IKANOS COMMUNICATIONS, INC. - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - IKANOS COMMUNICATIONS, INC.	exhibit312dab.htm
EX-31.1 - EXHIBIT 31.1 - IKANOS COMMUNICATIONS, INC.	exhibit311omid.htm
EX-32.1 - EXHIBIT 32.1 - IKANOS COMMUNICATIONS, INC.	exhibit321both.htm
EX-10.6 - EXHIBIT 10.6 - IKANOS COMMUNICATIONS, INC.	a106omidgrant.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the Quarterly Period Ended June 28, 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: 000-51532

IKANOS COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)



Delaware		73-1721486
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

47669 Fremont Boulevard

Fremont, California 94538

(Address of principal executive offices) (Zip Code)

(510) 979-0400

(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 ý 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 ý No ¨

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



Large accelerated filer	¨	Accelerated filer	¨	Non-accelerated filer	¨	Smaller reporting company	ý

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

As of August 12, 2015, there were 17,228,613 shares of the Registrant’s common stock, par value $ 0.001, outstanding.

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IKANOS COMMUNICATIONS, INC.

FORM 10-Q

TABLE OF CONTENTS



		Page No.

PART I:	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	1

	Condensed Consolidated Balance Sheets as of June 28, 2015 and June 29, 2014	1

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 28, 2015 and June 29, 2014	2

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 28, 2015 and June 29, 2014	3

	Notes to Unaudited Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

PART II:	OTHER INFORMATION

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 6.	Exhibits	43

	Signatures	45

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

IKANOS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands and unaudited)



	June 28, 2015		December 28, 2014
Assets
Current assets:
Cash and cash equivalents	$	16,032	$	13,270
Short-term investments	—		2,421
Accounts receivable, net	10,765		13,849
Inventory, net	1,991		1,964
Prepaid expenses and other current assets	1,799		3,682
Total current assets	30,587		35,186
Property and equipment, net	13,947		8,581
Other assets	2,018		2,343
	$	46,552	$	46,110
Liabilities and Stockholders’ Equity
Current liabilities:
Revolving line	$	4,979	$	10,841
Accounts payable	4,553		5,054
Accrued liabilities	11,042		6,460
Total current liabilities	20,574		22,355
Long-term debt, net of debt discount	9,528		—
Other long-term liabilities	5,195		1,740
Total liabilities	35,297		24,095
Commitments and contingencies (Note 6)
Stockholders’ equity	11,255		22,015
	$	46,552	$	46,110

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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IKANOS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, and unaudited)



	Three Months Ended						Six Months Ended
	June 28, 2015			June 29, 2014			June 28, 2015			June 29, 2014
Revenue	$	11,068		$	11,255		$	21,249		$	25,768
Cost of revenue	5,392			5,775			10,585			13,211
Gross profit	5,676			5,480			10,664			12,557
Operating expenses:
Research and development	12,618			13,408			24,431			26,084
Selling, general, and administrative	4,901			4,105			9,907			8,926
Total operating expenses	17,519			17,513			34,338			35,010
Loss from operations	(11,843		)	(12,033		)	(23,674		)	(22,453		)
Interest and other, net	(378		)	(129		)	(486		)	113
Loss before provision for income taxes	(12,221		)	(12,162		)	(24,160		)	(22,340		)
Provision for income taxes	95			168			149			295
Net loss	$	(12,316	)	$	(12,330	)	$	(24,309	)	$	(22,635	)
Basic and diluted net loss per share	$	(0.72	)	$	(1.24	)	$	(1.49	)	$	(2.29	)
Weighted average number of shares (basic and diluted)	17,103			9,910			16,339			9,893

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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IKANOS COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands and unaudited)



	Six Months Ended
	June 28, 2015			June 29, 2014
Cash flow from operating activities
Net Loss	$	(24,309	)	$	(22,635	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation	2,651			2,039
Stock-based compensation expense	2,027			1,912
Amortization of intangible assets and acquired technology	239			240
Changes in assets and liabilities:
Accounts receivable, net	3,084			6,499
Inventory	(27		)	(143		)
Prepaid expenses and other assets	1,442			(508		)
Accounts payable and accrued liabilities	2,382			172
Net cash used in operating activities	(12,511		)	(12,424		)
Cash flows from investing activities:
Purchases of property and equipment	(2,862		)	(1,787		)
Purchases of investments	—			(3,026		)
Maturities and sales of investments	2,421			4,824
Net cash provided by (used in) investing activities	(441		)	11
Cash flows from financing activities:
Proceeds from issuances of common stock under employee stock plans	89			375
Proceeds from rights offering, net of issuance costs	11,487			—
Proceeds from revolving line	4,979			6,912
Repayments of revolving line	(10,841		)	(12,000		)
Proceeds from long-term debt	10,000			—
Net cash provided by (used in) financing activities	15,714			(4,713		)
Net increase (decrease) in cash and cash equivalents	2,762			(17,126		)
Cash and cash equivalents at beginning of period	13,270			36,043
Cash and cash equivalents at end of period	$	16,032		$	18,917

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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IKANOS COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Ikanos and Summary of Significant Accounting Policies

The Company

Ikanos Communications, Inc. (“Ikanos” or the “Company”) was incorporated in the State of California in April 1999 and reincorporated in the State of Delaware in September 2005. The Company is a provider of advanced semiconductor products and software for delivering high speed broadband solutions to the connected home. The Company’s broadband multi-mode and digital subscriber line (“DSL”) processors and other semiconductor offerings power carrier infrastructure (referred to as “Access”) and customer premise equipment (referred to as “Gateway”) for network equipment manufacturers (“NEMs”) who, in turn, serve leading telecommunications service providers.

The accompanying consolidated financial statements of the Company have been prepared on a basis that assumes that the Company will continue as a going concern and contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

Liquidity

The Company incurred net losses of $12.3 million and $24.3 million for the three and six months ended June 28, 2015 and had an accumulated deficit of $393.7 million as of June 28, 2015. On September 29, 2014, the Company entered into a collaboration arrangement with Alcatel-Lucent USA, Inc. (and its sister companies, collectively known as “ALU”) on the development of ultra-broadband products whereby the Company received a financial commitment of up to $45.0 million from ALU and a group of investors affiliated with Tallwood Venture Capital (the "Tallwood Group"). As part of their investments associated with the collaboration arrangement, on September 29, 2014, ALU and the Tallwood Group purchased 1.2 million shares and 2.7 million shares, respectively, of the Company's common stock for $5.0 million and $11.3 million, respectively (the "Private Placement"). Further, in December 2014, the Company commenced a rights offering pursuant to which stockholders of record on September 26, 2014 were offered the right to purchase shares of the Company’s common stock (the “Rights Offering”). On February 4, 2015, the Company completed its Rights Offering and recognized proceeds of $11.5 million, net of transaction costs of $0.8 million, inclusive of 2.7 million shares of the Company common stock purchased by the Tallwood Group for $11.2 million, which completed the Tallwood Group's portion of their financial commitment. On April 30, 2015, the Company received the proceeds of the $10.0 million loan from ALU, which was part of the previously announced collaboration arrangement. (See Note 5 - Notes Payable and Long-Term Debt.)

To achieve consistent profitability, the Company will need to generate and sustain higher revenue, while maintaining cost and expense levels necessary and appropriate for its business. During the remainder of 2015, the Company expects that its development costs, primarily associated with the Access product family, will increase over the level incurred during 2014. As a result of the Company’s planned increase in development spending in 2015, recurring losses from operations, and the need to maintain compliance with debt covenants, if the Company is unable to raise sufficient capital through additional debt or equity arrangements, there will be uncertainty regarding the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to the Company’s ability to continue as a going concern. These financial statements do not include any adjustments that might result from this uncertainty. There can be no assurance that such additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to the Company.

The Company utilizes an existing revolving line of credit with Silicon Valley Bank ("SVB") and proceeds from its $10.0 million loan received on April 30, 2015 under the aforementioned ALU loan to partially fund its operations. The most restrictive covenant under the revolving line of credit with SVB requires that the Company maintain a minimum monthly Adjusted Quick Ratio, as defined in the Amended SVB Loan Agreement, of 1.2 to 1.0. The ALU Loan Agreement contains the same Adjusted Quick Ratio covenant that appears in the Amended SVB Loan Agreement and both loan agreements contain provisions that provide that a default under one loan agreement is a default under the other. (See Note 5 - Notes Payable and Long-Term Debt.)

On April 30, 2015, SVB agreed to waive the non-compliance associated with the Adjusted Quick Ratio covenant for the month of April 2015. Although the Company is currently in compliance with the terms of the Amended SVB Loan Agreement, the Company anticipates that it may not be in compliance with all of the covenants during certain later periods of 2015 and, accordingly, has begun discussions with SVB to address those potential instances of noncompliance. The Company will need to take further action to generate adequate cash flows or earnings to ensure compliance with the Amended SVB Loan Agreement and fund its future capital requirements, including the need to raise additional financing. There can be no assurance that sufficient additional debt or equity financing will be available or, if available, that such financing will be on terms and conditions acceptable to the Company. Additionally, there can be no assurance that, if necessary, the Company will be

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successful in renegotiating the debt covenants contained in the Amended SVB Loan Agreement or the ALU Loan Agreement. If the Company is unsuccessful in these efforts, it will need to implement significant cost reduction strategies that could affect its near- and long-term business plan. These efforts may include, but are not limited to: consolidating locations, reducing capital expenditures, reducing overall headcount, and curtailing business activities.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), the rules and regulations of the Securities and Exchange Commission (“SEC"), and accounting policies consistent with those applied in preparing the Company’s audited annual consolidated financial statements. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with these rules and regulations. The information in this Quarterly Report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K filed with the SEC on March 20, 2015 (“Annual Report”).

In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for the interim periods presented. The operating results for the three and six month periods ended June 28, 2015 are not necessarily indicative of the results that may be expected for the full fiscal year ending January 3, 2016, or for any other future period.

The Company’s fiscal quarters end on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. There are 53 weeks in fiscal year 2015.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions. The Company believes that the estimates, judgments, and assumptions upon which it relies are reasonable based upon information available to it at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates and actual results, the Company’s financial statements would have been affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

Reverse Stock Split

On February 11, 2015, at a Special Meeting of Stockholders (the "February 2015 Special Meeting"), the Company's stockholders approved an amendment to the Company's Restated Certificate of Incorporation to effect a reverse stock split of its outstanding common stock at a ratio, to be determined by the Board of Directors, of not less than one-for-five (1:5) shares and not more than one-for-ten (1:10) shares. At a meeting of the Board of Directors immediately following the February 2015 Special Meeting, the Board of Directors approved and directed the Company's management to implement a 1:10 reverse stock split, effective February 13, 2015.

The reverse stock split applied to all outstanding common stock, restricted stock units, stock appreciation rights, and stock options. As of February 13, 2015, the effect of the reverse stock split was to reduce the number of shares issued and outstanding from 170.1 million to 17.0 million. Neither the total authorized shares nor the preferred stock was affected by the reverse stock split. Awards and options outstanding of 24.8 million shares and shares available for grant of 84.9 million were reduced to 2.5 million and 8.5 million, respectively.

Unless otherwise noted, the effect of the reverse stock split has been retroactively applied to all common stock, equity plans, and related activity as well as share and per share data in this Quarterly Report on Form 10-Q.

Rights Offering and Registration Statement on Form S-1

The Company filed a Registration Statement on Form S-1 on October 20, 2014 and amended it thereafter (declared effective on November 26, 2014) under which it distributed rights to the holders of its common stock as of September 26, 2014 (the "Record Date") non-transferable subscription rights to purchase 14.5 million shares of its common stock (the "Rights

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Offering"). Each subscription right entitled the rights holder to purchase 1.459707 shares of common stock at $4.10 per share to allow each holder of record to have the opportunity to maintain the same ownership percentage of the Company subsequent to the Private Placement as the stockholder had at the record date. The Rights Offering closed on February 4, 2015. The Company issued 3.0 million shares of the Company's common stock at $4.10 per share and recognized proceeds of $11.5 million after issuance costs of $0.8 million.

Option Exchange

At a Special Meeting of Stockholders, held on November 21, 2014, the Board of Directors proposed and the stockholders approved, a one-time stock option exchange program (the "Tender Offer") for the Company's active employees and directors to exchange certain outstanding stock options (the "Eligible Options") for new stock options. The exercise price of each new option would be the closing price of the Company's stock on The NASDAQ Capital Market on the date of grant, which occurred on the first trading day following the expiration of the Tender Offer. Eligible Options are those options (including Stock Appreciation Rights) issued prior to January 1, 2014 that had an exercise price equal to or greater than $4.10. All Eligible Options could be exchanged for new options on a one-for-one basis, except for those held by directors, the Chief Executive Officer, and his direct reports, who each received four new options for every five options tendered.

The Eligible Options also included 60,000 shares that contained a performance-based vesting element, granted to the Chief Executive Officer at the time he was hired. Mr. Tahernia tendered this grant and received a performance-based option to purchase 48,000 shares in exchange.

For employees, other than with respect to performance based stock option grants, vesting will occur monthly over thirty-six months for those Eligible Options that were partially vested and twenty-four months for those Eligible Options that were fully vested at the time the Tender Offer expired. The Tender Offer began on February 20, 2015 and expired on March 20, 2015. On March 23, 2015, options to purchase 1.3 million shares were issued at an exercise price of $2.80 per share.

Summary of Significant Accounting Policies

The Company's significant accounting policies are described in Note 1 to the audited consolidated financial statements for the year ended December 28, 2014 included in the Annual Report. These accounting policies have not significantly changed.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash, cash equivalents, accounts receivable, and short-term investments. Cash and cash equivalents are held with a limited number of financial institutions. Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. Management believes that the financial institutions that hold the Company’s deposits are credit worthy and, accordingly, minimal credit risk exists with respect to those deposits. At June 29, 2014, the Company’s short-term investments consisted solely of certificates of deposit. There were no short-term investments as of June 28, 2015. All investments were classified as available-for-sale. The Company does not hold or issue financial instruments for trading purposes.

Credit risk with respect to accounts receivable is concentrated due to the number of large orders recorded in any particular reporting period. Three customers represented 33%, 24%, and 12% of accounts receivable at June 28, 2015. Three customers represented 44%, 21%, and 16% of accounts receivable at December 28, 2014. Three customers accounted for 27%, 27%, and 21% of revenue for the three months ended June 28, 2015. Three customers accounted for 31%, 28%, and 17% of revenue for the six months ended June 28, 2015. Three customers accounted for 35%, 19%, and 18% of revenue for the three months ended June 29, 2014. Four customers accounted for 27%, 25%, 13%, and 10% of revenue for the six months ended June 29, 2014.

Concentration of Other Risk

The semiconductor industry is characterized by rapid technological change, competitive pricing pressures, and cyclical market patterns. The Company’s results of operations are affected by a wide variety of factors, including general economic conditions; economic conditions specific to the semiconductor industry; demand for the Company’s products; the timely introduction of new products; implementation of new manufacturing technologies; manufacturing capacity; the availability of materials and supplies; competition; the ability to safeguard patents and intellectual property in a rapidly evolving market; reliance on assembly and wafer fabrication subcontractors; and reliance on independent distributors and sales representatives. As a result, the Company may experience substantial period-to-period fluctuations in future periods due to the factors mentioned above as well as certain other factors.

Net Loss per Share

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Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. The calculation of basic and diluted net loss per common share is as follows (in thousands, except per share amounts):



	Three Months Ended						Six Months Ended
	June 28, 2015			June 29, 2014			June 28, 2015			June 29, 2014
Net loss	$	(12,316	)	$	(12,330	)	$	(24,309	)	$	(22,635	)
Weighted average shares outstanding	17,103			9,910			16,339			9,893
Basic and diluted net loss per share	$	(0.72	)	$	(1.24	)	$	(1.49	)	$	(2.29	)

The following potential common shares have been excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands):



	Three Months Ended		Six Months Ended
	June 28, 2015	June 29, 2014	June 28, 2015	June 29, 2014
Anti-dilutive securities:
Weighted average warrants to purchase common stock (a)	474	780	474	780
Weighted average restricted stock and restricted stock units	1,266	137	1,089	131
Weighted average options to purchase common stock	2,950	1,838	2,658	1,850
	4,690	2,755	4,221	2,761

(a) The warrants were issued to ALU as part of the collaboration arrangement. On April 30, 2015 the warrant agreements were amended to reprice the warrants at $2.75 and to allow for a reduction in the pricing of the warrants upon an issuance or sale of shares of the Company's common stock at any time prior to the 12-month anniversary of the amendment.

Recent Accounting Pronouncement

In April 2015, as part of its initiative to reduce complexity in accounting standards, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-03, "Interest--Imputation of Interest" (Subtopic 835-30) (the "Update"). Under the Update, debt issuance costs related to a recognized liability should be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement of debt issuance costs is not affected by the Update. The Update is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Update should be applied on a retrospective basis. The Company has adopted this Update concurrent with the ALU Loan Agreement debt taken down in the second quarter of 2015. See Note 5--Notes Payable and Long-Term Debt.

Note 2—Inventory, net

Inventory consisted of the following (in thousands):



	June 28, 2015		December 28, 2014
Finished goods	$	1,775	$	1,895
Purchased parts and raw materials	216		69
	$	1,991	$	1,964

The Company has an agreement with eSilicon Corporation (“eSilicon”) under which a majority of its day-to-day supply chain management, production test engineering, and production quality engineering functions (“Master Services”) have been transferred to eSilicon under a Master Services and Supply Agreement (“Service Agreement”). Pursuant to the Service Agreement, which will expire in October 2015, the Company places orders for its finished goods products with eSilicon, who, in turn, contracts with wafer foundries and assembly and test subcontractors and manages these operational functions for the Company on a day-to-day basis.

