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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR

 

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

For the transition period from                     to                     

Commission file number: 001-35528

 

 

AUDIENCE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   91-2061537

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

331 Fairchild Drive

Mountain View, California

  94043
(Address of principal executive offices)   (Zip Code)

(650) 254-2800

(Registrant’s telephone number, including area code)

440 Clyde Avenue

Mountain View, California

(Former address and former fiscal year, if changed since last report)

 

 

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

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

Indicate by check mark 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.

 

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

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

The number of shares of the Registrant’s Common Stock, $0.001 par value, outstanding at September 30, 2013 was: 21,889,082.

 

 

 


Table of Contents

AUDIENCE, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

     Page  

PART I. FINANCIAL INFORMATION

     3   

Item 1. Financial statements

     3   

Unaudited condensed consolidated balance sheets at September 30, 2013 and December 31, 2012

     3   

Unaudited condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2013 and 2012

     4   

Unaudited condensed consolidated statements of cash flows for the nine months ended September  30, 2013 and 2012

     5   

Notes to unaudited condensed consolidated financial statements

     6   

Item 2. Management’s discussion and analysis of financial condition and results of operations

     17   

Item 3. Quantitative and qualitative disclosures about market risk

     28   

Item 4. Controls and procedures

     28   

PART II. OTHER INFORMATION

     29   

Item 1. Legal proceedings

     29   

Item 1A. Risk factors

     30   

Item 6. Exhibits

     49   

Signatures

     50   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. Financial statements

Audience, Inc.

Condensed consolidated balance sheets

(in thousands, except share and per share data)

(unaudited)

 

     September 30,     December 31,  
     2013     2012  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 110,180     $ 109,606   

Restricted cash

     170       —     

Marketable securities

     21,869       18,032   

Accounts receivable, net

     9,102        12,926   

Inventories

     17,536       13,266   

Other current assets

     5,795        3,669   
  

 

 

   

 

 

 

Total current assets

     164,652       157,499   

Property and equipment, net

     27,073       11,801   

Other noncurrent assets

     1,740        1,389   

Restricted cash - noncurrent portion

     —          170   
  

 

 

   

 

 

 

Total assets

   $ 193,465     $ 170,859   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 2,703     $ 9,745   

Accrued and other current liabilities

     12,525       9,228   

Deferred credits and income

     342       285   

Financing obligation for construction in progress

     17,229       5,290   
  

 

 

   

 

 

 

Total current liabilities

     32,799       24,548   

Taxes payable - noncurrent

     1,170       376   

Other liabilities - noncurrent

     19       —     
  

 

 

   

 

 

 

Total liabilities

     33,988       24,924   
  

 

 

   

 

 

 

Commitments and contingencies (Note 8)

    

Stockholders’ equity:

    

Preferred stock:

    

$0.001 par value - 50,000,000 shares authorized and no shares issued and outstanding at September 30, 2013 and December 31, 2012

     —          —     

Common stock

    

$0.001 par value - 500,000,000 shares authorized and 21,889,082 shares issued and outstanding at September 30, 2013; 500,000,000 shares authorized and 20,862,845 shares issued and outstanding at December 31, 2012

     22       21   

Additional paid-in capital

     181,011       172,461   

Accumulated other comprehensive income

     3       3   

Accumulated deficit

     (21,559 )     (26,550
  

 

 

   

 

 

 

Total stockholders’ equity

     159,477       145,935   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 193,465     $ 170,859   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements (unaudited).

 

3


Table of Contents

Audience, Inc.

Condensed consolidated statements of comprehensive income (loss)

(in thousands, except per share data)

(unaudited)

 

     Three months ended     Nine months ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Revenue:

        

Hardware

   $ 32,445     $ 32,252     $ 118,901     $ 72,805   

Licensing

     2,007       8,499       8,089       32,411   
  

 

 

   

 

 

   

 

 

   

 

 

 
     34,452       40,751       126,990       105,216   

Cost of revenue

     15,179       18,355       55,461       44,392   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     19,273       22,396       71,529       60,824   

Operating expenses:

        

Research and development

     11,499       9,501       31,298       23,047   

Selling, general and administrative

     9,929       9,102       31,067       24,773   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     21,428       18,603       62,365       47,820   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (2,155 )     3,793       9,164       13,004   

Interest income, net

     37       77       128       90   

Other expense, net

     (50 )     (39 )     (209 )     (504
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (2,168 )     3,831       9,083       12,590   

Income tax expense

     153       167       4,092       432   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (2,321 )     3,664       4,991       12,158   

Non-cumulative dividends to preferred stockholders

     —          —          —          (2,248

Undistributed earnings allocated to preferred stockholders

     —          —          —          (3,709
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders - basic

     (2,321 )     3,664       4,991       6,201   

Adjustment for undistributed earnings reallocated to the holders of common stock

     —          —          —          521   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders - diluted

   $ (2,321 )   $ 3,664     $ 4,991     $ 6,722   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

        

Basic

   $ (0.11 )   $ 0.18     $ 0.23     $ 0.57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.11 )   $ 0.16     $ 0.22     $ 0.49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net income (loss) per share:

        

Basic

     21,636       20,342       21,281       10,956   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     21,636       23,159       23,121       13,816   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Foreign currency translation adjustments, net of tax

   $ —        $ —        $ —        $ 31   

Unrealized gain on marketable securities, net of tax

     4       —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     4       —          —          31   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (2,317 )   $ 3,664     $ 4,991     $ 12,189   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements (unaudited).

 

4


Table of Contents

Audience, Inc.

Condensed consolidated statements of cash flows

(in thousands)

(unaudited)

 

     Nine months ended  
     September 30,  
     2013     2012  

Cash flows from operating activities

    

Net income

   $ 4,991     $ 12,158   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     2,170       1,053   

Write-down of inventory to net realizable value

     372       2,953   

Change in fair value of convertible preferred stock warrants

     —          290   

Stock-based compensation

     4,195       2,190   

Excess tax benefit from stock options

     (796 )     —     

Loss on disposal of property and equipment

     7       20   

Amortization/accretion of marketable securities

     60       28   

Non-cash rent expense

     663       148   

Changes in assets and liabilities:

    

Accounts receivable

     3,823       (4,775

Inventories

     (4,642 )     5,751   

Other assets

     (983 )     (1,784

Accounts payable

     (7,524 )     (1,747

Accrued and other liabilities

     3,114       2,879   

Deferred credits and income

     58       (284
  

 

 

   

 

 

 

Net cash provided by operating activities

     5,508       18,880   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases and prepayments of property and equipment

     (5,393 )     (3,715

Purchases of marketable securities

     (21,896 )     (22,079

Proceeds from sales and maturities of marketable securities

     18,000       —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (9,289 )     (25,794
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from initial public offering, net of underwriting discounts and commissions

     —          91,548   

Proceeds from exercise of preferred stock warrants

     —          400   

Payment in connection with initial public offering

     —          (3,723

Proceeds from exercise of stock options and employee stock purchase plan

     3,663       512   

Tax payments related to restricted stock units

     (104 )     —     

Excess tax benefit from stock options

     796       —     

Repayment of equipment term loan

     —          (102
  

 

 

   

 

 

 

Net cash provided by financing activities

     4,355       88,635   
  

 

 

   

 

 

 

Effect of exchange rate change on cash and cash equivalents

     —          31   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     574       81,752   

Cash and cash equivalents

    

Beginning of period

     109,606       15,983   
  

 

 

   

 

 

 

End of period

   $ 110,180     $ 97,735   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Non-cash financing obligation for property, plant and equipment (see Note 8)

   $ 13,067     $ 630   

Non-cash for property, plant and equipment

   $ 482     $ —     

Conversion of convertible preferred stock to common stock

   $ —        $ 74,348   

Conversion of preferred stock warrants to common stock warrants

   $ —        $ 23   

See notes to condensed consolidated financial statements (unaudited).

 

5


Table of Contents

Audience, Inc.

Notes to condensed consolidated financial statements

(unaudited)

1. Formation and business of Audience, Inc.

Audience, Inc. (the “Company” or “Audience”) was incorporated in the State of California in July 2000 and subsequently reincorporated in the State of Delaware in June 2011. In June 2002, the Company changed its name from Applied Neurosystems Corporation to Audience, Inc. On May 15, 2012, the Company closed its initial public offering (“IPO”) and it listed its common stock on the NASDAQ Global Select Market under the symbol “ADNC.”

Audience provides intelligent voice and audio solutions that improve voice quality and the user experience in mobile devices. The Company outsources the manufacture of its voice and audio processors to independent foundries and uses third parties for assembly, packaging and test. The Company sells its voice and audio processors globally, directly to original equipment manufacturers (“OEMs”) and their contract manufacturers (“CMs”) and indirectly through distributors. In 2012, Audience also began to recognize royalty revenue for the use of its semiconductor intellectual property (“processor IP”) in the 2011 model of the mobile phones of a single OEM.

2. Basis of presentation and summary of significant accounting policies

Basis of presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring items, necessary for a fair statement of the Company’s financial statements for interim periods in conformity with U.S. generally accepted accounting principles (“GAAP”). The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (“Form 10-K”). The Company’s accounting policies are described in the “Notes to consolidated financial statements” in its Form 10-K and updated, as necessary, in this Form 10-Q. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

Basis of consolidation

All intercompany transactions and balances have been eliminated upon consolidation. The functional currency of each of the Company’s subsidiaries is the U.S. dollar. Foreign currency gains or losses are recorded as other expenses, net in the condensed consolidated statements of comprehensive income (loss).

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include the allowances for doubtful accounts receivable and sales returns, inventory write-downs, useful lives of long-lived assets, valuation of deferred tax assets and uncertain tax positions, the measurement of stock-based compensation and the valuation of the Company’s various equity instruments. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and beliefs of what could occur in the future, considering available information. Actual results could differ from those estimates.

Concentration of risk

As of September 30, 2013, three customers accounted for 58%, 20% and 12% of total accounts receivable. As of December 31, 2012, four customers accounted for 36%, 21%, 19% and 13% of total accounts receivable.

Revenue from Samsung Electronics Co., Ltd. (“Samsung”) accounted for 62% and 64% of total revenue for the three and nine months ended September 30, 2013, respectively, and 55% and 45% of total revenue for the three and nine months ended September 30, 2012, respectively. Apple Inc. (“Apple”) accounted for 20% and 23% of total revenue for the three and nine months ended September 30, 2013, respectively; and 21% and 31% of total revenue for the three and nine months ended September 30, 2012. Foxconn International Holdings, Ltd. and its affiliates (collectively “Foxconn”), a CM for Apple accounted for less than 10% of total revenue for both the three and nine months ended September 30, 2013, and 14% and 15% of total revenue for the three and nine months ended September 30, 2012, respectively.

 

6


Table of Contents

Apple transitioned from the purchase of Audience’s processors to licensing of Audience’s processor IP for a royalty with respect to its 2011 mobile phone model and as a result the Company began to recognize royalty revenue in 2012. The licensing revenue accounted for 6% of total revenue for both the three and nine months ended September 30, 2013, respectively; and 21% and 31% of total revenue for the three and nine months ended September 30, 2012, respectively.

Revenue recognition

The Company derives revenue from the direct sale of voice and audio processors to CMs and OEMs and indirect sales of voice and audio processors to OEMs through distributors. The Company recognizes revenue from sales to CMs and OEMs when persuasive evidence of an arrangement exists, the selling price is fixed or determinable, product delivery has occurred, which is when the risk and reward of ownership pass to the customer, and collectability of the resulting receivable is reasonably assured. The transfer of risk and reward of ownership to the customers is typically complete at the time of shipment as per the Company’s shipping terms. The Company also ships a portion of its products to the inventory hubs of CMs and recognizes the related revenue as the CMs notify the Company in writing that they have drawn its products from the hub, at which point delivery and transfer of title and risk of ownership have occurred.

Although the Company does not recognize revenue from sales to its distributors upon shipment, the title and the risk of ownership for the products typically transfers to the distributor upon shipment as per the Company’s shipping terms, and the distributor is obligated to pay for the products at that time. The Company does not offer distributors, CMs or OEMs return rights, rebates, price protection or other similar rights. However, in the past, the Company has occasionally accepted returns from distributors. As a result, the Company defers revenue recognition, adjustments to revenue and the related costs of revenue until the distributor notifies the Company in writing of its resale of the products. The amounts billed to distributors, adjustments to revenue and the cost of inventory shipped to, but not yet sold by the distributors, are included on the condensed consolidated balance sheets under “Deferred credits and income.” The Company takes into account the inventories held by its distributors in determining the appropriate level of provision for excess and obsolete inventory.

The Company began to earn royalties in 2012 on mobile phones integrating its licensed processor IP from a single OEM. The Company recognizes royalty revenue based on mobile phone shipments reported during the quarter, assuming that all other revenue recognition criteria are met. The OEM generally reports shipment information within 45 days following the end of the OEM’s quarter. Since there is no reliable basis on which the Company can estimate its royalty revenues prior to obtaining the OEM’s reports from the licensees, the Company recognizes royalty revenues on a one-quarter lag. The amount of revenue recognized is determined by multiplying the number of mobile phones sold during a particular period in which the Company’s processor IP is integrated and enabled at the agreed-upon royalty rate.

Litigation, investigation and settlement costs

From time to time, the Company is involved in legal actions and/or investigations by regulatory bodies. There are many uncertainties associated with any litigation, and the Company cannot be certain that these actions or other third-party claims against the Company will be resolved without costly investigation, defense, substantial settlement payments and/or judgments. If any of these were to occur, the Company’s business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes the Company to determine that a loss in any of its pending litigation is probable, and it can reasonably estimate the loss associated with such events, the Company records the loss in accordance with U.S. GAAP. However, the actual liability in any such litigation or investigations may be materially different from the Company’s estimates, which could require it to record additional cost.

Recent accounting pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued its guidance requiring new disclosures for the reclassification from accumulated other comprehensive income (“AOCI”) to net income. This new guidance requires that the Company present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of AOCI based on its source and the income statement line items affected by the reclassification. This guidance only impacts disclosures within the Company’s consolidated financial statements and notes to the consolidated financial statements and does not result in a change to the accounting treatment of AOCI. This new guidance became effective for the Company’s interim period ending March 31, 2013. The Company adopted this guidance and the adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.

In July 2013, the FASB issued final guidance on the presentation of certain unrecognized tax benefits in the financial statements. Under the new guidance, a liability related to an unrecognized tax benefit would be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In that case, the liability associated with the unrecognized tax benefit is presented in the financial statements as a reduction to the related deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2014 because the Company is an emerging growth company under the Jobs Act and has elected to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Early adoption is permitted. The Company did not elect for an early adoption of this new guidance. The Company is currently evaluating the impact this guidance may have on its financial position, results of operations, or cash flows.

 

7


Table of Contents

3. Consolidated balance sheet components

Inventories

Inventories as of September 30, 2013 and December 31, 2012 consisted of the following:

 

     September 30,      December 31,  
     2013      2012  
     (in thousands)  

Work in process

   $ 6,403       $ 4,467   

Finished goods

     11,133         8,799   
  

 

 

    

 

 

 

Total inventory

   $ 17,536       $ 13,266   
  

 

 

    

 

 

 

Property and equipment

Property and equipment, net as of September 30, 2013 and December 31, 2012 consisted of the following:

 

     September 30,     December 31,  
     2013     2012  
     (in thousands)  

Computers and equipment

   $ 3,484      $ 2,596   

Machinery and equipment

     4,519        3,357   

Software

     3,449        839   

Furniture and fixtures

     493        488   

Leasehold improvements

     1,595        1,534   

Construction in progress

     19,419        6,808   
  

 

 

   

 

 

 

Gross property and equipment

     32,959        15,622   

Accumulated depreciation and amortization

     (5,886     (3,821
  

 

 

   

 

 

 

Property and equipment, net

   $ 27,073      $ 11,801   
  

 

 

   

 

 

 

Depreciation and amortization expense for the three and nine months ended September 30, 2013 was $0.8 million and $2.2 million, respectively. Depreciation and amortization expense for the three and nine months ended September 30, 2012 was $0.4 million and $1.1 million, respectively.

On June 5, 2012, the Company entered into a lease agreement for its headquarters. Pursuant to the lease agreement, the Company agreed to pay construction costs in excess of a certain amount, and the Company has certain indemnification obligations related to the construction. As a result of the Company’s involvement during the construction period, it was considered to be the owner of the construction project during the construction period in accordance with accounting for the effect of lessee involvement in asset construction. As of September 30, 2013, the Company capitalized $19.4 million of assets as construction in progress, of which $2.2 million was incurred by the Company and $17.2 million was incurred by the landlord. The construction was completed and the lease commenced in the fourth quarter of 2013. The Company will assess whether the lease will be treated as a capital or operating lease under sale-leaseback accounting in the fourth quarter of 2013. See Note 8, “Commitments and contingencies” for additional details.

In November 2012, the Company started the implementation of its enterprise resources planning (“ERP”) system. In May 2013, the ERP system implementation was completed and as a result the Company capitalized $2.0 million related to the ERP system implementation project as software in property and equipment on the balance sheets. The estimated useful life is five years.

 

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Other current assets

Other current assets as of September 30, 2013 and December 31, 2012 consisted of the following:

 

     September 30,      December 31,  
     2013      2012  
     (in thousands)  

Prepaid expenses

   $ 4,059      $ 2,128   

Security deposits

     424        213   

Deferred tax asset

     1,233        1,233   

Other

     79        95   
  

 

 

    

 

 

 

Other current assets

   $ 5,795       $ 3,669   
  

 

 

    

 

 

 

Accrued and other current liabilities

Accrued and other current liabilities as of September 30, 2013 and December 31, 2012 consisted of the following:

 

     September 30,      December 31,  
     2013      2012  
     (in thousands)  

Compensation

   $ 5,392      $ 4,143   

Professional fees

     864        1,531   

Accrued inventory

     112        968   

Income taxes payable

     1,545        444   

Lease payable

     1,242        579   

Other

     3,370        1,563   
  

 

 

    

 

 

 

Accrued and other current liabilities

   $ 12,525      $ 9,228   
  

 

 

    

 

 

 

Accumulated other comprehensive income

Accumulated other comprehensive income as of September 30, 2013 and December 31, 2012 is comprised of unrealized gain on marketable securities, net of tax.

4. Marketable securities

The Company invests its excess cash primarily in U.S. government agency and treasury notes and money market funds that mature within one year.

All cash equivalents and marketable securities are classified as available-for-sale and are summarized as follows:

 

     September 30, 2013  
     Fair value      Amortized cost      Gross
unrealized
gains
     Gross
unrealized
losses
 
     (in thousands)  

Money market funds

   $ 83,213      $ 83,213      $ —         $ —     

U.S. Government agency, bonds and notes

     21,869        21,866        5        (2
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash equivalents and marketable securities

     105,082        105,079        5        (2

Cash

     26,967        —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash, cash equivalent and marketable securities

   $ 132,049      $ 105,079      $ 5      $ (2
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Available-for-sale securities are reported at fair value on the condensed consolidated balance sheets and classified as follows:

 

     September 30,      December 31,  
     2013      2012  
     (in thousands)  

Cash equivalents

   $ 83,213      $ 76,962   

Short-term marketable securities

     21,869        18,032   
  

 

 

    

 

 

 

Total cash equivalents and marketable securities

     105,082        94,994   

Cash

     26,967        32,644   
  

 

 

    

 

 

 

Total cash, cash equivalent and marketable securities

   $ 132,049      $ 127,638   
  

 

 

    

 

 

 

The Company invests in high quality, highly liquid debt securities that mature within one year. The Company holds all of its marketable securities as available-for-sale and marks them to market.

