AUDIENCE INC - FORM 10-Q

AUDIENCE INC - FORM 10-Q - May 11, 2015

Attached files

Attached files

AUDIENCE INC Reports

file	filename
EX-31.2 - EX-31.2 - AUDIENCE INC	d899397dex312.htm
EX-32.1 - EX-32.1 - AUDIENCE INC	d899397dex321.htm
EX-31.1 - EX-31.1 - AUDIENCE INC	d899397dex311.htm
EX-10.24 - EX-10.24 - AUDIENCE INC	d899397dex1024.htm
EXCEL - IDEA: XBRL DOCUMENT - AUDIENCE INC	Financial_Report.xls

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 March 31, 2015

¨	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)

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.

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 April 30, 2015 was: 23,535,767.

AUDIENCE, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION			3

Item 1. Financial statements (unaudited)			3
	Condensed consolidated balance sheets at March 31, 2015 and December 31, 2014		3
	Condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014		4
	Condensed consolidated statements of comprehensive income (loss) for the three months ended March 31, 2015 and 2014		5
	Condensed consolidated statements of cash flows for the three months ended March 31, 2015 and 2014		6
	Notes to condensed consolidated financial statements		7
Item 2. Management’s discussion and analysis of financial condition and results of operations			19
Item 3. Quantitative and qualitative disclosures about market risk			30
Item 4. Controls and procedures			30

PART II. OTHER INFORMATION			31

Item 1. Legal proceedings			31
Item 1A. Risk factors			32
Item 4. Mine Safety Disclosures			56
Item 6. Exhibits			57
Signatures			58

PART I – FINANCIAL INFORMATION

ITEM 1.

Financial statements

AUDIENCE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)


	March 31, 2015			December 31, 2014 (1)
Assets
Current assets:
Cash and cash equivalents	$	37,276		$	46,184
Short-term investments		6,998			8,999
Restricted cash		4,200			4,200
Accounts receivable		7,810			2,789
Inventories		23,826			27,999
Other current assets		3,309			3,880

Total current assets		83,419			94,051
Property and equipment, net		10,407			11,634
Intangible assets, net		5,292			6,317
Other noncurrent assets		2,990			2,840

Total assets	$	102,108		$	114,842

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	3,247		$	1,582
Accrued and other liabilities		13,168			12,064
Deferred credits and income		691			725

Total current liabilities		17,106			14,371
Income taxes payable- noncurrent		773			1,114
Deferred rent- noncurrent		2,129			2,046
Other liabilities- noncurrent		214			28

Total liabilities		20,222			17,559

Stockholders’ equity:
Common stock:		23			23
Additional paid-in capital		197,508			195,351
Accumulated deficit		(115,645	)		(98,091	)

Total stockholders’ equity		81,886			97,283

Total liabilities and stockholders’ equity	$	102,108		$	114,842

(1)	The condensed consolidated balance sheet at December 31, 2014 has been derived from audited consolidated financial statements.

See notes to condensed consolidated financial statements (unaudited).

AUDIENCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three months ended March 31,
	2015			2014
Revenue:
Hardware	$	17,788		$	34,076
Licensing		657			1,884

Total revenue		18,445			35,960
Cost of revenue		10,587			17,364

Gross profit		7,858			18,596
Operating expenses:
Research and development		13,639			12,188
Selling, general and administrative		11,125			12,245

Total operating expenses		24,764			24,433

Loss from operations		(16,906	)		(5,837	)
Interest income, net		6			18
Other expense, net		(393	)		(33	)

Loss before income taxes		(17,293	)		(5,852	)
Income tax provision		261			1,485

Net loss	$	(17,554	)	$	(7,337	)

Net loss per share:
Basic	$	(0.75	)	$	(0.33	)

Diluted	$	(0.75	)	$	(0.33	)

Weighted average shares used in computing net loss per share:
Basic		23,367			22,221

Diluted		23,367			22,221

See notes to condensed consolidated financial statements (unaudited).

AUDIENCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)


	Three months ended March 31,
	2015			2014
Net loss	$	(17,554	)	$	(7,337	)
Other comprehensive income:
Unrealized gain on available-for-sale securities, net of tax		—			1

Net comprehensive loss	$	(17,554	)	$	(7,336	)

See notes to condensed consolidated financial statements (unaudited).

AUDIENCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three months ended March 31,
	2015			2014
Cash flows from operating activities
Net loss	$	(17,554	)	$	(7,337	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,577			1,332
Write-down of inventory to net realizable value		377			305
Recovery of doubtful accounts		(60	)		—
Stock-based compensation		2,143			1,576
Excess tax benefit from stock options		—			(1,394	)
Loss on disposal of property and equipment		7			3
Amortization/accretion of marketable securities		(1	)		4
Changes in assets and liabilities:
Accounts receivable		(4,961	)		(5,904	)
Inventories		3,796			(5,561	)
Prepaid expenses and other assets		103			(682	)
Accounts payable		1,670			2,860
Accrued and other liabilities		1,237			810
Deferred credits and income		(34	)		377

Net cash used in operating activities		(10,700	)		(13,611	)

Cash flows from investing activities
Purchases of property and equipment		(225	)		(2,409	)
Purchases of marketable securities		(3,998	)		(11,996	)
Proceeds from sales and maturities of marketable securities		6,000			9,100
Change in restricted cash		—			170

Net cash provided by (used in) investing activities		1,777			(5,135	)

Cash flows from financing activities
Proceeds from exercise of stock options		167			422
Tax payment related to RSUs		(152	)		(157	)
Excess tax benefit from stock options		—			1,394

Net cash provided by financing activities		15			1,659

Net decrease in cash and cash equivalents		(8,908	)		(17,087	)
Cash and cash equivalents
Beginning of period		46,184			124,691

End of period	$	37,276		$	107,604

Supplemental disclosures:
Accrual for purchases of property, plant and equipment	$	—		$	215

See notes to condensed consolidated financial statements (unaudited).

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.

Audience is a leader in providing intelligent voice and audio solutions that improve voice quality and the user experience in mobile devices. Its family of earSmart™ intelligent voice processors is based on the processes of human hearing, to suppress background noise and enhance mobile voice quality. Audience’s technology substantially improves the mobile voice experience, while also improving the performance of speech-based services, and enhancing audio quality for multimedia. Audience earSmart™ processors are featured in mobile devices from leading providers in Asia-Pacific, Europe and the United States (“U.S.”). Audience has also started to offer software solutions for motion sensing, such as MotionQ, and voice quality, such as Audience S1.0.

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 products globally, directly to original equipment manufacturers (“OEMs”) and their contract manufacturers (“CMs”) and indirectly through distributors. In 2012, Audience also began to recognize license revenue on royalty payments for the use of its semiconductor intellectual property (“processor IP”) in certain mobile phones of a single OEM. In addition, the Company currently licenses software that interprets sensor data related to the motion of mobile devices and has announced its first stand-alone software product that improves sound quality and suppresses background noise, which may lead to the Company recognizing additional licensing revenue in the future.

On July 11, 2014, the Company and its wholly-owned subsidiary, Alameda Acquisition Corp., a Delaware corporation, acquired Sensor Platforms, Inc., a Delaware corporation (“Sensor Platforms”) for approximately $41 million. Sensor Platforms develops software and algorithms that interpret sensor data to enable broad context awareness on smart phones, wearables and other consumer devices.

Subsequent to the quarter ended March 31, 2015, there have been material declines in forecasted demand from the largest customer relative to management expectations for the second quarter of 2015, which has eroded projected operating results for 2015 as well as the projected cash balances. However, the Company believes that its existing sources of liquidity will satisfy its working capital and capital requirements for the next twelve months. Any further reductions in demand beyond current projections may require the Company to either implement a reduction in force or raise additional capital through equity or debt financing. Such additional financing may not be available on terms acceptable to the Company, or at all, and could require the Company to modify, delay or abandon some of its planned future expansion or expenditures or reduce some of its ongoing operating costs. If the Company is unable to obtain additional financing, it could have a material adverse effect on its business, financial condition, operating results and cash flows and its ability to achieve its intended business objectives. If the Company raises additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, its existing stockholders could suffer significant dilution in their percentage ownership of the Company and any new securities it issues could have rights, preferences and privileges senior to those of holders of its common stock.

2. Summary of significant accounting policies

Financial Statement Presentation

In the opinion of the Company, 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, 2014. The Company’s accounting policies described in the “Notes to consolidated financial statements” in its Form 10-K have not changed in the three months ended March 31, 2015. The December 31, 2014 condensed consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the three months ended March 31, 2015 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 foreign subsidiaries is the U.S. dollar. Foreign currency gains or losses are recorded as other expenses, net in the condensed consolidated statements of operations.