As part of its Service Agreement, the Company transferred ownership of certain work-in-process and raw materials to eSilicon as prepayment for the future delivery of finished goods. In addition, the Company has prepaid for certain wafers purchased by eSilicon on behalf of the Company. Prepayments under the arrangement were $0.3 million as of June 28, 2015 and $1.0 million as of December 28, 2014. The prepayments are classified in prepaid expenses and other current assets. As of June 28, 2015, the Company has $5.4 million of non-cancelable purchase obligations with eSilicon.

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Note 3—Property and Equipment, net

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



	June 28, 2015			December 28, 2014
Machinery and equipment	$	29,150		$	27,335
Software	12,382			6,591
Intellectual property (a)	5,069			5,530
Computer equipment	6,848			6,175
Furniture and fixtures	971			991
Leasehold improvements	1,846			1,818
Construction in progress	141			—
	56,407			48,440
Less: Accumulated depreciation and amortization	(42,460		)	(39,859		)
	$	13,947		$	8,581

(a) During the first quarter of 2015, the Company utilized intellectual property purchase obligations and capitalized its $6.0 million obligation as property and equipment with a useful life of six years.

Depreciation expense for property and equipment was $1.4 million and $1.0 million for the three months ended June 28, 2015 and June 29, 2014, respectively. Depreciation expense for property and equipment was $2.7 million and $2.0 million for the six months ended June 28, 2015 and June 29, 2014, respectively.

Note 4—Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):



	June 28, 2015		December 28, 2014
Accrued compensation and related benefits	$	3,218	$	2,139
Accrued intellectual property purchase obligations (a)	2,028		—
Deferred revenue	895		529
Deferred rent	563		699
Warranty accrual	108		131
Accrued royalties	594		751
Other accrued liabilities	3,636		2,211
	$	11,042	$	6,460

(a) Included in long-term liabilities is an additional $2.5 million in intellectual property purchase obligations payable in 2016 and 2017.

Note 5—Notes Payable and Long-Term Debt

SVB Revolving Line of Credit - The Company utilizes an existing revolving line of credit with SVB to partially fund its operations. On October 7, 2014, the Company entered into the First Amended and Restated Loan and Security Agreement with SVB (the "Amended SVB Loan Agreement"), which amended and restated the loan agreement with SVB, originally dated January 14, 2011, as subsequently amended. Under the Amended SVB Loan Agreement, the Company may borrow up to $20.0 million, subject to certain limitations. The Amended SVB Loan Agreement is collateralized by a first priority lien on all of the Company's present and future assets, other than its intellectual property, and a second lien on its intellectual property. The Amended SVB Loan Agreement also requires that the Company maintain a minimum monthly Adjusted Quick Ratio, as defined in the Amended SVB Loan Agreement, of 1.2 to 1.0.

The Company was in compliance with the Adjusted Quick Ratio covenant as of March 29, 2015 under the Amended SVB Loan Agreement, but was not in compliance with the covenant at the end of April 2015. On April 30, 2015, the Company entered into Amendment No. 2 to the Amended SVB Loan Agreement (“SVB Amendment No. 2”). SVB Amendment No. 2 provides, among other things, the following: (1) that SVB agrees to allow the Company to enter into Amendment No. 2 to the Loan and Security Agreement with ALU (the “ALU Loan Amendment”); (2) the removal of the LIBOR-based interest pricing option; (3) an increase in the interest rate margin by 75 basis points; and (4) a final payment fee of $250,000. On April 30, 2015, SVB agreed to limited waiver for the Company's non-compliance associated with the Adjusted Quick Ratio covenant for

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the month of April 2015 subject to receipt by the Company of $10.0 million under the ALU Loan Agreement. The funds were received on April 30, 2015.

At June 28, 2015, $5.0 million was outstanding under the SVB Amendment No. 2. Interest on advances against the line was equal to 6.5% as of June 28, 2015 and was payable monthly. The Company was in compliance with the Adjusted Quick Ratio covenant as of June 28, 2015. Although the Company is currently in compliance with the terms of Amendment No. 2, it anticipates that it may not be in compliance with all of the covenants during certain later periods of 2015 and, accordingly, has begun discussions with SVB to address those potential instances of noncompliance.

ALU Loan Agreement - In September 2014, as discussed in Note 1, the Company entered into a collaboration with ALU. On April 30, 2015, the Company and ALU entered into Amendment No. 2 (the “ALU Loan Amendment”) to the Loan and Security Agreement dated September 29, 2014, as amended (the “ALU Loan Agreement”). The ALU Loan Amendment provides, among other things, the following: (i) that interest shall be paid in arrears in cash, rather than in-kind; however, for any interest payment due after June 30, 2015, the Company may request that, at the discretion of ALU, such payments be made in-kind; (ii) the amendment of the warrants previously issued to ALU, as further described below; and (iii) that the outstanding balance of the loan shall automatically accelerate in the event of a change in control of the Company or a sale of all or substantially all of the Company’s assets.

On September 29, 2014, in connection with the ALU Loan, the Company issued to ALU a warrant (the “First Warrant”) to purchase up to 315,789 shares of the Company’s common stock with an exercise price of $4.75 per share. On December 10, 2014, in connection with the first amendment to the ALU Loan Agreement, the Company issued an additional warrant to ALU (the “Second Warrant”) to purchase up to 157,895 shares of the Company’s common stock, with an exercise price of $4.10 per share. Under the Black-Scholes formula, the Company initially valued the warrants at $0.6 million and, until the loan was funded, classified them under other current assets.

In connection with the ALU Loan Amendment, on April 30, 2015, the Company amended the First Warrant (the “Amended and Restated First Warrant”) and the Second Warrant (the “Amended and Restated Second Warrant” and, collectively, with the Amended and Restated First Warrant, the “Amended Warrants”) to lower the exercise price to $2.75 per share. The exercise price represents the closing price of the Company’s common stock on April 29, 2015, the last trading day before the Amended Warrants were issued. In addition, each of the Amended Warrants contains a provision to automatically adjust the per share exercise price downward in the event that on or before April 30, 2016, the Company issues or sells or publicly announces the issuance or sale of any of its common stock or options or convertible securities that are related to its common stock (other than certain employee and director options) at an effective price that is lower than the then-current exercise price under the Amended Warrants. In addition, the per share exercise price will be adjusted downward under various other circumstances, including if any of the following events occurs: certain adjustments are made to the purchase or exercise price of an option or the conversion rate of a convertible security; the Company makes any dividend or other distribution of assets to holders of its common stock that is not also given to holders of the Amended Warrants; or the Board of Directors of the Company determines that it is appropriate to adjust the per share exercise price. Neither of the Amended Warrants provides for a corresponding upward adjustment of the per share exercise price thereunder. Due to the significant reduction in exercise price, the Company revalued the warrants at $0.5 million. The warrants were reclassified and recorded as debt discount as of April 30, 2015 and shown as a reduction to long-term debt. The debt discount will be accreted over the life of the ALU Loan Agreement.

On April 30, 2015, the Company received $10.0 million under the ALU Loan Agreement. The ALU Loan Agreement contains the same Adjusted Quick Ratio covenant that appears in SVB Amendment No. 2 and both loan agreements contain provisions that provide that a default under one loan agreement is a default under the other.

At June 28, 2015, the long-term debt balance under the ALU Loan Agreement was $9.5 million, consisting of principal of $10.0 million less debt discount of $0.5 million. The interest rate is 9.5%. The Company must repay 15% of the principal and all outstanding interest on or before November 30, 2016 and the remainder on or before November 30, 2017.

Note 6—Commitments and Contingencies

Lease Obligations

The Company leases office facilities, equipment, and software under non-cancelable operating leases with various expiration dates through 2018. Rent expense for both the three months ended June 28, 2015 and June 29, 2014 was $0.6 million. Rent expense for both the six months ended June 28, 2015 and June 29, 2014 was $1.2 million. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred, but not paid.

Future minimum lease payments as of June 28, 2015 under non-cancelable leases with original terms in excess of one year are $1.3 million for the remainder of 2015; $2.0 million in 2016; $1.6 million in 2017; and $0.4 million in 2018.

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Purchase Commitments

As of June 28, 2015, the Company had $5.4 million of inventory purchase obligations that are expected to be paid during the third quarter of 2015.

Indemnities, Commitments and Guarantees

During its normal course of business, the Company has made certain indemnities, commitments, and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include intellectual property indemnities to the Company’s customers in connection with the sales of its products, indemnities for liabilities associated with the infringement of other parties’ technology based upon the Company’s products, and indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the various agreements that include indemnity provisions. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees’ development work to the Company. The Company has not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and the amount of the loss can be reasonably estimated, in accordance with authoritative guidance.

In addition, the Company indemnifies its officers and directors under the terms of indemnity agreements entered into with them, as well as pursuant to its certificate of incorporation, bylaws, and applicable Delaware law. To date, the Company has not incurred any expenses related to these indemnifications.

Litigation

From time-to-time, in the normal course of business, the Company and its subsidiaries are parties to litigation matters and claims that have involved and may involve in the future, among other things, claims related to intellectual property infringement as well as employment-related disputes. The Company is subject to claims and litigation arising in the ordinary course of business; however, the Company does not believe, based on currently available facts and circumstances, that the final outcome of these matters, taken individually or as a whole, will have a material adverse effect on its consolidated results of operations or financial position. The results of litigation are inherently uncertain and material adverse outcomes are possible. The Company has not provided accruals for any legal matters in its financial statements as potential losses for such matters are not considered probable and reasonably estimable. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy any liabilities arising from the matters described above will not have a material adverse effect on its consolidated results of operations, financial position, or cash flows.

Note 7—Significant Customer Information and Segment Reporting

FASB establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The method for determining the information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.

The Company’s chief operating decision-maker is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region for purposes of making operating decisions and assessing financial performance. On this basis, the Company is organized and operates in a single segment: the design, development, marketing, and sale of semiconductors and integrated firmware.

The following table summarizes revenue by geographic region, based on the country in which the customer's headquarters is located (in thousands):

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	Three Months Ended								Six Months Ended
	June 28, 2015				June 29, 2014				June 28, 2015				June 29, 2014
France	$	3,052	28	%	$	2,376	21	%	$	6,582	31	%	$	6,886	27	%
Japan	3,035		27		2,084		19		5,998		28		5,840		35
Taiwan	2,494		23		5,246		46		4,620		22		9,043		23
Germany	410		4		111		1		676		3		1,313		5
Korea	375		3		213		2		1,408		7		277		1
China	187		2		218		2		294		1		544		2
United States	182		2		76		—		239		1		147		1
Other	1,333		11		931		9		1,432		7		1,718		6
	$	11,068	100	%	$	11,255	100	%	$	21,249	100	%	$	25,768	100	%

The Company tracks its products within two product families: Gateway and Access. The Access product family consists of semiconductor and software products that power the carrier infrastructure for the central office (“CO”), as well as any node in a hybrid-fiber-copper network where fiber is terminated and copper is used to reach the consumer premises. The Gateway product family includes a variety of processors and the associated software designed for devices deployed at the customer premises. Gateway products enable service providers to offer their subscribers a variety services, including internet access, voice, over-the-top content, and security.

Revenue by product family is as follows (in thousands):



	Three Months Ended								Six Months Ended
	June 28, 2015				June 29, 2014				June 28, 2015				June 29, 2014
Gateway	$	6,854	62	%	$	8,817	78	%	$	13,792	65	%	$	19,122	74	%
Access	4,214		38		2,438		22		7,457		35		6,646		26
	$	11,068	100	%	$	11,255	100	%	$	21,249	100	%	$	25,768	100	%

The distribution of long-lived assets (excluding intangible assets and other assets) was as follows (in thousands):



	June 28, 2015		December 28, 2014
United States	$	13,843	$	8,257
Asia, predominantly India	104		324
	$	13,947	$	8,581

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Note 8—Subsequent Events

Merger Agreement

On August 5, 2015, Qualcomm Atheros, Inc., (“Parent”) a Delaware corporation and a wholly-owned subsidiary of QUALCOMM Incorporated, King Acquisition Co., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), and the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, subject to the terms of the Merger Agreement, Parent will cause the Merger Sub to commence, no later than August 19, 2015, a tender offer (the “Offer”) to purchase all of the outstanding shares (the “Shares”) of the Company’s common stock, $0.001 par value, at a price of $2.75 per share, without interest (the “Offer Price”), subject to any applicable withholding taxes and assume all outstanding indebtedness of the Company at the closing of the transaction.

Consummation of the Offer is subject to various conditions set forth in the Merger Agreement, including, but not limited to (i) at least a majority of Shares being tendered in the Offer, (ii) the receipt of required regulatory approvals in certain jurisdictions and (iii) other conditions set forth in the Merger Agreement.

The Offer will expire at 12:01 a.m. Eastern Time on the 21st business day (calculated in accordance with the rules of the Securities Exchange Act of 1934) following the commencement date of the Offer, unless extended in accordance with the terms of the Offer and the Merger Agreement and the applicable rules and regulations of the SEC.

Following consummation of the Offer, Merger Sub will merge with and into the Company with the Company surviving as a wholly-owned subsidiary of Parent (the “Merger”). In the Merger, each Share that is not tendered and accepted pursuant to the Offer (other than the Shares held in treasury, Shares held directly or indirectly by Parent or its subsidiaries, and Shares as to which appraisal rights have been perfected in accordance with applicable law) will be cancelled and converted into the right to receive the Offer Price, on the terms and conditions set forth in the Merger Agreement.

Pursuant to the Merger Agreement, as of the effective time of the Merger (the “Effective Time”), each outstanding and unexercised stock option that is subject to time-based vesting having an exercise price greater than the Offer Price (each, an “In-the-Money Time-based Option”), whether or not vested, shall be cancelled and converted into the right to receive cash in an amount equal to the product of (i) the total number of Shares subject to such In-the-Money Time-based Option immediately prior to the Effective Time, multiplied by (ii) the excess, if any, of (x) the Offer Price over (y) the exercise price payable per Share under such In-the-Money Time-based Option. As of the Effective Time, each unvested Ikanos stock option that is subject to performance-based vesting shall be cancelled for no consideration. As of August 5, 2015, 39,800 In-the-Money Time-based Options have a per share exercise price greater than the Offer Price. All other outstanding and unexercised Ikanos stock options will be cancelled for no consideration.

All outstanding and unexercised stock appreciation rights have a per share exercise price greater than the Offer Price. As a result, all outstanding and unexercised stock appreciation rights will be cancelled upon the consummation of the Merger and the holders of such stock appreciation rights will not have any right to receive any consideration in respect thereof.

Pursuant to the Merger Agreement, as of the Effective Time, each outstanding restricted stock unit (each, an “RSU”), whether or not vested, shall be cancelled and converted into the right to receive cash in an amount equal to the product of (i) the total number of Shares issuable in settlement of such RSU immediately prior to the Effective Time multiplied by (ii) the Offer Price.

The Merger Agreement provides that the Merger will be governed by Section 251(h) of the Delaware General Corporation Law (the “DGCL”) and shall be effected as soon as practicable following the consummation of the Offer without stockholder approval pursuant to the DGCL.

The Merger Agreement contains customary representations and warranties by Parent, Merger Sub and the Company. The Merger Agreement also contains customary covenants and agreements, including with respect to the operations of the business of the Company and its subsidiaries between signing and closing, restrictions on responses by the Company with respect to alternative transactions, governmental filings and approvals and other matters.

The Merger Agreement generally prohibits the Company’s solicitation of proposals relating to alternative business combination transactions and restricts the Company’s ability to furnish non-public information to, or participate in any discussions or negotiations with, any third party with respect to any such transaction, subject to certain limited exceptions.

The Merger Agreement includes a remedy of specific performance for the Company, Parent and Purchaser. The Merger Agreement also includes customary termination provisions for both the Company and Parent and provides that, in connection with the termination of the Merger Agreement under specified circumstances, including termination by the Company to accept and enter into a definitive agreement with respect to an unsolicited superior offer, the Company will be required to pay a termination fee of $1,750,000 (approximately 3.5% of the equity value of the transaction) (the “Termination Fee”). A superior offer is a written proposal pursuant to which a third party would acquire, among other acquisition structures set forth in the Merger Agreement, 50% or more of the outstanding voting securities or assets of the Company on terms that the

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board of directors of the Company will have determined in good faith (after consultation with its independent financial advisor of nationally recognized reputation and its outside legal counsel) to be more financially favorable to the Company’s stockholders and is reasonably likely to be consummated in accordance with the terms proposed taking into account relevant factors. Any such termination of the Merger Agreement by the Company is subject to certain conditions, including the Company’s compliance with certain procedures set forth in the Merger Agreement and a determination by the Company’s board of directors of that the failure to take such action would constitute a breach of its fiduciary duties under applicable law, the entrance into a definitive agreement by the Company with a third party and payment of the Termination Fee by the Company.