5. Fair value measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable:

 

Level 1 —   Quoted prices in active markets for identical assets or liabilities.
Level 2 —   Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 —   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 were as follows:

 

     Total      Level 1      Level 2      Level 3  
     (in thousands)  

Assets

           

Money market funds (1)

   $ 83,213      $ 83,213      $ —         $ —     

U.S. government agency, bonds and notes (2)

     21,869        21,869        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale debt securities

   $ 105,082      $ 105,082      $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Money market funds are included in cash and cash equivalents on the condensed consolidated balance sheet.
(2) U.S. government agency, bonds and notes are included in marketable securities on the condensed consolidated balance sheet.

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 were as follows:

 

     Total      Level 1      Level 2      Level 3  
     (in thousands)  

Assets

           

Money market funds (1)

   $ 76,962      $ 76,962      $ —         $ —     

U.S. government agency, bonds and notes (2)

     18,032        18,032        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale debt securities

   $ 94,994      $ 94,994      $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Money market funds are included in cash and cash equivalents on the condensed consolidated balance sheet.
(2) U.S. government agency, bonds and notes are included in marketable securities on the condensed consolidated balance sheet.

 

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6. Income taxes

Effective January 1, 2012, the Company implemented an international structure. The Company’s effective tax rate in the periods presented on or after January 1, 2012 is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The rate at which the provision for income taxes is calculated also differs from the U.S. federal statutory income tax rate primarily due to the partial valuation allowance on U.S. deferred tax assets, the utilization of research and development (“R&D”) credits subject to the tentative minimum tax limitation and different tax rates in foreign jurisdictions where income is earned and considered to be indefinitely reinvested.

The Company’s effective income tax rate was (7%) and 3% for the three months ended September 30, 2013 and 2012, respectively. The Company’s provision for income taxes was $0.2 million for both the three months ended September 30, 2013 and 2012. The decrease in effective income tax rate for the three months ended September 30, 2013 is primarily due to the third quarter loss before income taxes. For the nine months ended September 30, 2013 and 2012, the effective income tax rate was 45% and 3%, respectively. The provision for income taxes was $4.1 million and $0.4 million for the nine months ended September 30, 2013 and 2012, respectively. The increase in effective income tax rate and income tax provision for the nine months ended September 30, 2013 is primarily due to the increase in estimated U.S. income tax expenses as a result of the limitation on the utilization of the R&D credits and the decrease in the projected annual consolidated net income before tax for the year 2013. In the first quarter of 2013, the American Taxpayer Relief Act of 2012 was signed into law that reinstated the U.S. federal research and development tax credit retroactive to January 1, 2012. The impact on the financial statements from the additional credits was not material because of the partial valuation allowance on the U.S. deferred tax assets.

As of September 30, 2013, the Company had gross unrecognized tax benefits totaling $5.4 million. Approximately $4.4 million of the Company’s net unrecognized tax benefits, not including interest, if recognized, would affect its effective tax rate. One or more of these net unrecognized tax benefits could be subject to a valuation allowance if and when recognized in a future period, which could impact the timing of any related effective tax rate benefit. The Company recognizes interest and/or penalties related to income tax matters within the provision for income taxes in the condensed consolidated statements of comprehensive income. As of September 30, 2013 and December 31, 2012, the Company had no accrued interest or penalties due to its net operating losses and tax credits available to offset any tax adjustments. The Company does not believe that it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months.

The Company regularly assesses the realizability of its deferred tax assets and establishes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. The Company evaluates both positive and negative evidence in determining the need for a valuation allowance, such as historical losses, recent earnings, forecasted income, customer concentration, pricing pressures, competition from larger companies with significantly greater resources, and other risks inherent in the semiconductor industry. The Company gives significant weight to evidence that can be objectively verified. In the event the Company was to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which the Company makes such determination. Likewise, if the Company later determines that it is more likely than not that the net deferred tax assets would be realized, it would reverse the applicable portion of the previously provided valuation allowance. As of December 31, 2012, the Company released a valuation allowance of $2.0 million on U.S. federal deferred tax assets and had the remaining valuation allowance of $5.9 million on its U.S. deferred tax assets. With the Company’s earnings and anticipated future earnings, the Company believes it is reasonably possible that it may release some portion of the valuation allowance against its U.S. deferred income tax assets in the next 12 months. However, there can be no assurance of either the timing or amount of any reversal of the valuation allowance.

7. Earnings per share

Basic net income per share allocable to holders of common stock is computed by dividing the net income allocable to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Net income allocable to holders of common stock is calculated using the two-class method, as the Company previously issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings. Holders of the Company’s convertible preferred stock were each entitled to receive non-cumulative dividends at the annual rates payable prior and in preference to any dividends on any shares of the Company’s common stock. After payment of these preferred stock dividends, any additional dividends were required to be distributed among the holders of convertible preferred stock and common stock pro rata (on an as-converted basis). The holders of the convertible preferred stock did not have a contractual obligation to share in Company’s losses. The Company considered its convertible preferred stock, which converted to common stock in connection with its IPO, to be participating securities. The two-class method requires earnings for the period, after deduction of preferred stock dividends, to be allocated between the holders of common and preferred stock based on their respective rights to receive dividends. Basic net income per share is then calculated by dividing net income allocable to holders of common stock (after the reduction for any undeclared preferred stock dividends assuming the distribution of current income for the period) by the weighted average number of shares of common stock outstanding.

 

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In computing diluted net income allocable to holders of common stock, undistributed earnings are reallocated to reflect the potential impact of dilutive securities. Diluted net income per share allocable to holders of common stock is computed by dividing the net income allocable to holders of common stock for the period by the weighted average number of common and potential common shares outstanding during the period, if the effect of each class of potential shares of common stock is dilutive. Potential shares of common stock include incremental shares of common stock issuable upon the exercise of stock options, vesting of restricted stock units, conversion of preferred stock and exercise of warrants.

The Company is not required to present basic and diluted net income per share for securities other than its common stock. The following table sets forth the computation of basic and diluted net income per share under the two-class method attributable to common stockholders:

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2013     2012      2013      2012  
     (in thousands, except per share data)  

Numerator:

          

Net income (loss)

   $ (2,321 )   $ 3,664      $ 4,991       $ 12,158   

Non-cumulative dividends to preferred stockholders

     —          —           —           (2,248

Undistributed earnings allocated to preferred stockholders

     —          —           —           (3,709
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) - basic

     (2,321 )     3,664        4,991         6,201   

Adjustment for undistributed earnings reallocated to the holders of common stock

     —          —           —           521   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) - diluted

   $ (2,321 )   $ 3,664      $ 4,991       $ 6,722   
  

 

 

   

 

 

    

 

 

    

 

 

 

Denominator:

          

Weighted average shares used in computing net income (loss) per share:

          

Basic

     21,636       20,342        21,281         10,956   

Weighted average effect of potentially dilutive securities:

          

Options to purchase common stock

     —          2,699        1,816         2,789   

Restricted stock units

     —          —           1         —     

Employee stock purchase plan

     —          117        23         70   

Common stock warrants

     —          1        —           1   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted

     21,636       23,159        23,121         13,816   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) per share:

          

Basic

   $ (0.11 )   $ 0.18      $ 0.23       $ 0.57   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted

   $ (0.11 )   $ 0.16      $ 0.22       $ 0.49   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income has been allocated to shares of common stock and shares of convertible preferred stock based on their respective rights to share in dividends.

 

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The following potentially dilutive shares of common stock subject to options, restricted stock units, warrants and convertible preferred stock were excluded from the computation of diluted net income per share of common stock for the periods presented because including them would have had an antidilutive effect:

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2013      2012      2013      2012  
     (in thousands)  

Options to purchase common stock

     4,898        923        1,954        345   

Convertible preferred stock (if-converted basis)

     —           —           —           6,506   

Restricted stock units

     311        18        243        18   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,209        941        2,197        6,869   
  

 

 

    

 

 

    

 

 

    

 

 

 

8. Commitments and contingencies

Leases

The Company leases office space under noncancelable agreements with various expiration dates through October 2023. Rent expense for the three and nine months ended September 30, 2013 was $1.0 million and $2.8 million, respectively. Rent expense for the three and nine months ended September 30, 2012 was $0.7 million and $1.7 million, respectively. On June 5, 2012, the Company entered into a lease agreement for its headquarters, which consists of 87,565 square feet in Mountain View, California. The construction was completed and the lease commenced in the fourth quarter of 2013. The contractual annual base payment is $3.7 million subject to a full abatement of payment for the first month of the lease term. The annual base payment increases 3% each year. The lease term is for ten years with an option to extend additional five years.

Pursuant to the lease agreement, the Company agreed to pay construction cost in excess of a certain amount, and the Company has certain indemnification obligations related to the construction. As a result of the Company’s involvement during the construction period, it is considered to be the owner of the construction project during the construction period in accordance with accounting for the effect of lessee involvement in asset construction. As of September 30, 2013, the Company capitalized $19.4 million of assets as construction in progress, of which $2.2 million was incurred by the Company and $17.2 million incurred by the landlord. Of the $2.2 million incurred by the Company, $0.6 million was paid for construction costs, $0.5 million was paid to the landlord as a security deposit upon the execution of the lease and $1.1 million was accrued for tenant improvement overage allowance to the landlord. As a result, the corresponding liability of $17.2 million was reflected as a financing obligation for construction in progress on the condensed consolidated balance sheets. The liability of $17.2 million recorded on the Company’s condensed consolidated balance sheets will offset the future minimum lease payments. For the three and nine months ended of September 30, 2013, the Company also recorded non-cash rental expense of $0.2 million and $0.7 million associated with the lease of the land in which the construction project resides. The construction was completed and the lease commenced in the fourth quarter of 2013. The Company will assess whether the lease will be treated as a capital or operating lease under sale-leaseback accounting in the fourth quarter of 2013.

As of September 30, 2013 the Company’s total future minimum payments under noncancelable leases were $44.1 million.

Litigation

On September 13, 2012, a purported shareholder filed a class action complaint in the Superior Court of the State of California for Santa Clara County against the Company, the members of its board of directors, two of its executive officers and the underwriters of its IPO. On April 3, 2013, the outside members of the board of directors and the underwriters were dismissed without prejudice. An amended complaint was filed on February 25, 2013, which purports to be brought on behalf of a class of purchasers of the Company’s common stock issued in or traceable to the IPO. The amended complaint added additional shareholder plaintiffs and contains claims under Sections 11 and 15 of the Securities Act. The complaint seeks, among other things, compensatory damages, rescission and attorney’s fees and costs. On March 1, 2013, defendants responded to the amended complaint by filing a demurrer moving to dismiss the amended complaint on the ground that the court lacks subject matter jurisdiction. The court overruled that demurrer. On March 27, 2013, defendants filed a demurrer moving to dismiss the amended complaint on other grounds. The court denied the demurrer on September 4, 2013. The Company believes that the allegations in the complaint are without merit and intend to vigorously contest the action. However, there can be no assurance that the Company will be successful in its defense and it cannot currently estimate a range of any possible losses it may experience in connection with this case. Accordingly, the Company is unable at this time to estimate the effects of this complaint on its financial condition, results of operations or cash flows.

From time to time, the Company may be involved in other legal actions arising in the ordinary course of business.

 

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Table of Contents

Purchase commitments

The Company maintains certain open inventory purchase commitments with its suppliers to ensure a smooth and continuous supply for key components. The Company may cancel these purchase commitments at any time, however it is required to pay all costs incurred through the cancellation date. The Company rarely cancels these agreements once production has started. The Company had $22.0 million of open purchase commitments for inventory and $9.9 million of open purchase commitments for non-inventory items at September 30, 2013. The open purchase commitments are primarily due within the next 12 months.

9. Capital stock

Common stock

Under the Company’s certificate of incorporation, the Company was authorized to issue 500,000,000 shares of common stock as of September 30, 2013 and December 31 2012. The holder of each share of common stock is entitled to one vote. Common stockholders are entitled to dividends when and if declared by the Board of Directors. Since inception, the Company has not declared any cash dividends.

As of September 30, 2013 and December 31, 2012, the Company had reserved shares of its common stock for future issuance as follows:

 

     September 30,      December 31,  
     2013      2012  

Shares reserved for stock options and restricted stock units

     5,283,592         5,190,358   

Shares reserved for employee stock purchase plan

     286,234         268,505   

Shares reserved for warrants

     —           1,333   

10. Warrants

In connection with the Company’s line of credit agreement with Silicon Valley Bank (“SVB”), the Company issued warrants to purchase 1,333 shares of Series E convertible preferred stock at per share exercise price of $3.67. Upon the close of the Company’s IPO on May 15, 2012, the warrants to purchase 1,333 shares of preferred stock were converted to warrants to purchase common stock. On February 20, 2013, SVB net exercised the warrants and the Company issued 976 shares to net settle the warrants. As of September 30, 2013, the warrants had been exercised in full and were no longer outstanding.

11. Stock-based compensation and awards

The following is a summary of option activity under the Company’s 2001 Stock Option Plan (the “2001 Plan”) and 2011 Equity Incentive Plan (the “2011 Plan”) for the nine months ended September 30, 2013:

 

     Outstanding options  
     Number of
shares
    Weighted average
exercise price
 

Balances at December 31, 2012

     4,568,309      $ 6.23   

Options granted

     1,328,035        13.96   

Options exercised

     (813,392     2.92   

Options cancelled

     (545,922     14.82   
  

 

 

   

Balances at September 30, 2013

     4,537,030      $ 8.05   
  

 

 

   

 

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Table of Contents

The options granted and cancelled for the nine months ended September 30, 2013 in the table above include options that were exchanged under the Company’s stock option exchange program on February 5, 2013. Pursuant to the exchange offer, the Company accepted for cancellation options to purchase an aggregate of 239,945 shares of its common stock, which were cancelled as of February 5, 2013, and, in exchange, granted new options to purchase an aggregate of 223,946 shares of its common stock. The exercise price per share of the new options granted in the offer was $14.79, the closing price of the Company’s common stock as reported by the NASDAQ Global Select Market on February 5, 2013. Each new grant began a new vesting period commencing on the date of grant over four years. The unamortized expense of the cancelled grants was added to the incremental grant date fair value of the replacement grants, and the combined value will be amortized over the vesting period of the new grant. The incremental grant date fair value of the replacement grants was approximately $0.2 million.

On September 19, 2013, our Compensation Committee of the Board of Directors approved an amendment to our 2011 Employee Stock Purchase Plan to provide for overlapping 24 month offering periods comprised of four six month purchase periods, which will be effective as of November 15, 2013. In the event that the fair market value of our common stock on the purchase date is lower than the closing sales price of our common stock on the first day of the offering period, the applicable offering period will be automatically terminated and each participant in the applicable offering period will be automatically enrolled in the new 24 month offering period then commencing.

The following is a summary of unvested restricted stock units (“RSU”) activity for the nine months ended September 30, 2013:

 

     RSUs outstanding  
     Number of
Shares
    Weighted
average
grant
price
 

Balance at December 31, 2012

     17,500      $ 21.88   

RSU granted

     354,300        13.97   

RSU vested

     (31,210     15.45   

RSU forfeited

     (19,062     14.36   
  

 

 

   

Balance at September 30, 2013

     321,528      $ 14.23   
  

 

 

   

Stock-based compensation

The following table shows a summary of the stock-based compensation expense included in the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2013 and 2012:

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2013      2012      2013      2012  
     (in thousands)  

Cost of revenue

   $ 82       $ 50       $ 226       $ 104   

Research and development

     594         346         1,571         695   

Selling, general and administrative

     876         666         2,398         1,391   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock-based compensation expense

   $ 1,552       $ 1,062       $ 4,195       $ 2,190   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2013, the Company had $10.0 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock-based awards that it expects to recognize over a weighted average period of 3.5 years.

At September 30, 2013, total unrecognized estimated compensation expense related to unvested RSUs granted, net of estimated forfeitures was $4.4 million, which is expected to be recognized over a weighted average period of 3.4 years.

12. Borrowings

Line of credit

In July 2009, the Company entered into a $5.0 million revolving line of credit agreement with Silicon Valley Bank, under which available funds are based on eligible accounts receivable. Under the agreement, if the outstanding amount on any advance becomes greater than 80% of the face amount of the invoice (or 50% against amounts advanced against purchase orders), the Company is required to pay the difference to the lender. Borrowings under this facility accrue interest at the greater of the prime rate or 4% per annum with a penalty of an additional 0.25% applied each time the Company’s cash balance is under $2.5 million. These rates increase 5% per annum during an event of default. Payment to the lender is generally due when the payment is received on the receivable against which the line has been drawn.

On July 6, 2011, the Company amended its line of credit agreement with Silicon Valley Bank. Among other changes, the amendment (i) increases the Company’s line of credit from $5.0 million to $10.0 million and extends the availability of the line until July 6, 2013; (ii) provides that the Company may borrow up to $2.0 million (of the $10.0 million) without reference to the value of its accounts receivable or purchase orders; (iii) changes the applicable interest rate on the line of credit to the following: (a) for prime rate loans, a range from the bank’s prime rate to the prime rate plus 0.35% per annum (the higher rate is applicable if the quick ratio falls below 1.25:1.00), or (b) for LIBOR loans, LIBOR plus 1.75% per annum; and (iv) replaces the credit facility’s financial tests based on

 

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net cash balances with a condition that the Company maintains a quick ratio of at least 1.25:1.00 (used to determine borrowing eligibility and interest rate). The amendment also removed the covenant that the Company maintains a quick ratio of 1.50:1.00 while equipment loans remain outstanding. The Company was in compliance with all covenants and no amounts were outstanding at September 30, 2013 and December 31, 2012. Before the expiration of the line of credit in September 2013, the maturity date of the line of credit was extended to March 31, 2014.

13. Segment and geographic information

The Company operates in one reportable segment related to the selling and marketing of voice and audio processors and licensing of processor IP for use in mobile devices. The Company has identified its president and chief executive officer as the Chief Operating Decision Maker (“CODM”) who manages its operations as a whole. For the purpose of evaluating financial performance and allocating resources, the CODM reviews financial information accompanied by information by customer and by product.

Apple, one of the Company’s OEMs, transitioned the majority of its business in 2012 from the purchase of the Company’s processors to licensing of its processor IP, which is generated in the jurisdiction where this OEM has its headquarters in the United States. The Company began to recognize royalty revenue in 2012, which accounted for 6% of total revenue for both the three and nine months ended September 30, 2013 respectively, and 21% and 31% of total revenue for the three and nine months ended September 30, 2012. The decrease in revenue generated in the US is primarily due to the declining demand for Apple’s 2011 model mobile phones after the introduction of Apple’s 2012 and 2013 model mobile phones, in which our processor IP is not enabled.

