Form 10-Q ENTROPIC COMMUNICATIONS For: Sep 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September�30, 2014
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ������������ to ������������.
Commission file number: 001-33844
�
ENTROPIC COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 33-0947630 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
6350 Sequence Drive
San Diego, CA 92121
(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (858) 768-3600
Indicate by check mark whether the registrant (1)�has filed all reports required to be filed by Section�13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)�has been subject to such filing requirements for the past 90 days.����Yes��x����No��o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (�232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).����Yes��x����No��o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated�filer� o | Accelerated filer�x | ||
Non-accelerated filer �o�(Do not check if a smaller reporting company) | Smaller�reporting�company��o | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). �Yes��o����No��x
There were 90,073,049 shares of the registrant's common stock, par value $0.001 per share, outstanding as of October 31, 2014.
ENTROPIC COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM�10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER�30, 2014
TABLE OF CONTENTS
Item�1. | ||||
Item�2. | ||||
Item�3. | ||||
Item 4. | ||||
Item�1. | ||||
Item�1A. | ||||
Item�2. | ||||
Item�6. | ||||
PART I - FINANCIAL INFORMATION
Item�1. | Financial Statements |
�
Entropic Communications, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
September�30, 2014 | December 31, 2013(1) | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 10,350 | $ | 16,298 | |||
Marketable securities | 78,331 | 71,922 | |||||
Accounts receivable, net | 29,435 | 30,204 | |||||
Inventory | 14,492 | 13,503 | |||||
Deferred tax assets, current | 51 | 51 | |||||
Prepaid expenses and other current assets | 14,056 | 18,739 | |||||
Total current assets | 146,715 | 150,717 | |||||
Property and equipment, net | 23,502 | 17,994 | |||||
Long-term marketable securities | 18,817 | 69,534 | |||||
Intangible assets, net | 36,561 | 47,326 | |||||
Goodwill | 4,688 | 4,688 | |||||
Other long-term assets | 3,815 | 5,001 | |||||
Total assets | $ | 234,098 | $ | 295,260 | |||
Liabilities and stockholders equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 11,411 | $ | 8,601 | |||
Accrued expenses and other current liabilities | 7,055 | 6,318 | |||||
Accrued payroll and benefits | 9,933 | 7,077 | |||||
Total current liabilities | 28,399 | 21,996 | |||||
Deferred rent | 6,277 | 1,751 | |||||
Other long-term liabilities | 2,069 | 1,688 | |||||
Stockholders equity: | |||||||
Common stock | 95 | 92 | |||||
Additional paid-in capital | 501,347 | 487,007 | |||||
Treasury stock | (19,509 | ) | (5,455 | ) | |||
Accumulated deficit | (285,012 | ) | (212,273 | ) | |||
Accumulated other comprehensive income | 432 | 454 | |||||
Total stockholders equity | 197,353 | 269,825 | |||||
Total liabilities and stockholders equity | $ | 234,098 | $ | 295,260 | |||
(1) The unaudited condensed consolidated balance sheet at December�31, 2013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Entropic Communications, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net revenues | $ | 43,178 | $ | 56,376 | $ | 149,033 | $ | 201,445 | |||||||
Cost of net revenues | 20,609 | 28,863 | 76,864 | 104,837 | |||||||||||
Gross profit | 22,569 | 27,513 | 72,169 | 96,608 | |||||||||||
Operating expenses: | |||||||||||||||
Research and development | 29,073 | 28,510 | 95,555 | 84,914 | |||||||||||
Sales and marketing | 5,923 | 6,137 | 19,246 | 18,609 | |||||||||||
General and administrative | 5,435 | 5,751 | 17,688 | 17,290 | |||||||||||
Amortization of intangibles | 256 | 443 | 989 | 1,868 | |||||||||||
Restructuring charges (recoveries) | 2,186 | (69 | ) | 3,982 | 1,694 | ||||||||||
Impairment of assets | 7,386 | 7,386 | |||||||||||||
Total operating expenses | 50,259 | 40,772 | 144,846 | 124,375 | |||||||||||
Loss from operations | (27,690 | ) | (13,259 | ) | (72,677 | ) | (27,767 | ) | |||||||
Loss related to equity method investment | (1,115 | ) | |||||||||||||
Impairment of investment | (4,780 | ) | |||||||||||||
Other income, net | 176 | 464 | 449 | 1,147 | |||||||||||
Loss before income taxes | (27,514 | ) | (12,795 | ) | (72,228 | ) | (32,515 | ) | |||||||