Use of Estimates

The preparation of financial statements in conformity with 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 allowance for doubtful accounts receivable, inventory write-downs, useful lives of long-lived assets, valuation of deferred tax assets and uncertain tax positions and the measurement of stock-based compensation. 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 March 31, 2015, one customer accounted for 81% of total accounts receivable. As of December 31, 2014, two customers accounted for 58% and 14% of total accounts receivable.

Revenue from Samsung Electronics Co., Ltd. (“Samsung”) accounted for 85% of total revenue for the three months ended March 31, 2015. Revenue from Samsung and Comtech, International Ltd. (“Comtech”), a distributor who sells the Company’s products to end customers, accounted for 74% and 18%, respectively, of total revenue for the three months ended March 31, 2014.

Revenue recognition

The Company derives revenue from the direct sale of processors and codecs to OEMs and CMs and indirect sales of processors and codecs 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 had insignificant revenue from sales of its software products.

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. 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. As a result, product revenue is deferred until the distributor notifies the Company in writing of its resale of the products. Deferred revenue less the related cost of the inventories are included in 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 recognize licensing revenue on royalty payments in 2012 on mobile phones integrating its licensed semiconductor intellectual property (“processor IP”) from a single OEM. The Company recognizes licensing 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 typically within 45 days following the end of the OEM’s quarter. Since there is no reliable basis on which the Company can estimate its licensing revenues prior to obtaining the OEM’s reports from the licensees, the Company recognizes licensing 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 by the agreed-upon royalty rate.

Net Income (Loss) Per Share

The Company calculates basic net income (loss) per share by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. The diluted net income (loss) per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock and restricted stock units (“RSUs”) are considered to be common stock equivalents. When there is a net loss, potentially dilutive common equivalent shares are not included in the calculation of net loss per share since their inclusion would be anti-dilutive.

Recent accounting pronouncements

In January 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update (“ASU”) which simplifies income statement classification by removing the concept of extraordinary items from GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. The new standard is effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) issued a converged standard on revenue recognition from contracts with customers. The objective of the new guidance is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The newly converged standard contains principles that will be applied to determine how revenue should be measured and the timing of when it should be recognized. The guidance is effective for fiscal years, and interim periods within fiscal years, beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact that this guidance may have on its financial position, results of operations and cash flows.

3. Consolidated balance sheet components

Inventories

Inventories consisted of the following:


	March 31, 2015		December 31, 2014
	(in thousands)
Work in process	$	17,662	$	19,828
Finished goods		6,164		8,171

Total inventory	$	23,826	$	27,999

Property and equipment, net

Property and equipment, net, consisted of the following:


	March 31, 2015			December 31, 2014
	(in thousands)
Computers and equipment	$	4,447		$	4,346
Machinery and equipment		6,659			6,561
Software		4,309			4,294
Furniture and fixtures		4,821			4,821
Leasehold improvements		3,252			3,251
Construction in progress		48			81

Gross property and equipment		23,536			23,354
Accumulated depreciation		(13,129	)		(11,720	)

Property and equipment, net	$	10,407		$	11,634

Depreciation expense for the three months ended March 31, 2015 and 2014 was $1.4 million and $1.3 million, respectively.

Accrued and other current liabilities

Accrued and other current liabilities consisted of the following:


	March 31, 2015		December 31, 2014
	(in thousands)
Compensation	$	5,077	$	4,165
Professional fees		1,463		972
Income taxes payable		679		544
Escrow payable		4,200		4,200
Other		1,749		2,183

Accrued and other current liabilities	$	13,168	$	12,064

4. Fair Value of Financial Instruments

The Company invests its excess cash primarily in money market funds and U.S. government agency and treasury notes that mature within one year. All cash equivalents and marketable securities are classified as available-for-sale. As of March 31, 2015, the unrealized gains or losses associated with the Company’s investments were insignificant. No gains or losses were realized from sale of securities in the periods presented.

The amortized cost and fair value of available-for-sale securities were as follows:


	March 31, 2015
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
	(in thousands)
Money market funds	$	25,715	$	—	$	—	$	25,715
U.S. agency securities		6,998		—		—		6,998

Total available-for-sale securities	$	32,713	$	—	$	—	$	32,713


	December 31, 2014
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
	(in thousands)
Money market funds	$	23,715	$	—	$	—	$	23,715
U.S. agency securities		8,998		1		—		8,999

Total available-for-sale securities	$	32,713	$	1	$	—	$	32,714

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


	March 31, 2015		December 31, 2014
	(in thousands)
Cash equivalents	$	25,715	$	23,715
Short-term investments		6,998		8,999

Total available-for-sale securities	$	32,713	$	32,714

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.

As there were no financial liabilities that were required to be measured at fair value, the following tables summarize the Company’s financial assets measured at fair value on a recurring basis within the fair value hierarchy:


	March 31, 2015
	Total		Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents:
Money market funds	$	25,715	$	25,715	$	—	$	—
Short-term investments:
U.S. agency securities		6,998		6,998		—		—

Total available-for-sale securities	$	32,713	$	32,713	$	—	$	—


	December 31, 2014
	Total		Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents:
Money market funds	$	23,715	$	23,715	$	—	$	—
Short-term investments:
U.S. agency securities		8,999		8,999		—		—

Total available-for-sale securities	$	32,714	$	32,714	$	—	$	—

5. Acquisition of Sensor Platforms

On July 11, 2014, the Company completed the acquisition contemplated by the Agreement and Plan of Merger by and among the Company, Alameda Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of the Company, Sensor Platforms, and the stockholders’ agent listed therein (the “Acquisition”). Sensor Platforms develops software and algorithms that interpret sensor data to enable broad context awareness on smart phones, wearables and other consumer devices. The Company believes the combination of Sensor Platforms’ motion sensing technology with its voice and audio solutions places the combined company in a unique position to deliver compelling solutions based on the fusion of voice and motion.

The Company incurred $0.5 million in transaction costs in 2014. These expenses were included in selling, general and administrative expenses in the Company’s consolidated statement of operations.

The Acquisition was accounted for using the acquisition method of accounting and accordingly, Sensor Platforms’ results of operations were included in the Company’s consolidated financial statements from July 11, 2014. Pursuant to the acquisition method of accounting, the purchase price has been allocated to assets acquired and liabilities assumed based on their respective fair values. The Company’s management has determined the fair value of the intangible and tangible assets acquired and liabilities assumed as of the closing date of the Acquisition. The difference between the fair value of the consideration issued and the fair value of the assets acquired and liabilities assumed was recorded as goodwill.

The fair value of consideration transferred to acquire Sensor Platforms was approximately $41 million and consisted of the following, in thousands:


Cash consideration paid to acquire Sensor Platforms	$	40,486
Fair value of employee stock options assumed		209

Total acquisition consideration	$	40,695

The Company deposited $4.2 million of the cash consideration into an escrow account. This amount is reflected in the restricted cash and accrued and other current liabilities line items in the condensed consolidated balance sheet. The escrow period is one year from the date of the Acquisition.

Sensor Platforms’ employee stock options and RSUs assumed

In connection with the Acquisition, the Company assumed both vested and unvested, in-the-money stock options and unvested RSUs originally granted by Sensor Platforms and exchanged them for stock options and RSUs for the Company’s common stock. The Company included $0.2 million, representing the portion of the fair value of the assumed Sensor Platforms vested stock options associated with service rendered prior to the acquisition date, as a component of the total acquisition consideration.

Purchase price allocation

The following table summarizes the estimated fair value of tangible and intangible assets acquired and liabilities assumed as of the date of the Acquisition, in thousands:


Purchase price allocated to:
Cash and cash equivalents	$	841
Accounts receivable		152
Prepaid expenses and other current assets		289
Property and equipment		42
Acquired intangibles		19,000
Goodwill		20,734
Other assets		41
Accounts payable		(24	)
Accrued expenses		(181	)
Deferred revenue		(110	)
Deferred tax liability		(89	)

Total acquisition consideration	$	40,695

The total estimated fair value of $19.0 million for intangible assets acquired were related to developed technology of $18.0 million and customer relationships of $1.0 million. The estimated fair values of the developed technology and customer relationship intangible assets were determined using the income approach (through the with-and-without method) and cost approach (through the replacement cost method), respectively.

The goodwill resulting from the Acquisition is not deductible for tax purposes.

As a result of a significant drop in the Company’s trading prices of the Company’s common stock in the public stock market during the three months ended December 31, 2014, the Company performed impairment analyses on both its goodwill and long-lived assets as of November 1, 2014. Based on the results of the impairment analyses, the Company recorded impairment charges of $20.7 million for goodwill, $10.5 million for the developed technology intangible asset and $0.1 million for the customer relationships intangible asset.