Substantially all of the Company’s revenue was generated from the sale of its products to CMs and OEMs whose primary manufacturing operations and distributions are in Asia. Since the Company’s OEMs market and sell their products worldwide, the Company’s revenue by geographic location is not necessarily indicative of the geographic distribution of mobile device sales, but rather of where the mobile devices are manufactured. The following table sets forth reportable revenues by geographic regions:

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2013      2012      2013      2012  
     (in thousands)  

Revenues:

           

Korea

   $ 21,630      $ 23,162      $ 81,511      $ 49,311   

China

     10,673        8,540        36,484        22,697   

Other

     142        158        293        347   

United States

     2,007        8,891        8,702        32,861   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,452      $ 40,751      $ 126,990      $ 105,216   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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ITEM 2. Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, the consolidated financial statements and notes thereto for the year ended December 31, 2012, and with management’s discussion and analysis of our financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.

This Quarterly Report on Form 10-Q, including this “Management’s discussion and analysis of financial condition and results of operations”, includes a number of forward-looking statements that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words “would,” “could,” “will,” “may,” “expect,” “believe,” “should,” “anticipate,” “outlook,” “if,” “future,” “intend,” “plan,” “estimate,” “predict,” “potential,” “targets,” “seek” or “continue” and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this Quarterly Report on Form 10-Q. These factors include, but are not limited to, the risks described under Item 1A of Part II — “Risk factors,” Item 2 of Part I — “Management’s discussion and analysis of financial condition and results of operations,” elsewhere in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the SEC. We make these forward-looking statements based upon information available on the date of this Quarterly Report on Form 10-Q, and we have no obligation (and expressly disclaim any such obligation) to update or alter any forward-looking statements, whether as a result of new information or otherwise except as otherwise required by securities regulations.

Overview

We are the leading provider of intelligent voice and audio solutions that improve voice quality and the user experience in mobile devices. We collaborate with leading auditory neuroscientists to understand the human auditory system and have developed purpose-built processors that combine science and technology to function like human hearing. Our low power, hardware-accelerated digital signal processors (“DSPs”) and audio codecs and associated algorithms substantially improve sound quality and suppress noise in mobile devices. As the primary driver of the mobile device market, the mobile phone continues to play an increasingly prominent role in peoples’ lives. Voice communication is a primary function of mobile phones, and we expect voice to increasingly complement touch as a core user interface, heightening the importance of voice and audio quality in mobile devices.

We recorded total revenue of $34.5 million and $127.0 million for the three and nine months ended September 30, 2013, respectively; and $40.8 million and $105.2 million for the three and nine months ended September 30, 2012, respectively. We recorded net loss of $2.3 million and net income of $5.0 million for the three and nine months ended September 30, 2013, respectively; and net income of $3.7 million and $12.2 million for the three and nine months ended September 30, 2012, respectively.

We work with original equipment manufacturers (“OEMs”) to have our voice and audio processors designed into their products, which we refer to as design wins. Once our voice and audio processor is designed into a mobile device, we generally sell our processors to contract manufacturers (“CMs”) retained by OEMs on a purchase order basis and the CMs incorporate them into the mobile devices that they build for the OEMs. We sell a small portion of our products indirectly to OEMs through distributors. For a single OEM, we also license semiconductor intellectual property (“processor IP”), which that OEM has integrated into certain of its mobile phones and we began to recognize royalty revenue for the use of our processor IP from this OEM in 2012. Our OEMs’ products are complex and require significant time to design, launch and ramp to volume production. As a result, our sales cycle is lengthy. We typically commence commercial shipments of our products up to one year following a design win. Because the sales cycle for our products is long, we incur expenses to develop and sell our products, regardless of whether we achieve a design win and well in advance of generating revenue, if any. In addition, achieving a design win from an OEM does not ensure that the OEM will begin producing the related product in a timely manner, if at all, or that the design win will ultimately generate additional revenue for us.

Business factors affecting our performance

Creation of voice and audio improvement as a new category for users. Our success will depend, in part, on increasing market awareness among OEMs, mobile network operators (“MNOs”), operating system companies and applications vendors of the importance of voice and audio quality on the user experience. User demand for new levels of voice and audio quality will depend on our ability to provide solutions that continue to improve the user experience and our ability to convey the impact of our solutions on the mobile device ecosystem.

Design wins. We closely monitor design wins by OEMs and their mass production releases because we consider these to be important indicators of future revenue. The revenue that we generate from each design win can vary significantly and in some cases, our OEMs may cancel projects for which we have been awarded a design win. Our long-term sales expectations are based on forecasts

 

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from OEMs and internal estimations of demand factoring in the expected time to market for final mobile devices incorporating our solutions and associated revenue potential. Our ability to implement our product roadmap and introduce new products will facilitate the adoption of our solutions into future generations of mobile devices.

We estimate the life cycle of our OEMs’ mobile devices on the basis of our history with the OEM, the type of mobile device and discussions with our OEMs. A given design win for our processors or processor IP can generate a wide range of sales volumes for our voice and audio processors, depending on the market demand for our OEMs’ mobile devices. The market demand for our OEMs’ mobile devices, in turn, can depend on a number of factors, including the reputation of the OEM, the geographic markets in which the OEM intends to introduce the mobile devices and whether the MNOs on whose networks the mobile devices are designed to operate provide marketing and subsidies for the mobile devices.

Revenue driven by significant customers. Historically, our revenue has been significantly concentrated in a small number of OEMs, CMs and distributors and we expect that concentration to continue for the foreseeable future. Samsung Electronics Co., Ltd. (“Samsung”) accounted for 62% and 64% of our total revenue for the three and nine months ended September 30, 2013, respectively, and 55% and 45% of our total revenue for the three and nine months ended September 30, 2012, respectively. Apple Inc. (“Apple”) accounted for 20% and 23% of total revenue for the three and nine months ended September 30, 2013, respectively; and 21% and 31% of our total revenue for the three and nine months ended September 30, 2012. Foxconn International Holdings, Ltd. and its affiliates (collectively “Foxconn”), Apple’s CM, accounted for less than 10% of total revenue for both the three and nine months ended September 30, 2013, and 14% and 15% of total revenue for the three and nine months ended September 30, 2012, respectively. Apple transitioned from the purchase of our processors to the licensing of our processor IP for loyalty revenue with respect to their 2011 model of its mobile phone. We began to recognize royalty revenue in 2012, which accounted for 6% of total revenue for both the three and nine months ended September 30, 2013, respectively; and 21% and 31% of our total revenue for the three and nine months ended September 30, 2012, respectively. No other OEM, CM or distributor accounted for 10% or more of our total revenue for the three and nine months ended September 30, 2013 and 2012.

While we strive to expand and diversify our base of OEMs and we expect our customer concentration to decline over time, we anticipate that sales to a limited number of OEMs will continue to account for a significant percentage of our total revenue for the foreseeable future. Our customer concentration may cause our financial performance to fluctuate significantly from period to period based on the device release cycles and seasonal sales patterns of these OEMs and the success of their products. The loss of or any significant decline in sales to these OEMs may have an adverse effect on our financial condition and results of operations.

Fluctuations in the demand for the products of our large OEMs have a significant impact on our business. For example, we announced in August 2013 that as a result of lower than anticipated demand for Samsung’s high end smart phones, we expected that our revenue would decline significantly in the quarter ended September 30, 2013 and that we would incur a net loss. In October 2013, we also announced that continued weakness in demand for high end smart phones from Samsung was expected to continue in the three months ending December 31, 2013. Although our diversification of OEMs has improved over time and has increased on an absolute dollar basis, OEMs other than Samsung and Apple represented less than 20% and 15% of our revenue in the three and nine months ended September 30, 2013, respectively. Further, we do not expect additional sales to these other OEMs to make up the short-fall in our revenue from reduced sales of our processors to Samsung. Because our operating expenses are primarily related to personnel, we do not anticipate that we will make material reductions in these expenses in the short-term to respond to lower revenue as many of our personnel are engaged in new product development and sales diversification efforts. We cannot predict how long the impact on Samsung’s products, and thus ours, will last. Consistent with our experience with Samsung, we anticipate that over time, demand fluctuations from any single OEM which represents a significant portion of our revenue will impact our operating results.

We have made efforts to diversify the end user products in which our processors are designed in order to reduce the impact of fluctuations in the market for high end smart phones on our results of operations. As a result of recent design wins, our processors have been included in recently launched personal computers and tablets. As we endeavor to diversify the end user devices in which our processors are designed in, we may not achieve acceptance in other end markets quickly or achieve design wins in end user devices that are produced in substantial numbers. We have also begun to seek design wins in other end user markets where we have limited or no experience and our efforts may not result in substantial end user device diversification in the near-term, if at all.

Pricing and gross margins of our products. Our gross margin has been and will continue to be affected by a variety of factors, including the timing of changes in pricing, shipment volumes, new product introductions, changes in OEM concentration and product mixes, changes in our purchase price of fabricated wafers and assembly and test service costs and inventory write-downs, if any. In general, products with higher performance and a higher number of features tend to be priced higher and have higher gross margins. We expect our gross margin to fluctuate over time, in part from the impact of competitive pricing pressure. Erosion of average selling prices as products mature is typical in the semiconductor industry. Consistent with this historical trend, we expect that the average selling prices of our products will decline as they mature. As a normal course of business, we will seek to offset the effect of declining average selling prices on existing products by reducing manufacturing costs and introducing new and higher value-added products. If we are unable to maintain overall average selling prices, our gross margin will decline.

 

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Relationships with MNOs. MNOs determine product specifications for OEM products, thereby influencing the design and components selected by OEMs, which specifications have generated demand for our products. We have invested and continue to invest significant resources in working with MNOs to increase awareness of the potential and benefits of our processors. We intend to continue our work with MNOs to educate them about the impact of sound quality on the user experience. MNOs may not continue to value the improvements in sound quality that our products can provide and may not require their OEMs to meet certain sound quality specifications.

General economic conditions and geographic concentration. A global economic slowdown or financial crisis, similar to the one that occurred beginning in late 2008, would likely have a significant impact on the mobile device industry and our financial results. As the economy slows, consumer confidence may decline and, because our products serve the mobile device market, any decline in purchases by consumers of new mobile devices would adversely affect our revenue. Moreover, because our sales have been concentrated in a few selected markets, including China, Taiwan and Korea, our financial results will be impacted by general economic and political conditions in these markets.

Our arrangement with one of our OEMs

On August 6, 2008, we entered into an agreement with Apple. Pursuant to the terms of the agreement with this OEM, we develop, supply and support our custom voice and audio processors for use in certain mobile devices which this OEM purchases from Foxconn and Protek (Shanghai) Limited and its affiliates (collectively, “Protek”); however, we cannot assure you that Foxconn and Protek will continue to purchase our processors in similar volumes, or at all. To date, Foxconn and Protek have purchased a custom version of our voice processor that Foxconn and Protek have incorporated into the 2010 model of the mobile phones for this OEM and this OEM licensed our processor IP for the 2011 model of its mobile phones. Pursuant to our agreement, this OEM pays us a royalty, on a quarterly basis, for the use of our processor IP in mobile phones in which it is integrated. In September 2012, we concluded and announced our belief that it was unlikely that our processor IP would be enabled in this OEM’s 2012 model of its mobile phone. Based on this OEM’s subsequent royalty reports to us, our processor IP has been included but not enabled in this OEM’s 2012 and 2013 models of its mobile phones. As a result, our royalty revenue declined substantially starting in the last quarter of 2012 and we expect it to continue to decline. In addition, we believe that it is unlikely that this OEM would enable our processor IP or license new processor IP for future mobile phones or other devices. The OEM is not obligated to license additional processor IP from us or utilize the processor IP it has already licensed.

With respect to an older model of mobile phone for which we sell our processors to this OEM, the OEM or its CMs may also elect to stockpile inventory of these processors in anticipation of the time that this model may reach the end of its product lifecycle. As a result, we expect sales of our processors to CMs for this OEM for older generation mobile phones will decline as newer models take market share from older models.

Our royalty revenue from the 2011 model of this mobile phone has declined as consumers focus on this OEM’s 2012 and 2013 model mobile phones and we anticipate that it will continue to decline as consumers anticipate the launch of this OEM’s future model mobile phones. Although we are unable to determine when this OEM will stop production of the 2011 model of its mobile phones, we expect that over time, the OEM will sell fewer of the 2011 models of its mobile phones and at some point we will cease to receive royalty revenue from this model.

Our royalty revenue lags the sales from this model of mobile phones that integrate our processor IP by one quarter. We have limited rights to audit the shipment data we receive, which limits our ability to verify calculated royalty revenue or seek redress for reports we believe are not accurate, and we have limited experience in testing and evaluating the accuracy of such data from this OEM.

Components of our results of operations

Revenue

To date, we have generated hardware revenue from sales of our voice and audio processors and we expect the sale of our processors to continue to represent the substantial majority of our revenue. We sell processors through three separate channels. First, for certain OEMs, we ship our voice and audio processors directly and recognize revenue at the time of delivery and title transfer. The transfer of risk and reward of ownership to the customers is typically complete at the time of shipments as per our shipping terms. Second, we ship a portion of our products to the inventory hubs of CMs and recognize the related revenue as the CMs notify us in writing that they have drawn our products from the hub, at which point delivery and transfer of title and risk of ownership has occurred. Our sales to Foxconn are an example of this type of arrangement. Third, we ship a small portion of our products to our distributors under our shipping terms. These distributors tend to buy from us at the request of specific OEMs, and we recognize revenue on sales to distributors when the distributor notifies us in writing of the final resale of our products.

We anticipate that in the future as significant OEMs prepare worldwide launches of their products, we may see substantial increases in revenue shortly before the launch. We also anticipate that for some period before the OEM begins building new inventory for the new mobile device or following the launch, we may see reductions in revenue related to our products incorporated in prior generations of devices, as the OEMs reduce their inventories of those products.

 

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Under a license agreement we entered into in 2008, we began to recognize royalty revenue in the three months ended March 31, 2012. As part of our 2008 license, we are entitled to receive a royalty for each 2011 model of mobile device that is sold incorporating and, for the 2012 model of this mobile device, incorporating and enabling our processor IP. We entered into an additional license agreement in 2010 relating to a new generation of our processor IP.

We recognize royalty revenue on the basis of the number of mobile phones sold that incorporate our processor IP. We are reliant on the accuracy of shipment reports, which we receive no later than 45 days after the OEM’s fiscal quarter end, in order to calculate our royalty revenue. Our royalty revenue recognition lags the sales of mobile phones that integrate our processor IP by one quarter. We have limited rights to audit the shipment data we receive, which limits our ability to verify calculated royalty revenue or seek redress for reports we believe are not accurate and we have no experience in testing and evaluating the accuracy of the data we will receive. Our royalty revenue declined substantially in the fourth quarter of 2012 and thereafter, and we expect it to continue to decline. In addition, we believe that it is unlikely that this OEM will enable our processor IP or license new processor IP for future mobile phones or other devices.

We maintain sales operations, which include our direct sales force, third-party sales representatives and distributors, in Asia, North America, Japan and Europe. Substantially all of our revenue has been generated by sales to CMs and OEMs that manufacture their products in Asia and we expect sales to such CMs and OEMs in Asia to contribute a majority of our revenue in the foreseeable future. Because our OEMs market and sell their products worldwide, our revenue by geographic location is not necessarily indicative of where mobile device sales occur, but rather of where their manufacturing operations occur. Since our inception, our sales in Asia have represented substantially all of our hardware revenue.

Cost of revenue and gross margin

The largest components of our cost of revenue are costs of materials and outsourced manufacturing costs for the silicon wafer fabrication, assembly, packaging and test of our voice and audio processors. To a lesser extent, cost of revenue also includes expenses relating to cost of personnel, stock-based compensation, logistics and quality assurance, royalty expense, shipping, provisions for excess and obsolete inventories, if any, and an allocation of overhead. We intend to continue to manage our cost of revenue through both cost improvements and economies of scale.

We expect our gross margins to fluctuate over time depending on the mix of newer, higher margin products and older products, whose margins have declined over time, as well as the mix between sales of processors and royalties from the license of processor IP. In general, new products with higher performance and more features tend to be priced higher and have higher gross margins. Consistent with trends in the semiconductor industry, we have reduced the price of certain of our products over time and may continue to do so in the future. As a normal course of business, we seek to offset the effect of declining average selling prices by reducing manufacturing costs of existing products and introducing new and higher value-added products. The license of our processor IP does not require the manufacture, assembly, packaging, test or shipment of integrated circuits, resulting in higher gross margins than for the sale of stand-alone processors.

Operating expenses

We classify our operating expenses as either research and development or selling, general and administrative. Personnel-related costs, including salaries, benefits, bonuses and stock-based compensation, are the most significant component of each of our operating expense categories. In the near term, we expect to hire additional employees and in any particular period, the timing of additional hires could materially affect our operating expenses.

Research and development. Our research and development expenses consist primarily of personnel-related costs for the design and development of our products and technologies. Additional research and development expenses include nonrecurring engineering expenses, product prototypes, external test and characterization expenses, depreciation, amortization of design tool software licenses and allocated overhead expenses. We also outsource portions of our research and development activities. We record all research and development expenses as incurred, except for capital equipment, which we depreciate over its estimated useful life. We have engineering development teams in the United States and India and outsourced engineering teams in the United States and India. In 2012, we opened our own design center outside of the United States and reduced the extent to which we rely on outsourced research and development teams. We expect research and development expenses to increase in absolute dollars for the foreseeable future as we continue to improve our product features and increase our portfolio of solutions. Historically, from time to time, one of our OEMs retained us to provide nonrecurring engineering services, which enhanced our proprietary technology. This OEM reimbursed us at contractually predetermined rates for the costs we incur to provide these services. We applied these cost reimbursements against research and development expense when acceptance occurred, which was generally upon cash receipt.

 

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Selling, general and administrative. Selling, general and administrative expenses consist primarily of personnel-related costs for our sales, business development, marketing, applications engineering, executive, finance and human resources activities. Additionally, selling, general and administrative expenses include promotional and other marketing expenses, third-party sales representative commissions, travel, professional fees, depreciation and allocated overhead expenses. Professional fees principally consist of legal, audit, tax and accounting consultation services. We expect selling, general and administrative expenses to increase in absolute dollars for the foreseeable future as we hire additional personnel, make improvements to our infrastructure and incur significant additional costs for the compliance requirements of operating as a public company, including the costs associated with public reporting, Sarbanes-Oxley Act requirements and insurance.

Other expense, net

Although a majority of our sales are outside of the United States, we incur a substantial majority of our expenses and receive all of our revenue in U.S. dollars. As a result, our foreign currency related expense and income has not been material to date.

Income tax expense

Effective January 1, 2012, our new international structure became operational. Our effective tax rate in the periods presented on or after January 1, 2012 is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The rate at which the provision for income taxes is calculated also differs from the U.S. federal statutory income tax rate primarily due to the partial valuation allowance release on U.S. federal deferred tax assets, the utilization of U.S. research and development (“R&D”) credits subject to the tentative minimum tax limitation and different tax rates in foreign jurisdictions where income is earned and considered to be indefinitely reinvested.

