never exercised its rescission right.

F-21

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Stock Options

The per-share fair value of each stock option was determined on the date of grant using the Black-Scholes option pricing model using the following assumptions:


	Nine Months Ended, September 30, 2011	Year Ended December 31,
	Nine Months Ended, September 30, 2011	2010	2009
	(unaudited)
Expected life (in years)	5 years	6.25 years	5.2 years
Risk-free interest rate	2.36%	1.58% - 2.42%	2.28% - 2.51%
Expected volatility	60%	55% - 60%	55%
Expected dividend yield	0%	0%	0%

The expected life of the stock options granted represents the weighted average period that the stock options are expected to remain outstanding. The Company determined the expected term assumption based on the Company’s historical exercise behavior combined with estimates of the post-vesting holding period. Expected volatility is based on historical volatility of peer companies in the Company’s industry that have similar vesting and contractual terms. The risk-free interest rate is based on the implied yield currently available on US Treasury issues with terms approximately equal to the expected life of the option. The Company currently has no history or expectation of paying cash dividends on its common stock.

F-22

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


	Number of Shares			Weighted Average Exercise Price
	(in thousands)
Outstanding at December 31, 2009		3,161		$	0.04
Exercisable at December 31, 2009		1,048			0.06
Granted		3,009			0.03
Exercised		(12	)		0.03
Cancelled		(28	)		0.03
Outstanding at December 31, 2010		6,130			0.04
Exercisable at December 31, 2010		3,042			0.04
Granted (unaudited)		63			0.03
Exercised (unaudited)		(278	)		0.03
Cancelled or forfeited (unaudited)		(482	)		0.03
Outstanding at September 30, 2011 (unaudited)		5,433			0.04
Exercisable at September 30, 2011 (unaudited)		3,630			0.04

The following table summarizes all options to purchase the Company’s common stock outstanding at December 31, 2010:


December 31, 2010	Outstanding						Exercisable
Exercise price	Number of Shares		Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number of Shares		Weighted- Average Exercise Price
	(in thousands)						(in thousands)
$0.0296		2,928		9.47	$	0.03		1,318	$	0.03
$0.0316		71		9.88		0.03		4		0.03
$0.0332		3,068		8.86		0.03		1,658		0.03
$0.0364		55		2.55		0.04		55		0.04
$3.2000		8		1.68		3.20		7		3.20

		6,130		8.17	$	0.04		3,042	$	0.04

Repricing of Options

In February 2008, the Company repriced 635,000 outstanding options with an exercise price of $8.00 per share to $1.60 per share, the deemed fair value of the Company’s common stock at the date of this modification.

In November 2009, the Company repriced 895,000 outstanding options with an exercise price of $1.60 per share to $0.03 per share, the deemed fair value of the Company’s common stock at the date of this modification.

Each amended option has the same material terms and conditions as it did prior to each repricing of the options. The modification resulted in incremental stock-based compensation expense that will be amortized over the remaining vesting of the options. The incremental expense for the February 2008 modification was not significant and for the November 2009 modification it was $231,000.

Stock-based Compensation Expense

The total stock-based compensation expense during the nine months ended September 30, 2011 and the years ended December 31, 2010 and 2009 recognized in the statements of operations was $266,000 (unaudited), $550,000 and $610,000, respectively.

At September 30, 2011 and December 31, 2010, there was $0.4 million (unaudited) and $0.7 million of unrecognized compensation cost related to the options which are expected to be recognized over a weighted average period of 1.4 years and 2.1 years, respectively.

F-23

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

11.

Commitments and Contingencies

Capital Lease Obligations

The Company has entered into various capital lease obligations related to the purchase of equipment during the years ended December 31, 2008 and 2010.

The following is a schedule of future minimum lease payments due under the capital lease obligations as of December 31, 2010 (in thousands):


Year Ending December 31:
2011	$	130
2012		123
2013		92

Total minimum lease payments		345
Less: amount representing interest		(43	)

Present value of minimum lease payments		302
Less: current portion		(104	)

Capital lease obligation, non-current	$	198

Operating Leases

The Company has operating leases relating to buildings and equipment. As of December 31, 2010, the Company’s minimum future obligations under operating leases were as follows (in thousands):


Year Ended December 31,
2011	$	342
2012		354
2013		364
2014		364
2015 Thereafter		242

Total minimum future lease payments	$	1,666

Rent expense, which is being recognized on a straight-line basis over the lease term, was $690,000 (unaudited), $677,000, and $514,000 for the nine months ended September 30, 2011 and for the years ended December 31, 2010 and 2009, respectively.

Product Warranties and Indemnification

The Company’s products typically carry a warranty for defective products for periods of up to one year. The Company has had no history of claims on product warranties. No product warranty costs and related reserves have been recorded. The Company indemnifies its sales of software relating to liabilities in respect of patent infringements. The Company has had no history of claims on this indemnification, and related reserves have been recorded.

Settlement of Claims

The Company previously entered into a Collaborative Research Agreement (“CRA”) with a research partner for the co-development of certain software. The CRA provided for certain revenue sharing arrangements relating to software developed under the agreement. The research partner entered a claim against the Company with respect to the entitlement to a share of past and future revenues, which the Company disputed.

In October 2009, the Company settled the claim through an agreement to pay an amount of $4.3 million to the research partner by way of the following installments in order to settle all past and future obligations between the parties. As of September 30, 2011, the Company has paid $2.2 million (unaudited) to the research partner in settlement of the claim. The Company has accrued future settlement payments as the liability has been incurred and the amount of the loss is fixed and determinable.