6. Intangible Assets, net

Intangible assets, net consisted of the following (in thousands):


	March 31, 2015							December 31, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technology	$	7,494	$	(2,427	)	$	5,067	$	7,494	$	(1,627	)	$	5,867
Customer relationships		904		(679	)		225		904		(454	)		450

	$	8,398	$	(3,106	)	$	5,292	$	8,398	$	(2,081	)	$	6,317

Amortization expense relating to developed technology included in cost of revenue for the three months ended March 31, 2015 was approximately $0.8 million. Amortization expense relating to customer relationships included in selling, general and administrative expenses for the three months ended March 31, 2015 was approximately $0.2 million.

The estimated future amortization expense of intangible assets as of March 31, 2015 was as follows (in thousands):


Nine months ended December 31, 2015	$	2,625
2016		2,667

Total	$	5,292

7. Net Loss per Share

The following table sets forth the computation of the Company’s basic and diluted net loss per share:


	Three months ended March 31,
	2015			2014
	(in thousands, except per share data
Numerator:
Net loss - basic and diluted	$	(17,554	)	$	(7,337	)

Denominator:
Weighted average shares used in computing net loss per share:
Basic		23,367			22,221
Weighted average effect of potentially dilutive securities:
Options to purchase common stock		—			—
Restricted stock units		—			—
Employee stock purchase plan		—			—

Diluted		23,367			22,221

Net loss per share:
Basic	$	(0.75	)	$	(0.33	)

Diluted	$	(0.75	)	$	(0.33	)

The following potentially dilutive securities were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive:


	Three months ended March 31,
	2015		2014
	(in thousands)
Options to purchase common stock		3,882		4,679
Restricted stock units		1,580		566

Total		5,462		5,245

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 months ended March 31, 2015 and 2014 was $1.3 million and $1.4 million, respectively.

On June 5, 2012, the Company entered into a lease agreement for its corporate headquarters, which consists of 87,565 square feet of office space in Mountain View, California. The lease for this facility commenced on October 1, 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 for an additional five years. As of December 31, 2013, the Company had completed the build-out of its corporate headquarters and had taken occupancy of the facility.

Purchase commitments

The Company subcontracts with other companies to manufacture its voice and audio processors. Audience may generally cancel these purchase commitments at any time; however, the Company is required to pay all costs incurred through the cancellation date. The Company rarely cancels these agreements once production has started. The Company had $29.6 million in open purchase commitments with its third-party foundries and other suppliers at March 31, 2015.

Noncurrent Gross Unrecognized Tax Benefits

As of March 31, 2015, the Company had $0.8 million of non-current gross unrecognized tax benefits that are reflected in income taxes payable-noncurrent in the condensed consolidated balance sheets. The timing of any payments that could result from these unrecognized tax benefits will depend upon a number of factors. Accordingly, the Company is not able to provide a reasonable estimate of the timing of future payments relating to these obligations.

Litigation

From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. The Company 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 the Company and its customers by determining the scope, enforceability and validity of third party proprietary rights or to establish the Company’s proprietary rights. The Company has also received a complaint which purports to be brought on behalf of a class of purchasers of its common stock issued in or traceable to the Company’s initial public offering (“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 the Company or pursuant to which it has indemnification obligations and the outcome could have a material adverse impact on its 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 the Company, the members of its board of directors, two of its executive officers and the underwriters of its IPO. 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. 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 grounds 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. On January 16, 2015, the court granted plaintiff’s motion to certify a class. A trial has been scheduled for September 15, 2015. On May 1, 2015, the parties submitted a stipulation to reschedule the trial date to March 14, 2016. The Court has not yet approved the stipulation. The Company believes that the allegations in the complaint are without merit and intends 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 the Company 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.

Indemnities, Commitments and Guarantees

During the normal course of business, the Company may make certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying condensed consolidated balance sheets. Where necessary, the Company accrues for losses for any known contingent liabilities, including those that may arise from indemnification provisions, when future payment is probable and estimable.

9. Stock-based Compensation

The following is a summary of option activity under the Company’s 2011 Equity Incentive Plan (the “2011 Plan”) for the three months ended March 31, 2015:


	Outstanding options
	Number of Shares			Weighted Average Exercise Price
Balances at December 31, 2014		3,773,745		$	8.73
Options granted		599,300			4.60
Options exercised		(67,248	)		2.48
Options cancelled		(264,815	)		11.38

Balances at March 31, 2015		4,040,982			8.04

The following is a summary of RSU activity for the three months ended March 31, 2015:


	Shares outstanding
	Number of Shares			Weighted Average Grant Date Fair Value
Balance at December 31, 2014		1,482,916		$	8.67
RSUs granted		733,561			4.61
RSUs released		(82,506	)		12.24
RSUs cancelled/forfeited		(287,782	)		7.68

Balance at March 31, 2015		1,846,189			7.06

Stock-based Compensation

The following table shows a summary of the stock-based compensation expense included in the condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014:


	Three months ended March 31,
	2015		2014
	(in thousands)
Cost of revenue	$	14	$	62
Research and development		980		652
Selling, general and administrative		1,149		862

Stock-based compensation expense	$	2,143	$	1,576

At March 31, 2015, the Company had $5.2 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested stock options that it expects to recognize over a weighted average period of 3.4 years.

At March 31, 2015, total unrecognized estimated compensation expense, net of estimated forfeitures, related to unvested RSUs granted was $11.5 million, which is expected to be recognized over a weighted-average period of 2.3 years.

10. Capital stock

Common stock

As of March 31, 2015 and December 31, 2014, the Company had reserved shares of its common stock for future issuance as follows:


	March 31, 2015		December 31, 2014
Shares reserved for stock options and restricted stock units		6,427,298		5,511,373
Shares reserved for employee stock purchase plan		232,832		70

11. 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 valuation allowance on U.S. deferred tax assets 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 (1.5)% and (25)% for the three months ended March 31, 2015 and 2014, respectively. The Company’s provision for income taxes was $0.3 million and $1.5 million for the three months ended March 31, 2015 and 2014, respectively. The decrease in income tax provision for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 was primarily due to an increase in loss before income taxes and a change in the jurisdictional mix of where income is earned. The Company provides U.S. income taxes on the earnings of foreign subsidiaries, unless the subsidiaries’ earnings are considered indefinitely reinvested outside the U.S. The Company’s intent is to indefinitely reinvest its non-U.S. funds in its foreign operations, and its current plans do not demonstrate a need to repatriate them to fund its U.S. operations.

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 weighs both positive and negative evidence in determining the need for a valuation allowance, such as historical income (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. In the event the Company determines that it would not be able to realize all or part of its net deferred tax assets, 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. The realization of deferred tax assets is primarily dependent on the Company generating sufficient U.S. and foreign taxable income in future fiscal years. The Company weighs both positive and negative evidence, from a quantitative and qualitative perspective, with more weight given to evidence that can be objectively verified. Under this standard, the Company’s downward trend of U.S. pretax income and current year U.S. pretax loss and three year cumulative loss in the U.S. considering the current and prior 2 years was considered significant and objectively verifiable negative evidence. In addition, the Company is subject to business uncertainties that make it difficult to forecast demand and production levels due to a lack of long term purchase commitments. Therefore, the Company is unable to reliably forecast taxable income in order to realize its U.S. deferred tax assets. Based on this significant negative evidence, the Company concluded that a valuation allowance should be maintained on all U.S. deferred tax assets as of March 31, 2015. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions and maintain the valuation allowances until sufficient positive evidence exists to support a reversal. In the event that the Company determines that the deferred tax assets are realizable, an adjustment to the valuation allowance will be reflected in the tax provision in the period such determination is made.

As of March 31, 2015, the Company had gross unrecognized tax benefits totaling $7.8 million. Approximately $6.5 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 adopted ASU No. 2013-11 during the three months ended March 31, 2015 and offset $0.3 million of the unrecognized tax benefits in noncurrent income taxes payable with the related deferred tax assets. The Company recognizes interest and/or penalties related to income tax matters within the provision for income taxes in the condensed consolidated statements of operations. As of March 31, 2015, the Company had no accrued interest or penalties due to its net operating losses and tax credits available to offset any tax adjustments. Although timing of the resolution and/or closure of audits is highly uncertain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months.

12. 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 the Company’s operations on a consolidated basis for purposes of allocating resources. When evaluating financial performance, the CODM reviews individual customer and product information, while other financial information is reviewed on a consolidated basis.

Substantially all of the Company’s revenue was generated from the sale of its products to CMs and OEMs whose primary manufacturing operations and distributors 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 Company’s revenue is therefore based on the country or region in which its OEMs or their CMs issue their purchase orders to the Company.