Our effective tax rate may be affected by such factors as the additional release or re-establishment of a valuation allowance against our remaining U.S. deferred tax assets, changes in tax laws, regulations or rates, changes in interpretation of existing laws or regulations, the impact of accounting for stock-based compensation, changes in our international organization and shifts in the amount of income before tax earned in the United States as compared with other regions in the world.

Critical accounting policies and estimates

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2012.

JOBS Act

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies. Additionally, we are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act.

Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions, including without limitation, providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 and complying with any requirement that may be adopted regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). These exemptions will apply for a period of five years following the completion of our IPO although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31.

 

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Results of operations

Comparison of the three months ended September 30, 2013 and 2012

The following sets forth our operating results for the three months ended September 30, 2013 and 2012. The period to period comparison of our financial results is not necessarily indicative of the financial results we may achieve in future periods.

Revenue

 

     Three months ended September 30,     Change  
     2013     2012     Amount     Percent  
     (in thousands, except percentages)  

Revenue:

        

Hardware

   $ 32,445     $ 32,252     $ 193       1

% of total revenue

     94 %     79 %    

Licensing

     2,007       8,499       (6,492 )     (76 %) 

% of total revenue

     6 %     21 %    
  

 

 

   

 

 

   

 

 

   

Total revenue

   $ 34,452     $ 40,751     $ (6,299 )     (15 %) 
  

 

 

   

 

 

   

 

 

   

Hardware revenue for the three months ended September 30, 2013 was $32.4 million, compared to $32.3 million for the three months ended September 30, 2012, an increase of $0.2 million, or 1%.

Licensing revenue for the three months ended September 30, 2013 was $2.0 million, compared to $8.5 million for the three months ended September 30, 2012, a decrease of $6.5 million or 76%. The decrease in licensing revenue for the three months ended September 30, 2013 was the result of declining demand for Apple’s 2011 model mobile phones after the introduction of its 2012 and 2013 models, in which our processor IP is not enabled.

For the three months ended September 30, 2013, Samsung and Apple revenue accounted for 62% and 20% of total revenue, respectively. For the three months ended September 30, 2012, revenue from Samsung, Apple and Foxconn accounted for 55%, 21% and 14% of total revenue, respectively. No other OEM, CM or distributor accounted for more than 10% of our total revenue in either period. Aggregate sales to distributors accounted for less than 10% of our total revenue for the three months ended September 30, 2013 and 2012.

Revenue by geography

 

     Three months ended September 30,      Change  
     2013      2012      Amount     Percent  
     (in thousands, except percentages)  

Korea

   $ 21,630      $ 23,162      $ (1,532 )     (7 %) 

China

     10,673        8,540        2,133       25

Other

     142        158        (16 )     (10 %) 

United States

     2,007        8,891        (6,884 )     (77 %) 
  

 

 

    

 

 

    

 

 

   

Total

   $ 34,452      $ 40,751      $ (6,299 )     (15 %) 
  

 

 

    

 

 

    

 

 

   

Substantially all of our hardware revenue was generated from the sale of our products to CMs and OEMs with their primary manufacturing operations and distributors located in Asia. Revenue generated in Asia represented 94% and 78% of our total revenue for the three months ended September 30, 2013 and 2012, respectively. Revenue generated in China increased $2.1 million for the three months ended September 30, 2013 compared to the same period in 2012 and was primarily due to the continued market expansion in that region.

Revenue generated in the United States primarily comprised of our licensing revenue which represented 6% and 21% of our total revenue for the three months ended September 30, 2013 and 2012, respectively. Revenue generated in the United States decreased $6.9 million for the three months ended September 30, 2013 compared to the same period in 2012 and was primarily due to the result of declining sales of Apple’s prior mobile phone models after the introduction of its 2012 and 2013 models, in which our processor IP is not enabled.

 

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Cost of revenue and gross profit

 

     Three months ended September 30,     Change  
     2013     2012     Amount     Percent  
     (in thousands, except percentages)  

Cost of revenue

   $ 15,179     $ 18,355     $ (3,176 )     (17 %) 

% of total revenue

     44 %     45 %    

Gross profit

     19,273       22,396       (3,123 )     (14 %) 

% of total revenue

     56 %     55 %    

Cost of revenue for the three months ended September 30, 2013 was $15.2 million, compared to $18.4 million for the three months ended September 30, 2012, a decrease of $3.2 million, or 17%. The decrease was primarily due to decreased sales volume of our processors and lower excess and obsolete inventory charges of $1.5 million. Gross margin percentage was 56% and 55% for the three months ended September 30, 2013 and 2012, respectively. The increase in gross margin percentage was due to the increased sales of higher margin products and lower excess and obsolescence charges of $1.5 million, offset by lower royalty revenue.

Operating expenses

 

     Three months ended September 30,     Change  
     2013     2012     Amount      Percent  
     (in thousands, except percentages)  

Research and development

   $ 11,499     $ 9,501     $ 1,998        21

% of total revenue

     33 %     23 %     

Selling, general and administrative

     9,929       9,102       827        9

% of total revenue

     29 %     22 %     
  

 

 

   

 

 

   

 

 

    

Total operating expenses

   $ 21,428     $ 18,603     $ 2,825        15
  

 

 

   

 

 

   

 

 

    

Research and development. Research and development expenses for the three months ended September 30, 2013 were $11.5 million, compared to $9.5 million for the three months ended September 30, 2012, an increase of $2.0 million, or 21%. The increase was primarily due to additional headcount resulting in a $1.5 million increase in salaries, employee-related benefits, stock-based compensation expense and travel costs. Facility and information technology costs increased $0.2 million primarily to support the overall increased headcount. Depreciation costs increased $0.2 million due to the increase of fixed assets. Licensing costs increased $0.2 million in order to support research and development initiatives. These increases were partly offset by the decrease in mask sets and related cost of pre-production products of $0.4 million.

Selling, general and administrative. Selling, general and administrative expenses for the three months ended September 30, 2013 were $9.9 million, compared to $9.1 million for the three months ended September 30, 2012, an increase of $0.8 million, or 9%. The increase was primarily due to additional headcount resulting in a $0.7 million increase in salaries, employee-related benefits, stock-based compensation expense and travel costs. Depreciation costs increased $0.2 million due to the increase of fixed assets. These increases were partly offset by a decrease of $0.1 million in legal and consulting services.

 

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Comparison of the nine months ended September 30, 2013 and 2012

The following sets forth our operating results for the nine months ended September 30, 2013 and 2012. The period to period comparison of our financial results is not necessarily indicative of the financial results we may achieve in future periods.

Revenue

 

     Nine months ended September 30,     Change  
     2013     2012     Amount     Percent  
     (in thousands, except percentages)  

Revenue:

        

Hardware

   $ 118,901     $ 72,805     $ 46,096       63

% of total revenue

     94 %     69 %    

Licensing

     8,089       32,411       (24,322 )     (75 %) 

% of total revenue

     6 %     31 %    
  

 

 

   

 

 

   

 

 

   

Total revenue

   $ 126,990     $ 105,216     $ 21,774       21
  

 

 

   

 

 

   

 

 

   

Hardware revenue for the nine months ended September 30, 2013 was $118.9 million, compared to $72.8 million for the nine months ended September 30, 2012, an increase of $46 million, or 63%. The increase was due primarily to $32.8 million increase in sales of our voice and audio processors to Samsung and the remaining increase was due to increase in sales to other customers.

Licensing revenue for the nine months ended September 30, 2013 was $8.1 million, compared to $32.4 million for the nine months ended September 30, 2012, a decrease of $24.3 million, or 75%. The decrease in licensing revenue for the nine months ended September 30, 2013 was the result of declining demand for Apple’s 2011 model mobile phones after the introduction of Apple’s 2012 and 2013 models, in which our processor IP is not enabled.

For the nine months ended September 30, 2013, Samsung and Apple revenue accounted for 64% and 23% of total revenue, respectively. For the nine months ended September 30, 2012, revenue from Samsung, Apple and Foxconn accounted for 45%, 31% and 15% of total revenue, respectively. No other OEM, CM or distributor accounted for more than 10% of our total revenue in either period. Aggregate sales to distributors accounted for less than 10% of our total revenue for the nine months ended September 30, 2013 and 2012.

Revenue by geography

 

     Nine months ended September 30,      Change  
     2013      2012      Amount     Percent  
     (in thousands, except percentages)  

Korea

   $ 81,511       $ 49,311      $ 32,200       65

China

     36,484         22,697        13,787       61

Other

     293         347        (54 )     (16 %) 

United States

     8,702         32,861        (24,159 )     (74 %) 
  

 

 

    

 

 

    

 

 

   

Total

   $ 126,990       $ 105,216      $ 21,774       21
  

 

 

    

 

 

    

 

 

   

Revenue generated in Asia represented 93% and 69% of our total revenue for the nine months ended September 30, 2013 and 2012, respectively. Revenue generated in Korea increased $32.2 million for the nine months ended September 30, 2013 compared to the same period in 2012 and was primarily due to the increase in sales of our voice and audio processors to Samsung.

Revenue generated in the United States primarily comprised of our licensing revenue which represented 6% and 31% of our total revenue for the nine months ended September 30, 2013 and 2012, respectively. Revenue generated in the United States decreased $24.2 million for the nine months ended September 30, 2013 compared to the same period in 2012 and was primarily due to the result of declining sales of Apple’s prior mobile phone models after the introduction of its 2012 and 2013 models, in which our processor IP is not enabled.

 

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Cost of revenue and gross profit

 

     Nine months ended September 30,     Change  
     2013     2012     Amount      Percent  
     (in thousands, except percentages)  

Cost of revenue

   $ 55,461     $ 44,392     $ 11,069        25

% of total revenue

     44 %     42 %     

Gross profit

     71,529       60,824       10,705        18

% of total revenue

     56 %     58 %     

Cost of revenue for the nine months ended September 30, 2013 was $55.5 million, compared to $44.4 million for the nine months ended September 30, 2012, an increase of $11.1 million, or 25%. The increase was primarily due to increased sales volume of our processors which was partly offset by the lower excess and obsolete inventory charges of $2.6 million. Gross margin was 56% and 58% for the nine months ended September 30, 2013 and 2012, respectively. The decrease in gross margin percentage was due to lower royalty revenue, offset by lower excess and obsolescence charges of $2.6 million and increased sales of higher margin products.

Operating expenses

 

     Nine months ended September 30,     Change  
     2013     2012     Amount      Percent  
     (in thousands, except percentages)  

Research and development

   $ 31,298     $ 23,047     $ 8,251        36

% of total revenue

     25 %     22 %     

Selling, general and administrative

     31,067       24,773       6,294        25

% of total revenue

     24 %     24 %     
  

 

 

   

 

 

   

 

 

    

Total operating expenses

   $ 62,365     $ 47,820     $ 14,545        30
  

 

 

   

 

 

   

 

 

    

Research and development. Research and development expenses for the nine months ended September 30, 2013 were $31.3 million, compared to $23.0 million for the nine months ended September 30, 2012, an increase of $8.3 million, or 36%. The increase was primarily due to additional headcount resulting in a $5.6 million increase in salaries, employee-related benefits, stock-based compensation expense and travel costs. Facility and information technology costs increased $1.1 million primarily due to India design center facility lease that started in July 2012 and also to support overall increase in headcount. Depreciation costs increased $0.6 million due to increase of fixed assets. Licensing costs increased $0.9 million in order to support research and development initiatives. Additionally, our research and development expense reimbursement decreased $1.3 million for cash received for the performance of nonrecurring engineering work. These increases were offset by a $0.7 million decrease in professional and consulting services primarily due to shifting of the cost from R&D consulting to additional headcount as a result of the launch of our India design center, and decrease in mask sets and related costs of pre-production products of $0.6 million.

Selling, general and administrative. Selling, general and administrative expenses for the nine months ended September 30, 2013 were $31.1 million, compared to $24.8 million for the nine months ended September 30, 2012, an increase of $6.3 million, or 25%. The increase was primarily due to additional headcount resulting in a $3.9 million increase in salaries, employee-related benefits, stock-based compensation expense and travel costs. Facility and information technology costs increased $0.4 million primarily to support the increased headcount and infrastructure. Depreciation costs increased $0.5 million due to increase of fixed assets and licensing costs increased $0.2 million. In addition, legal and consulting services increased $0.8 million primarily due to the compliance costs associated with being a public company and other matters.

Other expense, net

 

     Nine months ended September 30,     Change  
     2013     2012     Amount      Percent  
     (in thousands, except percentages)  

Other expense, net

   $ (209 )   $ (504 )   $ 295        59

Other expense, net for the nine months ended September 30, 2013 was an expense of $209,000 compared to an expense of $504,000 for the nine months ended September 30, 2012, a decrease of $295,000 or 59%. The expense decrease was primarily due to the $290,000 mark-to-market adjustments in the fair value of our convertible stock warrants in 2012 which were exercised or became warrants to purchase common stock upon the closing of our initial public offering (“IPO”) on May 15, 2012.

 

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Income tax expense

Income tax expense for the nine months ended September 30, 2013 was $4.1 million, compared to $0.4 million for the nine months ended September 30, 2012. The increase was primarily related to income taxes in the United States as a result of the limitation on the Company’s use of its R&D credits to offset its U.S. taxable income.

Liquidity and capital resources

Since our inception, we have incurred significant losses, and as of September 30, 2013, we had an accumulated deficit of $21.6 million. We have funded our operations primarily with proceeds from the sale of an aggregate of $74.3 million of convertible preferred stock, which converted to our common stock on May 15, 2012 in connection with our IPO, and positive cash flow from our operations.

On May 15, 2012, we closed our IPO with total gross proceeds from the offering of $98.4 million and after deducting underwriting discounts and commissions, the aggregate net proceeds received by us were approximately $91.5 million. As of September 30, 2013, we had cash and cash equivalents of $110.2 million, marketable securities of $21.9 million, no debt and future lease payment obligations of $44.1 million.

As of September 30, 2013, we had access to a $10.0 million revolving line of credit, with available funds based on eligible accounts receivable and customer purchase orders. Our master loan agreement for our revolving line of credit contains covenants with which we were in compliance and we had no amount outstanding as of September 30, 2013. Before the expiration of the line of credit in September 2013, the maturity date of the line of credit was extended to March 31, 2014.

Despite our anticipated net losses, we believe that our existing sources of liquidity will satisfy our working capital and capital requirements for at least the next 12 months. We cannot assure you that we will be successful in executing our business plan, maintaining and growing our existing customer base or achieving profitability. Failure to generate sufficient revenue or control costs may require us to raise additional capital through equity or debt financing. Such additional financing may not be available on terms acceptable to us, or at all, and could require us to modify, delay or abandon some of our planned future expansion or expenditures or reduce some of our ongoing operating costs. If we are unable to obtain additional financing, it could have a material adverse effect on our business, financial condition, operating results and cash flows and ability to achieve our intended business objectives. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.

Our cash flows for the nine months ended September 30, 2013 and 2012 were as follows:

 

     Nine months ended
September 30,
 
     2013     2012  
     (in thousands)  

Net cash provided by operating activities

   $ 5,508      $ 18,880   

Net cash used in investing activities

     (9,289     (25,794

Net cash provided by financing activities

     4,355        88,635   

Effect of exchange rate on cash and cash equivalents

     —          31   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     574        81,752   

Cash and cash equivalents:

    

Beginning of period

     109,606        15,983   
  

 

 

   

 

 

 

End of period

   $ 110,180      $ 97,735   
  

 

 

   

 

 

 

Cash flows from operating activities. Net cash provided by operating activities of $5.5 million for the nine months ended September 30, 2013 was primarily attributable to net income of $5.0 million adjusted for non-cash items such as stock-based compensation of $4.2 million, depreciation and amortization expense of $2.2 million and excess tax benefits from stock options of ($0.8) million. Account receivable decreased by $3.8 million primarily due to the timing of cash receipts, and accrued and other liabilities increased by $3.1 million primarily due to an increase in compensation accrual, tax accrual and tenant improvement overage accrual. The net cash provided by operating activities was partially offset by an increase in inventory of $4.6 million to satisfy anticipated demand of our next generation voice and audio processors and a decrease in account payable of $7.5 million due to the timing of vendor payments related to inventory and operating expenses.

For the nine months ended September 30, 2012, net cash provided by operating activities was $18.9 million. The increase in net cash provided by operating activities was attributable to net income of $12.2 million primarily due to the receipt of royalty revenue from a single OEM without any use of cash to purchase inventory to support the revenue. Non-cash items such as stock-based compensation

 

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of $2.2 million, depreciation and amortization expense of $1.1 million, and write-down of inventory to net realizable value of $3.0 million also contributed to the cash provided by operating activities. Inventory decrease of $5.8 million due to the sell-through of built up inventory and accrued and other liabilities increase of $2.9 million, which was primarily due to the new employee stock purchase plan and increase accrual due to compensation accrual as a result of increased headcount have also contributed to the net cash provided by operating activities. The cash provided by operating activities were partially offset by an increase in account receivable of $4.8 million due to the timing of the cash receipts, increase in other assets of $1.8 million and decrease in account payable of $1.7 million due to the timing of vendor payments.

Cash flows from investing activities. Net cash used in investing activities of $9.3 million for the nine months ended September 30, 2013 consisted primarily of the purchase of marketable securities of $21.9 million and the purchases and prepayments of property and equipment of $5.4 million primarily due to the implementation of our enterprise resources planning (“ERP”) system, additional system infrastructure to support the ERP system, and prepayment deposits related to furniture and fixtures to our new headquarters. These purchases were offset by the proceeds from the sale and maturities of marketable securities of $18.0 million.

Net cash used in investing activities was $25.8 million for the nine months ended September 30, 2012, due primarily to purchases of marketable securities of $22.1 million and purchases of property and equipment of $3.7 million to support the growth in our business.

Cash flows from financing activities. Net cash provided by financing activities of $4.4 million for the nine months ended September 30, 2013 was primarily due to proceeds from the exercise of employee stock options and employee stock purchase plan of $3.7 million and excess tax benefits from stock options of $0.8 million. The excess tax benefits reflected as a financing cash inflow represents excess tax benefits realized relating to share-based payments to our employees and directors, in accordance with Accounting Standards Codification 718 – Stock Compensation. A corresponding cash outflow is included in cash flows from operating activities.

Net cash provided by financing activities of $88.6 million for the nine months ended September 30, 2012 was primarily due to the proceeds received from our IPO, net of underwriting discounts and commissions of $91.5 million, the proceeds received from the exercise of our preferred stock warrants of $0.4 million, and the proceeds received from the exercise of our stock options of $0.5 million. The net cash provided by financing activities was partially offset by the payment of our offering costs of $3.7 million associated with our IPO.

Off-balance sheet arrangements

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

Contractual obligations and commitments

We maintain certain open inventory purchase commitments with our suppliers to ensure a smooth and continuous supply for key components. We may cancel these purchase commitments at any time, however we are required to pay all costs incurred through the cancellation date. We rarely cancel these agreements once production has started. We had $22.0 million of open purchase commitments for inventory and $9.9 million of open purchase commitments for non-inventory items at September 30, 2013. The open purchase commitments are primarily due within the next 12 months.