Tender and Support Agreement

Concurrently with the execution of the Merger Agreement, each of the directors and named executive officers of the Company, entities affiliated with Tallwood Venture Capital and Alcatel-Lucent Participations (each a “Tender and Support Stockholder”) entered into a Tender and Support Agreement with Parent and Merger Sub (the “Tender and Support Agreement”), which provides, among other things, that such stockholder will tender their Shares in the Offer and vote their Shares in favor of approving the principal terms of the Merger, if applicable. In aggregate, such persons owned approximately 58.2% of the Shares outstanding as of the close of business on August 5, 2015. The Tender and Support Agreement will terminate upon termination of the Merger Agreement and certain other specified events. Upon the occurrence of the Company’s board of directors changing their recommendation that the stockholders support the Offer as a result of a permitted change in recommendation for certain intervening events (not in connection with an alternative acquisition proposal), as described in the Merger Agreement, each Tender and Support Stockholder will be permitted to withdraw the excess of the aggregate number of Shares owned by the Tender and Support Stockholders as of the date of the Tender and Support Agreement and any additional Shares acquired by the Tender and Support Stockholders after the entry into such agreement (the “Subject Securities”) that is equal to each Tender and Support Stockholder’s pro rata portion (as measured against the aggregate Subject Securities held by each of the Tender and Support Stockholders) of the sum of (i) thirty percent (30%) of the total number of Shares outstanding, on a fully diluted basis (the “30% Shares”) plus (ii) such additional number of Subject Securities (rounded down to the nearest whole Share) held by all of the Tender and Support Stockholders that is equal to product of (x) the total number of Subject Securities held by all Tender and Support Stockholders less the 30% Shares, multiplied by (y) the percentage, rounded to two decimal places, of the total number of outstanding Shares that have been tendered and not withdrawn prior to the expiration of the Offer by all holders of the Shares (other than the Tender and Support Stockholders).

The foregoing descriptions of the Merger Agreement and the Tender and Support Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of such agreements, which are filed as Exhibit 2.1 and Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with Securities and Exchange Commission on August 6, 2015 and incorporated herein by reference.

If the Merger is consummated, the Company will become a wholly-owned subsidiary of Parent. Accordingly, this Quarterly Report on Form 10-Q, which assumes the Company remains a standalone business, should be read with the understanding that should the Merger be completed, Parent will have the power to control the conduct of the Company’s business.

Additional Information and Where to Find It

The Offer described above has not yet commenced. This shall not constitute an offer to sell or the solicitation of an offer to buy any shares of common stock of Ikanos, nor shall there be any sale of such common stock in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. Any offer will only be made through a Tender Offer Statement on Schedule TO, which will contain an offer to purchase, form of letter of transmittal and other documents relating to the Offer (collectively, the “ Offer Materials”), each to be filed with the SEC by the Merger Sub and Parent. In addition, Ikanos will file with the SEC a solicitation/recommendation statement on Schedule 14D-9 with respect to the Offer. Merger Sub and Ikanos expect to mail the Offer Materials and the Schedule 14D-9 to Ikanos stockholders. Investors and stockholders are urged to carefully read these documents and the other documents relating to the transactions contemplated by the Merger Agreement when they become available because these documents will contain important information relating to the Offer and related transactions. The Offer Materials and the Schedule 14D-9 will also be available at no cost on the SEC’s web site at www.sec.gov.

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Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, particularly in the sections entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and to future events with respect to our business and industry in general. Statements that include the words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms, or other similar expressions, identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, the following: our pending acquisition by Qualcomm, our ability to raise additional capital in the future; our history of losses; our need for capital and ability to continue as a going concern; our ability to utilize our revolving credit facility; the volatility of our common stock; the opinions of the securities analysts that publish reports regarding our company; our ability to develop and achieve market acceptance of new products and technologies as we transition away from older products; our dependence on a relatively small number of customers; the intensity of the competition we face in the semiconductor industry and the broadband communications market; general macroeconomic declines could reduce demand for our products; cyclical and unpredictable decreases in demand for our semiconductors; our ability to adequately forecast demand for our products; the length of our sales cycle; that the selling prices of our products are subject to decline over time and may do so more rapidly than we anticipate; our reliance on subcontractors to manufacture, test, and assemble our products; our dependence on and qualification of foundries to manufacture our products; changes in our product sales mix; our ability to secure production capacity; our ability to recruit and retain personnel, including our senior management team; the fluctuations in our operating results and expenses; our reliance on third-party technologies in our products; the development and future growth of the broadband digital subscriber line ("DSL") and communications processing markets in general; the defense of third-party claims of infringement and the protection of our own intellectual property; currency fluctuations; undetected defects, errors, or failures in our products; the significant number of shares held by a single group of investors; rapidly changing technologies, standards, and regulations; and our accounting policies and disclosure controls.

The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this Quarterly Report on Form 10-Q, including under the caption “Risk Factors” in Part II, Item 1A. Moreover, we operate in a very competitive and rapidly changing environment in which new risks emerge from time-to-time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Except as required by law, we undertake no obligation to publicly update any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.

In this Quarterly Report on Form 10-Q, references to “Ikanos,” “we,” “us,” “our,” or the “Company” mean Ikanos Communications, Inc. and its subsidiaries, unless otherwise indicated or the context otherwise requires.

Ikanos Communications, Ikanos and the Ikanos logo, the “Bandwidth without boundaries” tagline, Fusiv, inSIGHT BXM, Ikanos NodeScale, and Ikanos Velocity are among the trademarks or registered trademarks of Ikanos Communications, Inc.

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The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1, above, and with our financial statements and notes thereto for the year ended December 28, 2014, contained in our Annual Report on Form 10-K filed on March 20, 2015. All references to year ends refer to our fiscal year ends.

Overview

We were incorporated in April 1999 and, through December 31, 2001, we were engaged principally in research and development. We began commercial shipment of our products in the fourth quarter of 2002. Our revenue was $125.9 million in 2012, $79.7 million in 2013, and $48.4 million in 2014. Revenue fluctuations are characteristic of our industry and affect our business, especially due to the concentration of our revenue among a few customers and a limited number of products. These fluctuations can result from a variety of factors, including the inability to offset lower demand for products that near end-of-life with new product offerings as a result of development delays, competitive pricing pressures, or the inability to meet product requirements. We have limited visibility into the buying patterns of our original equipment manufacturers ("OEMs"), who, in turn, are affected by changes in the buying and roll out patterns of the service provider market. In order to obtain future revenue growth we must be successful in designing our new products to match customer requirements while delivering the requisite products within the customers' required development cycle.

We incurred net losses of $12.3 million and $24.3 million, respectively, for the three and six months ended June 28, 2015 and had an accumulated deficit of $393.7 million as of June 28, 2015. As a result of our planned increase in development spending associated with our next generation Access platform or G.fast offerings, recurring losses from operations, and our need to stay in compliance with our debt covenants, there is uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt as to our ability to continue as a going concern. In order to continue our business, we will need to raise additional capital. There can be no assurance that such additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to us.

We are a leading provider of advanced semiconductor products and software for delivering high speed broadband solutions to the connected home. Our broadband multi-mode and digital subscriber line ("DSL") processors and other semiconductor offerings power carrier infrastructure (referred to as "Access") and customer premises equipment (referred to as "Gateway") for network equipment manufacturers ("NEMs") supplying leading telecommunications service providers. Our products are at the core of DSL access multiplexers ("DSLAMs"), optical network terminals ("ONTs"), concentrators, modems, voice over Internet Protocol ("VoIP") terminal adapters, integrated access devices ("IADs"), and residential gateways ("RGs"). On September 29, 2014, we entered into a collaboration arrangement with Alcatel-Lucent USA, Inc. (along with its sister companies, collectively known as “ALU”) on the development of ultra-broadband products. We expect this collaboration not only to help increase our share of the broadband Access market but also to positively affect our global carrier engagements, as well as Gateway OEM interest in our products and technology. Our products have been deployed by service providers globally, including in Asia, Europe, and North and South America.

Our products reflect advanced designs in silicon, systems, and firmware and are programmable and highly-scalable. Our expertise in the integration of our digital signal processor ("DSP") algorithms with advanced digital, analog, and mixed signal semiconductors enables us to offer high-performance, high-density, and low-power asymmetric DSL ("ADSL") and very-high bit rate DSL ("VDSL") products. We have released to production VDSL-based solutions to the market that offer vectoring and bonding to increase speeds over existing telecom carrier copper infrastructure. These products support high speed broadband service providers’ multi-play deployment plans to the connected home while keeping their capital and operating expenditures relatively low compared to competing frameworks. Our broadband DSL products consist of high performance Access and Gateway chips. We have demonstrated: (1) an aggregate downstream and upstream rate of 300 megabits per second (Mbps) over a single pair copper line at a distance of up to 200 meters, and (2) 150Mbps aggregate data rate up to a distance of 500 meters. Our next generation G.fast products for the ultra-broadband market are currently in development and will be designed to achieve speeds up to a gigabit per second (1Gbps or 1,000 Mbps). We also offer a line of multi-mode communications processors ("CPs") for RGs that can support a variety of wide area network ("WAN") topologies for telecom carriers, wireless carriers, and cable multiple system operators ("MSOs"), including Ethernet and gigabit Ethernet, passive optical network ("PON"), DSL, and LTE. In addition to our DSL and RG processors, our product portfolio also includes inSIGHT BXM software ("inSIGHT"), an innovative software suite of Gateway-based diagnostics and analytics software products.

Outsourcing all of our semiconductor fabrication, assembly, and test functions allows us to focus on the design, development, marketing, and sales of our products and reduces the level of our capital investment. In 2012, we expanded our outsourcing model by transitioning a majority of our day-to-day supply chain management, production test engineering, and production quality engineering functions ("Master Services") to eSilicon Corporation ("eSilicon") under a Master Services and Supply Agreement ("Service Agreement"). Pursuant to the Service Agreement, which will expire in October 2015, we place

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orders for our finished goods products with eSilicon, who, in turn, contracts with wafer foundries and the assembly and test subcontractors and manages these operational functions for us on a day-to-day level.

Our semiconductor customers consist primarily of NEMs, original design manufacturers ("ODMs"), contract manufacturers ("CMs"), and OEMs, and include vendors such as Sagemcom Tunisie ("Sagemcom"), Askey Computer Corporation ("Askey"), NEC Corporation ("NEC"), and AVM Computersysteme Vertriebs GmbH ("AVM"). Our products are deployed in the networks of telecom carriers such as AT&T Inc. ("AT&T"), Bell Canada, Orange S.A. (formerly, known as France Telecom) ("Orange"), KDDI Corporation ("KDDI"), and Nippon Telegraph and Telephone Corporation ("NTT").

Our families of DSL processors are designed for a range of devices that deliver high-speed access to the connected home. Following are updated overviews of the progress that we have made on our latest products:


•	We are currently shipping our Fusiv Vx185 and Vx183 family of chipsets which are high performance G.Vector-compliant communications processors designed specifically for the next generation of service gateways in the home.


•	The Vx585 family maintains the distributed architecture of the Vx185/183, while supporting a higher level of performance with a dual-core CPU architecture and additional, higher performance acceleration processor engines. The Vx585 family of processors is currently in production.


•	Our Access Velocity-3 solution combines the rich feature set of the Velocity family with innovative Ikanos NodeScale vectoring technology. Velocity-3 started carrier and OEM trials in 2014 and trials are continuing.

•

Our families of multi-mode gateway processors complement our DSL broadband products and are designed to address a wide range of devices for value-added carrier services and high-speed access to the connected home. The Fusiv Multi-core Vx175 and Fusiv Vx173, and Fusiv Vx575 family, are built on our Fusiv family of processors and extend the range of access technologies and device types that can be supported by our products. The Vx575 family of processors is currently in production.


•	We are currently in development of our next generation Access platform or G.fast.


•	inSIGHT represents an expansion of our product portfolio by offering software as a product sold directly to carriers. Our inSIGHT monitoring and diagnostic software is in field trials and is now scheduled to be ready for production in the latter half of 2015.

On October 7, 2014, we entered into a First Amended and Restated Loan and Security Agreement (the "Amended SVB Loan Agreement") with Silicon Valley Bank, or SVB. The Amended SVB Loan Agreement amends and restates the SVB Loan Agreement, originally dated January 14, 2011, and subsequently amended, and extends the maturity date until October 2017. Under the Amended SVB Loan Agreement, we may borrow up to $20.0 million, subject to certain limitations.

We were not in compliance with the Adjusted Quick Ratio covenant at the end of April 2015. On April 30, 2015, SVB agreed to waive the non-compliance associated with the Adjusted Quick Ratio covenant for the month of April 2015 and we entered into Amendment No. 2 to the Amended SVB Loan Agreement (“Amendment No. 2”). Amendment No. 2 provides for, among other things, the following: (1) SVB allowed us to enter into an amendment to the ALU Loan Agreement (as defined below); (2) the removal of the LIBOR-based interest pricing option; (3) an increase in the interest rate margin by 75 basis points; and (4) a final payment fee of $250,000.

At June 28, 2015, $5.0 million was outstanding under the Amended SVB Loan Agreement. Interest on advances against the line was 6.5% as of June 28, 2015 and was payable monthly. We utilize the line of credit with SVB to partially fund our operations. We were in compliance with the Adjusted Quick Ratio covenant as of June 28, 2015 under the Amended SVB Loan Agreement. Although we are currently in compliance with the terms of the Amended SVB Loan Agreement, we anticipate that we may not be in compliance with all of the covenants during certain later periods of 2015 and, accordingly, have begun initial discussions with SVB to address those potential instances of noncompliance.

In connection with the collaboration arrangement, ALU and a group of investors affiliated with Tallwood Venture Capital (the “Tallwood Group”) collectively agreed to a financial commitment of up to $45.0 million, consisting of the purchase through a private placement on September 29, 2014 of approximately 4.0 million shares of the Company’s common stock at $4.10 per share for proceeds of $15.1 million (net of issuance costs of $1.2 million); ALU’s commitment to loan the Company up to $10.0 million that was received by us on April 30, 2015 (the “ALU Loan Agreement”); the Tallwood Group’s agreement to purchase from us an additional $11.2 million of common stock; and ALU’s agreement to provide additional funding associated with the collaboration arrangement.

On April 30, 2015, we and ALU entered into Amendment No. 2 (the “ALU Loan Amendment”) to that certain Loan and Security Agreement dated September 29, 2014, as amended (the “ALU Loan Agreement”). The ALU Loan Amendment provides, among other things, the following: (i) that interest shall be paid in arrears in cash, rather than in-kind; however, for any interest payment due after June 30, 2015, we may request that, at the discretion of ALU, such payments be made in-kind; (ii) the amendment of the warrants previously issued to ALU, as further described below; and (iii) that the outstanding balance

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of the loan shall automatically accelerate in the event of a change in control of Ikanos or a sale of all or substantially all of the our assets.

At June 28, 2015, $10.0 million was outstanding under the ALU Loan Agreement. Interest on the loan is to 9.5% and is payable monthly. We are required to repay an amount equal to 15% of the outstanding principal and any outstanding interest on or before November 30, 2016 and the remainder on or before November 30, 2017. The ALU Loan Agreement contains the same Adjusted Quick Ratio covenant as the Amended SVB Loan Agreement and both loan agreements contain provisions that provide that a default under one loan agreement is a default under the other.

In conjunction with the collaboration arrangement, during the fourth quarter of 2014 we issued to ALU two warrants to purchase a total of 474,000 shares of common stock at $4.75 per share. On April 30, 2015, we amended each of the first warrant (the “Amended and Restated First Warrant”) and the second warrant (the “Amended and Restated Second Warrant” and, collectively, with the Amended and Restated First Warrant, the “Amended Warrants”) to lower the exercise price to $2.75 per share of our common stock that is issuable thereunder, which exercise price represents the closing price of the our common stock on April 29, 2015, the last trading day before the Amended Warrants were issued. In addition, each of the Amended Warrants contains a provision to automatically adjust the per share exercise price downward in the event that on or before April 30, 2016, we issue or sell or publicly announce the issuance or sale of any of our common stock or options or convertible securities that are related to our common stock (other than certain employee and director options) at an effective price that is lower than the then-current exercise price under the Amended Warrants. Based on the revised exercise price, using the Black Scholes model, we valued the warrants at $0.5 million and recorded the amount as debt discount. The debt discount will be accreted over the life of the ALU Loan Agreement.

Proposed Merger with Qualcomm

On August 5, 2015, Qualcomm Atheros, Inc., (“Parent”) a Delaware corporation and a wholly-owned subsidiary of QUALCOMM Incorporated, King Acquisition Co., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), and Ikanos entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, subject to the terms of the Merger Agreement, Parent will cause the Merger Sub to commence, no later than August 19, 2015, a tender offer (the “Offer”) to purchase all of the outstanding shares (the “Shares”) of our common stock at a price of $2.75 per share, without interest (the “Offer Price”), subject to any applicable withholding taxes and assume all of our outstanding indebtedness at the closing.

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The Merger Agreement provides that the Merger will be governed by Section 251(h) of the Delaware General Corporation Law and shall be effected as soon as practicable following the consummation of the Offer without stockholder approval pursuant to Delaware law.

The Merger Agreement contains customary representations and warranties by Parent, Merger Sub and Ikanos. The Merger Agreement also contains customary covenants and agreements, including with respect to the operation of our business between signing and closing, restrictions on responses by us with respect to alternative transactions, governmental filings and approvals and other matters.

The Merger Agreement generally prohibits us from soliciting proposals relating to alternative business combination transactions and restricts our ability to furnish non-public information to, or participate in any discussions or negotiations with, any third party with respect to any such transaction, subject to certain limited exceptions.