Revenues by geographic regions are based upon the customers’ or their CM’s ship-to address or headquarters location. The following table sets forth reportable revenues by geographic regions:


	Three months ended March 31,
	2015		2014
	(in thousands)
Revenues:
South Korea	$	15,753	$	26,769
China		1,604		7,218
United States		657		1,884
Other		431		89

Total	$	18,445	$	35,960

13. Subsequent events

On April 29, 2015, the Company, Knowles Corporation, a Delaware corporation (“Knowles”), and Orange Subsidiary, Inc., a Delaware corporation and a wholly-owned subsidiary of Knowles (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) which contemplates the acquisition by Knowles, through Merger Sub, of the Company in a two-step transaction comprised of a combination cash and stock exchange offer for all of the issued and outstanding shares of the Company’s common stock, followed by a merger of Merger Sub with and into the Company with the Company surviving as a wholly-owned subsidiary of Knowles.

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, 2014, 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, 2014.

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 a 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 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 $18.4 million and $36.0 million for the three months ended March 31, 2015 and 2014, respectively. We recorded a net loss of $17.6 million and $7.3 million for the three months ended March 31, 2015 and 2014, respectively.

On July 11, 2014, we completed our acquisition of Sensor Platforms. Sensor Platforms develops software and algorithms that interpret sensor data to enable broad context awareness on smart phones, wearables and other consumer devices. We believe the combination of Sensor Platforms’ motion sensing technology with our voice and audio solutions places the combined company in a unique position to deliver compelling solutions based on the fusion of voice and motion.

We work with OEMs to have our voice and audio processors and, more recently, software designed into their products, which we refer to as design wins. We generally sell our voice and audio processors directly to OEMs and their CMs on a purchase order basis. We also sell a small portion of our products indirectly to OEMs through distributors. For a single OEM, we also license 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. In addition, we currently license software that interprets sensor data related to the motion of mobile devices and have announced our first stand-alone software product that improves sound quality and suppresses background noise. 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.

Although we have been impacted by softness in demand for certain high-end smart phones sold by our largest OEM, we intend to continue to invest in projects to support future revenue growth and revenue diversification. We anticipate that our operating results will continue to fluctuate and be subject to consumer demand for high-end smart phones and anticipate that reductions in demand by our large OEM customers will continue to have a disproportionate impact on our results.

On April 29, 2015, we entered into a Merger Agreement with Knowles and Merger Sub, which contemplates the acquisition by Knowles, through Merger Sub, of Audience in a two-step transaction comprised of a combination cash and stock exchange offer for all of the issued and outstanding shares of our common stock (the “Offer”), followed by a merger of Merger Sub with and into Audience (the “Merger”) with Audience surviving as a wholly-owned subsidiary of Knowles. In the Offer, each of our stockholders who participates in the Offer will receive consideration in the form of $2.50 per share in cash (the “Cash Consideration”) and validly issued, fully paid and nonassessable shares of common stock of Knowles (the “Stock Consideration”, and together with the Cash Consideration, the “Offer Consideration”) equal to the quotient, subject to adjustment for stock splits, stock dividends and similar events, obtained by dividing $2.50 by an amount equal to the volume weighted average of the sale prices for the common stock of Knowles (the “Closing Date Average Price”) on each of the 10 consecutive trading days ending on and including the second trading day prior to the expiration of the Offer; provided that the value of the Closing Date Average Price may not exceed $23.35 nor be less than $18.16 (the adjustments to the Closing Date Average Price referred to herein as the “Collar”). Pursuant to the terms of the Merger Agreement, at the Effective Time, by virtue of the Merger, each share of the our common stock (other than dissenting shares) will be converted into the right to receive the Offer Consideration. Consummation of the Offer is subject to various conditions set forth in the Merger Agreement, including, among others: (i) the condition that at least a majority of (x) the total number of shares of our common stock outstanding as of the expiration of the Offer, including such shares subject to RSUs and such shares deemed issued

pursuant to our employee stock purchase plan, plus (y) the aggregate number of shares of our common stock issuable to holders of options to purchase shares of our common stock from which we have received notices of exercise prior to the expiration of the Offer, be tendered in the Offer; and (ii) other conditions set forth in Annex II to the Merger Agreement, including that five of six specified key employees have employment arrangements with Knowles, Audience or an Affiliate in full force and effect as of the closing of the Merger.

Business factors affecting our performance

Competition in market for voice and audio improvement. The market for our products is evolving rapidly and is technologically challenging. Our success will depend, in part, on growth of this market, our ability to adapt to demands from users, OEMs and mobile network operators, (“MNOs”), and our ability to remain competitive in the industry. OEMs and MNOs may decide that the costs of improving sound quality outweigh the benefits, which could limit demand for our solutions. User demand for new levels of voice and audio quality and functionality 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.

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 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 can generate a wide range of sales volumes for our products, 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. Revenue from Samsung Electronics Co., Ltd. (“Samsung”) accounted for 85% of total revenue for the three months ended March 31, 2015. Revenue from Samsung and Comtech, International Ltd. (“Comtech”), a distributor who sells the Company’s products to end customers, accounted for 74% and 18%, respectively, of total revenue for the three months ended March 31, 2014. No other OEM, CM or distributor accounted for 10% or more of our total revenue for the three months ended March 31, 2015 and 2014.

Fluctuations in the demand for the products of our OEMs have a significant impact on our business as our OEMs reduce their purchase orders with us in response to such demands and competitive pressures. For example, we announced in April 2015, that there have been material declines in forecasted demand from our largest customer relative to management expectations for the quarter ended June 30, 2015, and we announced in July 2014 and October 2014 that weakness in demand for certain high-end smart phones was anticipated to cause a decline in the volume of processors purchased from us by Samsung, and that such weakness in demand was expected to continue. As a result, we expect that we will continue to incur net losses in 2015. We anticipate that fluctuations in demand for certain high-end smart phones and concentration of revenue in one or more OEMs will continue in the short-term and that we may not be able to foresee slowing demand early enough to take action to control our expenses. Any further reductions in demand beyond current projections may require us to either implement a reduction in force or raise additional capital through equity or debt financing. As a majority of our expenses, other than the cost of manufacturing our processors, are staff-related, a reduction in those expenses may be delayed in having an effect on our operating results. For example, in August 2014, we announced and implemented a restructuring plan for a workforce reduction through involuntary terminations. We may also impair our ability to grow our revenue in the future if our expense cuts cause us to forego development of future programs.

While we strive to expand and diversify our OEM base and 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.

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 selling price, 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.

Relationships with MNOs. MNOs can help determine product specifications for OEM products, thereby influencing the design and components selected by OEMs. 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. However, MNOs may not continue to value additional 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 select markets, including South Korea, China and the United States (“U.S. “), our financial results will be impacted by general economic and political conditions in these markets.

Components of our results of operations

Revenue

To date, we have generated hardware revenue from sales of our processors and codecs and we expect the sale of our processors to continue to represent the substantial majority of our revenue. 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 customers is typically complete at the time of shipments as per our shipping terms. We also 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.

Under a license agreement we entered into in 2008, we began to recognize licensing revenue on royalty payments in the first quarter of 2012. As part of our 2008 license agreement, we are entitled to receive a royalty fee for each 2011 model of mobile device that is sold incorporating our processor IP. For the 2012 and 2013 models of this mobile device, we are entitled to receive a royalty fee that depends upon whether our processor IP is incorporated and/or enabled in units sold. We entered into an additional license agreement in 2010 relating to a new generation of our processor IP. We do not expect to offer this arrangement to other OEMs. However, in 2014, we introduced our first software product and anticipate that it, as well as the acquisition of certain software products from Sensor Platforms, may lead us to recognize additional licensing revenue in the future.

We recognize licensing revenue on the basis of the number of mobile phones sold that incorporate our processor IP and for which a royalty payment is received by us. We are reliant on the accuracy of quarterly OEM shipment reports, which we typically receive within 45 days after the OEM’s fiscal quarter end, in order to calculate royalties owed to us and recognize our licensing revenue. Our licensing revenue will lag the sales of mobile phones that integrate our processor IP by one quarter. For example, although mobile phones integrating our processor IP commenced shipping in the three months ended December 31, 2011, we did not recognize license revenue related to those mobile devices until the three months ended March 31, 2012. We have limited rights to audit the shipment data we receive, which limits our ability to verify calculated licensing revenue or seek redress for reports we believe are not accurate and we have limited experience in testing and evaluating the accuracy of the data we receive.

We maintain sales operations, which include our direct sales force, third-party sales representatives and distributors, in Asia, North America, 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 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, an allocation of overhead and provisions for excess and obsolete inventories, if any. Additionally, cost of revenue also includes the amortization of the developed technology intangible asset that we recorded as part of the purchase price accounting associated with the acquisition of Sensor Platforms in July 2014. 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, royalties from the license of processor IP, and sales of software. 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 components of each of our operating expense categories. 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 and internally developed software, which we depreciate and amortize over their estimated useful lives. We have engineering development teams in the United States and India.