Income tax provision (benefit) | 123 | (860 | ) | 511 | 21,737 | ||||||||||
Net loss | $ | (27,637 | ) | $ | (11,935 | ) | $ | (72,739 | ) | $ | (54,252 | ) | |||
Net loss per sharebasic and diluted | $ | (0.31 | ) | $ | (0.13 | ) | $ | (0.81 | ) | $ | (0.60 | ) | |||
Weighted average number of shares used to compute net loss per sharebasic and diluted | 89,293 | 91,069 | 89,520 | 90,225 | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Entropic Communications, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net loss | $ | (27,637 | ) | $ | (11,935 | ) | $ | (72,739 | ) | $ | (54,252 | ) | |||
Other comprehensive (loss) income, net of taxes: | |||||||||||||||
Change in foreign currency translation adjustment | (63 | ) | 162 | 15 | 183 | ||||||||||
Available-for-sale investments: | |||||||||||||||
Change in net unrealized (loss) gain | (55 | ) | 159 | (37 | ) | (81 | ) | ||||||||
(118 | ) | 321 | (22 | ) | 102 | ||||||||||
Comprehensive loss | $ | (27,755 | ) | $ | (11,614 | ) | $ | (72,761 | ) | $ | (54,150 | ) | |||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Entropic Communications, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine Months Ended September 30, | |||||||
2014 | 2013 | ||||||
Operating activities: | |||||||
Net loss | $ | (72,739 | ) | $ | (54,252 | ) | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||
Depreciation | 5,437 | 6,288 | |||||
Amortization of intangible assets | 9,140 | 8,750 | |||||
Impairment of assets | 7,386 | ||||||
Change in acquisition related contingent consideration liability | (131 | ) | |||||
Deferred taxes | 220 | 24,221 | |||||
Excess tax expense on stock option exercises | 2,177 | ||||||
Stock-based compensation | 15,032 | 11,821 | |||||
Amortization of premiums on investments | 1,465 | 2,593 | |||||
Provision for excess and obsolete inventory | 271 | 3,492 | |||||
Loss related to equity method investment | 1,115 | ||||||
Impairment of investment | 4,780 | ||||||
Loss (gain) on disposal of assets | 284 | (98 | ) | ||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | 769 | 1,050 | |||||
Inventory | (1,260 | ) | 7,787 | ||||
Prepaid expenses and other current assets | 1,644 | (5,400 | ) | ||||
Other long-term assets | (98 | ) | (3,586 | ) | |||
Accounts payable | 2,812 | 3,580 | |||||
Accrued expenses and other current liabilities | (447 | ) | 30 | ||||
Accrued payroll and benefits | 2,149 | (1,251 | ) | ||||
Deferred rent | 4,858 | 1,497 | |||||
Other long-term liabilities | 157 | 305 | |||||
Net cash (used in) provided by operating activities | (22,920 | ) | 14,768 | ||||
Investing activities: | |||||||
Purchases of property and equipment | (11,828 | ) | (6,482 | ) | |||
Purchases of marketable securities | (22,695 | ) | (93,364 | ) | |||
Sales/maturities of marketable securities | 65,391 | 108,962 | |||||
Net cash used in acquisition | (13,017 | ) | |||||
Net cash provided by (used in) investing activities | 30,868 | (3,901 | ) | ||||
Financing activities: | |||||||
Net proceeds from the issuance of equity plan common stock, net of withholding tax | 62 | 1,941 | |||||
Excess tax expense on stock option exercises | (2,177 | ) | |||||
Purchase of treasury stock | (14,054 | ) | |||||
Net cash used in financing activities | (13,992 | ) | (236 | ) | |||
Net effect of exchange rates on cash | 96 | 64 | |||||
Net (decrease) increase in cash and cash equivalents | (5,948 | ) | 10,695 | ||||
Cash and cash equivalents at beginning of period | 16,298 | 17,206 | |||||
Cash and cash equivalents at end of period | $ | 10,350 | $ | 27,901 | |||
Supplemental disclosure of cash flow information: | |||||||
Cash paid for income taxes | $ | 614 | $ | 726 | |||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Entropic Communications, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. | Organization and Summary of Significant Accounting Policies |
Business
Entropic Communications, Inc. was organized under the laws of the state of Delaware on January�31, 2001. Entropic Communications is a leading fabless semiconductor company that designs, develops and markets semiconductor solutions to enable home entertainment. Our technologies change the way traditional broadcast video, streaming video, and other multimedia content such as movies, music, games and photos are brought into, distributed and processed throughout the home.
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP.