The Merger Agreement includes a remedy of specific performance for us, Parent, and Purchaser. The Merger Agreement also includes customary termination provisions for both us and Parent and provides that, in connection with the termination of the Merger Agreement under specified circumstances, including termination by us to accept and enter into a definitive agreement with respect to an unsolicited superior offer, we will be required to pay a termination fee of $1,750,000 (approximately 3.5% of the equity value of the transaction) (the “Termination Fee”). A superior offer is a written proposal pursuant to which a third party would acquire, among other acquisition structures set forth in the Merger Agreement, 50% or more of our outstanding voting securities or assets on terms that our board of directors will have determined in good faith (after consultation with its independent financial advisor of nationally recognized reputation and its outside legal counsel) to be more financially favorable our stockholders and is reasonably likely to be consummated in accordance with the terms proposed taking into account relevant factors. Any such termination of the Merger Agreement by us is subject to certain conditions, including the Company’s compliance with certain procedures set forth in the Merger Agreement and a determination by our board of directors of that the failure to take such action would constitute a breach of its fiduciary duties under applicable law, the entrance into a definitive agreement by us with a third party and payment of the Termination Fee by the us.

Concurrently with the execution of the Merger Agreement, each of our directors and named executive officers, entities affiliated with Tallwood Venture Capital and Alcatel-Lucent Participations (each a “Tender and Support Stockholder”) entered into a Tender and Support Agreement with Parent and Merger Sub (the “Tender and Support Agreement”), which provides, among other things, that such stockholder will tender their Shares in the Offer and vote their Shares in favor of approving the principal terms of the Merger, if applicable. In aggregate, such persons owned approximately 58.2% of the Shares outstanding as of the close of business on August 5, 2015. The Tender and Support Agreement will terminate upon termination of the Merger Agreement and certain other specified events. Upon the occurrence of our board of directors' changing their recommendation that the stockholders support the Offer as a result of a permitted change in recommendation for certain intervening events (not in connection with an alternative acquisition proposal), as described in the Merger Agreement, each Tender and Support Stockholder will be permitted to withdraw the excess of the aggregate number of Shares owned by the Tender and Support Stockholders as of the date of the Tender and Support Agreement and any additional Shares acquired by the Tender and Support Stockholders after the entry into such agreement (the “Subject Securities”) that is equal to each Tender and Support Stockholder’s pro rata portion (as measured against the aggregate Subject Securities held by each of the Tender and Support Stockholders) of the sum of (i) thirty percent (30%) of the total number of Shares outstanding, on a fully diluted basis (the “30% Shares”) plus (ii) such additional number of Subject Securities (rounded down to the nearest whole Share) held by all of the Tender and Support Stockholders that is equal to product of (x) the total number of Subject Securities held by all Tender and Support Stockholders less the 30% Shares, multiplied by (y) the percentage, rounded to two decimal places, of the total number of outstanding Shares that have been tendered and not withdrawn prior to the expiration of the Offer by all holders of the Shares (other than the Tender and Support Stockholders).

If the Merger is consummated, the Company will become a wholly-owned subsidiary of Parent. Accordingly, this Quarterly Report on Form 10-Q, which assumes Ikanos remains a standalone business, should be read with the understanding that should the Merger be completed, Parent will have the power to control the conduct of our business.

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Additional Information and Where to Find It

The Offer described above has not yet commenced. This shall not constitute an offer to sell or the solicitation of an offer to buy any shares of our common stock, nor shall there be any sale of such common stock in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. Any offer will only be made through a Tender Offer Statement on Schedule TO, which will contain an offer to purchase, form of letter of transmittal and other documents relating to the Offer (collectively, the “ Offer Materials”), each to be filed with the SEC by the Merger Sub and Parent. In addition, we will file with the SEC a solicitation/recommendation statement on Schedule 14D-9 with respect to the Offer. Merger Sub and we expect to mail the Offer Materials and the Schedule 14D-9 to Ikanos stockholders. Investors and stockholders are urged to carefully read these documents and the other documents relating to the transactions contemplated by the Merger Agreement when they become available because these documents will contain important information relating to the Offer and related transactions. The Offer Materials and the Schedule 14D-9 will also be available at no cost on the SEC’s web site at www.sec.gov.

Critical Accounting Policies and Estimates

In preparing our unaudited condensed consolidated financial statements, we make assumptions, judgments, and estimates that can have a significant impact on amounts reported. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments, and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of our Board of Directors. We believe that the assumptions, judgments, and estimates involved in the accounting for revenue, cost of revenue, accounts receivable, inventories, warranty, income taxes, impairment of goodwill and related intangibles, acquisitions, and stock-based compensation expense have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments, and estimates relative to our critical accounting policies have not differed materially from actual results.

The Company's significant accounting policies are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year ended December 28, 2014 and have not changed materially during the six months ended June 28, 2015.

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Results of Operations



	Three Months Ended										Six Months Ended
	June 28, 2015			Percent of Revenue		June 29, 2014			Percent of Revenue		June 28, 2015		Percent of Revenue		June 29, 2014		Percent of Revenue
	(in millions except percent)
Revenue	$	11,068		100	%	$	11,255		100	%	21,249		100	%	25,768		100	%
Cost of revenue	5,392			49		5,775			51		10,585		50		13,211		51
Gross profit	5,676			51		5,480			49		10,664		50		12,557		49
Operating expenses:
Research and development	12,618			114		13,408			119		24,431		115		26,084		101
Selling, general, & administrative	4,901			44		4,105			36		9,907		47		8,926		35
Total operating expenses	17,519			158		17,513			156		34,338		162		35,010		136
Loss from operations	(11,843		)	(107	)	(12,033		)	(107	)	(23,674	)	(111	)	(22,453	)	(87	)
Interest and other, net	(378		)	(3	)	(129		)	(1	)	(486	)	(2	)	113		—
Loss before income taxes	(12,221		)	(110	)	(12,162		)	(108	)	(24,160	)	(113	)	(22,340	)	(87	)
Provision for income taxes	95			1		168			2		149		1		295		1
Net loss	$	(12,316	)	(111	)%	$	(12,330	)	(110	)%	(24,309	)	(114	)%	(22,635	)	(88	)%

Revenue by Product Family

The following table presents net revenue by reportable product family:



	Three Months Ended				2015 vs 2014					Six Months Ended				2015 vs 2014
	June 28, 2015		June 29, 2014		$ Change			% Change		June 28, 2015		June 29, 2014		$ Change			% Change
	(in millions except percent)
Gateway	$	6.9	$	8.8	$	(1.9	)	(22	)%	$	13.8	$	19.1	$	(5.3	)	(28	)%
Access	4.2		2.5		1.7			68		7.4		6.7		0.7			10
Total revenue	$	11.1	$	11.3	$	(0.2	)	(2	)	$	21.2	$	25.8	$	(4.6	)	(18	)

We track our products within two product families: Gateway and Access. The Access product family consists of semiconductor and software products that power the carrier infrastructure, as well as any node in a hybrid-fiber-copper network where fiber is terminated and copper is used to reach the consumer premises. The Gateway product family includes a variety of processors and the associated software designed for devices deployed at the customer premises.

Total revenue for the second quarter of 2015 declined by $0.2 million, or 2%, to $11.1 million from $11.3 million in the second quarter of 2014. Our three largest customers accounted for approximately 75% of our revenue in the second quarter of 2015 while our three largest customers accounted for 72% of our revenue in the second quarter of 2014. Total revenue for the first half of 2015 declined by $4.6 million, or 18%, to $21.2 million from $25.8 million in the first half of 2014. Our three largest customers accounted for approximately 76% of our revenue in the first half of 2015 while our three largest customers accounted for 65% of our revenue in the first half of 2014. Quarterly revenue has been relatively flat over the last year and we expect that it will continue to remain so until our new product introductions begin in the latter half of 2015. Until these new product introductions, we expect to continue to be adversely affected by the aging of our mature products.

The following table presents our direct customers that accounted for more than 10% of our revenue for the periods indicated:



	Three Months Ended				Six Months Ended
Our Direct Customer	June 28, 2015		June 29, 2014		June 28, 2015		June 29, 2014
Sagemcom	27	%	18	%	31	%	25	%
Paltek Corporation	27		19		28		13
Amod**	21		35		17		27
NEC Corporation of America	*		*		*		10


*	Less than 10%


**	Amod is a distributor whose purchases from us are contracted to its end customer, Askey, a contract manufacturer for Sagemcom.

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Revenue by Country as a Percentage of Total Revenue



	Three Months Ended				Six Months Ended
	June 28, 2015		June 29, 2014		June 28, 2015		June 29, 2014
France	28	%	21	%	31	%	27	%
Japan	27		19		22		23
Taiwan	23		46		28		35
Germany	4		1		3		5
Korea	3		2		7		1
China	2		2		1		2
United States	2		—		1		1
Other	11		9		7		6

The table above reflects sales to our direct customers based on where they are headquartered. It does not necessarily reflect carrier deployment of our products as we do not sell directly to carriers.

Cost of Revenue and Gross Margin



	Three Months Ended				Six Months Ended
	June 28, 2015		June 29, 2014		June 28, 2015		June 29, 2014

Gross margin	51	%	49	%	50	%	49	%

Gross margin improved 2% to 51% for the second quarter of 2015 compared to 49% for the second quarter of 2014. The increase is related to product mix as a higher proportion of high margin Access products were sold through the second quarter of 2015 compared to the second quarter of 2014. Gross margin increased slightly to 50% for the first six months of 2015 compared to the first six months of 2014.

Research and Development Expenses

Research and development ("R&D") expenses are recognized as incurred and generally consist of compensation (including stock compensation expense) and associated expenses of employees engaged in research and development; contractors; tape-out expenses; reference board development; development testing, evaluation kits and tools; stock-based compensation; amortization of acquisition-related intangibles; and depreciation expense. Before releasing new products, we incur charges for mask sets, prototype wafers, mask set revisions, bring-up boards, and other qualification materials, which we refer to as tape-out expenses. These tape-out expenses may cause our R&D expenses to fluctuate because they are not incurred uniformly every quarter.

The following table presents details of research and development expense:



	Three Months Ended						2015 vs 2014					Six Months Ended						2015 vs 2014
	June 28, 2015			June 29, 2014			$ Change			% Change		June 28, 2015			June 29, 2014			$ Change			% Change
	(In millions, except percent)
Salaries, related benefits, and consulting	$	8.3		$	7.8		$	0.5		6	%	$	16.4		$	16.1		$	0.3		2	%
Tape-out, development, and design costs	1.8			3.5			(1.7		)	(49	)	3.2			5.7			(2.5		)	(44	)
Other	2.5			2.1			0.4			19		4.8			4.3			0.5			12
	$	12.6		$	13.4		$	(0.8	)	(6	)	$	24.4		$	26.1		$	(1.7	)	(7	)
As a percent of revenue	114		%	119		%						115		%	101		%
Number of employees	182			186			(4		)	(2	)%	182			186			(4		)	(2	)%

R&D costs declined by 6% or $0.8 million to $12.6 million in the second quarter to 2015 compared to $13.4 million in the second quarter of 2014. Salaries, related benefits, and consulting were higher in 2015 than in 2014 by $0.5 million, the result of higher contract labor developing new chips. Tape-out, development, and design costs were lower as tape-out costs

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were $1.7 million lower in the second quarter of 2015 compared to the second quarter of 2014. The second quarter of 2014 included significant tape-out, design and development expenditures for our Vx585 products.

R&D costs declined by 7% or $1.7 million to $24.4 million in first half of 2015 compared to $26.1 million for the first half of 2014. Salaries, benefits and consulting increase by $0.3 million or 2% due principally to the addition of contract labor. Tape-out, development, and design costs decreased $2.5 million due to lower tape-out costs in the first half of 2015 compared to the first half of 2014. We anticipate that tape-out and related costs will increase over the remainder of 2015 as we ramp up for new product introductions.

Selling, General, and Administrative Expenses (in millions except percent)

Selling, general, and administrative ("SG&A") expenses generally consist of compensation and related expenses for personnel; public company expenses; legal, recruiting and auditing fees; and depreciation.

The following table presents details of selling, general, and administrative expenses:



	Three Months Ended						2015 vs 2014					Six Months Ended						2015 vs 2014
	June 28, 2015			June 29, 2014			$ Change			% Change		June 28, 2015			June 29, 2014			$ Change			% Change
	(In millions, except percent)
Salaries, related benefits, and consulting	$	3.2		$	2.9		$	0.3		10	%	$	6.6		$	6.2		$	0.4		6	%
Legal and accounting	0.9			0.5			0.4			80		1.5			1.3			0.2			15
Other	0.8			0.7			0.1			14		1.8			1.4			0.4			29
	$	4.9		$	4.1		$	0.8		20	%	$	9.9		$	8.9		$	1.0		11	%
As a percent of revenue	44		%	36		%						47		%	35		%
Number of employees	53			58			(5		)	(9	)%	53			58			(5		)	(9	)%

SG&A costs increased by $0.8 million or 20% in the second quarter of 2015 versus the comparable 2014 period. The 10% increase in salaries, related benefits, and consulting costs in the second quarter of 2015 compared to the second quarter of 2014 is primarily attributable to an increase in stock compensation, commissions, and consulting costs. Legal and accounting costs were higher in the second quarter of 2015 compared to the second quarter of 2014 primarily due to incremental expenses related to patent maintenance costs in non-U.S. countries and jurisdictions.

SG&A costs increased by $1.0 million or 11% in the first half of 2015 versus the comparable 2014 period. The 10% increase in salaries, related benefits, and consulting costs in the second quarter of 2015 compared to the second quarter of 2014 is primarily attributable to an increase in stock compensation costs and consulting costs which offset the effect of the lower number of employees. Legal and accounting costs were higher due to the costs related to our rights offering and stock option exchange that occurred in the first quarter of 2015 as well as incremental expenses related to patent maintenance costs in non-U.S. countries and jurisdictions.

Interest and Other, Net

Interest and other, net consists of interest income primarily earned on short-term investments, other non-operating expenses, interest expense related to the Amended SVB Loan Agreement and, starting in April 2015, interest expense under the ALU Loan Agreement, and other non-operating income and expense items such as gains and losses on foreign exchange. Interest and other, net was an expense of $0.4 million in the second quarter of 2015 compared to an expense of $0.1 million in the second quarter of 2014. Higher interest expense and lower interest income accounted for the entire difference. Interest and other, net total was an expense of $0.5 million for the first half of 2015 compared to income of $0.1 million in the first half of 2014. Higher interest expense and lower interest income for the first half of 2015 and foreign exchange losses in the first quarter of 2015 accounted for the entire difference.

Provision for Income Taxes

Income taxes are comprised mostly of federal income tax, foreign income taxes, and state minimum taxes. The income tax provision marginally declined in the second quarter and first half of 2015 compared to the comparable periods in 2014. Our income tax provision primarily represents foreign taxes on certain of our international subsidiaries as well as federal taxes on unremitted earnings of foreign subsidiaries.

We are subject to taxation in the U.S., various states, and certain foreign jurisdictions. We are currently undergoing an income tax audit in India. Otherwise, there are no ongoing examinations by income taxing authorities at this time. We do not

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expect any material adjustments to our reserves. Our tax years from 2007 to 2014 remain open to examination in various tax jurisdictions.

Liquidity, Capital Resources, and Going Concern

Working Capital, Cash and Cash Equivalents

The following table presents working capital, cash and cash equivalents:



	Three Months Ended
	June 28, 2015		March 29, 2015		$ Change
	(In millions)
Working capital	$	10.0	$	11.0	$	(1.0	)
Cash and cash equivalents	$	16.0	$	13.0	$	3.0
Revolving line	5.0		5.0		—
Long-term debt	10.0		—		10.0
Cash and cash equivalents, net of revolving line and ALU loan	$	1.0	$	8.0	$	(7.0	)

We have funded our operations primarily through cash from private and public offerings of our common stock, our line of credit, our loan from ALU, cash generated from the sale of our products, proceeds from the exercise of stock options, and stock purchased under our employee stock purchase plan. Our uses of cash include payroll and payroll-related expenses, manufacturing costs, purchases of equipment, tools, and software as well as operating expenses, such as product tapeouts, marketing programs, travel, professional services, facilities, and other costs. We incurred net losses of $12.3 million for the three months ended June 28, 2015 and June 29, 2014 and net losses of $24.3 million and $22.6 million for the six months ended June 28, 2015 and June 29, 2014, respectively. We had an accumulated deficit of $393.7 million as of June 28, 2015.

Our cash and cash equivalents, net of our revolving line and ALU loan, decreased by $7.0 million to $1.0 million as of June 28, 2015 compared to $8.0 million as of March 29, 2015. The quarter-to-quarter decline is attributable to our operating losses offset, in part, by the loan from ALU.

We were in compliance with the Adjusted Quick Ratio covenant under the Amended SVB Loan Agreement as of March 29, 2015, but we were not in compliance with the covenant at the end of April 2015. On April 30, 2015, SVB agreed to waive the non-compliance associated with the Adjusted Quick Ratio covenant for the month of April 2015. As of June 28, 2015, we were in compliance with the terms of the Amended SVB Loan Agreement but we anticipate that we may not be in compliance with all of the covenants during certain later periods of 2015 and, accordingly, have begun discussions with SVB to address those potential instances of noncompliance. We expect that we will need to take further actions to generate adequate cash flows or earnings to ensure compliance with the Amended SVB Loan Agreement and fund our future capital requirements, including the need to raise additional capital. There can be no assurance that sufficient debt or equity financing will be available or, if available, that such financing will be on terms and conditions acceptable to us. Additionally, there can be no assurance that we will be successful in renegotiating the covenants with SVB, if necessary. If we are unsuccessful in these efforts, we will need to implement significant cost reduction strategies that could affect our near- and long-term business plan. These efforts may include, but are not limited to: consolidating locations, reducing capital expenditures, and reducing overall headcount and curtailing business activities.