On June 5, 2012, we entered into a lease agreement for our headquarters, which consists of 87,565 square feet in Mountain View, California. The construction was completed and the lease commenced in the fourth quarter of 2013. The lease term is for ten years with an option to extend for an additional five years. We agreed to pay construction cost in excess of a certain amount, and we have certain indemnification obligations related to the construction. As a result of our involvement during the construction period, we are considered to be the owner of the construction project during the construction period in accordance with accounting for the effect of lessee involvement in asset construction. As of September 30, 2013, we capitalized $19.4 million of assets as construction in progress, of which $2.2 million was incurred by us and $17.2 million incurred by the landlord. Of the $2.2 million incurred by us, $0.6 million was paid for construction costs, $0.5 million was paid by the landlord as a security deposit upon the execution of the lease and $1.1 million was accrued for tenant improvement overage allowance to the landlord. As a result, the corresponding liability of $17.2 million was reflected as a financing obligation for construction in progress on the condensed consolidated balance sheets. The liability of $17.2 million recorded on our condensed consolidated balance sheets will offset our future minimum lease payments. We will assess whether the lease will be treated as a capital or operating lease under sale-leaseback accounting in the fourth quarter of 2013.

 

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Recent accounting pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued its guidance requiring new disclosures for the reclassification from accumulated other comprehensive income (“AOCI”) to net income. This new guidance requires that we present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. This guidance only impacts disclosures within our consolidated financial statements and notes to the consolidated financial statements and does not result in a change to the accounting treatment of AOCI. This new guidance became effective for our interim period ended March 31, 2013. We adopted this guidance and the adoption did not have a material impact on our financial position, results of operations or cash flows.

In July 2013, the FASB issued final guidance on the presentation of certain unrecognized tax benefits in the financial statements. Under the new guidance, a liability related to an unrecognized tax benefit would be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In that case, the liability associated with the unrecognized tax benefit is presented in the financial statements as a reduction to the related deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2014 because we are an emerging growth company under the Jobs Act and have elected to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Early adoption is permitted. We did not elect for an early adoption of this new guidance. We are currently evaluating the impact this guidance may have on our financial position, results of operations, or cash flows.

ITEM 3. Quantitative and qualitative disclosures about market risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include foreign exchange rate and interest rate sensitivities as follows:

Foreign currency risk

We sell our products to CMs and OEMs with their primary manufacturing operations and distributors in Asia. All sales of our processors and the license of our processor IP are denominated in U.S. dollars. We incur a small portion of our expenses in currencies other than the U.S. dollar. The expenses we incur in currencies other than U.S. dollars affect gross profit, research and development, selling, general and administrative expenses and income taxes.

As of September 30, 2013, the functional currency of our non-U.S. entities was the U.S. dollar. Transaction gains and losses resulting from transactions denominated in currencies other than the respective functional currencies are included in “Other income, net” for the periods presented. The amounts of transaction gains and losses were not material in any of the periods presented.

Given that the operating expenses that we incur in currencies other than U.S. dollars have not been a significant percentage of our revenue, we do not believe that our foreign currency exchange rate fluctuation risk is significant. Consequently, we do not believe that a hypothetical 10% change in foreign currency exchange rates would have a significant effect on our future net income or cash flows as of September 30, 2013.

We have not hedged exposures denominated in foreign currencies or used any other derivative financial instruments. Although we transact the overwhelming majority of our business in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the competitiveness of our products and thus may impact our results of operations and cash flows.

Interest rate sensitivity

We had cash and cash equivalents of $110.2 million as of September 30, 2013. Our cash and cash equivalents are held primarily in cash deposits and money market funds. We hold our cash and cash equivalents for working capital purposes. We also had an investment portfolio of $21.9 million as of September 30, 2013, consisting of a variety of financial instruments that exposes us to interest rate risk, including, but not limited to, money market funds and U.S. government bonds and notes. These investments are classified as available-for-sales and, consequently, are recorded on our balance sheet at fair market value with their related unrealized gain or loss reflected as component of accumulated other comprehensive income in stockholders’ equity. Due to the short-term nature of our investment portfolio, we do not believe that an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio. Since we believe we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio.

ITEM 4. Controls and procedures

Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to

 

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allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2013, our Chief Executive Officer and Chief Financial Officer concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal control over financial reporting

On May 1, 2013, the Company completed the installation and integration of a new ERP system which upgraded our information system capabilities, and improved our business processes and financial reporting system. In addition to these objectives, the new system is expected to result in enhanced internal controls. We determined that there were no other changes in our internal control over financial reporting during the nine months ended September 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the effectiveness of controls

Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any have been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION

ITEM 1. Legal proceedings

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We have received, and may in the future continue to receive, claims from third parties asserting infringement of their intellectual property rights. Future litigation may be necessary to defend ourselves and our customers by determining the scope, enforceability and validity of third party proprietary rights or to establish our proprietary rights. We have also received a complaint which purports to be brought on behalf of a class of purchasers of our common stock issued in or traceable to our IPO which contains claims under Sections 11, 12(a)(2) and 15 of the Securities Act. There can be no assurance with respect to the outcome of any current or future litigation brought against us or pursuant to which we have indemnification obligations and the outcome could have a material adverse impact on our business, operating results and financial condition.

On September 13, 2012, a purported shareholder filed a class action complaint in the Superior Court of the State of California for Santa Clara County against us, the members of our board of directors, two of our executive officers and the underwriters of our IPO. An amended complaint was filed on February 25, 2013, which purports to be brought on behalf of a class of purchasers of our common stock issued in or traceable to the IPO. On April 3, 2013, the outside members of the board of directors and the underwriters were dismissed without prejudice. The amended complaint added additional shareholder plaintiffs and contains claims under Sections 11 and 15 of the Securities Act. The complaint seeks, among other things, compensatory damages, rescission and attorney’s fees and costs. On March 1, 2013, defendants responded to the amended complaint by filing a demurrer moving to dismiss the amended complaint on the ground that the court lacks subject matter jurisdiction. The court overruled that demurrer. On March 27, 2013, defendants filed a demurrer moving to dismiss the amended complaint on other grounds. The Court denied the demurrer on September 4, 2013. We believe that the allegations in the complaint are without merit and intend to vigorously contest the action. However, there can be no assurance that we will be successful in our defense and we cannot currently estimate a range of any possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the effects of this complaint on our financial condition, results of operations or cash flows.

 

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ITEM 1A.  Risk Factors

We operate in a rapidly changing environment that involves numerous uncertainties and risks. The following risks and uncertainties may have a material and adverse effect on our business, financial condition or results of operations. You should consider these risks and uncertainties carefully, together with all of the other information included or incorporated by reference in this Quarterly Report on Form 10-Q. If any of the risks or uncertainties we face were to occur, the trading price of our securities could decline and you may lose all or part of your investment.

Risks related to our business and industry

We depend on Samsung for the majority of our revenue and the loss of, or a significant reduction in orders from, Samsung could adversely affect our revenue and significantly harm our business, financial condition, operating results and cash flows.

For the nine months ended September 30, 2013 and 2012, Samsung accounted for 64% and 45% of our total revenue, respectively. Samsung may purchase fewer of our voice and audio processors than they did in the past, alter their purchasing patterns, modify the terms on which they purchase our products, or decide not to purchase our products at all. We generally operate under purchase orders from Samsung and do not have a master supply agreement with this OEM. We renegotiate prices with Samsung periodically and our revenue and gross margins may fluctuate as a result. Samsung is not obligated to continue to purchase processors from us and may seek second sources. If we fail to achieve design wins for global platforms at Samsung, our future revenue and profitability may be harmed.

In the past, we were substantially dependent on Apple and its CMs for our revenue. Our relationship with this OEM is undergoing a significant transition, which may have a material and negative effect on our business, financial condition, operating results and cash flows.

We sell our products to Apple and also license our processor IP to this OEM. For the three and nine months ended September 30, 2013, Apple accounted for 20% and 23% of our total revenue, respectively. We entered into an agreement with Apple in 2008, which governs our relationship and under which we sell custom processors to Foxconn and Protek and license our processor IP to this OEM for mobile phones. Based on this OEM’s royalty reports to us, our processor IP has been included but not enabled in this OEM’s 2012 and 2013 models of its mobile phones. As a result, our royalty revenue declined substantially commencing in the three months ended December 31, 2012, and we expect it to continue to decline thereafter. In addition, we believe that it is unlikely that this OEM would enable our processor IP or license new processor IP for future mobile phones or other devices. This OEM is not obligated to license additional processor IP from us or utilize the processor IP it has already licensed. In the event that we do not receive royalties from new generations of this OEM’s mobile devices and the demand for the mobile devices in which our processor IP is currently enabled declines, our revenue and profits will suffer. Although we may replace the revenue with processor sales to other OEMs, our gross margins may decline as we incur expenses for manufacturing those processors that we do not incur with processor IP.

With respect to an older model of mobile phone for which we sell our processors to this OEM’s CMs, this OEM may also elect to stockpile inventory of these processors in anticipation of the time that this model may reach the end of its product lifecycle. We expect sales of our processors to CMs for this OEM for older generation mobile phones will decline as newer models take market share from older models. If we fail to anticipate the end of life of this model of mobile phone, we may also overestimate the level of inventory needed to satisfy demand for this processor and may incur charges for excess and obsolete inventory. If sales to other OEMs do not increase sufficiently to offset the decline, our total revenue may also decline.

Our royalty revenue from the 2011 model of this mobile phone has declined as consumers focus on this OEM’s 2012 and 2013 model mobile phone and we anticipate that it will continue to decline as consumers anticipate the launch of this OEM’s future model mobile phones. Although we are unable to determine when the OEM will stop production of the 2011 model of its mobile phones, we expect that over time, the OEM will sell fewer units of the 2011 model and at some point we will cease to receive royalty revenue for this model. In the event that our royalty revenue declines or we cease to receive royalty revenue from the mobile devices in which our processor IP is currently enabled, our revenue and profits will suffer and our gross margins may decline.

Our royalty revenue from this OEM lags the sales of its mobile phones that integrate and enable our processor IP by one quarter. We have limited rights to audit the shipment data we receive, which limits our ability to verify calculated royalty revenue or seek redress for reports we believe are not accurate, and we have limited experience in testing and evaluating the accuracy of such data from this OEM.

We depend on a small number of OEMs for a substantial portion of our revenue and the loss of, or a significant reduction in orders from, one or more of our OEMs could adversely affect our revenue and significantly harm our business, financial condition, operating results and cash flows.

We have historically derived a substantial majority of our revenue from sales to a small number of OEMs, primarily Samsung and Apple. We may be unable to secure future design wins from these OEMs as they develop and introduce new products and, even if we do, existing OEM product sales may decline and new mobile devices introduced by our current OEMs may not achieve widespread market acceptance or be produced in large number. We cannot assure you that we will be able to sustain our revenue from our existing OEMs.

 

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If one or more of our existing OEMs were to decide not to use our processors or processor IP, that decision could harm our brand and impair our ability to maintain or extend our relationships with our other OEMs or establish new OEM relationships. For example, Apple’s decision not to enable our processor IP in its 2012 and 2013 mobile phones may adversely impact other OEMs’ willingness to award design wins to us.

Our OEMs typically buy our processors on a purchase order basis and do not enter into long-term contracts or minimum purchase commitments that would obligate them to continue to buy additional processors from us in the future. For example, we announced in August 2013 that weakness in demand for high end smart phones was anticipated to cause a decline in the volume of processors purchased from us by our largest OEM.

Although we seek to grow our OEM base through new design wins, our sales and development cycle to obtain initial design wins from new OEMs is long and is subject to uncertainties, and we cannot assure you that we will be successful in doing so. Even if we are successful in obtaining design wins with new OEMs, our existing OEM customers may continue to account for a substantial portion of our sales in the future. If we are unable to generate repeat business from our existing OEMs, generate revenue from new OEMs or expand into broader markets, our operating results would be adversely affected. In addition, if concentration in the mobile phone industry or the smartphone market segment increases, we may be unable to diversify our revenue base, which could significantly harm our business, financial condition, operating results and cash flows.

Decreased purchases by large OEM customers, whether for current or future mobile device models in which our products were included or otherwise, changes in their purchasing patterns, modification of terms or a disruption or termination of our relationships with these OEMs could adversely affect our revenue and significantly harm our business, financial condition, operating results and cash flows. This type of loss could also cause significant fluctuations in our results of operations because we have significant fixed expenses in the short term and our sales and development cycle to obtain new design wins and new OEMs is long.

Although we are reliant on a small number of OEMs for our revenue in any period, the identity of those OEMs may change depending on the timing of their mobile device releases, seasonal user purchasing patterns and launch dates set by MNOs. We expect our operating results for the foreseeable future to depend on sales to a small number of OEMs and on the ability of these OEMs to sell mobile devices that incorporate our processors. Our revenue may fluctuate from quarter to quarter as our sales are dependent upon the timing of OEMs’ design cycles and product introductions. Substantially all of our sales to date have been made on a purchase order basis, which permits our OEMs to cancel, change or delay product purchase commitments with little or no notice to us and may make our revenue volatile from period to period. Our OEMs are generally not obligated to purchase from us and may purchase voice and audio solutions from our competitors.

We typically work with OEMs to obtain design wins prior to the OEM entering into an agreement with an MNO to produce a given mobile device. However, even if the design win is awarded, the OEM or MNO may cancel a given mobile device launch. Although it would be time consuming for an OEM to design our products out of mobile devices currently in production, an OEM may seek to do so or to establish a second source. Even if our products offer superior sound quality, OEMs may elect to divide their purchases among two or more companies that supply voice and audio solutions to avoid becoming reliant on a single supplier and due to the perception that having multiple suppliers will enable the OEM to secure more favorable pricing. OEMs may decline to design in our products if one or more of the features of our products do not perform as well as those offered by other suppliers, despite our other features’ superior performance. We do not have agreements with our OEMs requiring them to incorporate our processors in future mobile devices. Our OEMs are not obligated to complete the development or begin commercial shipment of any devices that incorporate our processors.

We derive a significant portion of our revenue from the high end smart phone market, and reductions in the growth rate of this market segment could adversely affect our revenue and significantly harm our business, financial condition, operating results and cash flows.

Much of our revenue comes from sales to OEMs incorporating our products in high end smart phones. Even if our products continue to be incorporated in these and similar high end smart phone models, shipment volumes of our products may decrease because of reduced demand for high end smart phones due to either user or MNO preference for less expensive smart phone models, or due to saturation of demand among users. If demand for high end mobile devices were to decline or fail to continue to grow in a manner consistent with expectations, our business, financial condition, operating results and cash flows would be significantly harmed.

 

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We may not be successful in our efforts to diversify end user devices that incorporate our products and may not realize substantial revenue from sales of our products for devices other than high end smart phones.

We have made efforts to diversify the end user devices that incorporate our products. As a result of recent design wins, our processors have been included in recently launched personal computers and tablets. However, we have limited experience selling in these new markets in which competition for design slots is intense, and may not achieve market acceptance or design wins in end user devices that are produced in substantial numbers. If we are unable to realize more revenue from the sale of our products for devices other than high end smart phones, we may not be able to maintain or increase our revenue.

We have a history of losses, and we may not be able to sustain profitability in the future.

Since our formation, we incurred a net loss in every year prior to 2010. Although we had net income in the nine months ended September 30, 2013, the years 2012, 2011 and 2010 of $5.0 million, $15.6 million, $8.3 million and $4.8 million, respectively, we incurred net losses of $16.8 million in 2009 and $14.5 million in 2008. As of September 30, 2013, our accumulated deficit was $21.6 million. We anticipate continuing to spend significantly to develop new processors and expand our business, including expenditures for additional personnel in sales and marketing and research and development. As a public company, we will also continue to incur significant legal, accounting and other expenses as a result of regulatory requirements. We may encounter unforeseen difficulties, complications and delays and other unknown factors that require additional expenditures. Due to these increased expenditures, we will have to generate and sustain higher revenue in order to maintain and sustain profitability. Our rate of revenue growth may not be sustainable and we may not generate revenue in excess of our anticipated additional expenditures to maintain profitability. For example, we announced in October 2013 that we expected to incur a net loss in the three months ending December 31, 2013.

Our expense levels are based in part on our expectations as to future sales and a significant percentage of our expenses are fixed in the short term. If sales are below expectations, our operating expenses would be disproportionately high relative to revenue, which would adversely impact our profitability. Although we have been profitable each year since 2010, we may not be able to sustain profitability in the future. Failure to sustain profitability may require us to raise additional capital, which may not be available on terms acceptable to us, or at all.

Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control, and you should not rely on our quarterly comparisons as an indicator of future performance.

Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. Our sales cycles are long and unpredictable and our sales efforts require substantial time and expense. Our revenue is difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly. We ship a significant portion of our processors in the same quarter in which they are ordered such that small delays in receipt of purchase orders and shipment of products could result in our failure to achieve our internal forecasts or stock market expectations. In any quarter, our revenue may be largely attributable to the timing of our OEMs’ orders. Our OEMs often increase purchases of our processors as part of product launches and the timing of those product launches may cause the timing of our orders with our OEMs to fluctuate. Our revenue depends on the ability of OEMs to sell mobile devices that incorporate our processors. In addition, we expect our gross margins to fluctuate over time depending on the mix of more recently introduced, higher margin products and older products that are subject to declining margins, as well as the mix between sales of processors and license of our processor IP. For these reasons, comparisons of our operating results on a period to period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or the securities analysts that follow us, the price of our common stock may decline.

Other factors that are difficult to predict and that may affect our operating results include:

 

    the timing and magnitude of shipments of our processors and the sale of mobile devices that have integrated and enabled our processor IP in each quarter;

 

    the extent to which and the timing of when our OEMs launch new mobile devices incorporating our voice and audio processors;

 

    deferral of purchases of existing mobile devices in anticipation of new devices from our OEMs;

 

    the introduction of new mobile device operating systems or upgrades and their impact on sales of existing mobile devices;

 

    the timing of product introductions or upgrades or announcements by us or our competitors;

 

    the gain or loss of one or more design wins with one or more significant OEMs;

 

    fluctuations in demand and prices for our voice and audio processors;

 

    increases in the cost to manufacture, assemble and test our processors;

 

    OEMs overbuilding inventories of mobile devices and reducing purchases of our processors as they sell their excess inventory;

 

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    efforts to reduce the cost and/or the bill of materials of OEMs’ mobile devices and the impact on our pricing;

 

    our ability to anticipate changing demands and develop new technologies, products and improvements that meet OEM and MNO requirements on a timely basis;

 

    production delays as a result of manufacturing capacity or quality issues;

 

    unanticipated sales return reserves or charges for excess or obsolete inventory;

 

    changes in industry standards in the mobile device industry;

 

    any change in the competitive landscape of our industry, including consolidation or the emergence of new competitors;

 

    general economic conditions in the markets in which we operate; and

 

    other factors outside of our control.