The accompanying unaudited condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of the financial position and results of operations for the periods presented.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and these accompanying notes. Among the significant estimates affecting the unaudited condensed consolidated financial statements are those related to business combinations, allowance for doubtful accounts, inventory reserves, long-lived assets (including intangible assets), warranty reserves, accrued bonuses, income taxes, valuation of equity securities and stock-based compensation. On an ongoing basis, management reviews its estimates based upon currently available information. Actual results could differ materially from those estimates.
Foreign Currency Translation
The functional currency for our foreign subsidiaries is the local currency. Assets and liabilities denominated in foreign currencies are translated using the exchange rates on the balance sheet dates. Net revenues and expenses are translated using the average exchange rates prevailing during the year. Any translation adjustments resulting from this process are shown as a component of accumulated other comprehensive income within stockholders' equity in the unaudited condensed consolidated balance sheets. Foreign currency transaction gains and losses are reported in operating expenses in the unaudited condensed consolidated statements of operations.
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Derivative Financial Instruments
Our primary objective for holding derivative financial instruments is to hedge non-functional currency risks and to guarantee a minimum fixed price in local currency. Our accounting policies for derivative financial instruments are based on the criteria for designation of a hedging transaction as an accounting hedge, either as a cash flow or fair value hedge. A cash flow hedge refers to the hedge of the exposure to variability in the cash flows of an asset or a liability, or of a forecasted transaction. A fair value hedge refers to the hedge of the exposure to changes in fair value of an asset or a liability, or of an unrecognized firm commitment. The criteria for designating a derivative as a hedge include the instrument's effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument to its underlying transaction. Gains and losses from derivatives designated as fair value accounting hedges generally offset changes in the values of the hedged assets or liabilities over the life of the hedge. We recognize gains and losses on derivatives that are not currently designated as hedges for accounting purposes in earnings in other income, net. As of September�30, 2014, we had no derivative instruments designated as accounting hedges. As such, all gains and losses on derivatives for the three and nine months ended September�30, 2014 were recognized in earnings.
Revenue Recognition
Our net revenues are generated principally by sales of our semiconductor solutions products.
We recognize product revenues when the following fundamental criteria are met: (i)�persuasive evidence of an arrangement exists, (ii)�delivery has occurred or services have been rendered, (iii)�the price to the customer is fixed or determinable and (iv)�collection of the resulting receivable is reasonably assured. These criteria are usually met at the time of product shipment; however, we do not recognize revenue until all substantive customer acceptance requirements have been met, when applicable.
A portion of our sales are made through distributors, agents or customers acting as agents under agreements allowing for nonstandard rights of return or other potential concessions. Net revenues on sales made through these distributors are not recognized until the distributors ship the product to their customers.
Revenues derived from billing customers for shipping and handling costs are classified as a component of net revenues. Costs of shipping and handling charged by suppliers are classified as a component of cost of net revenues.
We record reductions to net revenues for estimated product returns and pricing adjustments, such as competitive pricing programs, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns and historical participation in pricing programs and other factors known at the time. If actual returns or actual participation in pricing programs differ significantly from our estimates, such differences would be recorded in our results of operations for the period in which the actual returns become known or pricing programs terminate. To date, changes in estimated returns and pricing adjustments have not been material to net revenues in any related period.
We provide rebates on our products to certain customers. At the time of the sale, we accrue 100% of the potential rebate as a reduction to net revenue and, based on our historical experience rate, do not apply a breakage factor. The amount of these reductions is based upon the terms included in various rebate agreements. We reverse the accrual for unclaimed rebate amounts as specific rebate programs contractually end or when we believe unclaimed rebates are no longer subject to payment and will not be paid. For the three months ended September�30, 2014 and 2013 and the nine months ended September�30, 2014 and 2013, we reduced net revenue by $0.6 million, $1.3 million, $2.0 million and $1.9 million, respectively, in connection with our rebate programs.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cash equivalents, marketable securities, accounts receivable and leases payable. Our policy is to place our cash, cash equivalents and marketable securities with high quality financial institutions in order to limit our credit exposure. We extend credit to certain of our customers based on an evaluation of the customer's financial condition and a cash deposit is generally not required. We estimate potential losses on trade receivables on an ongoing basis.
We maintain cash and cash equivalent accounts with Federal Deposit Insurance Corporation, or FDIC, insured financial institutions. In addition, certain of the our interest bearing collateral money market and savings accounts are each insured up to $250,000 by the FDIC. Our exposure for amounts in excess of FDIC insured limits at September�30, 2014 was $9.8 million. We have not experienced any losses in such accounts.