On April 30, 2015 we received the proceeds of $10.0 million under the ALU Loan Agreement (See, "ALU Collaboration and Rights Offering" below). The ALU Loan Agreement contains the same Adjusted Quick Ratio covenant as the Amended SVB Loan Agreement and both loan agreements contain provisions that provide that a default under one loan agreement is a default under the other. ALU has a first priority lien on all our assets including intellectual property. In conjunction with the ALU Loan Agreement we issued warrants to purchase 474 thousand shares of common stock. Using the Black Scholes model, we valued the warrants at $0.5 million and classified the amount as debt discount, which we will amortize over the life of the debt.

Despite the receipt of the proceeds under the ALU Loan Agreement and funds utilized under our line of credit, as a result of our planned increase in development spending during the remainder of 2015, recurring losses from operations, and the need to stay in compliance with our debt covenants, if we are unable to raise sufficient additional capital through alternative debt or equity arrangements, there will be uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt as to our ability to continue as a going concern. There can be no assurance that such additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to us.

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Cash, cash equivalents, and short-term investments held by foreign subsidiaries were $1.4 million and $4.6 million at June 28, 2015 and December 28, 2014, respectively. In April 2015, we repatriated $2.3 million, net of $0.5 million taxes, from our Indian affiliate. We previously provided for taxes upon the repatriation of funds held overseas.

ALU Collaboration and Rights Offering

On September 29, 2014, as part of our collaboration arrangement with ALU on the development of ultra-broadband products, ALU and a group of investors affiliated with Tallwood Venture Capital (the “Tallwood Group”) collectively agreed to a financial commitment of up to $45.0 million, which consisted of the purchase of approximately 4.0 million shares of the Company’s common stock at $4.10 per share for aggregate gross proceeds of $16.3 million, ALU’s commitment to loan the Company up to $10.0 million following the satisfaction of certain conditions and a security interest in all of our assets (the “ALU Loan Agreement”), the Tallwood Group’s agreement to purchase an aggregate of an additional $11.2 million of common stock at the same per share price in the Rights Offering, and ALU’s agreement to provide additional other funding associated with the collaboration arrangement.

Our Rights Offering closed on February 4, 2015 and we issued 3.0 million shares of common stock to the participants and received gross proceeds of $12.4 million. After deducting legal, accounting, and other costs, we recognized net proceeds of $11.5 million from the Rights Offering. The Tallwood Group participated in the Rights Offering and, thereby, fulfilled its commitment by investing $11.2 million to purchase an additional 2.7 million shares of our common stock.

Amended SVB Loan Agreement

We utilize the line of credit under the Amended SVB Loan Agreement to partially fund our operations. The agreement was originally entered into in January 2011 and amended periodically thereafter. On October 7, 2014, we entered into the Amended SVB Loan Agreement which amends and restates the prior agreement and extends the maturity date until October 2017. As of June 28 2015, $5.0 million was outstanding under the Amended SVB Loan Agreement. The interest rate on advances against the line was 6.5% as of June 28, 2015 and is payable monthly.

The Amended SVB Loan Agreement is collateralized by a first priority lien on all of our present and future assets, other than our intellectual property, and a second lien on our intellectual property. The Amended SVB Loan Agreement also requires that we maintain a minimum monthly Adjusted Quick Ratio of 1.2 to 1.0, as defined in the Amended SVB Loan Agreement. We will need to continue to take further actions during the remainder of 2015 to generate adequate cash flows or earnings to ensure compliance with the Amended SVB Loan Agreement and fund our capital requirements.

On April 24, 2015, we entered into Amendment No. 2 to the Amended SVB Loan Agreement (“SVB Amendment No. 2”). SVB Amendment No. 2 provides, among other things, the following: (1) that SVB agrees to allow for an amendment to the ALU Loan Agreement; (2) the removal of the LIBOR-based interest pricing option; (3) an increase in the interest rate margin by 75 basis points; and (4) a final payment fee of $250,000.

Operating, Investing, and Financing Activities

The following table summarizes our statement of cash flows for the six months ended June 28, 2015 and June 29, 2014 (in millions):



	2015			2014
Statements of Cash Flows Data:
Cash and cash equivalents—beginning of year	$	13.3		$	36.0
Net cash used in operating activities	(12.5		)	(12.4		)
Net cash used in investing activities	(0.4		)	—
Net cash provided by (used in) financing activities	15.6			(4.7		)
Cash and cash equivalents—end of period	$	16.0		$	18.9

Operating Activities

During the first half of 2015, we used $12.57 million in net cash from operating activities while incurring a loss of $24.3 million. Included in the net loss were non-cash charges amounting to $4.9 million that resulted from depreciation of $2.7 million, stock-based compensation of $2.0 million, and the amortization of intangible assets and acquired technology of $0.2 million. Favorable cash flow resulted from a reduction in accounts receivable of $3.1 million, prepaid expenses and other assets of $1.4 million and higher accounts payable and accrued liabilities of $2.4 million. Accounts receivable days sales outstanding declined from 109 days at the end of 2014 to 89 days at June 28, 2015. Inventories remained flat from the end of 2014 to the end of the second quarter of 2015, while purchase commitments have declined from $6.7 million to $5.4 million during the

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same period. Prepaid expenses and other assets declined as prepaid wafers purchased by eSilicon on our behalf declined by $0.7 million, issuance costs of $0.8 million from our private placement and Rights Offering were transferred and charged to additional paid-in capital and the value of warrants, approximately $0.5 million, issued to ALU were transferred from other assets to debt discount.

For the six months ended June 29, 2014, we used $12.4 million of net cash in operating activities, while incurring a net loss of $22.6 million. Included in the net loss was approximately $4.2 million in various non-cash expenses consisting of depreciation, stock-based compensation expense, and the amortization of intangible assets and acquired technology. Operating cash flows also benefited from decreases in accounts receivable of $6.5 million related to lower revenue and increases of accounts payable and accrued liabilities of $0.2 million offset by increases in prepaid expenses and other assets of $0.5 million.

Investing Activities

During the first half of 2015, cash used in investing activities was $0.4 million, which was comprised of purchases of property and equipment of $2.8 million, offset by the net maturities and sales of certificates of deposit of $2.4 million. During the first half of 2014, cash used in investing activities was minimal as purchases of property and equipment of $1.8 million was offset by net proceeds from the maturities and sales of investments of $1.8 million.

Financing Activities

During the first half of 2015, our financing activities provided $15.7 million as net proceeds from our rights offering and the ALU loan were $11.5 million and $10.0 million, respectively, while net repayments under our revolving line amounted to $5.9 million. During the first half of 2014, we used $4.7 million as repayments under the revolving loan were offset by proceeds from the issuance of common stock under our employee stock plans of $0.4 million.

Contractual Commitments and Off Balance Sheet Arrangements

We do not use off balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off balance sheet arrangements such as special purpose entities and research and development arrangements. Accordingly, our liquidity and capital resources are not subject to off balance sheet risks from unconsolidated entities.

We lease certain office facilities, equipment, and software under non-cancelable operating leases and we have incurred certain debt and tax obligations all of which are payable over the next few years. The following table summarizes these obligations as of June 28, 2015 and the effect that they are expected to have on our liquidity and cash flow in future periods (in millions):



	Total		Remainder of 2015		2016 and 2017		2018 and 2019		There- after
Operating lease payments	$	5.3	$	1.3	$	3.6	$	0.4	$	—
CAD software tools	8.4		2.8		5.6		—		—
Intellectual property purchase obligations (1)	4.6		0.5		4.1		—		—
Inventory purchase obligations	5.4		5.4		—		—		—
Repayment of long-term debt	10.0		—		10.0		—		—
Non-current income tax payable	0.8		—		—		—		0.8
Royalties	0.8		0.6		0.2		—		—
	$	35.3	$	10.6	$	23.5	$	0.4	$	0.8

(1) During the first quarter of 2015, we utilized intellectual property purchase obligations and capitalized our $6.0 million obligation as property and equipment with a six year useful life.

For the purposes of this table, purchase obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, we have purchase orders that represent authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements.

Computer aided design ("CAD") tools are expensed when utilized. We expect to have a majority of the tools expensed prior to the fulfillment of payment obligations as a result of the ongoing G.fast-related product development.

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Non-current income tax payable represents both the tax obligation and related accrued interest. We are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond twelve months due to the uncertainties in the timing of tax outcomes.

In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant, and we are unable to estimate the maximum potential impact of these indemnification provisions on our future consolidated results of operations.

Recent Accounting Pronouncement

In April 2015, as part of its initiative to reduce complexity in accounting standards, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-03, "Interest--Imputation of Interest" (Subtopic 835-30) (the "Update"). Under the Update, debt issuance costs related to a recognized liability should be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement of debt issuance costs is not affected by the Update. The Update is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Update should be applied on a retrospective basis. We adopted this Update concurrent with the ALU Loan Agreement debt taken down in the second quarter of 2015.



Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our line of credit. We do not use derivative financial instruments in our investment portfolio. The primary objective of our investment activities is to preserve principal and meet liquidity needs, while maximizing yields and without significantly increasing risk. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer, or type of investment. As of December 28, 2014, we had investments of $2.4 million in certificates of deposit. As of June 28, 2015, we had no investments.

As of June 28, 2015, we had cash and cash equivalents totaling $16.0 million. We do not enter into investments for trading or speculative purposes and, therefore, a change by one hundred basis points in interest rates would have limited or no effect on cash or cash equivalents.

As of June 28, 2015, we had $5.0 million outstanding under our line of credit with SVB and $10.0 million outstanding under our loan from ALU. The interest rate was variable and was 6.5% under the revolving line and 9.5% under the ALU loan at June 28, 2015. If the rates were to change by one hundred basis points and the balance remained the same, the annual effect would be less than $0.2 million.

Foreign Currency Risk

Our revenue and cost of revenue are predominately denominated in U.S. dollars. An increase of the U.S. dollar relative to the currencies of the countries in which our customers operate would make our products more expensive to them and increase pricing pressure or reduce demand for our products. We also incur a portion of our expenses in currencies other than the U.S. dollar, including the euro, the Japanese yen, Korean won, Indian rupee, Singapore dollar, the Chinese yuan, and the Taiwanese dollar. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. We expect that our foreign currency exposure will increase as our operations in India and other countries expand. If exchange rates were to change by ten percent, the effect would be to increase/decrease income by approximately $1.0 million.



Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by our Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded these disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the

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Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the quarter ended June 28, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION



Item 1.	Legal Proceedings

From time-to-time, in the normal course of business, we are a party to litigation matters that have involved and may involve in the future, among other things, claims related to intellectual property infringement as well as employment-related disputes. We are subject to claims and litigation arising in the ordinary course of business; however, we do not believe, based on currently available facts and circumstances, that the final outcome of these matters, taken individually or as a whole, will have a material adverse effect on our consolidated results of operations or financial position. The results of litigation are inherently uncertain and material adverse outcomes are possible. We have not provided accruals for any legal matters in our financial statements as potential losses for such matters are not considered probable and reasonably estimable. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy any liabilities arising from the matters described above will not have a material adverse effect our consolidated results of operations, financial position, or cash flows.



Item 1A.	Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this Quarterly Report on Form 10-Q, and in our other filings with the SEC, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not presently known to us may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition, and results of operations could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment.

Risks Related to our Pending Merger with an Affiliate of QUALCOMM Incorporated

Our proposed merger with an affiliate of QUALCOMM Incorporated is subject to a number of conditions beyond our control. Failure to complete the merger within the expected timeframe or at all could materially and adversely affect our future business, results of operations, financial condition and stock price.

On August 5, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Qualcomm Atheros, Inc., (“Parent”) a Delaware corporation and a wholly-owned subsidiary of QUALCOMM Incorporated (“Qualcomm”) and King Acquisition Co., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”). The Merger Agreement provides that, subject to the terms of the Merger Agreement, Parent will cause the Merger Sub to commence, no later than August 19, 2015, a tender offer (the “Offer”) to purchase all of our outstanding shares (the “Shares”) of common stock, $0.001 par value, at a price of $2.75 per share, without interest (the “Offer Price”), subject to any applicable withholding taxes and assume all of our outstanding indebtedness at the closing of the transaction. Following consummation of the Offer, Merger Sub will merge with and into us and we will survive as a wholly-owned subsidiary of Parent (the “Merger”).

We cannot predict whether and when these conditions will be satisfied. If one or more of these conditions is not satisfied, and as a result, we do not complete the Merger, or in the event the proposed Merger is not completed or is delayed for any other reason, our business, results of operations, financial condition and stock price may be harmed because:


•	management’s and our employees’ attention may be diverted from our day-to-day operations as they focus on matters related to preparing for integration of our operations with those of Qualcomm;

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•	we could potentially lose key employees if such employees experience uncertainty about their future roles with us and decide to pursue other opportunities in light of the proposed Merger;


•	we could potentially lose customers or vendors, new customer or vendor contracts could be delayed or decreased and we may have difficulty hiring and retaining new employees;

•

we have agreed to restrictions in the Merger Agreement that limit how we conduct our business prior to the consummation of the Merger, including, among other things, restrictions on our ability to make certain capital expenditures, investments and acquisitions, sell, transfer or dispose of our assets, amend our organizational documents and incur indebtedness. These restrictions may not be in our best interests as an independent company, and may disrupt or otherwise adversely affect our business and our relationships with our customers, prevent us from pursuing otherwise attractive business opportunities, limit our ability to respond effectively to competitive pressures, industry developments and future opportunities, and otherwise harm our business, financial results and operations;


•	we have incurred and expect to continue to incur expenses related to the Merger, such as legal, financial advisory and accounting fees, and other expenses that are payable by us whether or not the proposed Merger is completed;


•	we may be required to pay a termination fee to Parent if the Merger Agreement is terminated under certain circumstances, which would negatively affect our financial results and liquidity;


•	activities related to the Merger and related uncertainties may lead to a loss of revenue and market position that we may not be able to regain if the proposed Merger does not occur; and


•	the failure to, or delays in, consummating the Merger may result in a negative impression of us with customers, potential customers or the investment community.

The occurrence of these or other events individually or in combination could have a material adverse effect on our business, results of operations, financial condition and stock price.

In addition, our stock price may fluctuate significantly based on announcements by us, Qualcomm or other third parties regarding the proposed Merger.

If the proposed Merger is not completed, we will need to obtain additional capital to operate our business and may consider other strategic alternatives that are subject to risks and uncertainties.

If the proposed Merger is not completed, our Board of Directors may consider various alternatives available to us, including, among others, continuing as a public company with no material changes to our business or capital structure, seeking to raise capital through the sale of equity or debt securities, seeking additional debt financing, or attempting to sell our company to another potential acquirer. These alternatives may involve additional risks to our business, including, among others, risks related to our ability to continue as a going concern, the diversion of management’s attention and additional expenses, our ability to consummate any such alternative transaction, our ability to obtain capital sufficient to operate our business, the valuation assigned to our business in any such alternative transaction, our ability or a potential buyer’s ability to access capital on acceptable terms or at all and other matters that may materially and adversely affect our business, results of operations and financial condition.

The Merger Agreement contains provisions that could discourage a potential competing acquiror.

The Merger Agreement contains “no solicitation” provisions that, subject to limited exceptions, restrict our ability to solicit, initiate, or knowingly encourage, facilitate or induce third party proposals for the acquisition of our common stock. In addition, Parent has an opportunity to modify the terms of the Merger in response to any competing acquisition proposals before our Board of Directors may withdraw or change its recommendation with respect to the Merger. Upon the termination of the Merger Agreement, including in connection with a “superior proposal”, we may be required to pay $1.75 million as a termination fee.

These provisions could discourage a potential third party acquiror from considering or proposing an acquisition transaction, even if it were prepared to pay a higher per Share price than what would be received in the Merger. These provisions might also result in a potential third party acquiror proposing to pay a lower price per Share to our stockholders than it might otherwise have proposed to pay because of the added expense of the $1.75 million termination fee that may become payable.

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If the Merger Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Merger.

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

Our executive officers and members of our Board of Directors may be deemed to have interests in the Merger that may be different from or in addition to those of our stockholders, generally. These interests may create potential conflicts of interest. Our Board of Directors was aware of these potentially differing interests and considered them, among other matters, in evaluating and negotiating the Merger Agreement and in reaching its decision to approve the Merger Agreement and the transactions thereunder. These interests relate to or arise from, among other things:


•	the consideration to be received in respect of options to purchase Shares and restricted stock unit awards held by our executive officers and members of our Board of Directors;


•	the receipt of certain payments and benefits to which certain executive officers may become entitled pursuant to such executive officers’ respective employment agreements and in connection with the completion of the Offer and the Merger; and


•	the right to continued indemnification and insurance coverage for our directors and executive officers following the completion of the Merger.

We may be subject to class action lawsuits relating to the Merger, which could materially adversely affect our business, financial condition and operating results.

We, our directors and officers, and Qualcomm may be subject to class action lawsuits relating to the Merger and other additional lawsuits that may be filed. Such litigation is very common in connection with acquisitions of public companies, regardless of any merits related to the underlying acquisition. While we will evaluate and defend against any actions vigorously, the costs of the defense of such lawsuits and other effects of such litigation could have an adverse effect on our business, financial condition and operating results.

One of the conditions to consummating the Merger is that no injunction or other order prohibiting or otherwise preventing the consummation of the Merger shall have been issued by any governmental entity of competent jurisdiction in the United States. Consequently, if any of the plaintiffs in these lawsuits or in any other subsequently filed similar lawsuit is successful in obtaining an injunction preventing the parties from consummating the Merger, such injunction may prevent the Merger from being completed in the expected timeframe, or at all.