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, allocated overhead expenses, and the amortization of the customer relationship intangible asset recorded as part of the purchase price accounting associated with the acquisition of Sensor Platforms in July 2014. Professional fees principally consist of legal, audit, tax and accounting consultation services.

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 have not been material to date.

Income tax provision

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 valuation allowance on U.S. deferred tax assets 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 future changes in the realizability of our 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, resolution of unrecognized tax benefits and shifts in the amount of income before tax earned in the United States as compared with other regions in the world.

Backlog

We do not believe that our backlog as of any particular date is meaningful, as our sales are made primarily pursuant to purchase orders. Only a small portion of our orders is noncancelable, and the dollar amount associated with the noncancelable portion is not significant.

JOBS Act

In April 2012, the JOBS Act was enacted. We are an emerging growth company as defined under the JOBS Act, and as such we intend to rely on certain exemptions allowed under the JOBS Act as described in our Annual Report on Form 10-K for the year ended December 31, 2014.

Results of operations

Comparison of the three months ended March 31, 2015 and 2014

The following sets forth our operating results for the three months ended March 31, 2015 and 2014. 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 March 31,
	2015					2014					Change
	(in thousands, except percentages)
	Amount		% of total revenues			Amount		% of total revenues			Amount			Percent
Revenue:
Hardware	$	17,788		96	%	$	34,076		95	%	$	(16,288	)		(48	%)
Licensing		657		4	%		1,884		5	%		(1,227	)		(65	%)

Total revenue	$	18,445		100	%	$	35,960		100	%	$	(17,515	)		(49	%)

Hardware revenue for the three months ended March 31, 2015 was $17.8 million, compared to $34.1 million for the three months ended March 31, 2014, a decrease of $16.3 million, or 48%. The decrease was primarily due to the softness in demand for certain high-end smart phones and a reduction in demand for older generation products.

Licensing revenue for the three months ended March 31, 2015 was $0.7 million, compared to $1.9 million for the three months ended March 31, 2014, a decrease of $1.2 million, or 65%. The decrease was primarily due to declining demand for one of our OEM’s 2011 model of its mobile phones. We expect this royalty-related revenue to continue to decline for the remainder of 2015.

For the three months ended March 31, 2015, revenue from Samsung accounted for 85% of total revenue. For the three months ended March 31, 2014, revenue from Samsung and Comtech accounted for 74% and 18% of total revenue, respectively. No other OEM, CM or distributor accounted for more than 10% of our total revenue in either period.

Revenue by geography


	Three months ended March 31,
	2015					2014					Change
	(in thousands, except percentages)
	Amount		% of total revenues			Amount		% of total revenues			Amount			Percent
Revenue:
South Korea	$	15,753		85	%	$	26,769		75	%	$	(11,016	)		(41	%)
China		1,604		9	%		7,218		20	%		(5,614	)		(78	%)
United States		657		4	%		1,884		5	%		(1,227	)		(65	%)
Other		431		2	%		89		0	%		342			384	%

Total revenue	$	18,445		100	%	$	35,960		100	%	$	(17,515	)		(49	%)

Revenue generated in Asia represented 96% and 95% of our total revenue for the three months ended March 31, 2015 and 2014, respectively. Revenue generated in South Korea decreased $11.0 million for the three months ended March 31, 2015 compared to the same period in 2014 and was primarily due to the softness in demand for certain high-end smart phones. Revenue generated in China decreased $5.6 million primarily due to a reduction in demand for older generation products from Chinese OEMs. Revenue generated in the United States decreased $1.2 million primarily due to the decrease in licensing revenue for one of our OEM’s mobile phone models which we anticipate will continue to decline as this OEM phases out the older generation of mobile phones in which our processor IP had been included.

Cost of revenue and gross profit


	Three months ended March 31,
	2015					2014					Change
	(in thousands, except percentages)
	Amount		% of total revenues			Amount		% of total revenues			Amount			Percent
Cost of revenue	$	10,587		57	%	$	17,364		48	%	$	(6,777	)		(39	%)
Gross profit	$	7,858		43	%	$	18,596		52	%	$	(10,738	)		(58	%)

Cost of revenue for the three months ended March 31, 2015 was $10.6 million, compared to $17.4 million for the three months ended March 31, 2014, a decrease of $6.8 million, or 39%. The decrease was primarily due to the softness in demand for certain high-end smart phones and a reduction in demand for older generation products. This was partially offset by an increase of approximately $0.8 million in amortization expense related to the developed technology intangible asset acquired in connection with our acquisition of Sensor Platforms.

Gross margin percentage was 43% and 52% for the three months ended March 31, 2015 and 2014, respectively. The decrease was primarily due to a reduction in licensing revenue and amortization expense related to the developed technology intangible asset acquired in connection with our acquisition of Sensor Platforms.

Operating expenses


	Three months ended March 31,
	2015					2014					Change
	(in thousands, except percentages)
	Amount		% of total revenues			Amount		% of total revenues			Amount			Percent
Research and development	$	13,639		74	%	$	12,188		34	%	$	1,451			12	%
Selling, general and administrative		11,125		60	%		12,245		34	%		(1,120	)		(9	%)

Total operating expenses	$	24,764		134	%	$	24,433		68	%	$	331			1	%

Research and development. Research and development expenses for the three months ended March 31, 2015 were $13.6 million, compared to $12.2 million for the three months ended March 31, 2014, an increase of $1.5 million, or 12%. The increase was primarily due to a $0.8 million increase in bonus expense primarily related to changes in our bonus programs, an increase of $0.5 million in tape-out related expenses related to future products and a $0.3 million increase in stock-based compensation expenses related to new equity awards. These were partially offset by a decrease of $0.2 million in supply-related expenses due to the timing of purchases.

Selling, general and administrative. Selling, general and administrative expenses for the three months ended March 31, 2015 were $11.1 million, compared to $12.2 million for the three months ended March 31, 2014, a decrease of $1.1 million, or 9%. The decrease was primarily due to a decrease of $0.8 million in salaries and wages related to a decrease in headcount, a decrease of $0.2 million in travel related expenses related to a decrease in headcount and a decrease of $0.2 million in equipment and related expense due to continuing efforts to manage spending.

Other expense, net


	Three months ended March 31,
	2015			2014			Change
	(in thousands, except percentages)						Amount			Percent
Other expense, net	$	(393	)	$	(33	)	$	(360	)		1092	%

Other expense, net, for the three months ended March 31, 2015 was an expense of $393,000, compared to an expense of $33,000 for the three months ended March 31, 2014, an increase of $360,000, or 1092%. The increase was primarily due to foreign exchange losses in the three months ended March 31, 2015.

Income tax provision


	Three months ended March 31,
	2015		2014		Change
	(in thousands, except percentages)				Amount			Percent
Income tax provision	$	261	$	1,485	$	(1,224	)		(82	%)

Income tax provision for the three months ended March 31, 2015 was $0.3 million, compared to an income tax provision of $1.5 million for the three months ended March 31, 2014. The decrease was primarily due to the increase of $11.4 million in loss before income taxes for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014, and a change in the jurisdictional mix of where income was earned.

Liquidity and capital resources

Since our inception, we have incurred significant losses, and, as of March 31, 2015, we had an accumulated deficit of $115.6 million.

As of March 31, 2015, we had cash and cash equivalents of $37.3 million, short-term investments of $7.0 million, future minimum lease payment obligations of $38.1 million and no other debt.

Although there have been recent material declines in forecasted demand from our largest customer relative to management expectations for the quarter ended June 30, 2015 which has eroded projected operating results for 2015 as well as our projected cash balances, we believe that our existing sources of liquidity will satisfy our working capital and capital requirements for the next twelve months. However, any further reductions in demand beyond current projections may require us to either implement a reduction in force or 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 our 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 three months ended March 31, 2015 and 2014 were as follows:


	Three months ended March 31,
	2015			2014
	(in thousands)
Net cash used in operating activities	$	(10,700	)	$	(13,611	)
Net cash provided by (used in) investing activities		1,777			(5,135	)
Net cash provided by financing activities		15			1,659

Cash flows from operating activities

Net cash used in operating activities was $10.7 million for the three months ended March 31, 2015 and was primarily the result of a net loss of $17.6 million and an increase in accounts receivable of $5.0 million due to the timing of sales and collections. These were partially offset by a decrease of $3.8 million in inventories due to the continuing efforts to manage inventory levels, an increase in accounts payable and accrued and other liabilities of $2.9 million due to the timing of purchases, depreciation and amortization expense of $2.6 million and payment, and stock-based compensation expense of $2.1 million.