F-24

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The fair value of the settlement claim liability accrued as at September 30, 2011 is $1.8 million (unaudited) and at December 31, 2010 it is $2.2 million and is included in other current and long-term liabilities (in thousands):


June 30, 2011	$	500
June 30, 2012		500
June 30, 2013		800
June 30, 2014		800

Total		2,600
Less amount representing interest		(402	)

Liability at December 31, 2010	$	2,198

The Company recorded a prepaid royalty for the amount that was paid in connection with future periods and the prepaid balance is being amortized each period based on the ratio of royalties that would have been payable in the period pursuant to the original CRA compared to the total projected royalties payable since the settlement. As of December 31, 2010, the prepaid royalty balance is $156,000.

Litigation

From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. The Company discloses contingencies deemed to be reasonably possible and accrues loss contingencies when, in consultation with legal advisors, it is concluded that a loss is probable and reasonably estimable.

12.

Employee Benefit Plans

The Company operates a defined contribution retirement plan for all qualified employees. The assets of the retirement plan are held in separate trustee-administered funds. The Company has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expense when they are due. During the years ended December 31, 2010 and 2009, the Company contributed $101,000 and $66,000 in cash to the plan.

13.

Income Taxes

The US pre-tax loss for the period totalled $1.0 million in 2010 and $0.8 million in 2009. The foreign pre-tax loss totalled $10.6 million in 2010 and $10.4 million in 2009. A credit has been claimed for research and development expenditure on the tax return that totals $3.4 million (2009: $3.5 million). As this credit is refunded without regard to taxable income, this has been netted against the research and development expense in the income statement, and not included within the tax charge.

All tax expense amounts recognized during the years ended December 31, 2010 and 2009 ($186,000 and $52,000, respectively) represented current tax expense paid in foreign jurisdictions.

The tax expense differs from the amount of benefit that was derived by applying the standard rate of corporation tax in the US of 35% to the losses before income taxes. The significant reconciling items consist of the utilization of the current year’s foreign net operating loss carryforwards to obtain credits for research and development expenditure, difference in the income tax rates between the US and foreign jurisdictions, reduction in the UK corporation tax rate enacted during 2010, as well as a change in the valuation allowance in 2009.

Significant components of the Company’s deferred tax assets and liabilities are as follows (in millions):


	December 31,
	2010			2009
Deferred tax assets:
Net operating loss carryforwards	$	6,590		$	6,843
Deferred revenues		2,546			2,932
Property and equipment		808			647
Stock-based compensation		832			608
Accruals and other		716			746

Total deferred tax assets		11,492			11,776
Less valuation allowance		(11,492	)		(11,776	)

Net deferred tax assets	$	—		$	—

F-25

PICOCHIP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2010. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth. On the basis of this evaluation, a valuation allowance has been recognized in full against the Company’s net deferred tax assets, as there is currently insufficient evidence that the asset will be recovered in the foreseeable future. The valuation allowance decreased by $284,000 and increased by $1.0 million during the years ended December 31, 2010 and 2009, respectively.

As of December 31, 2010, the Company has net operating loss carryforwards for US federal and California income tax purposes of $1.1 million each, and for UK corporation tax purposes of $22.8 million. The US federal loss carry-forwards will expire at various dates from 2013 through 2030, California loss carry-forwards will expire at various dates from 2014 to 2019, and the loss carry-forwards in the UK have no expiration date.

Utilization of the US net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. The Company has not completed a Section 382 analysis of potential past ownership changes.

As of December 31, 2011, the total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate are not material. The Company does not anticipate that its existing unrecognized tax benefits will significantly increase or decrease within the next 12 months.

The Company files income tax returns in the United States, various states, and certain foreign jurisdictions. As a result of net operating loss carryforwards, all of the Company’s tax years are subject to federal, state and foreign tax examination.

14.

Subsequent Events

Financial Covenants Violation

In December 2011, the Company was in breach of one of its financial covenants with SVB. On January 6, 2012, the Company and SVB agreed a Loan Modification Agreement which included a reset of the covenant.

Sale of Company

On February 6, 2012, the Company was acquired by Mindspeed Technologies, Inc. (Mindspeed), a leading supplier of semi-conductor solutions for network infrastructure applications. Pursuant to the terms of the purchase agreement, all the Company’s outstanding shares were converted into the right to receive consideration consisting of cash and shares of Mindspeed’s common stock. Mindspeed paid $26.7 million in cash and issued an aggregate of 5.2 million shares of Mindspeed’s common stock to the stockholders of the Company. Mindspeed may also become obligated to make additional earn-out payments, contingent on the achievement of milestones relating to: (i) revenue associated with sales of certain Picochip products for the period beginning on the closing of the acquisition and ending on December 31, 2012; and (ii) product and business development milestones. The maximum amount payable upon achievement of the revenue and development milestones is $25.0 million. Earn-out payments, if any, will be paid in the first quarter of calendar 2013, and Mindspeed may make earn-out payments in the form of cash, stock or any combination thereof.

Subsequent Events

The Company has evaluated subsequent events through April 18, 2012, for initial recognizable and disclosable subsequent events and has included all accounting and disclosure requirements related to subsequent events in these financial statements.

F-26

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MINDSPEED TECHNOLOGIES, INC Reports