We have obligations under certain circumstances to hold harmless and indemnify our directors and officers against judgments, fines, settlements and expenses related to claims against such directors and officers and otherwise to the fullest extent permitted under Delaware law and our bylaws and certificate of incorporation. Such obligations may apply to any potential litigation. However, an unfavorable outcome in any lawsuit related to the Merger could prevent or delay the consummation of the Merger and result in substantial costs to us.

We will incur significant costs in connection with the Merger, whether or not it is consummated.

We will incur substantial expenses related to the Merger, whether or not it is completed. Through August 2015, we have incurred substantial transaction costs and we anticipate incurring additional costs until completion of the Merger. In addition, we estimate that we will incur investment banking fees of $1.9 million, which are payable upon consummation of the Merger. Payment of these expenses by us as a standalone entity would adversely affect our operating results and financial condition and would likely adversely affect our stock price.

Risks Related to an Investment in Us

We have a history of losses and we will need to raise additional capital in the future and our inability to do so may adversely impact our ability to continue as a going concern.

Our consolidated financial statements have been prepared on a going concern basis that assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. The report of our independent registered public accounting firm for the year ended December 28, 2014 contained an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a going concern as a result of recurring losses from operations. Since our inception, we have never been profitable on an annual basis and we have incurred significant net losses

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leading to an accumulated deficit of $393.7 million as of June 28, 2015. We expect to incur additional losses for the foreseeable future.

We will need to seek financing in the future. These financings could include the sale of equity securities (which would result in dilution to our stockholders) or we may incur additional indebtedness (which would result in increased debt service obligations and could result in additional operating and financial covenants that would restrict our operations). There can be no assurance that any such equity or debt financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to raise sufficient additional capital, there will be uncertainty regarding our ability to maintain liquidity sufficient to operate our business. Future losses or the inability to obtain additional equity or debt financing, if needed, could have a material adverse effect on our business, liquidity, and financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity, Capital Resources, and Going Concern-Working Capital, Cash and Cash Equivalents.”

We utilize a revolving credit facility to fund our operations. Should we no longer have access to the revolving line of credit, it would materially impact our business, financial condition, and liquidity.

On October 7, 2014, we entered into a First Amended and Restated Loan and Security Agreement, or the Amended SVB Loan Agreement, with Silicon Valley Bank, or SVB. Under the SVB Loan Agreement we may borrow up to $20 million, subject to certain limitations. The SVB Loan Agreement is collateralized by a first priority lien on all of our present and future property and assets, other than our intellectual property, and a second lien on our intellectual property. The Amended SVB Loan Agreement also requires that we maintain a minimum monthly Adjusted Quick Ratio (as defined) of 1.2 to 1.0. From time-to-time we draw advances under the Amended SVB Loan Agreement and repay the advances as our receivables are collected. As of June 28, 2015, the balance under the Amended SVB Loan Agreement was approximately $5.0 million. We were not in compliance with the covenants contained in the original SVB loan agreement as of September 28, 2014. Those covenants were replaced when the Amended SVB Loan Agreement was signed. Although we are currently in compliance with all of the covenants in the Amended SVB Loan Agreement, we were not in compliance for the month of April 2015 and received a waiver of such non-compliance from SVB. There can be no assurance that we will remain in compliance with the terms of the Amended SVB Loan Agreement in the future nor, should a default occur, that we would be successful in obtaining a further amendment to avoid SVB declaring a default. Should we be in default of the terms of the Amended SVB Loan Agreement and fail to obtain an amendment prior to SVB declaring us to be in default, SVB could require that any advances under the Amended SVB Loan Agreement be repaid immediately, in addition, such a default would trigger a default under the ALU Loan Agreement (as defined below) and ALU could demand immediately repayment, and if SVB began to foreclose on our assets, it would like lead ALU to initiate the same action, all of which would have a material adverse effect on our business, liquidity, and financial condition.

Our Amended SVB Loan Agreement is subject to contractual and borrowing base limitations, which could adversely affect our liquidity and business.

The maximum amount we can borrow under our Amended SVB Loan Agreement is subject to contractual and borrowing base limitations, which could significantly and negatively impact our future access to capital required to operate our business. Borrowing base limitations are based upon eligible accounts receivable. If our accounts receivable are deemed ineligible, because, for example, they are resident outside certain geographical regions or a receivable is older than 90 days, the amount we can borrow under the revolving credit facility would be reduced. These limitations could have a material adverse impact on our liquidity and business.

If we default under our term loan agreement with Alcatel-Lucent and the loan is called, it would materially impact our business, financial condition, and liquidity.

On September 29, 2014 we entered into the Loan and Security Agreement, or the ALU Loan Agreement, with Alcatel-Lucent USA, Inc., or ALU. Subsequently, on December 10, 2014 and April 30, 2015, we entered into the First Amendment and Second Amendment, respectively, to the ALU Loan Agreement. The ALU Loan Agreement is secured by a first position lien on our intellectual property and a second lien, behind SVB, on all of our other assets. By its terms, the ALU Loan Agreement, as amended, requires quarterly interest payments and repayment of 15% of the principal amount, plus accrued interest, on or before November 30, 2016, and payment-in-full of the outstanding balance, plus accrued interest, on or before November 30, 2017. The ALU Loan Agreement contains the same Adjusted Quick Ratio covenant as provided for in the Amended SVB Loan Agreement. In addition, both the Amended SVB Loan Agreement and the ALU Loan Agreement, or collectively, our Loan Agreements, contain a provision providing that a default under one agreement will constitute a default under the other agreement. If we were to default under the terms of either Loan Agreement, and ALU were to declare the ALU Loan Agreement in default, we would be required to use a significant portion of our cash to repay the loan, or if we were not in a position to repay the principal balance under the ALU Loan Agreement, ALU could then foreclose on all of our assets, which

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would likely lead to SVB initiating the same action, all of which would have a material impact on our business, financial condition, and liquidity.

Our Loan Agreements contain financial covenants that may limit our operating and strategic flexibility.

Our Loan Agreements contain financial covenants and other restrictions that limit our ability to engage in certain types of transactions. For example, these restrictions limit our ability to, or do not permit us to, incur additional debt, pay cash dividends, make other distributions or repurchase stock, engage in certain merger and acquisition activity, and make certain capital expenditures. We have been in violation of covenants under our loan agreement and may be in violation of covenants in the future. There can be no assurance that we will be in compliance with all covenants in the future or that SVB or ALU, or collectively, our Lenders, will agree to modify the Amended SVB Loan Agreement or the ALU Loan Agreement, respectively, should that become necessary.

Events beyond our control could affect our ability to comply with the covenants. Failure to comply with the covenants or restrictions could result in a default under one or both of our Loan Agreements. If we do not cure an event of default or obtain necessary waivers within the required time periods, our Lenders would be permitted to accelerate the maturity of the debt under our Loan Agreements, foreclose upon our assets securing the debt, and terminate any further commitments to lend. Under these circumstances, we may not have sufficient funds or other resources to satisfy our other obligations. In addition, the limitations imposed by our Loan Agreements may significantly impair our ability to obtain other debt or equity financing.

There can be no assurance that any waivers we request will be received on a timely basis, if at all, or that any waivers obtained will extend for a sufficient period of time to avoid an acceleration event, an event of default, or other restrictions on our business. The failure to obtain any necessary waivers could have a material adverse effect on our business, liquidity, and financial condition.

Our history of losses as well as future losses may adversely impact our relationships with customers and potential customers.

Since our inception, we have never been profitable on an annual basis and we have incurred significant net losses leading to an accumulated deficit of $393.7 million as of June 28, 2015. To achieve profitability, we will need to generate and sustain higher revenue and improve our gross margins, while maintaining expense levels that are appropriate and necessary for our business. We may not be able to achieve profitability and, even if we were able to attain profitability, we may not be able to sustain profitability on an on-going quarterly or annual basis. Since we compete with companies that have greater financial stability, our customers or potential customers may be reluctant to enter into arrangements with us due to the perceived risks to our long term viability and this, in turn, may adversely affect our financial results.

Risks Related to Our Common Stock

The market price of our common stock has been and may continue to be volatile, and holders of our common stock may not be able to resell shares at or above the price paid, or at all.

The market price of our common stock has fluctuated substantially since our initial public offering and is likely to continue to be highly volatile and subject to wide fluctuations. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including:


•	quarter-to-quarter variations in our operating results;


•	changes in our senior management;


•	the success or failure of our new products;


•	the gain or loss of one or more significant customers or suppliers;


•	announcements of technological innovations or new products by our competitors, customers, or us;


•	the gain or loss of market share in any of our markets;


•	general economic and political conditions;


•	specific conditions in the semiconductor industry and broadband technology markets, including seasonality in sales of consumer products into which our products are incorporated;


•	continuing international conflicts and acts of terrorism;

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•	changes in earnings estimates or investment recommendations by analysts;


•	changes in investor perceptions;


•	changes in product mix; or


•	changes in expectations relating to our products, plans, and strategic position or those of our competitors or customers.

In addition, the market prices of securities of semiconductor and other technology companies have been volatile, particularly for companies like us, with relatively low trading volumes. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. Accordingly, holders of our common stock may not be able to resell their shares at or above the price paid.

If the securities analysts who currently publish reports on us do not continue to publish research or reports about our business, or if they issue an adverse opinion regarding our common stock, the market price of our common stock and trading volume could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us and our business. Currently, one analyst periodically publish reports about our company. If that analyst issues an adverse opinion regarding our common stock, the stock price would likely decline. If the analyst ceases coverage of us or fails to regularly publish reports on us, we could lose further visibility to the financial markets, which in turn could cause the market price of our common stock or trading volume to decline.

Takeover attempts that stockholders may consider favorable may be delayed or discouraged due to our corporate charter and bylaws which contain anti-takeover provisions, Delaware law in general, or the Tallwood Group’s significant ownership of our common stock.

Provisions in our certificate of incorporation may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:


•	the right of our board of directors to expand the size of our Board and to elect directors to fill any such vacancies;


•	the establishment of a classified board of directors, which provides that not all members of the Board are elected at one time;


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


•	the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;


•	the ability of our board of directors to alter our bylaws without obtaining stockholder approval;


•	the ability of our board of directors to issue, without stockholder approval, up to 1,000,000 shares of preferred stock with terms set by the board of directors, which rights could be senior to those of common stock;


•	the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend, or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors, and the ability of stockholders to take action;


•	the required approval of holders of a majority of the shares entitled to vote at an election of directors to remove directors for cause; and


•	no right of stockholders to call a special meeting of stockholders or to take action by written consent.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation, bylaws, and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to

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pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.

Due to the significant number of shares of our common stock that the Tallwood Group holds, as discussed below, the Tallwood Group may have the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders, including a takeover attempt, and may have interests that diverge from, or even conflict with, our interests and those of our other stockholders.

Risks Related to Our Commercial Business

We are in a product-transition phase impacting revenue in the short term and we may not be able to adequately develop, market, or sell new products necessary to increase our quarterly revenue levels.

Revenues from our more mature products are decreasing as these products near end-of-life and this decrease in revenues is likely to keep our quarterly revenue relatively flat to declining in the near term. Increases in revenue will be derived from new products, however, revenue from these new products may not offset the declines in revenue from our mature products in the short-term, long-term, or at all. Beginning in the third quarter of 2012, we began selling our next generation Gateway products, the Fusiv Vx185, Vx183, Vx175, and Vx173 chipsets. Further, we are currently developing a new broadband DSL Access platform that incorporates vectoring technology. The successful customer migration to our new products is critical to our business, takes substantial time and effort, and there is no assurance that we are or will be able to market and or sell new products and services in a timely manner. Our newer products and services, including our Vx585 family and Velocity-3 products, may continue to be delayed, and new products may not be accepted by the market, may be accepted later than anticipated, or may be replaced by newer products more quickly than anticipated. Our sales and operating results may be adversely affected if we are unable to bring new products to market, if customers delay purchases, or if acceptance of new products is slower than expected or to a smaller degree than expected, if at all. Failure of future offerings to be accepted by the market could have a material adverse effect on our business, operations, financial condition, and reputation.

Because we depend on a relatively small number of significant customers for a substantial portion of our revenue, the loss of any of our key customers, our inability to continue to sell existing and new products to our key customers in significant quantities, or our failure to attract significant new customers, could adversely impact our revenue and harm our business.

We have in the past, and expect in the future, to derive a substantial portion of our revenue from sales to a relatively small number of significant customers. Our three largest customers accounted for approximately 75% of our revenue for the first half of 2015 and three customers accounted for approximately 65% of our revenue for the first half of 2014. For the six months ended June 28, 2015, Sagemcom, Paltek Corporation, and Amod Technology Inc., Ltd. (a distributor selling exclusively to Sagemcom’s OEM) represented 31%, 28%, and 17% of our revenue, respectively. For the six months ended June 29, 2014, Sagemcom, Paltek Corporaton, and Amod Technology, Inc., Ltd., represented 25%, 13%, and 27% of our revenue, respectively. The composition and concentration of these customers has varied in the past, and we expect that it will continue to vary in the future. Accordingly, the loss of any significant customer or a decline in business with any significant customer would materially and adversely affect our financial condition and results of operations. In addition, we may experience pressure from significant customers to agree to customer-favorable sales terms and price reductions.

Our lack of long-term agreements with our customers could have a material adverse effect on our business.

We typically do not have contracts with our major customers that obligate them to purchase any minimum amount of products from us. Sales to these customers are made pursuant to purchase orders, which typically can be canceled or modified up to a specified point in time, which may be after we have incurred significant costs related to the sale. If any of our key customers significantly reduced or canceled its orders, our business and operating results could be adversely affected. Because many of our semiconductor products have long product design and development cycles, it would be difficult for us to replace revenues from key customers that reduce or cancel their existing orders for these products, which may happen if they experience lower than anticipated demand for their products or cancel a program. Any of these events could have a material adverse effect on our business.

We face intense competition in the semiconductor industry and the broadband communications markets, which could reduce our market share and negatively affect our revenue.

The semiconductor industry and the broadband communications markets are intensely competitive. In the VDSL or VDSL-like technology and communications processing markets, we currently compete or expect to compete with, among others, Broadcom Corporation, Cavium, Inc., Freescale Semiconductor, Inc. (which recently announced a definitive merger agreement to be acquired by NXP Semiconductors N.V.), Intel Corporation (which recently acquired Lantiq Deutschland GmbH), Marvell Technology Group Ltd., MediaTek Inc., PMC-Sierra, Inc., and Realtek Semiconductor Corp.

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Many of our competitors have stronger manufacturing subcontractor relationships than we have as well as longer operating histories, greater name recognition, larger customer bases, and significantly greater financial, sales and marketing, manufacturing, distribution, technical, and other resources. In addition, many of our competitors have extensive technology libraries that could enable them to incorporate broadband or communications processing technologies into a system on a chip, creating a more attractive product line than ours. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements than we are able to. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers, or other third parties. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Existing or new competitors may also develop alternative technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of semiconductor integration, or lower cost. We cannot assure you that we will be able to compete successfully against current or new competitors, in which case we may lose market share and our revenue may fail to increase or may decline.

Our success is dependent upon achieving new design wins into commercially successful systems sold by our OEM and ODM customers.

Our products are generally incorporated into our OEM and ODM customers’ systems at the design stage. As a result, we rely on OEMs and ODMs to select our products to be designed into their systems. We refer to this as a design win. A design win is defined as achieving one of the following: a potential customer who has signed a memorandum of understanding to design our products into its portfolio; signed a definitive contract; a prototype purchase order for at least 100 units; an e-mail stating the customer's intent to award a design to us with a defined carrier or end customer. At any given time, we are competing for one or more design wins. We often incur significant expenditures over multiple quarters without any assurance that we will achieve a design win. Furthermore, even if we achieve a design win, we cannot be assured that the OEM or ODM equipment that we are designed into will be marketed, sold, or commercially successful and, accordingly, we may not generate any revenue from the design win. In addition, our OEM and ODM customers can choose at any time to discontinue their systems that include our products or delay deployment, which has occurred in the past from time-to-time. If we are unable to achieve design wins or if our OEM customers’ systems incorporating our products are not commercially successful or deployed, our operating results would suffer.

Our operating results have fluctuated significantly over time and are likely to continue to do so, and as a result, we may fail to meet or exceed our revenue forecasts or the expectations of securities analysts or investors, which could cause the market price of our common stock to decline.

Our industry is highly cyclical and is characterized by constant and rapid technological change, product obsolescence, price erosion, evolving standards, uncertain product life cycles, and wide fluctuations in product supply and demand. The industry has, from time-to-time, experienced significant and sometimes prolonged downturns, often connected with or in anticipation of maturing product cycles and declines in general economic conditions. To respond to these downturns, some service providers have decreased their capital expenditures, changed their purchasing practices to use refurbished equipment rather than purchasing new equipment, canceled or delayed new deployments, and taken a cautious approach to acquiring new equipment and technologies from OEMs, usually with very little notice. This, in turn, has reduced the demand for new semiconductors by our direct customers which could result in significant fluctuations of revenue as the economy changes. Any future downturns may reduce our revenue and could result in our accumulating excess inventory. By contrast, any upturn in the semiconductor industry could result in increased demand and competition for limited production capacity, which may affect our ability to ship products and prevent us from benefiting from such an upturn. Accordingly, our operating results may vary significantly as a result of the general conditions in the semiconductor or broadband communications industry, which could cause the market price of our common stock to decline.

Fluctuations in our expenses could affect our operating results.