Net cash used in operating activities was $13.6 million for the three months ended March 31, 2014 and was primarily the result of a net loss of $7.3 million, an increase in accounts receivable of $5.9 million due to the timing of sales and collections, an increase in inventories of $5.6 million to support continuing demand for our existing products and the build-up of our newer generation products for new customer devices, and excess tax benefits from stock options of $1.4 million. These were partially offset by non-cash items such as depreciation and amortization expense of $1.3 million, stock-based compensation expense of $1.6 million, an increase of accounts payable of $2.9 million due to the timing of payments, and an increase of accrued and other liabilities of $0.8 million.

Cash flows from investing activities

Net cash provided by investing activities for the three months ended March 31, 2015 of $1.8 million consisted primarily of proceeds from the sale and maturities of marketable securities of $6.0 million. This was partially offset by purchases of marketable securities of $4.0 million, and purchases of property and equipment of $0.2 million.

Net cash used in investing activities for the three months ended March 31, 2014 of $5.1 million consisted primarily of the purchase of marketable securities of $12.0 million and the acquisition of property and equipment of $2.4 million to support our ongoing business efforts. These were offset by the proceeds from the sale and maturities of marketable securities of $9.1 million, and the release of $0.2 million restricted cash maintained in a certificate of deposit account following the termination of the letter of credit required for the lease of our former headquarters facility.

Cash flows from financing activities

Net cash provided by financing activities of $15,000 for the three months ended March 31, 2015 was primarily due to proceeds of $167,000 from the exercise of employee stock options, partially offset by tax payments related to RSUs of $152,000.

Net cash provided by financing activities of $1.7 million for the three months ended March 31, 2014 was primarily due to proceeds of $0.4 million from the exercise of employee stock options and employee stock purchase plan, and excess tax benefits from stock options of $1.4 million. This was partially offset by cash payments of $0.2 million on minimum statutory withholding taxes on behalf of employees for shares issued pursuant to restricted stock units.

Application of Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). Accounting policies, methods and estimates are an integral part of the preparation of consolidated financial statements in accordance with GAAP and, in part, are based upon management’s current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the consolidated financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our consolidated financial statements, areas that are particularly significant include:

•

Revenue recognition policies;

•

Stock-based compensation; and

•

Income taxes.

We had no material changes to our critical accounting policies and estimates during the three months ended March 31, 2015, as compared to the critical accounting policies and estimates described in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed for the year ended December 31, 2014.

Contractual obligations and commitments

Our primary contractual obligations are from materials purchase obligations with our third-party foundries and other suppliers and operating leases for office space. See Note 8 to Condensed Consolidated Financial Statements for a discussion of these matters.

Other than the contractual obligations and commitments discussed in Note 8 to the Condensed Consolidated Financial Statements, we do not have commercial commitments under lines of credit, standby repurchase obligations or other such debt arrangements. We do not have any other material non-cancellable purchase commitments as of March 31, 2015.

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.

Recent accounting pronouncements

In January 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update (“ASU”) which simplifies income statement classification by removing the concept of extraordinary items from GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. The new standard is effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We do not expect to early adopt this guidance and we do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. Early adoption is permitted. We do not expect to early adopt this guidance and we do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) issued a converged standard on revenue recognition from contracts with customers. The objective of the new guidance is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The newly converged standard contains principles that will be applied to determine how revenue should be measured and the timing of when it should be recognized. The guidance is effective for fiscal years, and interim periods within fiscal years, beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the impact that this guidance may have on our financial position, results of operations and 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 March 31, 2015, 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 expense, net” in the condensed consolidated statements of operations 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 financial condition, operating results or cash flows.

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 financial condition, operating results and cash flows.

Interest rate sensitivity

Our exposure to market risk for changes in interest rates relates primarily to our cash, cash equivalents and short-term investments totaling $44.3 million as of March 31, 2015 and consisted primarily of cash, money market funds and U.S. government bonds and notes with maturities of less than one year from the date of purchase. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of the interest rates in the United States. However, because of the short-term nature of our interest bearing securities, a 10% change in market interest rates would not be expected to have a material impact on our financial condition, results of operations or cash flows.

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 March 31, 2015. 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 (the “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 our management, including its principal executive and principal financial officers, as appropriate to 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 March 31, 2015, 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

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended March 31, 2015 that has materially affected, or is 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, financial condition, operating results 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. 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. On January 16, 2015, the court granted plaintiff’s motion to certify a class. A trial has been scheduled for September 15, 2015. On May 1, 2015, the parties submitted a stipulation to reschedule the trial date to March 14, 2016. The court has not yet approved the stipulation. 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 business, financial condition, operating results or cash flows.

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, results of operations and cash flows. 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 proposed acquisition by Knowles

Failure to complete, or delays in completing, the merger with Knowles could materially and adversely affect our results of operations and stock price.

On April 29, 2015, we entered into a Merger Agreement with Knowles, which contemplates the acquisition by Knowles of us in a two-step transaction comprised of a combination cash and stock exchange offer for all of the issued and outstanding shares of our common stock (the “Offer”), followed by a merger of Merger Sub and us, with us being the surviving corporation (the “Merger”). Consummation of the Offer and the Merger (collectively, the “Transaction”) is subject to the conditions described therein, including the minimum tender requirement. We cannot assure you that we will be able to successfully consummate the Transaction as currently contemplated under the Merger Agreement or at all. Risks related to the failure of the proposed Transaction to be consummated include the following:

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we would not realize any or all of the potential benefits of the Transaction, including any synergies that could result from combining the resources of us and Knowles, which could have a negative effect on our stock price;

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we will remain liable for significant transaction costs, including legal, accounting, financial advisory and other costs relating to the Transaction regardless of whether the Transaction is consummated;

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under some circumstances, we may have to pay a termination fee to Knowles in the amount of $5 million if the Offer is not completed;

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the attention of our management and employees may be diverted from day-to-day operations during the period up to the completion of the Merger;

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our business may be disrupted by customer uncertainty over when or if the Transaction will be completed;

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under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Transaction, which restrictions could adversely affect our ability to conduct business as we otherwise would have done if we were not subject to these restrictions; and

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our ability to retain current key employees or attract new employees may be harmed by uncertainties associated with the proposed Transaction.

The occurrence of any of these events individually or in combination could materially and adversely affect our results of operations and stock price.

If the Transaction is completed, the combined company may not perform as we expect, or as the market expects, which could have an adverse effect on the price of Knowles stock, which our stockholders will own following such completion.

The integration of us into Knowles’ existing operations will be a complex, time-consuming and expensive process and may disrupt Knowles’ existing operations if it is not completed in a timely and efficient manner. If Knowles’ management is unable to minimize the potential disruption to its business during the integration process, Knowles may not realize the anticipated benefits of the Transaction. Realizing the benefits of the Transaction will depend in part on the integration of technology, operations, and personnel while maintaining adequate focus on Knowles’ core businesses. Knowles may encounter substantial difficulties, costs and delays in integrating us including the following, any of which could seriously harm its results of operations, business, financial condition and/or the price of its stock:

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conflicts between business cultures;

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difficulties and delays in the integration of operations, personnel, technologies, products, services, business relationships and information and other systems of the acquired businesses;

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the diversion of management’s attention from normal daily operations of the business;

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the incurrence of contingent liabilities;

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lost sales and customers as a result of customers of either of the two companies deciding not to do business with the combined company;

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difficulties caused by entering geographic and business markets in which Knowles has no or only limited experience;

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loss of key employees and disruptions among employees that may erode employee morale;

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inability to implement uniform standards, controls, policies and procedures; and

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failure to achieve anticipated levels of revenue, profitability or productivity.

Knowles’ operating expenses may increase significantly over the near term due to the increased headcount, expanded operations and changes related to the Transaction. To the extent that the expenses increase but revenues do not, there are unanticipated expenses related to the integration process, or there are significant costs associated with presently unknown liabilities, Knowles’ business, operating results and financial condition may be adversely affected. Failure to minimize the numerous risks associated with the post-acquisition integration strategy also may adversely affect the trading price of Knowles common stock.

The announcement and pendency of the Transaction could cause disruptions in our business or the business of Knowles, which could have an adverse effect on the respective businesses and financial results, and consequently on the combined company.

We and Knowles have operated and, until the consummation of the Transaction, will continue to operate, independently. Uncertainty about the effect of the Offer and the Transaction on customers and employees may have an adverse effect on Knowles or us and consequently on the combined company. In response to the announcement of the Offer, existing or prospective customers or suppliers of Knowles or us may:

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delay, defer or cease purchasing products or services from or providing products or services to Knowles, us or the combined company;

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delay or defer other decisions concerning Knowles, us or the combined company; or

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otherwise seek to change the terms on which they do business with Knowles, us or the combined company.