For these reasons, comparisons of our operating results on a period to period basis may not be meaningful. You should not rely on our past results as an indication of our future performance.

The market for mobile device components is highly competitive and includes larger companies with significantly greater resources than we have. If we are unable to compete effectively, we may experience decreased sales or increased pricing pressure, which would adversely impact our business, financial condition, operating results and cash flows.

The market for mobile device components is highly competitive and we expect competition to intensify in the future. There are a number of components in the voice and audio subsystem of a mobile device including baseband processors, audio codecs and voice and audio processors. We provide voice and audio processors, and have begun providing audio codecs to compete in the mobile device component market. In the future, we may elect to expand our offerings to include other subsystem components and we would need to compete against companies offering those subsystem components. Companies that currently compete for sales of other mobile device components may enter the voice and audio processor market with stand-alone components or software solutions with other functionalities and compete with us.

We currently face competition from a number of established companies that produce components or software for the mobile device audio subsystem, including companies that produce dedicated voice and audio solutions, such as Maxim, ON Semiconductor, NXP, Qualcomm, Texas Instruments, Wolfson, DSP Group and Yamaha. We also face competition from smaller, privately held companies and could face competition from new market entrants, whether from new ventures or from established companies moving into the areas of voice and audio subsystems that our products address.

We also compete against solutions internally developed by OEMs, as well as combined third-party software and hardware systems. OEMs may seek to reduce the number of processors in their mobile devices and incorporate the functionality of our voice and audio processors into the central processing units of their mobile devices. OEMs may also internally develop or rely on third-party suppliers to provide central processing units that combine multiple functionalities, including those provided by our processors, which could reduce the demand for our processors and adversely impact our business, financial condition, operating results and cash flows.

Many of our well established current and potential competitors have longer operating histories, greater brand awareness, a more diversified OEM base, a longer history of selling voice and audio subsystem components to OEMs and significantly greater financial, technical, sales, marketing and other resources than we have. As a result of their established presence in the industry, some of our competitors have substantial control and influence over future trends in the industry, including acceptance of a particular industry standard or competing technology. Many of our competitors benefit from long-standing relationships selling voice and audio subsystem components to key decision makers at many of our current and prospective OEMs. Our competitors may be able to leverage these existing OEM relationships to persuade our current and potential OEMs to purchase our competitors’ products, regardless of the performance or features of our processors. Our competitors may also be able to devote greater resources to the development, promotion and sale of products, which could allow them to introduce new technologies and products to the market faster than we can. In addition, the lack of widely accepted objective measures and testing standards for sound quality may make it difficult for OEMs and MNOs to assess the benefits of our solutions or differentiate our solutions from those of our competitors. Because many of our competitors have greater resources than we have and are able to offer a more diversified and comprehensive bundle of products and services, these competitors may be able to adopt more aggressive pricing policies than we can, through which they could deliver competitive products or technologies at a lower price than our processors. Due to the larger production and sales volumes enjoyed by our larger competitors across multiple product families, our competitors may be able to negotiate price reductions, production dates and other concessions from their suppliers that we cannot. If our competitors are able to undercut our prices and/or improve their product performance, we may be unable to remain competitive in the industry and lose sales or be forced to reduce our selling prices. This could result in reduced gross margins, increased sales and marketing expenses or our failure to increase or maintain market segment share, any of which could seriously harm our business, financial condition, operating results and cash flows.

 

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Our ability to compete effectively depends on a number of factors, including:

 

    our ability to attract, retain and support OEMs and to establish and maintain relationships with MNOs;

 

    our ability to recruit and retain engineering, sales and marketing personnel;

 

    our processors’ scalability, performance, quality, ease of use and cost effectiveness relative to those of our competitors’ products;

 

    our success in developing and creating demand for new and proprietary technologies to offer products and features previously not available in the marketplace;

 

    our ability to continue to improve and enhance the features and functions of our current products;

 

    our success in identifying new markets, applications and technologies;

 

    our products’ interoperability with various data access protocols and other voice and audio subsystem components of mobile devices;

 

    our ability to continue to establish greater name recognition and build upon our reputation in the industry;

 

    our ability to respond effectively to aggressive business tactics by our competitors, including providing software solutions, selling at lower prices, or asserting intellectual property rights, irrespective of the validity of the claims; and

 

    our ability to protect our intellectual property.

If the market for mobile devices with improved sound quality and the demand for our products do not continue to grow as we expect, our business, financial condition, operating results and cash flows could be materially and adversely affected.

Our processors are designed to address the sound quality challenges faced by users with their mobile devices. OEMs and MNOs may decide that the costs of improving sound quality outweigh the benefits, which could limit demand for our solutions. Users may also be satisfied with existing sound quality or blame poor quality on their MNOs’ networks. The market for our products is evolving rapidly and is technologically challenging, and our future financial performance will depend in large part on growth of this market and our ability to adapt to user, OEM and MNO demands. Our current products are primarily focused on improving the sound quality of mobile devices. Consequently, we are vulnerable to fluctuations in or the absence of demand for products that improve sound quality. A number of factors could adversely affect the growth in the market or the demand for our products, including the following:

 

    introduction of new mobile devices with different components or software that provide the same function as our products;

 

    internally developed solutions that reduce the demand for our products;

 

    improved wireless network technology that performs similar functions to those currently performed by our solutions;

 

    lack of user acceptance of sound quality improvements that we may develop or our inability to timely develop product enhancements that satisfy user requirements;

 

    OEM budgetary constraints or reduced bill of materials spending on sound quality solutions; and

 

    OEM design constraints for sound quality solutions and tradeoffs they face in the design process.

If the average selling prices of our products decrease, our revenue and gross margins could decline.

Consistent with trends in the semiconductor industry, we have reduced the price of our products in the past and may do so in the future. Because of the resources available to and the broader product portfolios of many of our large, established competitors, erosion in average selling prices throughout our industry could have a larger impact on our business than on these large competitors. We may also elect to sell lower priced products to address the requirements of mobile devices with lower price points, which could cause our average selling prices, revenue and gross margins to decline. Our average selling prices and gross margins may vary substantially from period to period as a result of the mix of products we sell during any given period and the relative proportion of royalty revenue. As a result, our revenue and gross margin results in any period may fall short of investors’ and securities analysts’ expectations and our stock price may decline.

If the capability of noise suppression hardware and/or software solutions offered by our competitors continues to increase, the average selling prices of our noise suppression products may decline. We may not be able to introduce additional, desired functionality into our products in a timely enough manner to prevent the price erosion of our products. If the average selling prices for our existing products decline without offsetting cost reductions and we are unable to introduce and develop significant demand for higher margin processors, we may be unable to maintain our gross margins and our revenue may decline.

 

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If we are unsuccessful in developing, selling or licensing new products that achieve market acceptance, our ability to attract and retain OEMs could be impaired, our competitive position could be harmed and our revenue could be reduced.

We compete in a market characterized by rapid technological change, frequent new product introductions, changing OEM needs, evolving MNO requirements and increasing user demands. We expect technical requirements of voice and audio solutions in mobile devices to evolve rapidly. Improvements in existing technologies and applications may reduce or eliminate the need for our products or our competitors may improve their product performance. The role played by our products may also be filled by products combining voice and audio processing and other aspects of the voice and audio subsystem. Improvements in other emerging technologies, such as reduction of background noise through MNO network components, could have a similar effect. Our future growth depends on our ability to anticipate future market needs and to successfully design, develop, market and sell new products that provide increasingly higher levels of user experience, performance, functionality and reliability that meet the cost expectations of our OEMs. We may also need to expand our product portfolio to perform some of the other functions of the voice and audio subsystems in mobile devices to achieve widespread market acceptance. In the event that noise suppression as a stand-alone feature is offered by competitors as a software solution or in combination with other hardware, our noise reduction products may be less attractive to OEMs. Developing our products is expensive and the development investment may involve a long payback cycle. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain and extend our competitive position.

Our new products must address technological changes and evolving industry standards and may not achieve market acceptance. In the event that new products require features that we have not developed or licensed, we will be required to develop or obtain such technology through purchase, license or other arrangements. If the required technology is not available on commercially reasonable terms, or at all, we may incur additional expenses in an effort to internally develop the required technology.

We cannot assure you if or when the products and solutions on which we have focused our research and development expenditures will become commercially successful or generate a sufficient return. Despite our efforts to develop new and successful voice and audio processor solutions, our competitors, many of whom have greater financial and engineering resources than we do, may be able to introduce new processors or develop new technologies more quickly than we can. If our investments in research and development do not achieve market acceptance or the desired returns in a timely manner, our ability to attract and retain OEMs could be impaired, our competitive position could be harmed and our revenue could be reduced. In addition, we may not have sufficient resources to maintain the level of investment in research and development required to remain competitive or succeed in our strategy.

Our sales cycles can be long and unpredictable. Our sales efforts often require substantial time and expenses and are often more than a year in advance of the first commercial sale of the mobile devices including our products.

Our sales efforts involve educating our current and prospective OEMs and MNOs about the use and benefits of our processors as compared to sound quality solutions they currently use or other solutions that are available. OEMs often undertake a significant design, evaluation and test process that can result in a lengthy sales cycle that ranges from nine to 12 months, but has, in some cases, exceeded 12 months from initial contact to the award of a design win. We spend substantial time and resources on our sales efforts without any assurance that they will result in a design win or that the mobile device will be produced at scale. The award of design wins by our current and prospective OEMs are frequently subject to bill of material constraints, multiple approvals and a variety of administrative, processing and other delays. Purchases of our processors may also occur in connection with a new product launch, which may be delayed or postponed indefinitely. Once we secure a design win, it may be 12 to 24 months before the OEM begins commercial production of a corresponding mobile device and we begin to generate revenue. The effect of these factors tends to be magnified in the case of substantial mobile device redesigns that are unrelated to our products.

The selection processes for mobile device designs are lengthy and can require us both to incur significant design and development expenditures and dedicate significant engineering resources in pursuit of a single OEM opportunity. We may not win the competitive selection process and may never generate any revenue despite incurring significant design and development expenditures. These risks are exacerbated by the fact that some of our OEMs’ products likely will have short life cycles. Failure to obtain a design win could prevent us from supplying an entire generation of a product. This could cause us to lose revenue and require us to write off obsolete inventory and could weaken our position in future competitive selection processes. Our lengthy and uncertain sales cycles make it difficult for us to predict when OEMs may purchase and accept products from us or sell mobile phones that have integrated and enabled our licensed processor IP, may prevent us from recognizing revenue in a particular quarter and ultimately may not produce any sales. As a result, our operating results may vary significantly from quarter to quarter.

If we are unable to adequately control our cost of revenue, our gross margins could decrease, we may not sustain or maintain profitability and our business, financial condition, operating results and cash flows could suffer.

The largest component of our cost of revenue is production costs of our processors. We have made, and expect to continue to make, significant efforts to reduce the cost of our processors, including but not limited to wafer costs. Our processors are fabricated by Taiwan Semiconductor Manufacturing Company Ltd. (“TSMC”) and GLOBALFOUNDRIES Inc. (“GlobalFoundries”), for both which we are not a large customer. We rely on third parties, such as Signetics Corporation for assembly, packaging and test. The low

 

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volume of our orders relative to other customers at these suppliers makes it difficult for us to control the cost of the fabrication of our processors. As compared to our larger competitors, we typically do not purchase a sufficiently high volume of wafers and services to obtain the discounts that our larger competitors may be able to obtain from their foundries and other suppliers. We do not have long-term supply contracts with our suppliers. If we are unable to reduce, or maintain controls over, our cost of manufacturing relative to our selling prices, our business, financial condition, operating results and cash flows could be materially and adversely impacted.

We may experience difficulties demonstrating the value to OEMs and MNOs of newer, higher priced and higher margin products if they believe our existing products are adequate to meet user expectations regarding sound quality, which would cause our revenue to decline and negatively affect our business, financial condition, operating results and cash flows.

As we develop and introduce new solutions, we face the risk that OEMs may not understand or be willing to bear the cost of incorporating these newer solutions into their mobile devices. MNOs may also be unwilling to require OEMs to include newer sound quality solutions if they believe users are satisfied with current solutions. Transitioning OEMs and MNOs to newer generations of solutions involves a substantial amount of time educating them on the benefits provided by the newer solutions, particularly since there are currently no common objective measures or testing standards for sound quality. Regardless of the improved features or superior performance of the newer solutions, OEMs may be unwilling to adopt our new solutions as a result of design or bill of material constraints associated with their new mobile device introductions. We must also successfully manage product transition in order to minimize disruption in our OEMs’ ordering and purchasing patterns, provide timely availability of sufficient supplies of new products to meet OEM demand and avoid reductions in the demand for our existing processors. If we fail to manage the transition successfully, we may have to write down or write off excess inventory of the older generation of processors. Due to the extensive time and resources that we invest in developing new solutions, if we are unable to sell OEMs new generations of our solutions, our revenue could decline and our business, financial condition, operating results and cash flows could be negatively impacted.

We are dependent on sales of mobile devices that incorporate our voice and audio processors and our processor IP, and a decline in the demand for these mobile devices could harm our business.

Since inception, our revenue has been generated from the sale of processors for mobile devices. Continued market adoption of mobile device sound quality solutions is critical to our future success. Our success is also dependent on our OEMs’ ability to successfully commercialize their mobile devices in which our solutions are incorporated. The markets for our OEMs’ mobile devices are intensely competitive and are characterized by rapid technological change. These changes result in frequent product introductions, short product life cycles and increased device convergence and capabilities. Mobile devices incorporating our solutions may not achieve market success or may become obsolete. We cannot assure you that our OEMs will dedicate the resources necessary to promote and commercialize mobile devices incorporating our solutions, successfully execute their business strategies for these mobile devices, be able to manufacture quantities sufficient to meet demand or cost effectively manufacture mobile devices at high volume. Any of these factors, as well as more general mobile device industry issues, could result in a decline in sales of mobile devices that incorporate our products. If demand for our products or our OEMs’ mobile devices were to decline, fail to continue to grow at all or in a manner consistent with expectations, our revenue would decline and our business would be harmed.

If our voice and audio processors fail to integrate or interoperate with our OEMs’ product designs, including various system control and audio interface protocols, we may be unable to maintain or increase market segment share and we may experience reduced demand for our processors.

Our products must integrate and interoperate with our OEMs’ existing and future mobile devices, including components such as baseband processors, audio codecs, microphones and software applications, each of which may have different specifications. When new or updated versions of these components, interface protocols or software applications are introduced, or if we find defects in other vendors’ or our OEMs’ software or hardware or an incompatibility or deficiency in our products, we may need to develop updated versions of our products so that they interoperate properly. We may not complete these development efforts quickly, cost effectively or at all. These development efforts may require substantial capital investment and the devotion of substantial resources. In addition, our OEMs may rely on third-party vendors to provide chipset kits for our OEMs’ use in designing their mobile devices. These chipset kits may not include our products and may include components, interface protocols or software applications that do not interoperate properly with our products. If we fail to achieve and maintain compatibility with components, interface protocols or software applications, our products may not be able to fulfill our OEMs’ requirements, or we may experience longer design win and development cycles or our solutions may be designed out of mobile devices. As a result, demand for our products may decline and we may fail to increase or maintain market segment share.

We are subject to business uncertainties that make it difficult to forecast demand and production levels accurately and to have our products manufactured on a timely basis, which could interfere with our ability to deliver our processors and generate sales.

Sales of our processors are generally based on purchase orders with our OEMs rather than long-term purchase commitments. As a result, it is difficult to accurately forecast OEM demand for future periods. Our primary foundry, TSMC, produces silicon wafers for other fabless semiconductor companies in volumes that are far greater than ours. We do not have supply or timing commitments from TSMC or GlobalFoundries and our production orders are typically filled on a delayed basis as production capacity becomes available

 

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between larger orders. In order to secure foundry space for the production of our processors on a timely basis and to ensure that we have sufficient inventory to meet our OEMs’ demands, we place orders with TSMC and GlobalFoundries well in advance of receipt of OEM orders. If we inaccurately forecast demand for our processors, we may have excess or inadequate inventory or incur cancellation charges or penalties. Excess inventory levels could result in unexpected charges to operations that could adversely impact our business, financial condition, operating results and cash flows. Conversely, inadequate inventory levels could cause us to forego revenue opportunities, potentially lose market segment share and harm our OEM relationships. As we continue to introduce new products, we may need to achieve volume production rapidly. We may need to increase our wafer purchases, foundry capacity and assembly, packaging and test operations if we experience increased demand. The inability of TSMC or GlobalFoundries, as the case may be, to provide us with adequate supplies of our processors on a timely basis, or an inability to obtain adequate quantities of wafers or packages, could cause a delay in our order fulfillment and could interfere with our ability to generate revenue.

We rely on a limited number of manufacturing, assembly, packaging and test, as well as logistics, contractors, in some cases single sources, and any disruption or termination of these arrangements could delay shipments of our voice and audio processors and reduce our revenue.

We rely on a limited number of contractors for several key functions in producing our processors, including the processors themselves, which are primarily manufactured by TSMC and to a lesser extent by GlobalFoundries. We also rely on third parties, such as Signetics and STATSChipPAC, for assembly, packaging, testing and warehousing, and other contractors for logistics. This reliance on a limited number of contractors involves several risks, including:

 

    capacity constraints;

 

    price increases;

 

    delivery delays; and

 

    yield and other quality issues.

If any of these contractors were to cancel or materially change their commitments to us or fail to meet the quality or delivery requirements needed to allow us to timely manufacture, assemble, package, test and deliver our processors, we could lose time-sensitive OEM orders or be forced to pay damages for the cost of replacement components, be unable to develop or sell certain processors cost effectively or on a timely basis, if at all, and experience significantly reduced revenue. In the event that it became necessary to find other contractors, transition to a new vendor could take significant time due to the technology development process and other qualification criteria for a different contractor. For example, developing a second source foundry for one of our products could require us to redesign the product to meet the specialized requirements of that foundry. Inadequate supplies of critical components, such as wafers or packages, may also impair our ability to fulfill orders in a given quarter and/or result in a decrease in our revenue.

We currently rely primarily on TSMC to manufacture our processors and to a lesser extent, GlobalFoundries. Our reliance on TSMC and GlobalFoundries reduces our control over the fabrication process, exposing us to risks, including reduced control over quality assurance, production costs and product supply. If we fail to manage our relationship with TSMC and GlobalFoundries effectively, or if TSMC or GlobalFoundries experiences delays, disruptions, capacity constraints or yield problems in its operations, our ability to ship products to our OEMs could be impaired and our competitive position and reputation could be harmed. We do not have a supply agreement with TSMC or GlobalFoundries and neither of them is under any obligation to continue to supply us at all or at the capacity we need. We are a relatively small customer of each of TSMC and GlobalFoundries and, in times of capacity constraint, we may not receive the capacity allocation we need. If TSMC or GlobalFoundries, as the case may be, is unwilling or unable to meet our production requirements, we would be required to engage a new foundry. Qualifying a new foundry and commencing volume production would be expensive and time consuming. While we have engaged GlobalFoundries to produce some of our products, the transfer of additional products that we currently produce at TSMC to GlobalFoundries or vice versa may require significant redesign of such processors. Any redesign may take nine months or more to complete and may involve further delays if such redesigned products do not meet our or our OEMs’ performance specifications. If we are required to change foundries or move between production lines of a particular foundry or other supplier for any reason, this could disrupt the supply of our processors and increase our costs.