Our expenses are subject to fluctuations resulting from various factors, including, but not limited to, higher expenses associated with new product releases, addressing technical issues arising from development efforts, unanticipated tape-out costs, additional or unanticipated costs for manufacturing or components because we do not have formal pricing arrangements with our subcontractors, costs of design tools, and large up-front license fees to third parties for intellectual property integrated into our products, as well as other factors identified throughout these risk factors.

Because many of our expenses are relatively fixed in the short term, or are incurred in advance of anticipated sales, we may not be able to reduce our expenses sufficiently to mitigate any reductions in revenue. Therefore, it may be necessary to take other measures to align expenses with revenue, including, implementation of a corporate restructuring plan. We last implemented a restructuring plan in 2012. Restructuring charges included expenses related to the severance for terminated employees and other exit-related costs arising from contractual and other obligations.

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General macroeconomic conditions could reduce demand for services based upon our products.

Our business is susceptible to macroeconomic and other world market conditions. As an example, we believe that consumer-targeted broadband services, which are deployed using our technology, are part of most households’ discretionary spending. We believe the global financial economic downturn that began in 2008 and continues into 2015, particularly in Europe, negatively affected consumer confidence and spending. These outcomes and behaviors may adversely affect our business and financial condition. If individual consumers decide not to install, or discontinue purchasing, broadband services in their homes, whether to save money in an uncertain economic climate or otherwise, the resulting drop in demand could cause telecommunications service providers to reduce or stop placing orders for OEM equipment containing our products. Accordingly, the OEMs’ demand for our products could drop further, potentially having a materially negative effect on our revenue.

Industry consolidation may lead to increased competition and may harm our operating results.

There has been a trend toward consolidation in our industry. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete for customers. This could have a material adverse effect on our business, financial condition, and results of operations. Furthermore, rapid consolidation could result in a decrease in the number of customers we serve. Loss of a major customer could have a material adverse effect on our business, financial condition, and results of operations.

If we are unable to develop, introduce, or achieve market acceptance of our new semiconductor products, our operating results would be adversely affected.

Our industry is characterized by rapid technological innovation and intense competition. Our future success will depend on our ability to continue to predict what new products are needed to meet the demand of the broadband, communications processor, or other markets addressable by our products and then introduce, develop, and distribute such products in a timely and cost-effective manner. The development of new semiconductor products is complex, and from time-to-time we have experienced delays in completing the development and introduction of new products. In the past we have invested substantial resources in developing and purchasing emerging technologies that did not achieve the market acceptance that we had expected.

Our ability to develop and deliver new semiconductor products successfully will depend on various factors, including our ability to:


•	successfully integrate our products with our OEM customers’ products;


•	gain market acceptance of our products and our OEM customers’ products;


•	accurately predict market requirements and evolving industry standards;


•	accurately define new semiconductor products;


•	timely complete and introduce new product designs or features;


•	timely qualify and obtain industry interoperability certification of our products and the equipment into which our products will be incorporated;


•	ensure that our subcontractors have sufficient foundry capacity and packaging materials and achieve acceptable manufacturing yields; and


•	shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration.

If we are unable to develop and introduce new semiconductor products successfully and in a cost-effective and timely manner, we will not be able to attract new customers or retain our existing customers, which would harm our business.

If we do not successfully manage our inventory in the transition process to next generation semiconductor products, our operating results may be harmed.

If we are successful in developing new semiconductor products ahead of competitors but do not cost-effectively manage our inventory levels of existing products when making the transition to the new semiconductor products, our financial results could be negatively affected by high levels of obsolete inventory and our operating results would be harmed.

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The average selling prices and gross margins of our products are subject to declines, which may harm our revenue and profitability.

Our products are subject to rapid declines in average selling prices due to pressure from customers. We have lowered our prices significantly at times to gain or maintain market share, and we expect to do so again in the future. In addition, we may not be able to reduce our costs of goods sold as rapidly as our prices decline. Our financial results, in particular, but not limited to, our gross margins, will suffer if we are unable to maintain or increase pricing, or are unable to offset any future reductions in our average selling prices by increasing our sales volumes, reducing our manufacturing costs, or developing new or enhanced products that command higher prices or better gross margins on a timely basis.

Our product sales mix is subject to frequent changes, which may impact our revenue and margin.

Our product margins vary widely by product and customer. As a result, a change in the sales mix of our products could have an impact on forecasted revenue and margins. For example, our Access product family generally has higher margins as compared to our Gateway product family. Furthermore, the product margins within our product families can vary based on the performance and type of deployment, as the market typically commands higher prices for higher performance. While we forecast a future product mix and make purchase decisions based on that forecast, actual results can be materially different which could negatively impact our revenue and margins.

Any defects in our products could harm our reputation, customer relationships, and results of operations.

Our products may contain undetected defects, errors, or failures, which may not become apparent until the products are in the hands of our customers or our customers’ customers. The occurrence of any defects, errors, or failures discovered after we have sold the product could result in:


•	cancellation of orders;


•	product returns, repairs, or replacements;


•	monetary or other accommodations to our customers;


•	diversion of our resources;


•	legal actions by customers or customers’ end users;


•	increased insurance and warranty costs; and


•	other losses to us or to customers or end users.

Any of these occurrences could also result in the loss of or delay in market acceptance of these or other products and loss of sales, which could negatively affect our business and results of operations. As our products become even more complex in the future, this risk may intensify over time and may result in increased expenses.

The semiconductor industry is highly cyclical, which may cause our operating results to fluctuate.

We operate in the highly cyclical semiconductor industry. This industry is characterized by wide fluctuations in product supply and demand. In the past, the semiconductor industry has experienced significant downturns, often in connection with, or in anticipation of, excess manufacturing capacity worldwide, maturing product cycles, and declines in general economic conditions. Even if demand for our products remains constant, a lower level of available foundry capacity could increase our costs, which would likely have an adverse impact on our results of operations.

Changes in our senior management could negatively affect our operations and relationships with our customers and employees.

We have in the past and may in the future experience significant changes in our senior management team. In the past three years, we have appointed a new President and Chief Executive Officer, a new Vice President of Operations, a new Vice President of Marketing, and a new Vice President of Sales. Changes in our senior management or technical personnel could affect our customer relationships, employee morale, and our ability to operate in compliance with existing internal controls and regulations and harm our business. If we are unable to maintain a consistent senior management team or successfully integrate our current and future members of senior management, our business could be negatively affected.

Because competition for qualified personnel is intense in our industry, we may not be able to recruit and retain necessary personnel, which could impact our product development and sales.

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Our future success depends on our ability to continue to attract, retain, and motivate our senior management team as well as qualified technical personnel, particularly software engineers, digital circuit designers, mixed-signal circuit designers, and systems and algorithms engineers. Competition for these employees is intense and many of our competitors may have greater name recognition and significantly greater financial resources to better compete for these employees. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of capacity to develop and market our products. All of our key employees are employed on an “at will” basis. The loss of any of these key employees could slow our product development processes and sales efforts or harm the perception of our business. We may also incur increased operating expenses and be required to divert the attention of our senior management to recruit replacements for key employees. Also, our depressed common stock price may result in difficulty attracting and retaining personnel as stock options and other forms of incentive equity grants generally comprise a significant portion of our compensation packages for all employees, which could harm our ability to provide technologically competitive products.

Further, the changes in senior management as well as the multiple restructurings and reductions in force have had, and may continue to have, a negative effect on employee morale and the ability to attract and retain qualified personnel.

Risks Related to Our Operations and Technology

We rely on third-party technologies for the development of our products, and our inability to use such technologies in the future or the failure of such technology would harm our ability to remain competitive.

We rely on third parties for technologies that are integrated into some of our products, including memory cells, input/output cells, hardware interfaces, and core processor logic. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed. Further, if we were to seek such a license and such license were available, we could be required to make significant payments with respect to past and/or future sales of our products, and such payments may adversely affect our financial condition and operating results. If a party determines to pursue claims against us for patent infringement, we might not be able to successfully defend against such claims. In addition, the third party intellectual property could also expose us to liability and, while we have not experienced material warranty costs in any period as a result of third party intellectual property, there can be no assurance that we will not experience such costs in the future.

Our service agreement with eSilicon Corporation, or eSilicon, limits our ownership and control of raw materials and work-in-process. Should eSilicon default on its contractual commitments to us or fail to timely deliver furnished goods, it would negatively impact our revenue and reputation.

In 2012, we entered into an agreement with eSilicon, or the Service Agreement, under which eSilicon handles a majority of our day-to-day supply chain management, production test engineering, and production quality engineering functions. The agreement expires in October 2015. Pursuant to the Service Agreement, we place orders for our finished goods with eSilicon, who, in turn, contracts with wafer foundries and assembly and test subcontractors, and manages these operational functions for us on a day-to-day basis. eSilicon owns the raw materials and work-in-process until such time as the products are delivered to us as finished goods. Should eSilicon default on its contractual obligation to deliver finished goods to us in a timely manner, or at all, we may be required to restart the wafer production process with a total cycle time of approximately one calendar quarter. As a result, we may be required to incur additional costs and we would experience delays in delivering products to our customers, which would result in decreased revenue, have a negative effect on operating results, and harm our reputation.

We are a fabless semiconductor company and failure to secure and maintain sufficient capacity with eSilicon and its subcontractors could significantly disrupt shipment of our products, impair our relationships with customers, and decrease sales, which would negatively impact our market share and operating results.

We are a fabless semiconductor company and are therefore dependent on and currently use multiple third-party wafer foundries and other subcontractors, located primarily in Israel, Malaysia, the Philippines, and Taiwan, to manufacture, assemble, and test all of our semiconductor devices. While we work with multiple suppliers, generally each individual product is made by one foundry and processed at a single assembly and test subcontractor. Accordingly, we have been and will continue to be greatly dependent on a limited number of suppliers to deliver quality products in a timely manner. In past periods of high demand in the semiconductor market, we have experienced delays in obtaining sufficient capacity to meet our demand and as a result were unable to deliver all of the products to our customers on a timely basis. In addition, we have experienced similar delays due to technical and quality control problems. We are dependent on eSilicon and, in turn, its suppliers to deliver our products on time.

If we and/or eSilicon were to need to qualify a new facility to meet a need for additional capacity, or if a foundry or subcontractor ceased working with eSilicon, as has happened in the past, or if production is disrupted (including an event where eSilicon ceases its business operations), we may be unable to meet our customer demand on a timely basis, or at all. We may be

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required to incur additional costs and may need to successfully qualify an alternative facility in order to not disrupt our business.

When our service agreement with eSilicon terminates in October 2015 we will incur costs and risks associated with a transition away from eSilicon, which could negatively impact our operating results.

When our service agreement with eSilicon terminates in October 2015 we will incur costs and risks associated with the transition back to providing such services ourselves. The transition will require the time and attention of management and introduce risk associated with ensuring the transition does not interrupt our supply of product. If such transition were to occur and our supply of product suffered from interruptions due to the transition, it would negatively impact our operating results and reputation.

In the event that we seek to use new wafer foundries to manufacture a portion of our semiconductor products, we may not be able to bring the new foundries on-line rapidly enough and may not achieve anticipated cost reductions.

As indicated above, we have used and will continue to use a limited number of independent wafer foundries to manufacture all of our semiconductor products, which could expose us to risks of delay, increased costs, and customer dissatisfaction in the event that any of these foundries are unable to meet our requirements. Additional wafer foundries may be sought to meet our future requirements, however, the qualification process typically requires several months or more. By the time a new foundry is qualified, the need for additional capacity may have passed or we may have lost the potential opportunity to a competitor. If qualification cannot be completed in a timely manner, we would experience a significant interruption in supply of the affected products, which could in turn cause our costs of revenue to increase and our overall revenue to decrease. This would harm our customer relationships and our market share, as well as our operating results would suffer.

When demand for manufacturing capacity is high, we may take various actions to try to secure sufficient capacity, which could be costly and negatively impact our operating results.

Although we have purchase order commitments to supply specified levels of products to our OEM customers, neither we nor eSilicon have a guaranteed level of production capacity from any of our foundries or subcontractors’ facilities that we depend upon to produce our semiconductors. Facility capacity may not be available when we need it or at reasonable prices. We place our orders on the basis of our OEM customers’ purchase orders or our forecast of customer demand, and eSilicon or its foundries and subcontractors may not be able to meet our requirements in a timely manner, or at all.

In order to secure sufficient manufacturing facility capacity when demand is high and mitigate the risks described in the foregoing paragraphs, we may enter into various arrangements with eSilicon, or directly with foundries or other subcontractors, that could be costly and negatively affect our operating results, including minimum order quantities over extended periods, and payment of premiums to secure necessary lead-times.

We may not be able to make such arrangements in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility, not be on terms favorable to us, and may contain financial penalties if we do not use all of our allocated facility capacity. These penalties and obligations may be expensive and could harm our business.

Defects and poor performance in our products could result in a loss of customers, decreased revenue, unexpected expenses, and loss of market share, and we may face warranty and product liability claims arising from defective products.

We have experienced in the past, and may experience in the future, defects (commonly referred to as “bugs”) in our products which may not always be detected by testing processes. Defects can result from a variety of causes, including, but not limited to, manufacturing problems or third party intellectual property that we have incorporated into our products. If defects are discovered after our products have shipped, we have experienced, and could continue to experience, warranty and consequential damage claims from our customers. If we are unable to deliver quality products, our reputation would be harmed, which could result in the loss of future orders from our customers. Further, we may experience difficulties in achieving acceptable yields on some of our products, which may result in higher per unit cost, shipment delays, and increased expenses associated with resolving yield problems. If any of these adverse risks are realized and we are not able to offset the lost opportunities, our revenue, margins, and operating results would decline.

If our forecasts of our OEM customers’ demand are inaccurate, our financial condition and liquidity would suffer.

We place some orders with our suppliers based on the forecasts of our OEM customers’ demand. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates. If we do not accurately forecast customer demand, we may allocate resources to manufacturing products that we may not be able to sell. As a result, as we experienced in the past, we could have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our cost of revenue, negatively affect gross margins, and reduce our liquidity. Similarly, if our forecast underestimates customer

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demand, we may forgo revenue opportunities, lose market share, and damage customer relationships. Our failure to accurately manage inventory against demand would adversely affect our financial results.

To remain competitive, we may need to migrate to smaller geometrical processes and our failure to do so may harm our business.

We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometrical processes, which are measured in microns or nanometers. We have in the past, and may in the future, experience some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which has resulted in reduced manufacturing yields, delays in product deliveries, and increased product costs and expenses. Additionally, upfront expenses associated with smaller geometrical process technologies such as for masks and tooling can be significantly higher than those for the processes that we currently use, and our migration to these newer process technologies can result in significantly higher research and development expenses.

Third-party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products, or seek licenses from third parties, and harm our business. In addition, any litigation that we are required to defend regarding such claims could result in significant expenses and diversion of our resources.

Other companies in the semiconductor industry and intellectual property holding companies often aggressively protect and pursue their intellectual property rights. From time-to-time, we receive, and we are likely to continue to receive in the future, notices that claim our products infringe upon other parties’ intellectual property rights. We may in the future be engaged in litigation with parties who claim that we have infringed their intellectual property rights or who may seek to invalidate one or more of our patents, and it is possible that we would not prevail in any such lawsuit. An adverse determination in any of these types of claims could prevent us from manufacturing or selling some of our products, could increase our costs of products and could expose us to significant liability. In addition, a court could issue a preliminary or permanent injunction that could require us to stop selling certain products in that market or redesign certain products offered for sale or that are under development. In addition, we may be liable for damages for past infringement and royalties for future use of the technology and we may be liable for treble damages if infringement is found to have been willful. Even if claims against us are not valid or successfully asserted, these claims could nevertheless result in significant costs and a diversion of management and personnel resources to defend.

Many companies in the semiconductor industry have significant patent portfolios. These companies and other parties may claim that our products infringe their proprietary rights. We may become involved in litigation as a result of allegations that we infringe the intellectual property rights of others. Any party asserting that our products infringe their proprietary rights could force us to defend ourselves, and possibly our customers, against the alleged infringement. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. We could also be forced to do one or more of the following:


•	stop selling, incorporating, or using our products that utilize the challenged intellectual property;


•	obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all, or we could be required us to make significant payments with respect to past or future sales of our products;


•	redesign those products that use any allegedly infringing technology, which may be costly and time-consuming; or


•	refund to our customers amounts received for allegedly infringing technology or products.

Any potential dispute involving our patents or other intellectual property could also include our customers which could trigger our indemnification obligations to one or more of them and result in substantial expense to us.

In any potential dispute or claim involving a third party’s patents or other intellectual property, our customers could also become the target of litigation. We are aware of certain instances in which third parties have recently notified our customers that their products (incorporating our technology) may infringe on the third parties’ technology. We expect that our customers may receive similar notices in the future. Because we have entered into agreements whereby we have agreed to indemnify our customers for intellectual property claims made against them for products incorporating our technology, any litigation could trigger indemnification obligations. Any indemnity claim could adversely affect our relationships with our customers and result in substantial expense to us.

Other data transmission technologies and communications processing technologies may compete effectively with the services enabled by our products, which could adversely affect our revenue and business.

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Our revenue currently is dependent upon the increase in demand for services that use broadband technology and integrated residential gateways. Besides xDSL and other discrete multi-tone, or DMT,-based technologies, service providers can decide to deploy passive optical network or fiber and thereby reducing the need for our products. If more service providers decide to extend fiber all the way to the home, commonly referred to as fiber to the home, or FTTH, deployment, it could harm our xDSL business. Furthermore, residential gateways compete against a variety of different data distribution technologies, including Ethernet routers, set-top boxes provided by cable and satellite providers, wireless, or WiFi and WiMax, and emerging power line and multimedia over coax alliance technologies. If any of these competing technologies proves to be more reliable, faster, less expensive, or has any other advantages over the broadband technologies we provide, the demand for our products may decrease and our business would be harmed.

Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and operating results to suffer.

We design our products to conform to regulations established by governments and to standards set by industry standards bodies worldwide, such as the Alliance for Telecommunications Industry Solutions, or ATIS, and the International Telecommunication Union Telecommunication Standard, or ITU-T. Because our products are designed to conform to current specific industry standards, if competing standards emerge that are preferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or competing industry standards with which our products are not compatible, industry groups adopt new standards, or governments issue new regulations with which our products are not compatible, our existing products would become less desirable to our customers, and our revenue and operating results would suffer.

If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our revenue, or increase our cost.

Our success will depend, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright, trademark, and trade secret laws, confidentiality agreements, and licensing arrangements to establish and protect our proprietary rights. From time-to-time we file new patent applications. These pending patent applications may not result in issued patents, and our existing and future patents may not be sufficiently broad to protect our proprietary technologies or may be determined to be invalid or unenforceable. While we are not currently aware of any misappropriation of our existing technology, policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly unauthorized use in foreign countries where we have not applied for patent protection and, even if such protection was available, the laws may not protect our proprietary rights as fully as United States law. The patents we have obtained or licensed, or may obtain or license in the future, may not be adequate to protect our proprietary rights. Our competitors may independently develop or may have already developed technology similar to us, duplicate our products, or design around any patents issued to us or our other intellectual property. In addition, we have been, and may be, required to license our patents as a result of our participation in various standards organizations. If competitors appropriate our technology and it is not adequately protected, our competitive position would be harmed, our legal costs would increase, and our revenue would decrease.

Changes in current or future laws or regulations or the imposition of new laws or regulations by federal or state agencies or foreign governments could impede the sale of our products or otherwise harm our business.

The effects of regulation on our customers and the industries in which they operate may materially and adversely impact our business. For example, various governments around the world have considered, and it is anticipated that others may consider, regulations that would limit or prohibit sales of certain telecommunications products manufactured in China. If these rules apply to equipment containing our semiconductor products, such regulation could reduce sales of our products and have a negative effect on our operating results.

In addition, the Ministry of Internal Affairs and Communications in Japan, the Ministry of Communications and Information in Korea, various national regulatory agencies in Europe, the European Commission in the European Union, and the U.S. Federal Communications Commission have broad jurisdiction over our target markets. Although the laws and regulations of these and other government agencies may not be directly applicable to our products, they do apply to much of the equipment into which our products are incorporated. Governmental regulatory agencies worldwide may affect the ability of telephone companies to offer certain services to their customers or other aspects of their business, which may in turn impede sales of our products.

In addition to the laws and regulations specific to telecommunications equipment, other laws and regulations affect our business. For instance, changes in tax, employment, and import/export laws and regulations, and their enforcement, commonly occur in the countries in which we operate. If changes in those laws and regulations, or in the enforcement of those laws and

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regulations, occur in a manner that we did not anticipate, those changes could cause us to have increased operating costs or to pay higher taxes, and thus have a negative effect on our operating results.

Failure to maintain adequate internal controls as required by Section 404 of the Sarbanes-Oxley Act, or SOX, could harm our operating results, our ability to operate our business, and our investors’ view of us.

If we do not maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of SOX. Effective internal controls, particularly those related to revenue recognition, valuation of inventory, and warranty provisions, are necessary for us to produce reliable financial reports and are important in helping to prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.

We are exposed to legal, business, political, and economic risks associated with our international operations.

We currently obtain substantially all of our manufacturing, assembly, and testing services from suppliers and subcontractors located outside of the United States, and have a significant portion of our research and development team located in India. In addition, 99%, 97%, and 99% of our revenue for the years ended 2014, 2013, and 2012, respectively, were derived from sales to customers outside the United States. We have expanded our international business activities and may open other design and operational centers abroad. International operations are subject to many other inherent risks, including, but not limited to:


•	political, social, and economic instability, including war and terrorist acts;


•	exposure to different legal standards, particularly with respect to intellectual property;


•	trade and travel restrictions;


•	the imposition of governmental controls and restrictions or unexpected changes in regulatory requirements;


•	burdens of complying with a variety of foreign laws;


•	import and export license requirements and restrictions of the United States and each other country in which we operate;


•	foreign technical standards;


•	changes in tariffs;


•	difficulties in staffing and managing international operations;


•	foreign currency exposure and fluctuations in currency exchange rates;


•	difficulties in collecting receivables from foreign entities or delayed revenue recognition; and


•	potentially adverse tax consequences.

Because we are currently almost wholly dependent on our foreign sales, as well as our research and development facilities located off-shore and operations in foreign jurisdictions, any of the factors described above could significantly harm our ability to produce quality products in a timely and cost effective manner, as well as our ability to increase or maintain our foreign sales.

Fluctuations in exchange rates among the U.S. dollar and other currencies in which we do business may adversely affect our operating results.

We maintain extensive operations internationally. We have offices or facilities in China, France, Germany, India, Japan, Korea, and Taiwan. We incur a portion of our expenses in currencies other than the U.S. dollar, including, predominantly, the Indian rupee and the Chinese yuan. A large portion of our cash is held by our international affiliates both in U.S. dollar and local currency denominations. As a result, we may experience foreign exchange gains or losses due to the volatility of these currencies compared to the U.S. dollar. Because we report our results in U.S. dollars, the difference in exchange rates in one period compared to another directly impacts period to period comparisons of our operating results. In addition, our sales have been historically denominated in U.S. dollars. Currency exchange rates have been especially volatile in the recent past and these currency fluctuations may make it difficult for us to predict and/or provide guidance on our results. Currently, we have

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not implemented any strategies to mitigate risks related to the impact of fluctuations in currency exchange rates and we cannot predict future currency exchange rate changes.

Several of the facilities that manufacture our products, most of our OEM customers and the service providers they serve, and our California headquarters are located in regions that are subject to earthquakes and other natural disasters.

Several of our subcontractors’ facilities that manufacture, assemble, and test our products, and most of our wafer foundries, are located in Malaysia, the Philippines, and Taiwan. Several of our large customers are located in Japan and Korea. The Asia-Pacific region has experienced significant earthquakes and other natural disasters in the past and will be subject to seismic activities in the future. Any earthquake or other natural disaster in these areas could significantly disrupt these manufacturing facilities’ production capabilities and could result in our experiencing a significant delay in delivery, or substantial shortage of wafers, in particular, and possibly in higher wafer prices, and increased production costs in general. Natural disasters could also adversely affect our customers and their demand for our products. Our headquarters in California is also located near major earthquake fault lines. If there is a major earthquake or any other natural disaster in a region where one of our facilities is located, it could significantly disrupt our operations.

Changes in our tax rates could affect our future results.

Our future effective tax rates could be favorably or unfavorably affected by the absolute amount and future geographic distribution of our pre-tax income, our ability to successfully shift our operating activities to foreign jurisdictions, and the amount and timing of intercompany payments from our foreign operations that are subject to U.S. income taxes. In addition, our subsidiary in India is currently being audited by the tax authorities in that country. Should the audit or any subsequent appeals result in a decision adverse to us, such decision could not only result in assessments for prior periods, but also an increased tax rate in future periods.

Regulations related to “conflict minerals” have resulted in additional expenses, may make our supply chain more complex, and may result in damage to our reputation with customers.

On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted new requirements for companies that use certain minerals and metals, known as “conflict minerals,” in their products, whether or not these products are manufactured by third parties. These requirements require companies to diligence, disclose, and report whether or not such minerals originate from the Democratic Republic of the Congo, or DRC, and adjoining countries. There were and continue to be costs associated with complying with these rules, includes costs related to determining the source of any of the relevant minerals and metals used in our products. In addition, the implementation of these new requirements could adversely affect the sourcing, availability, and pricing of such minerals. For example, there may only be a limited number of suppliers offering “conflict free” materials, we cannot be sure that we will be able to obtain necessary “conflict free” materials from such suppliers in sufficient quantities or at reasonable prices. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation, could increase our costs, and could adversely affect our manufacturing operations. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products be certified as conflict mineral free.

Risks Related to Tallwood

The Tallwood Group may exercise significant influence over us as a significant stockholder and holder of a right to elect the proportionate number of directors equal to its ownership interest in us.

As of May 1, 2015, the Tallwood Group beneficially owned approximately 50% of our outstanding common stock.

We are also party to a Stockholder Agreement with the Tallwood Group, which, among other things, contains certain governance arrangements and various provisions relating to board composition, stock ownership, transfers by the Tallwood Group, voting, registration rights, and other matters. Subject to certain exceptions, the Tallwood Group is permitted under the terms of the Stockholder Agreement to maintain their ownership interest in us in subsequent equity offerings. Given their current ownership interest in us, the Tallwood Group may have the ability to control or significantly influence the outcome of any matter submitted for the vote of our stockholders. The Tallwood Group may also have interests that diverge from, or even conflict with, our interests and those of our other stockholders. Certain voting restrictions in the Stockholder Agreement require that the Tallwood Group vote all shares owned by it in excess of 37.5% of the outstanding voting shares in the same proportion as the votes of all stockholders that are not affiliated with the Tallwood Group and will expire in February 2020. At that time, the Tallwood Group may continue to own a majority of the outstanding voting shares, which will give the Tallwood Group the ability to control our board of directors and the outcome of any vote of our stockholders, which could have a material adverse effect on the other stockholders. Even if the Tallwood Group does not own a majority of the outstanding

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voting shares, it may have substantial holdings that could give the Tallwood Group effective control of the affairs of our company because it may own a majority of the shares that actually vote at any meeting of our stockholders.

The market price of our common stock may decline as a result of future sales of our common stock by the Tallwood Group.

We are unable to predict the potential effects of the Tallwood Group’s ownership of our outstanding common stock on the trading activity in and market price of our common stock. Pursuant to the Stockholder Agreement, we have granted the Tallwood Group and their permitted transferees’ registration rights for the resale of all shares of our common stock that the Tallwood Group holds. Any such resale would increase the number of shares of our common stock available for public trading. Sales by the Tallwood Group or their permitted transferees of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.

Stockholders may not want to invest in our company given the significant ownership of our common stock by the Tallwood Group.

The Tallwood Group’s ownership of our common stock may delay, deter, or prevent acts that would be favored by our other stockholders and its interests may not always coincide with our interests or the interests of our other stockholders. In addition, the Tallwood Group may seek to cause us to take courses of action that, in its judgment, could enhance its investments in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders. As a result, this concentration of stock ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with a significant stockholder.



Item 6.	EXHIBITS



Exhibit Number	Description
2.1	Agreement and Plan of Merger by and among Qualcomm Atheros, Inc., a Delaware corporation (“Parent”), King Acquisition Co., a Delaware corporation and a wholly owned subsidiary of Parent, and Ikanos Communications, Inc., dated as of August 5, 2015. Incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on August 6, 2015.

3.1	Restated Certificate of Incorporation, as amended on June 3, 2014. Incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 8, 2014.

3.2	Certificate of Amendment of the Restated Certificate of Incorporation, dated as of February 12, 2015. Incorporated by reference to Exhibit 3.2 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 20, 2015.

3.3	Amended and Restated Bylaws (As Amended Through July 7, 2015). Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the SEC on July 8, 2015.

3.4	Certificate of Designation of Series A Preferred Stock. Incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on August 25, 2009.

4.1	Form of Registrant’s Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Amendment No. 1 of the Registrant’s Registration Statement on Form S-1 dated August 6, 2004 (Registration No. 333-116880).

4.2	Amended and Restated Stockholder Agreement by and between Ikanos Communications, Inc. and Tallwood III, L.P., Tallwood III Partners, L.P., Tallwood III Associates, L.P., and Tallwood III Annex, L.P. dated as of September 29, 2014. Incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on September 29, 2014.

4.3	Amended and Restated Warrant No. 5 to Purchase Common Stock of Ikanos Communications, Inc., originally issued to Alcatel-Lucent Participations on September 29, 2014, dated as of April 30, 2015. Incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed with the SEC on May 4, 2015.

4.4	Amended and Restated Warrant No. 6 to Purchase Common Stock of Ikanos Communications, Inc., originally issued to Alcatel-Lucent Participations on December 10, 2014, dated as of April 30, 2015. Incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed with the SEC on May 4, 2015.

10.1	Forbearance to Loan and Security Agreement with Limited Waiver dated as of March 28, 2015. Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 2, 2015.

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Exhibit Number	Description
10.2	Amendment No. 2 to the First Amended and Restated Loan and Security Agreement dated October 7, 2014, by and between Ikanos Communications, Inc. and Silicon Valley Bank, dated as of April 30, 2015. Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the SEC on May 4, 2015.

10.3	Limited Waiver to the First Amended and Restated Loan and Security Agreement dated October 7, 2014, by and between Ikanos Communications, Inc. and Silicon Valley Bank, dated as of April 30, 2015. Incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed with the SEC on May 4, 2015.

10.4	Amendment No. 2 to the Loan and Security Agreement, dated September 29, 2014, by and between the Ikanos Communications, Inc. and Alcatel-Lucent USA, Inc., dated as of April 30, 2015. Incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed with the SEC on May 4, 2015.

10.5	Amendment No. 1 to the First Amended and Restated Loan and Security Agreement and Limited Waiver dated as of March 18, 2015, by and between the Registrant and Silicon Valley Bank.

10.6 #	Notice of Stock Option Grant and Stock Option Agreement dated as of March 23, 2015 by and between the Registrant and Mr. Tahernia.

31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

#	Indicates management contract or compensatory plan or arrangement

**	In accordance with Item 601(b)(32)(ii) of Regulation S‑K and SEC Release No. 34‑47986, the certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10‑Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”). Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

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SIGNATURES

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




	IKANOS COMMUNICATIONS, INC.

Dated: August 12, 2015	By:	/s/ Omid Tahernia
		Omid Tahernia
		President, Chief Executive Officer and Director
		(Duly Authorized Officer and Principal Executive Officer)

Dated: August 12, 2015	By:	/s/ Dennis Bencala
		Dennis Bencala
		Chief Financial Officer and Vice President of Finance
		(Duly Authorized Officer and Principal Financial and Accounting Officer)

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Exhibit Index



ExhibitNumber	Description
2.1	Agreement and Plan of Merger by and among Qualcomm Atheros, Inc., a Delaware corporation (“Parent”), King Acquisition Co., a Delaware corporation and a wholly owned subsidiary of Parent, and Ikanos Communications, Inc., dated as of August 5, 2015. Incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on August 6, 2015.

3.1	Restated Certificate of Incorporation, as amended on June 3, 2014. Incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 8, 2014.

3.2	Certificate of Amendment of the Restated Certificate of Incorporation, dated as of February 12, 2015. Incorporated by reference to Exhibit 3.2 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 20, 2015.

3.3	Amended and Restated Bylaws (As Amended Through July 7, 2015). Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the SEC on July 8, 2015.

3.4	Certificate of Designation of Series A Preferred Stock. Incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on August 25, 2009.

4.1	Form of Registrant’s Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Amendment No. 1 of the Registrant’s Registration Statement on Form S-1 dated August 6, 2004 (Registration No. 333-116880).

4.2	Amended and Restated Stockholder Agreement by and between Ikanos Communications, Inc. and Tallwood III, L.P., Tallwood III Partners, L.P., Tallwood III Associates, L.P., and Tallwood III Annex, L.P. dated as of September 29, 2014. Incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on September 29, 2014.

4.3	Amended and Restated Warrant No. 5 to Purchase Common Stock of Ikanos Communications, Inc., originally issued to Alcatel-Lucent Participations on September 29, 2014, dated as of April 30, 2015. Incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed with the SEC on May 4, 2015.

4.4	Amended and Restated Warrant No. 6 to Purchase Common Stock of Ikanos Communications, Inc., originally issued to Alcatel-Lucent Participations on December 10, 2014, dated as of April 30, 2015. Incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed with the SEC on May 4, 2015.

10.1	Forbearance to Loan and Security Agreement with Limited Waiver dated as of March 28, 2015. Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 2, 2015.

10.2	Amendment No. 2 to the First Amended and Restated Loan and Security Agreement dated October 7, 2014, by and between Ikanos Communications, Inc. and Silicon Valley Bank, dated as of April 30, 2015. Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the SEC on May 4, 2015.

10.3	Limited Waiver to the First Amended and Restated Loan and Security Agreement dated October 7, 2014, by and between Ikanos Communications, Inc. and Silicon Valley Bank, dated as of April 30, 2015. Incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed with the SEC on May 4, 2015.

10.4	Amendment No. 2 to the Loan and Security Agreement, dated September 29, 2014, by and between the Ikanos Communications, Inc. and Alcatel-Lucent USA, Inc., dated as of April 30, 2015. Incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed with the SEC on May 4, 2015.

10.5	Amendment No. 1 to the First Amended and Restated Loan and Security Agreement and Limited Waiver dated as of March 18, 2015, by and between the Registrant and Silicon Valley Bank.

10.6 #	Notice of Stock Option Grant and Stock Option Agreement dated as of March 23, 2015 by and between the Registrant and Mr. Tahernia.

31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

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101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

#	Indicates management contract or compensatory plan or arrangement

**	In accordance with Item 601(b)(32)(ii) of Regulation S‑K and SEC Release No. 34‑47986, the certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10‑Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”). Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

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