Any such delays or changes to terms could seriously harm the business of each company or, if the Transaction is completed, the combined company.

In addition, as a result of the Transaction, current and prospective employees could experience uncertainty about their future with Knowles, us or the combined company. These uncertainties may impair the ability of each company to retain, recruit or motivate key personnel.

Our executive officers and directors may have interests that are different from, or in addition to, those of our stockholders generally.

Our executive officers and directors may have interests in the Transaction that are different from, or are in addition to, those of our stockholders generally. These interests include direct or indirect ownership of our common stock, stock options and restricted stock units and for executive officers, change of control and severance agreements.

The following risk factors assume that we remain a stand-alone company except as otherwise noted.

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 would adversely affect our revenue and significantly harm our business, financial condition, operating results and cash flows.

For the three months ended March 31, 2015 and 2014, Samsung accounted for 85% and 74% of our total revenue, respectively, and we anticipate that Samsung will continue to represent a majority of our revenue at least through the end of 2015. Samsung may purchase fewer of our voice and audio processors than it did in the past, alter its purchasing patterns, modify the terms on which it purchases our products, or decide not to purchase our products at all. For example, we announced in April 2015, that there have been material declines in forecasted demand from our largest customer relative to management’s expectations for the quarter ended June 30, 2015. In addition, our revenue is dependent upon consumer acceptance of and demand for Samsung’s high-end smart phones, in which our products are incorporated. Samsung announced in October 2014 that its third quarter earnings decreased substantially as a result of declining phone sales due to increased smart phone competition and later announced in January 2015 that it expected demand for its smart phones to be weak in the first quarter of 2015 as a result of seasonality. If Samsung continues to experience declining sales of its smart phones which include our processors, our business, financial condition, operating results and cash flows would be significantly harmed. 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. Samsung may seek second sources or decide to replace our processors with other hardware, software or lower cost solutions. If we fail to achieve design wins for global platforms at Samsung, our future revenue and profitability may be harmed.

We depend on a small number of OEMs for a substantial majority 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 derive a substantial majority of our revenue from sales to a small number of OEMs. For the three months ended March 31, 2015, Samsung accounted for 85% of our total revenues. We expect this concentration in a small number of OEMs to continue during the remainder of 2015. 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. For example, we announced in April 2015, that there have been material declines in forecasted demand from our largest customer relative to management’s expectations for the quarter ended June 30, 2015. In addition, we expect our licensing revenue on royalty payments from Apple to substantially decline as this OEM phases out older generations of mobile phones in which our processor IP had been included.

Our OEMs typically buy our products 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 products from us in the future. For example, we announced in August 2013, July 2014 and October 2014 that weakness in demand for certain high-end smart phones was anticipated to cause a decline in the volume of products purchased from us by our largest OEM and as a result, we had excess inventory for which we recorded reserves.

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. Although an OEM may design us into a particular device, we endeavor to win design slots in other devices, including the next generation devices and may not be able to do so. Because the commercial life of smart phones is relatively limited, we have limited ability to predict whether a given OEM will continue to use our processors. 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. 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. 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. For example, due to weakness in demand for certain high-end smart phones we experienced a significant decline in the year ended December 31, 2014 and we do not expect to see a recovery in such high-end smart phones during the first half of 2015. Decreased purchases by large OEM customers could also cause significant fluctuations in our results of operations because we have significant fixed expenses in the short term and may not be able to reduce expenses in a timely manner to offset such a short-fall. In addition, 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 products and/or technology. 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.

We are dependent on sales of mobile devices that incorporate our processors and software, 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 and processor IP for mobile devices. Continued market adoption of mobile device sound quality solutions, as well as motion sensor and voice quality software, 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.

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 personal computers and a smartwatch. 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 may not be successful in our efforts to expand our product offerings.

We have expanded our product portfolio to include codecs, which can translate back and forth between analog audio and digital signals, motion sensor software and voice quality software. We have limited experience in designing audio codecs, motion sensor software and audio quality software, and selling processors that include audio codecs or software. The market for audio codecs, motion sensor software and audio quality software is intensely competitive and we may not achieve market acceptance or design wins in end user devices that are produced in substantial numbers. In addition, we may encounter unforeseen difficulties, complications and other unknown factors that may delay deployment of processors that include our audio codec or in our software releases. If we are unable to realize revenue from the sale of our processors incorporating audio codecs or from our software offerings, we may not be able to maintain or increase our revenue.

In November 2014, we announced our first generation of software products that improve audio quality, reduce background noise and assist with voice-controlled applications. In addition, we are developing new versions of our processors that feature the ability to track and process information from motion sensors. We have limited experience in designing and selling software products and processors with motion sensing capabilities and may not be successful in doing so. In addition, we may encounter unforeseen difficulties, complications and other unknown factors that may delay deployment of our processors or software. The markets for audio software and motion sensor solutions are rapidly evolving and we may not achieve market acceptance or design wins in end user devices that are produced in substantial numbers. A failure to integrate our audio processing with motion sensing software in a timely manner, could adversely affect our business, financial condition or results of operations. If we are unable to realize revenue from the sale of our software and processors incorporating motion sensing, we may not be able to maintain or increase our revenue.

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

Since our formation, we incurred a net loss in every year prior to 2010 and in 2014. Although we had net income for the years ended December 31, 2010 through 2013, we experienced a net loss in the three months ended September 30, 2013 and each quarter thereafter. We expect to incur net losses in the three months ending June 30, 2015. As of March 31, 2015, our accumulated deficit was $115.6 million.

We anticipate continuing to spend significantly to develop new processors and software solutions and expand our business, including expenditures for additional personnel in sales, 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 achieve profitability. Our rate of revenue growth may not be sustainable and we may not generate revenue in excess of our anticipated additional expenditures to achieve profitability.

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 were profitable in 2010 through 2013, we were not profitable in 2014. We do not expect to be profitable in the three months ended June 30, 2015 and we may not be able to return to profitability in the near term. Failure to return to 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 products and older products that are subject to average selling price erosion resulting in 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:

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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;

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

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

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

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

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

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

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

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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;

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

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

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unanticipated bad debt reserves or charges for excess or obsolete inventory;

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changes in industry standards in the mobile device industry;

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any change in the competitive landscape of our industry, including consolidation or the emergence of new competitors and announcements by us of significant acquisitions;

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

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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.

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, sensor analysis software 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 impact our sales. Competition for these and the other personnel we require, particularly in Silicon Valley, is intense. In recent months, our employees have been subject to aggressive recruitment efforts by established publicly traded companies, which has led to an increase in attrition. If our stock price performs poorly, it may adversely affect our ability to retain employees receiving stock-based compensation. 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.

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. We have also started to offer software solutions for motion sensing, such as MotionQ, and voice quality, such as Audience S1.0, and in the future, may elect to expand our offerings further to include other subsystem components. As such, we compete and, in the future may continue 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, or expect to face, competition from a number of established companies that produce components or software for the mobile device audio subsystem, or provide motion sensor solutions, such as Cirrus Logic, DSP Group, Maxim, NXP, InvenSense, Qualcomm and Texas Instruments. We also face competition from smaller, privately held companies, such as Fortemedia and Hillcrest Labs, 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 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 and software 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. 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 or provide free or promotional offers with the purchase of a package of products. 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.

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

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

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

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

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our success in developing and creating demand for new and proprietary technologies to offer products and features, including, but not limited to, our recently introduced VoiceQ feature;

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

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our success in identifying new markets, applications and technologies;

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

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

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

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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 products are designed to address the sound quality challenges faced by users with their mobile devices. OEMs and MNOs may decide that the costs of additional improvements to 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:

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introduction of new mobile devices with different components or software that provide similar functionality as our products;

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internally developed solutions that reduce the demand for our products;

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lower cost solutions;

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

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

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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 and audio codecs, we may be unable to maintain our gross margins and our revenue may decline. In addition, new products with additional functionality may have increased costs, but the selling prices for such new products may not offset such cost increases, which could reduce our gross margins.

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, or have obtained through acquisitions, 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 and/or software solutions more quickly and at reduced selling prices than we can. If our investments in acquisitions and 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 9 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 up to 12 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 TSMC and GlobalFoundries, for both of which we are not a large customer. We rely on third parties, such as STATS ChipPAC Ltd. for assembly, packaging and test. The low 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 products if they believe existing lower cost 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, including audio and multisensory solutions, we face the risk that OEMs may not understand or be willing to bear the additional 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. 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 cost 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. 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.