Disruption or termination of supplies from TSMC or GlobalFoundries and problems with yield of good die from the wafers we purchase from them could delay shipments of our products and materially and adversely affect our operating results. Production delays and quality defects are often outside of our control and are difficult to predict. Any delay of shipments or the existence of defects in our products could damage our relationships with current and prospective OEMs, increase our costs due to the time and money spent remedying the defects and reduce our revenue.

If flaws in the design, production or test of our processors were to occur, we could experience a failure rate in our products that could result in substantial yield reductions, increased manufacturing costs and harm to our reputation. Even minor deviations in the manufacturing process can cause substantial manufacturing yield losses or cause halts in production. We have in the past, and may in

 

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the future, experience quality problems with the die provided by our foundries. Our foundries may not be able to detect these defects early in the fabrication process or determine the cause of such defects in a timely manner, which may affect the quality or reliability of our products. Although we have procedures in place to monitor the quality of our foundries’ processes, we cannot assure you that our efforts will be sufficient to avoid a rate of failure in our processors that results in substantial delays in shipment or significant repair or replacement costs, any of which could result in lost sales, harm to our reputation and an increase in our operating costs.

Any errors or defects discovered in our products after commercial release could result in a loss of OEM business, a termination of design wins or increased warranty costs, any of which may adversely affect our business, financial condition, operating results and cash flows. We may also face claims for product liability and breach of warranty, including claims relating to the manner in which our products interact with other components of mobile devices produced by our OEMs. We may also be required to indemnify our OEMs for losses allegedly caused by our voice and audio solutions that are incorporated into their mobile devices. Any warranty or other rights we may have against our suppliers for yield or other quality issues caused by them may be more limited than those our OEMs have against us, based on our relative size, bargaining power or otherwise. We cannot assure you that our warranty reserves will be sufficient or either increase or decrease in future periods. Defending a lawsuit, regardless of its merit, could be costly and might divert management’s attention and adversely affect the market’s perception of us and our solutions. In addition, if the amount and scope of our business liability insurance coverage proves inadequate for a claim, or future coverage is unavailable on acceptable terms or at all, our business, financial condition, operating results and cash flows could be harmed.

Our voice and audio processors may fail to meet OEM or MNO specifications or may contain undetected software or hardware defects that might result in liability to us or our OEMs or MNOs, harm to our reputation, a loss of OEMs and a reduction in our revenue.

Our processors are highly technical and complex. In many cases, our processors are assembled in customized packages or feature high levels of integration. Our products may fail to meet exacting OEM specifications for sound quality, performance and reliability or may contain undetected errors, defects or security vulnerabilities that could result in degradation in voice and audio data quality. Some errors in our processors may only be discovered after they have been incorporated into our OEMs’ mobile devices. Resolving these errors and defects may require a significant amount of time and resources. If our voice and audio processors fail to meet OEM or MNO specifications or contain undetected software or hardware defects, we and our OEMs or MNOs may incur liability, our reputation and relationships with our OEMs and MNOs may be harmed and our revenue and results of operations may be adversely affected.

If we are unable to maintain or expand our relationships with MNOs or establish new MNO relationships, we may not be able to affect MNO demand for mobile devices that meet high sound quality specifications, which may limit our growth and adversely affect our business, financial condition, operating results and cash flows.

We have invested and continue to invest significant resources in working with MNOs to educate them about the impact of sound quality on the user experience in order to increase awareness of and demand for our processors. We also intend to collaborate with

MNOs in new geographic markets in order to extend our geographic reach. MNOs may not value the improvements in sound quality that our products can provide. The specifications that MNOs impose on their OEMs may not be sufficiently high to differentiate our processors compared to the solutions of our competitors. MNOs may grant waivers to their sound quality specifications if individual mobile devices do not meet the specifications but provide other benefits to users. We do not have and do not expect to have any influence on whether a MNO waives compliance with its specifications. In addition, mobile device specifications and the level of control of MNOs over the mobile devices operating on their networks vary by OEM and geography. MNOs in geographic markets outside of the United States may impose sound quality specifications on their OEMs which are not as high as specifications by leading MNOs in the United States, which could reduce demand for the improvements in sound quality that our processors can provide and harm our ability to differentiate our processors from the solutions of our competitors in these markets. As a result, we may be unable to extend or maintain our geographic reach, which could limit our growth and harm our business. We do not have any long-term contracts with the MNOs we work with and these MNOs have no obligation to require the use of our products by their OEMs or to impose or enforce a certain level of sound quality specifications. If we are unable to maintain or expand our relationships with MNOs, we may not realize the potential benefits that we believe these relationships can provide. We cannot assure you that MNOs will continue to work with us to assess and evaluate their voice and audio requirements. If we are unable to maintain or expand our existing relationships with MNOs or enter into new MNO relationships, demand for our products may decline and our business, financial condition, operating results and cash flows may be adversely affected.

Our future effective income tax rates could be affected by changes in the relative mix of our operations and income among different geographic regions and by proposed and enacted U.S. federal income tax legislation, which could affect our future operating results, financial condition and cash flows.

We have sought to structure our worldwide operations to take advantage of certain international tax planning opportunities and incentives. Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure

 

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or if the relative mix of our U.S. and international income changes for any reason, or if U.S. or international tax laws were to change in the future. In particular, a majority of our revenue is generated from customers located outside the U.S. Foreign withholding taxes and U.S. income taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries, because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. In the past, the administration has considered initiatives which could substantially reduce our ability to defer U.S. taxes including: limitations on deferral of U.S. taxation of foreign earnings eliminate utilization or substantially reduce our ability to claim foreign tax credits, and eliminate various tax deductions until foreign earnings are repatriated to the U.S. If any of these proposals are constituted into law, they could have a negative impact on our financial position and results of operations. We cannot assure you that our effective tax rate will not increase in the future.

We may not be able to sustain or manage any future growth effectively. If we fail to manage our growth effectively, we may be unable to execute our business plan, sell our voice and audio solutions successfully and adequately address competitive challenges. As a result, our business, financial condition, operating results and cash flows may suffer.

In recent periods, we have significantly expanded the size and scope of our business. Our future growth prospects depend in large part on our ability to secure design wins and orders from a broader OEM base, our ability to establish and expand our relationships with key suppliers to expand our product manufacturing, assembly, packaging, test and delivery capacity and our ability to manage our growing business effectively. We have also expanded our international operations and as of September 30, 2013 had offices outside of the United States in China, India, Singapore, South Korea and Taiwan. Continued growth in our business will place significant demands on our managerial, administrative, operational, financial and other resources. Successful management of any future growth will require substantial management attention with respect to, among other things:

 

    maintaining and expanding our relationships with OEMs and MNOs and educating and supporting their product design and quality personnel;

 

    anticipating and meeting the technology needs of users;

 

    continuing to expand and improve our intellectual property portfolio and making technological advances;

 

    expanding our relationships with our foundries and assembly, packaging, test and logistics providers and entering into new relationships with additional foundries, assembly, packaging, test and logistics providers to ensure that we can produce, test and deliver sufficient processors to meet market demand;

 

    recruiting, hiring, integrating and retaining highly skilled and motivated individuals, including research and development and sales personnel;

 

    expanding and broadening our product development capabilities, including managing our own design center outside the United States;

 

    accurately forecasting revenue and controlling costs;

 

    enhancing and expanding our infrastructure;

 

    managing inventory levels;

 

    expanding our international operations and managing increasingly dispersed geographic locations and facilities; and

 

    implementing and improving our company-wide processes and procedures to address human resource, financial reporting and financial management matters, including the implementation of an enterprise resources planning system.

If we are unable to execute our growth strategy effectively or to manage any future growth we may experience, we may not be able to take advantage of market opportunities, execute our business plan, sell our voice and audio solutions successfully, remain competitive, maintain OEM relationships or attract new OEMs. Our failure to effectively sustain or manage any future growth we do experience could result in a reduction in our revenue and materially and adversely affect our business, financial condition, operating results and cash flows.

If we are unable to attract and retain highly qualified personnel, our business, financial condition, operating results and cash flows would be harmed.

Our future success depends on our continued ability to attract and retain highly qualified technical, sales, support and management personnel. In particular, our ability to improve and maintain our technology requires talented software and hardware development engineers with specialized skills in areas such as computational auditory scene analysis algorithms, acoustic engineering, digital and analog integrated circuit design and mobile systems design and integration. If we are unable to recruit and retain these engineers, the quality and speed with which our solutions are developed would likely be seriously compromised and our reputation and business would suffer as a result. Our sales positions require candidates with specific sales and engineering backgrounds in the integrated circuit or mobile device manufacturing industries and we may be unable to locate and hire individuals with these credentials as quickly as needed, if at all. Once new sales personnel are hired, we need a reasonable amount of time to train them before they are able to effectively and efficiently perform their responsibilities. Failure to hire and retain qualified sales personnel could adversely

 

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impact our sales. Competition for these and the other personnel we require, particularly in the Silicon Valley area, is intense and we compete for these personnel with large, established publicly traded companies. We may fail to attract or retain highly qualified technical, sales, support and management personnel necessary for our business. If we are unable to attract and retain the necessary key personnel, our business, financial condition, operating results and cash flows could be harmed.

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

In the future, we may acquire other businesses, products or technologies. We have not made any acquisitions to date and do not have any agreements or commitments for any specific acquisition at this time. Our ability to make and successfully integrate acquisitions is unproven. If we complete acquisitions, we may not strengthen our competitive position or achieve our goals in a timely manner, or at all, and these acquisitions may be viewed negatively by OEMs, financial markets or investors. In addition, any acquisitions we make could lead to difficulties in integrating personnel, technologies and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. Acquisitions may disrupt our ongoing operations, divert management from their primary responsibilities, subject us to additional liabilities, increase our expenses and adversely impact our business, financial condition, operating results and cash flows. Acquisitions may also reduce our cash available for operations and other uses and could result in an increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt, any of which could harm our business.

The political and economic conditions of the countries in which we conduct business and other factors related to our international operations could adversely affect our business, financial condition, operating results and cash flows.

We have generated substantially all of our revenue from sales to CMs and OEMs that manufacture in Asia and we expect sales to such CMs and OEMs to contribute a majority of our revenue in the foreseeable future. We have sales and technical support personnel in countries other than the United States and we outsource all manufacturing, assembly, packaging and test of our processors to third parties in Asia, as well as a portion of product development to a third party in India. We opened our own research and development operation outside of the United States during 2012, and we may establish administrative offices offshore and continue to add sales personnel in additional countries. Our international operations subject us to a variety of risks, including:

 

    difficulties in managing and staffing international offices and increased travel, infrastructure and legal compliance costs associated with multiple international locations;

 

    the challenge of managing a development team in geographically disparate locations;

 

    differing employment practices and labor relations issues;

 

    difficulties in enforcing contracts, judgments and arbitration awards and collecting accounts receivable and longer payment cycles;

 

    impediments to the flow of foreign exchange capital payments and receipts due to exchange controls instituted by certain foreign governments;

 

    tariffs and trade barriers and other regulatory or contractual limitations on our ability to sell or develop our processors in various foreign markets, threats to U.S. national security or violation of U.S. laws;

 

    difficulties in obtaining governmental and export approvals for communications, processors and other products;

 

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

 

    increased exposure to foreign currency exchange rate risk;

 

    burdens of complying with a wide variety of complex foreign laws and treaties and unanticipated changes in local laws and regulations, including tax laws;

 

    potentially adverse tax consequences;

 

    reduced protection for intellectual property rights in some countries; and

 

    political and economic instability.

As we expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these risks. Our failure to manage any of these risks successfully could adversely affect our business, financial condition, operating results and cash flows.

If we need additional capital in the future, it may not be available to us on favorable terms, or at all.

We cannot assure you that we will be successful in executing our business plan, maintaining and growing our existing OEM base or achieving and sustaining profitability. Failure to generate sufficient revenue, achieve planned gross margins or control

 

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operating costs may require us to raise additional capital through equity or debt financing. Such additional financing may not be available on acceptable terms, or at all and could require us to modify, delay or abandon some of our planned future expansion or expenditures or reduce some of our ongoing operating costs, which could have a material adverse effect on our business, financial condition, operating results and cash flows and ability to achieve our intended business objectives. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. Additionally our existing credit facilities preclude us from entering into additional credit agreements, other than in limited circumstances.

We are exposed to fluctuations in currency exchange rates that could negatively impact our business, financial condition, operating results and cash flows.

Because a portion of our business is conducted outside of the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and they could have a material adverse impact on our financial results and cash flows. Historically, we have paid our suppliers and sold our products in U.S. dollars. We have also historically paid our outsourced research and development services provider in U.S. dollars. As we start performing those research and development activities ourselves and have more significant non-U.S. payroll and operating expenses, we may begin to incur material expenses in currencies other than the U.S. dollar. Increases in the value of these currencies relative to the U.S. dollar could increase our operating expenses. In addition, an increase in the value of the U.S. dollar could increase the real cost of our products to our OEMs that produce and sell their mobile devices outside of the United States. This may increase pressure on and result in erosion of our average sales prices without any offset in our production costs if we continue to pay those expenses in U.S. dollars, which could compress our margins. Average selling price erosion, compressed margins and increased operating expenses could have a negative effect on our business, financial condition, operating results and cash flows.

The implementation of our new ERP system could disrupt our business and adversely affect our financial results.

In the fourth quarter of 2012, we began the implementation of our solution for a new ERP system. We started utilizing the new system in the second quarter of 2013. We may experience difficulties in implementing the ERP, and we may fail to obtain the risk mitigation benefits that the implementation is designed to produce. The implementation could also be disruptive to our operations, including the ability to report our financial results timely and accurately, timely ship and track product orders to our customers, project inventory requirements, manage our supply chain and otherwise adequately service our customers.

Our business is vulnerable to interruption by events beyond our control, including earthquakes, fire, floods, disease outbreaks and other catastrophic events.

Our corporate headquarters and the operations of our key OEMs, foundries and third-party contractors which we rely on for assembly, packaging, testing, warehousing and logistics are located in areas exposed to risks of natural disasters such as earthquakes and tsunamis, including the San Francisco Bay area, China, Japan, Singapore, Hong Kong and Taiwan. Our finished goods inventory of processors for many of our OEMs, including Samsung, is warehoused at a single facility located in this area, and any catastrophic loss to this facility could significantly disrupt our operations and delay shipments and revenue. A significant natural disaster, such as an earthquake, tsunami, fire or flood, or other catastrophic event such as disease outbreak, could have a material adverse impact on our business, financial condition, operating results and cash flows. In the event that any of our OEMs’ or MNOs’ information technology systems, manufacturing facilities or logistics abilities are impeded by any of these events, shipments could be delayed and we could miss key financial targets, including revenue and earnings estimates, for a particular quarter.

Risks related to regulations to which we may be subject and our intellectual property

Concerns over possible health and safety risks posed by mobile devices may result in the adoption of new regulations and may otherwise reduce the demand for our products and those of our OEMs.

Concerns over the effects of radio frequency emissions, even if unfounded, may have the effect of discouraging the use of mobile devices, which may decrease demand for our products and those of our OEMs. In recent years, the Federal Communications Commission (“FCC”) and foreign regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions from radio equipment, including mobile phones and other mobile devices. In addition, interest groups have requested that the FCC investigate claims that wireless communications technologies pose health concerns and cause interference with airbags, hearing aids and medical devices. Concerns have also been expressed over the possibility of safety risks due to a lack of attention associated with the use of mobile devices while driving. These concerns and any future legislation that may be adopted in response to them, could reduce demand for our products and those of our OEMs in the United States as well as other countries, which could materially and adversely affect our business, financial condition, operating results and cash flows.

 

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Claims of infringement against us or our OEMs could increase our expenses, disrupt our ability to sell our voice and audio solutions and reduce our revenue.

The mobile communications industry is characterized by the existence of a large number of patents, trademarks, trade secrets and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third parties may claim that our processors or technologies infringe or misappropriate their intellectual property rights. The costs associated with any actual, pending or threatened litigation could negatively impact our operating results regardless of the actual outcome.

We expect that infringement claims and misappropriation claims may increase as the number of products and competitors in our market increases and as we gain greater visibility and market exposure as a public company. We cannot assure you that we do not currently infringe or misappropriate, or that we will not in the future infringe or misappropriate, any third-party patents or other proprietary rights. For instance, because patent applications in the United States and foreign jurisdictions are typically maintained in confidence for up to 18 months after their filing or, in some cases, for the entire time prior to issuance as a U.S. patent, third parties may have earlier filed applications covering methods or other inventions that we consider our trade secrets. The limited size of our patent portfolio may not provide meaningful deterrence against third parties alleging that we infringe their patents, particularly against patent holding companies or other adverse patent owners who have no relevant product revenue. Any claims of infringement or misappropriation by a third party, even those without merit, could cause us to incur substantial costs defending against the claims and could distract our management from our business. A party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from offering our processors or licensing our processor IP. In addition, we might be required to seek a license for the use of the infringed intellectual property, which might not be available on commercially reasonable terms or at all. Alternatively, we might be required to develop non-infringing technology, which could require significant effort and expense and might ultimately be unsuccessful. Any of these events could seriously harm our business, financial condition, operating results and cash flows.

Third parties may also assert infringement claims against our OEMs. Claims against our OEMs may require us to initiate or defend potentially protracted and costly litigation on an OEM’s behalf, regardless of the merits of these claims, because we generally agree to defend and indemnify our OEMs with which we have long-term agreements from claims of infringement and misappropriation of proprietary rights of third parties based on the use or resale of our products. Other OEMs, with which we do not have formal agreements requiring us to indemnify them, may ask us to indemnify them if a claim is made as a condition to awarding future design wins to us. Because our OEMs are much larger than we are and have much greater resources than we do, they may be more likely to be the target of an infringement claim by third parties than we would be, which could increase our chances of becoming involved in a future lawsuit. If any of these claims succeeds, we might be forced to pay damages on behalf of our OEMs that could increase our expenses, disrupt our ability to sell our voice and audio solutions and reduce our revenue. A party making an infringement claim against our OEMs, if successful, could secure an injunction or other court order that could prevent our OEMs from producing or selling their mobile devices incorporating our products. Any such claims or injunction against our OEMs could seriously harm our business, financial condition, operating results and cash flows.

The mobile device market is one in which competition is intense and OEMs attempt to defend and expand their market positions with their patent portfolios. In the event that one of our key OEMs were unable to market its products in one or more large geographic markets because of a court decision concluding that the OEM infringed another party’s patents, our revenue would be harmed. Our OEMs or their CMs may purchase fewer of our processors than they did in the past if such OEMs are enjoined from selling the mobile devices in which our processors are incorporated in certain markets or are required to redesign such mobile devices as a result of patent litigation. We anticipate that mobile device OEMs will continue to bring and litigate patent infringement cases against each other for some time and cannot assess the impact on our business, financial condition and results of operations from these cases.