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, hardware requirements, interface protocols or software applications that do not interoperate properly with our products. If we fail to achieve and maintain compatibility with components, hardware requirements, 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 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, Amkor 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:

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capacity constraints;

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price increases;

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delivery delays; and

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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. We may be required to accept warranty returns from our OEMs due to production defects and may be unable to resell and have to scrap the defective products. 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 the future, experience quality problems with the die provided by our foundries and quality problems with packaging and other production activities. Our foundries and other contract manufacturers 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’ and other contract manufacturers’ 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. Past quality problems could also impair our ability to achieve new design wins with an OEM.

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 or other product failures. 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 business, financial condition, operating results 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 in various jurisdictions challenge our international tax structure 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 U.S. Administration has considered initiatives such as limitations on deferral of U.S. taxation of foreign earnings, eliminating utilization or substantially reducing our ability to claim foreign tax credits and eliminating various tax deductions until foreign earnings are repatriated to the U.S., which could substantially reduce our ability to defer U.S. taxes. If any of these proposals are constituted into law, they could have a negative impact on our business, financial condition, operating results and cash flows. 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. In addition, we acquired Sensor Platforms, which added motion sensing software to our technology offering. We have also expanded our international operations and as of December 31, 2014 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:

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

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anticipating and meeting the technology needs of users;

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

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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;

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

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

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accurately forecasting revenue and controlling costs;

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enhancing and expanding our infrastructure;

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managing inventory levels;

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

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implementing and improving our company-wide processes and procedures to address human resource, financial reporting and financial management matters.

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.

We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions could disrupt our business, cause dilution to our stockholders, reduce our financial resources and harm our business.

We acquired Sensor Platforms, and in the future, we may acquire other businesses, products or technologies. Our ability to make and successfully integrate acquisitions is unproven and we may not realize the anticipated benefits of our recent acquisition or any other future acquisition. Any acquisition, including our acquisition of Sensor Platforms, has numerous risks. Such acquisitions may not strengthen our competitive position or achieve the financial and strategic goals for the acquired and combined businesses 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. We may also experience difficulty in retaining and motivating key personnel, as well as key customers, vendors and other business partners from these businesses. Acquisitions may disrupt our ongoing operations, divert management from their primary responsibilities and employees from other opportunities, 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 intangible assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt, any of which could harm our business. Acquisitions of companies are inherently risky, and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition, results of operations and cash flows.

We may be required to recognize a significant charge to earnings if our intangible assets become impaired.

We evaluate our intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable from their future cash flows. If the sum of the estimated undiscounted cash flows is less than the carrying value of the assets, the assets will be written down to their estimated fair value. Factors that would suggest a possible impairment include, but are not limited to a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of our intangible assets, a significant adverse change in legal factors or in the business climate, including an adverse action or assessment by a regulator and a significant decrease in our stock price. We may be required to record a significant charge in our financial statements during the period in which any impairment of intangible assets is determined, which would adversely impact our results of operations. For example, during the three months ended December 31, 2014, we recorded a $10.6 million impairment charge related to intangible assets which was the result of a significant drop in the trading prices of our common stock in the public market.

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 or distributors located in Asia and we expect sales to such CMs, OEMs and distributors 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 third parties outside the U.S. During 2012, we opened our own design center in India and sales and sales support operations in China. During 2013 and 2014, we continued to expand our operations in these locations. Our international operations subject us to a variety of risks, including:

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

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

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differing employment practices and labor relations issues;

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

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

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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;

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

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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;

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increased exposure to foreign currency exchange rate risk;

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

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potentially adverse tax consequences;

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reduced protection for intellectual property rights in some countries; and

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political and economic instability.

As we expand our business globally, including China, 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 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.

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 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.

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, South Korea and Taiwan. Our finished goods inventory of processors for many of our OEMs, including Samsung, is warehoused at a single facility located in Singapore, 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 CMs’ 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.

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, operating results and cash flows 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 March 31, 2015, we held 73 issued U.S. patents expiring between July 2019 and March 2034 and also had 122 U.S. patent applications pending. As of March 31, 2015, we also had 42 pending foreign patent applications and 14 foreign patents issued. 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. Furthermore, we have historically only filed foreign patent applications in a limited number of countries and for only a relatively small subset of our U.S. patent application portfolio. Even so, we may not be able to effectively protect intellectual property rights in China or elsewhere, even if patents are granted for these filed, foreign applications. 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 and 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.

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 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 through March 31, 2015, the closing sale prices of our common stock ranged from a low of $3.32 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:

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

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recruitment or departure of key personnel;

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lawsuits threatened or filed against us;

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

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

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our failure to receive ongoing analyst coverage;

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adverse publicity and investors’ general perception of us;

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

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

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

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

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level of sales in a particular quarter;

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changes in the estimates of our operating results;

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

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major catastrophic events; and

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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. On January 16, 2015, the court granted plaintiffs’ motion to certify a class. A trial has been scheduled for September 21, 2015. On May 1, 2015, the parties submitted a stipulation to reschedule the trial date to March 14, 2016. The court has not yet approved the stipulation. 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.

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.

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 July 2014 that we believed demand from Samsung would decline as a result of end user demand for high-end smart phones, and our announcement in October 2014 regarding the continued softness in demand for high-end smart phones incorporating our products, 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 (“Section 404”), 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 upon the earliest of (i) January 1, 2018, (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) as of the end of any fiscal year in which the market value of our common stock that is held by nonaffiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

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, operating results or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

We are required, under Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for each year beginning with 2013. This assessment includes 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.

Section 404 requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the Annual Report that we filed with the SEC for 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. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) January 1, 2018, (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) as of the end of any fiscal year in which the market value of our common stock that is held by nonaffiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

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, operating results 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, 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 until the earliest of

(i) January 1, 2018, (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) as of the end of any fiscal year in which the market value of our common stock that is held by nonaffiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

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.

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. Despite litigation resulting in the limitation of certain requirements, initial disclosures were required no later than May 31, 2014, with subsequent disclosures required no later than May 31 of each following year. We incurred and expect to continue 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 business, financial condition, operating results and cash flows.

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

As of March 31, 2015, our directors, executive officers, principal stockholders and their affiliates beneficially owned, in the aggregate, approximately 38.4% of our outstanding common stock. As a result, these stockholders, if acting together, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions such as a merger or other sale of our company or our assets. In addition, these stockholders, if acting together, have the ability to exercise significant influence over 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:

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delaying, deferring or preventing a change in corporate control;

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

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

Our business could be negatively affected as a result of the actions of activist stockholders.

Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Furthermore, any perceived uncertainties may lead to the perception of a change in the direction of our business or other instability, which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. If customers choose to delay, defer or reduce transactions with us or do business with our competitors instead of us because of any such issues, then our business, financial condition, operating results and cash flows would be adversely affected.

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:

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provide that directors may only be removed for cause;

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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;

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

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

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

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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. 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.

ITEM 4.

Mine Safety Disclosures

Not applicable.

ITEM 6.

Exhibits


Exhibit number		Incorporated by reference from form	Incorporated by reference from exhibit number
Exhibit number	Description	Incorporated by reference from form	Incorporated by reference from exhibit number	Date filed

2.1	Agreement and Plan of Merger, dated as of April 29, 2015, by and among Knowles Corporation, Orange Subsidiary, Inc. and Audience, Inc.	8-K	2.1	4/30/2015

10.24#	Offer letter to Jim Steele, dated June 16, 2014, as amended March 15, 2015.

10.25	Form of Tender and Support Agreement, dated as of April 29, 2015, between Knowles Corporation and Audience directors and certain members of Audience’s senior management and certain affiliates of Tallwood Venture Capital.	8-K	10.1	4/30/2015

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.

†

The certification furnished in Exhibit 32.1 hereto is deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act of 1934. Such certification will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933 or the Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.

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: May 11, 2015	By:	/s/ PETER B. SANTOS
		Peter B. Santos
		President, Chief Executive Officer and Director

Date: May 11, 2015	By:	/s/ KEVIN S. PALATNIK
		Kevin S. Palatnik
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Exhibit index


Exhibit number		Incorporated by reference from form	Incorporated by reference from exhibit number
Exhibit number	Description	Incorporated by reference from form	Incorporated by reference from exhibit number	Date filed

2.1	Agreement and Plan of Merger, dated as of April 29, 2015, by and among Knowles Corporation, Orange Subsidiary, Inc. and Audience, Inc.	8-K	2.1	4/30/2015

10.24#	Offer letter to Jim Steele, dated June 16, 2014, as amended March 15, 2015.

10.25	Form of Tender and Support Agreement, dated as of April 29, 2015, between Knowles Corporation and Audience directors and certain members of Audience’s senior management and certain affiliates of Tallwood Venture Capital.	8-K	10.1	4/30/2015

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.

†

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company