It is also not uncommon for foundries, packaging providers or suppliers of other components in our processors to be involved in infringement lawsuits by or against third parties. Although some of our foundries, packaging providers or other suppliers are obligated to indemnify us in connection with infringement claims related to their intellectual property rights, these parties may contest their obligations to indemnify us, or their available assets or indemnity obligation may not be sufficient to cover our losses. Third-party intellectual property infringement claims that involve us or our suppliers may require us to alter our technologies, obtain licenses or cease certain activities.

We may not be able to protect and enforce our intellectual property rights, which could harm our competitive position and reduce the value of our proprietary technology.

Our success depends in part on obtaining, maintaining and enforcing our patent and other proprietary rights. We rely on trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our proprietary rights may not be adequate to prevent misappropriation of our proprietary information or infringement of our intellectual property rights and our ability to prevent such misappropriation or infringement is uncertain, particularly in countries outside of the United States. We do not know whether any of our pending patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims. As of

 

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September 30, 2013, we had 31 issued U.S. patents, 95 pending U.S. patent applications, 44 pending foreign patent applications and six issued foreign patents. Each foreign patent and foreign patent application is related to a U.S. patent or a pending U.S. patent application. Our patents may be contested, circumvented, found unenforceable or invalidated and we may not be able to prevent third parties from infringing them. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages and, as a result, our competitors may be able to copy or develop technologies similar or superior to ours. In some countries where our processors are sold or may be sold, we do not have foreign patents or pending applications corresponding to some of our U.S. patents and patent applications. Even if foreign patents are granted, effective enforcement in foreign countries may not be available.

Protecting against the unauthorized use of our technology, trademarks and other proprietary rights is expensive and difficult. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm our business, financial condition, operating results and cash flows. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, any enforcement of our patents or other intellectual property may provoke third parties to assert counterclaims against us. Many of our current and potential competitors have the ability to dedicate substantially greater resources to enforcing their intellectual property rights than we have. We may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Patent protection outside of the United States is generally not as comprehensive as in the United States and may not protect our intellectual property in some countries where our processors are sold or may be sold in the future. Even if patents are granted outside of the United States, effective enforcement in those countries may not be available. For example, the legal regime protecting intellectual property rights in China is relatively weak and it is often difficult to create and enforce such rights. We may not be able to effectively protect our intellectual property rights in China or elsewhere. Many companies have encountered substantial intellectual property infringement in countries where we sell or intend to sell processors. If such an impermissible use of our intellectual property or trade secrets were to occur, our ability to sell our processors at competitive prices and to be a leading provider of processors may be adversely affected and our business, financial condition, operating results and cash flows could be materially and adversely affected.

We rely on the availability of third-party licenses.

Our products include intellectual property licensed from third parties, such as certain design technology, circuits and manufacturing rights for processor cores. It may be necessary in the future to renew these licenses or obtain additional licenses. We cannot assure you that the necessary licenses would be available on acceptable terms, or at all. Our failure to obtain, maintain and renew certain licenses or other rights on favorable terms, or at all, and our involvement in litigation regarding third-party intellectual property rights could have a material adverse effect on our business, financial condition, operating results and cash flows.

Our use of “open source” software presents risks that could have an adverse effect on our intellectual property rights and on our business.

We may use software licensed for use from third-party authors under open source licenses in certain of our products. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This could allow our competitors to create similar products with lower development effort and in less time and result in a loss of product sales for us. It is possible that our use of open source software may trigger the foregoing requirements. Furthermore, there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis, any of which could materially and adversely affect our business, financial condition, operating results and cash flows.

Failure to comply with the U.S. Foreign Corrupt Practices Act (“FCPA”) and similar laws associated with our activities outside of the United States could subject us to penalties and other adverse consequences.

We face significant risks if we fail to comply with the FCPA and other anticorruption laws that prohibit improper payments or offers of payment to foreign governments and political parties by us for the purpose of obtaining or retaining business. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other applicable laws and regulations. We cannot assure you that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. Any violation of the FCPA or other applicable anticorruption laws could result in severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracting, which could have a material and adverse effect on our reputation, business, financial condition, operating results and cash flows.

 

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We are subject to governmental export and import controls and economic sanctions laws that could subject us to liability and impair our ability to compete in international markets.

Because we incorporate U.S. origin technology into our processors, our processors are subject to U.S. export controls and may be exported or licensed outside of the United States only with the required level of export license or through an export license exception. If a transaction involves countries, individuals or entities that are the target of U.S. or other economic sanctions, licenses or other approvals from the U.S. Department of the Treasury’s Office of Foreign Assets Control or other sanctions authorities may be required and may not be granted. Various countries regulate the importation of certain encryption technology and have enacted laws that could limit our ability to distribute our processors or license our processor IP in such countries or could limit our OEMs’ ability to sell mobile devices incorporating our processors in those countries. Changes in our processors or changes in export or import or economic sanctions regulations may create delays in the introduction of our processors in international markets, prevent our OEMs with international operations from incorporating our processors in their products or, in some cases, prevent the export or import of our processors to certain countries altogether. Any change in export, import or economic sanctions regulations or related legislation, shift in approach to the enforcement or scope of existing regulations or change in the countries, persons or technologies targeted by these regulations could result in decreased use of our processors by, or in our decreased ability to export, license or sell our processors to, existing or potential OEMs with international operations. Failure to obtain required import or export approval for our processors or failure to comply with these regulations could result in penalties and restrictions on export privileges and could impair our ability to compete in international markets.

We, our OEMs and third-party contractors are subject to increasingly complex environmental regulations and compliance with these regulations may delay or interrupt our operations and adversely affect our business.

We face increasing complexity in our research and development and procurement operations as a result of requirements relating to the materials composition of many of our processors, including the European Union’s (“EU’s”) Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment directive, which restricts the content of lead and certain other substances in specified electronic products put on the market in the EU after July 1, 2006 and similar Chinese legislation relating to marking of electronic products which became effective in March 2007. Failure to comply with these laws and regulations could subject us to fines, penalties, civil or criminal sanctions and contract damage claims, which could harm our business, reputation and operating results. The passage of similar requirements in additional jurisdictions or the tightening of these standards in jurisdictions where our products are already subject to such requirements could cause us to incur significant expenditures to make our products compliant with new requirements, or could limit the markets into which we may sell our products. Other environmental regulations may require us to reengineer our processors to use components that are compatible with these regulations and this reengineering and component substitution may result in additional costs to us.

Some of our operations, as well as the operations of our CMs and foundries and other suppliers, are also regulated under various other federal, state, local, foreign and international environmental laws and requirements, including those governing, among other matters, the discharge of pollutants into the air and water, the management, disposal, handling, use, labeling of and exposure to hazardous substances and wastes and the cleanup of contaminated sites. Liability under environmental laws can be joint and several and without regard to comparative fault. We cannot assure you that violations of these laws will not occur in the future, as a result of human error, accident, equipment failure or other causes. Environmental laws and regulations have increasingly become more stringent over time. We expect that our products and operations will be affected by new environmental requirements on an ongoing basis, which will likely result in additional costs, which could adversely affect our business. Our failure to comply with present and future environmental, health and safety laws could cause us to incur substantial costs, result in civil or criminal fines and penalties and decreased revenue, which could adversely affect our operating results. Failure by our foundries or other suppliers to comply with applicable environmental laws and requirements could cause disruptions and delays in our product shipments, which could adversely affect our relations with our OEMs and adversely affect our business and results of operations.

As a result of efforts by us and our third-party contractors to comply with these or other future environmental laws and regulations, we could incur substantial costs, including those relating to excess component inventory, and be subject to disruptions to our operations and logistics. In addition, we will need to procure the manufacture of compliant processors and source compliant components from suppliers. We cannot assure you that existing laws or future laws will not have a material adverse effect on our business.

Risks related to the ownership of our common stock

The trading prices of our common stock could be volatile due to a number of factors.

The trading prices of our common stock have been highly volatile and could be highly volatile in the future due to a number of factors. For example, since our IPO, the closing sale prices of our common stock ranged from a low of $5.62 to a high of $22.36. Factors that could affect the trading price of our common stock, some of which are outside of our control, include the following:

 

    the gain or loss of significant OEMs or other developments involving our OEMs;

 

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    recruitment or departure of key personnel;

 

    lawsuits threatened or filed against us;

 

    actual or anticipated changes in recommendations by any securities analysts who elect to follow our common stock;

 

    whether our operating results meet the expectations of investors or securities analysts;

 

    our failure to receive ongoing analyst coverage;

 

    adverse publicity and investors’ general perception of us;

 

    price and volume fluctuations in the overall stock market from time to time;

 

    significant volatility in the market price and trading volume of technology companies in general and of companies in our industry;

 

    variations in our operating results or those of our competitors or other companies perceived to be similar to us;

 

    actual or anticipated announcements of technological innovations, new services or service improvements, strategic alliances or significant agreements by us or by our competitors;

 

    level of sales in a particular quarter;

 

    changes in the estimates of our operating results;

 

    sales of large blocks of our stock or other changes in the volume of trading in our stock;

 

    major catastrophic events; and

 

    adoption or modification of regulations, policies, procedures or programs applicable to our business or our OEMs.

If the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. Each of these factors, among others, could have a material adverse effect on your investment in our common stock.

We are involved in securities class action litigation and may be subject to similar litigation in the future. If the outcome of this litigation is unfavorable, it could have a material adverse effect on our financial condition, results of operations and cash flows.

On September 13, 2012, a purported shareholder filed a class action complaint in the Superior Court of the State of California for Santa Clara County against us, the members of our board of directors, two of our executive officers and the underwriters of our IPO. On April 3, 2013, the outside members of the board of directors and the underwriters were dismissed without prejudice. An amended complaint was filed on February 25, 2013, which purports to be brought on behalf of a class of purchasers of our common stock issued in or traceable to the IPO. The amended complaint added additional shareholder plaintiffs and contains claims under Sections 11 and 15 of the Securities Act. The amended complaint seeks, among other things, compensatory damages, rescission and attorney’s fees and costs. On March 1, 2013, we and the other defendants responded to the amended complaint by filing a demurrer moving to dismiss the amended complaint on the ground that the court lacks subject matter jurisdiction. The court overruled that demurrer. On March 27, 2013, we and the other defendants filed a demurrer moving to dismiss the amended complaint on other grounds. The court denied the demurrer on September 4, 2013. We believe that the allegations in the complaint are without merit and intend to vigorously contest the action. However, there can be no assurance that we will be successful in our defense and we cannot currently estimate a range of any possible losses it may experience in connection with this case. Accordingly, we are unable at this time to estimate the effects of this complaint on our financial condition, results of operations or cash flows.

In the future, especially following periods of volatility in the market price of our shares, other purported class action or derivative complaints may be filed against us. The outcome of the pending and potential future litigation is difficult to predict and quantify and the defense of such claims or actions can be costly. In addition to diverting financial and management resources and general business disruption, we may suffer from adverse publicity that could harm our brand or reputation, regardless of whether the allegations are valid or whether we are ultimately held liable. A judgment or settlement that is not covered by or is significantly in excess of our insurance coverage for any claims, or our obligations to indemnify the underwriters and the individual defendants, could materially and adversely affect our financial condition, results of operations and cash flows.

Our management has broad discretion as to the use of our cash and might invest or spend our cash in ways that may not yield a return.

Our management might not apply our cash in ways that increase the value of our common stock. We expect to use our cash for working capital and general corporate purposes, which may include acquisitions of complementary businesses, products or technologies. Our management might not be able to yield a significant return, if any, on any investment of our cash. The holders of our common stock may not have the opportunity to influence our decisions on how to use our cash. Until our cash is used, it may be placed in investments that do not produce significant income or lose value.

 

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on any research and reports that securities or industry analysts publish about us or our business. A small number of securities analysts’ commenced coverage of us after the closing of our IPO. If one or more securities or industry analysts downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. For example, following our announcement in September 2012 that we believed it would be unlikely that Apple would enable our processor IP in the 2012 model of its mobile phones, securities analysts downgraded our stock and the trading price of our common stock declined significantly. If one or more of these analysts stops coverage of us or fails to publish reports on us regularly, demand for our stock could decrease which could cause our stock price and trading volume to decline.

Our actual operating results may differ significantly from our guidance and investor expectations, causing our stock price to decline.

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

We are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of other public companies. As a result of this and other reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31.

If we experience material weaknesses or otherwise fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our financial condition, results of operations or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

We will be required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for each year beginning with the year ending December 31, 2013. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting and, once we are no longer an emerging growth company as defined in the JOBS Act, an opinion from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.

 

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Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the annual report that we would expect to file with the SEC for the year ending December 31, 2013. However, for as long as we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31.

We are in the early stages of the costly and challenging process of hiring personnel, and compiling the system and process documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, we would lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline. Our independent auditors will not be required to attest to their effectiveness while we are an emerging growth company under the JOBS Act. If our management and our independent auditors determine we have a material weakness or significant deficiency in our internal control over financial reporting, investors may lose confidence in us. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

We incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.

As a public company, we incur significant legal, accounting, investor relations and other expenses, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with current corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended (the “Dodd-Frank Act”), as well as rules implemented by the SEC and the NASDAQ Global Select Market. Although we may benefit from some of the disclosure and attestation deferrals for the period in which we remain an emerging growth company under the JOBS Act, we do not expect those deferrals to materially alter the costs and burdens we will experience as a public company. However, for as long as we remain an emerging growth company as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31.

The expenses incurred by public companies for reporting and corporate governance purposes have increased dramatically over the past several years. We expect these rules and regulations to continue to increase our legal and financial compliance costs substantially and to make some activities more time consuming and costly. We are currently unable to estimate these costs with any degree of certainty. Greater expenditures may be necessary in the future with the advent of new laws and regulations pertaining to public companies. If we are not able to comply with these requirements in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC, the applicable stock exchange or other regulatory authorities, which would require additional financial and management resources. Because the JOBS Act has only recently been enacted, it is not yet clear whether investors will accept the more limited disclosure requirements that we may be entitled to follow while we are an emerging growth company. To the extent investors are not comfortable with a more limited disclosure regime, they may not be comfortable purchasing and holding our common stock if we elect to comply with the reduced disclosure requirements. We also expect that, as a public company, it will continue to be expensive for us to obtain director and officer liability insurance.

 

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New disclosure requirements under the new provisions of the Dodd-Frank Act relating to “conflict minerals” could increase our costs and limit the supply of certain metals used in our products and affect our reputation with customers and stockholders.

The Dodd-Frank Act imposes new disclosure requirements regarding the use of certain minerals and metals, known as “conflict minerals,” mined from the Democratic Republic of the Congo and adjoining countries in products, whether or not these products are manufactured by third parties. These new requirements require us to engage in due diligence efforts beginning in 2013 to ascertain and disclose the origin of some of the raw materials used in our products. Initial disclosures will be required no later than May 31, 2014, with subsequent disclosures required no later than May 31 of each following year. We expect to incur costs associated with complying with these disclosure requirements, including due diligence to determine the sources of materials used in our products and other potential changes to our products, processes or sources of supply as a consequence of such due diligence. The implementation of these requirements and our compliance procedures could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict free” minerals, we cannot be sure that the foundries that manufacture our products will be able to obtain sufficient quantities of materials from such suppliers or at competitive prices. Also, our reputation with our customers and our stockholders could be damaged if we determine that our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for the materials used in our products through the procedures we may implement. If we cannot guarantee that all of our products exclude conflict minerals sourced from the Democratic Republic of the Congo or adjoining countries, certain of our customers may discontinue or reduce purchases of our products, which could materially and adversely affect our financial condition, results of operations and cash flows.

Insiders have substantial control over us, which could limit your ability to influence corporate matters.

As of September 30, 2013, our directors, executive officers, principal stockholders and their affiliates beneficially owned, in the aggregate, approximately 60% of our outstanding common stock. As a result, these stockholders, if acting together, are able to determine all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions such as a merger or other sale of our company or our assets. In addition, these stockholders, if acting together, have the ability to control the management and affairs of our company. This concentration of ownership could limit your ability to influence corporate matters and might harm the market price of our common stock by:

 

    delaying, deferring or preventing a change in corporate control;

 

    impeding a merger, consolidation, takeover or other business combination involving us; and

 

    discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

Provisions in our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of us or changes in our management and therefore depress the trading price of our common stock.

Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that our stockholders may consider advantageous. These provisions:

 

    provide that directors may only be removed for cause;

 

    authorize the issuance of blank check preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;

 

    eliminate the ability of our stockholders to call special meetings of stockholders;

 

    prohibit stockholder action by written consent, which has the effect of requiring all stockholder actions to be taken at a meeting of stockholders;

 

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

 

    establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of us by prohibiting stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us.

Any provision of our certificate of incorporation, our bylaws or Delaware law that has the effect of discouraging, delaying or preventing a change in control of us could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

We do not expect to pay dividends for the foreseeable future.

We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends for the foreseeable future. We expect to retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. In addition, our existing credit agreement precludes us from paying cash dividends. Consequently, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

 

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ITEM 6. Exhibits

 

Exhibit

number

  

Description

   Incorporated by reference herein
      Form    Date
  10.5#    Amended and Restated 2011 Employee Stock Purchase Plan and form of agreements used thereunder.      
  10.7.5    Fifth Amendment to Loan and Security Agreement by and between Audience, Inc. and Silicon Valley Bank dated September 30, 2013.    Current Report
on
Form 8-K
   October 4,
2013
  31.1    Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.      
  31.2    Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.      
  32.1    Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.      
101.INS†    XBRL Instance Document      
101.SCH†    XBRL Taxonomy Schema Linkbase Document      
101.CAL†    XBRL Taxonomy Calculation Linkbase Document      
101.DEF†    XBRL Taxonomy Definition Linkbase Document      
101.LAB†    XBRL Taxonomy Labels Linkbase Document      
101.PRE†    XBRL Taxonomy Presentation Linkbase Document      

 

# Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  AUDIENCE, INC.
Date: November 14, 2013   By:  

/s/ PETER B. SANTOS

    Peter B. Santos
    President, Chief Executive Officer and Director
Date: November 14, 2013   By:  

/s/ KEVIN S. PALATNIK

    Kevin S. Palatnik
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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Exhibit index

 

Exhibit

number

  

Description

   Incorporated by reference herein
      Form    Date
  10.5#    Amended and Restated 2011 Employee Stock Purchase Plan and form of agreements used thereunder.      
  10.7.5    Fifth Amendment to Loan and Security Agreement by and between Audience, Inc. and Silicon Valley Bank dated September 30, 2013.    Current Report
on
Form 8-K
   October 4,
2013
  31.1    Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.      
  31.2    Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.      
  32.1    Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.      
101.INS†    XBRL Instance Document      
101.SCH†    XBRL Taxonomy Schema Linkbase Document      
101.CAL†    XBRL Taxonomy Calculation Linkbase Document      
101.DEF†    XBRL Taxonomy Definition Linkbase Document      
101.LAB†    XBRL Taxonomy Labels Linkbase Document      
101.PRE†    XBRL Taxonomy Presentation Linkbase Document      

 

# Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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