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We invest cash in deposits and money market funds with major financial institutions, U.S. government obligations and debt securities of corporations with investment grade credit ratings in a variety of industries. It is our policy to invest in instruments that have a final maturity of no longer than two years, and to maintain a portfolio weighted average maturity of no longer than 12 months.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds and commercial paper. We consider all highly liquid investments with a maturity of three months or less from the date of purchase that are readily convertible into cash to be cash equivalents.
Deferred Compensation
In June 2011, we implemented a non-qualified deferred compensation plan that permits certain key employees to defer portions of their compensation, subject to annual deferral limits, and have it credited to one or more investment options in the plan. At September�30, 2014, we had marketable securities totaling $0.3 million related to investments in equity securities that are held in a rabbi trust under our non-qualified deferred compensation plan. The total related deferred compensation liability was $0.3 million at September�30, 2014, all of which was classified as non-current liabilities and is recorded in the unaudited condensed consolidated balance sheets under other long-term liabilities.
Marketable Securities
We account for marketable securities by determining the appropriate classification of such securities at the time of purchase and reevaluating such classification as of each balance sheet date. As of September�30, 2014, we had classified $0.3 million of bank and time deposits and $0.3 million held under our non-qualified deferred compensation plan as trading securities. Trading securities are bought and held principally for the purpose of selling in the near term and are reported at fair value, with unrealized gains and losses included in earnings. All other marketable securities were classified as available-for-sale. Cash equivalents and available-for-sale marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders' equity, net of tax. The investments are adjusted for amortization of premiums and discounts to maturity and such amortization is included in interest income. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in the unaudited condensed consolidated statements of operations.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, marketable securities, trade receivables, accounts payable and other accrued liabilities approximate fair value due to their relative short-term maturities. The fair value of marketable securities was determined using the quoted market price for those securities. The carrying amounts of our long-term liabilities approximate their fair value.
Allowance for Doubtful Accounts
We evaluate the collectability of accounts receivable based on a combination of factors. In cases where we are aware of circumstances that may impair a specific customer's ability to meet its financial obligations subsequent to the original sale, we will record a specific allowance against amounts due, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based upon specific identification, industry and geographic concentrations, the current business environment and our historical experience. At September�30, 2014 and December�31, 2013 our allowance for doubtful accounts was $0.1 million and $0, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. Lower of cost or market adjustments reduce the carrying value of the related inventory and take into consideration reductions in sales prices, excess inventory levels and obsolete inventory. These adjustments are calculated on a part-by-part basis and, in general, represent excess inventory value on hand compared to 12-month demand projections. Once established, these adjustments are considered permanent and are not reversed until the related inventory is sold or disposed.
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We make estimates about future customer demand for our products when establishing the appropriate reserve for excess and obsolete inventory. We write down inventory that has become obsolete or unmarketable by an amount equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. Inventory write downs are a component of our product cost of goods sold. For the three months ended September�30, 2014 and 2013 and the nine months ended September�30, 2014 and 2013, we recorded net charges for excess and obsolete inventory of $0.2 million, $2.6 million, $0.3 million and $3.5 million, respectively.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets (three to seven years), except leasehold improvements and software which are amortized over the lesser of the estimated useful lives of the asset or the remaining lease/license term.
Goodwill and Intangible Assets
We record goodwill and other intangible assets based on the fair value of the assets acquired. In determining the fair value of the assets acquired, we utilize extensive accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired. We use the discounted cash flow method to estimate the value of intangible assets acquired. The estimates used to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages.
We assess goodwill and indefinite-lived intangible assets for impairment using fair value measurement techniques on an annual basis during the fourth quarter of the year, or more frequently if indicators of impairment exist. We operate as one reporting unit. The goodwill impairment test is a two-step process. The first step compares the reporting unit's fair value to its net book value. If the fair value is less than the book value, the second step of the test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill exceeds its implied fair value, we would recognize an impairment loss equal to that excess amount. Determining the fair value of the implied goodwill is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value are primarily determined using market comparisons. This approach uses significant estimates and assumptions, including the determination of appropriate market comparables and whether a premium or discount should be applied to comparables.
Investment in a Privately Held Company
Through the second quarter of 2013, we had accounted for our investment in Zenverge, Inc., or Zenverge, under the equity method of accounting since we had exercised significant influence until this time as a result of our Chief Executive Officer, or CEO, serving as a member of Zenverge's board of directors, but we did not have the elements of control that would require consolidation. The rights of the other investors were both protective and participating. Unless we were determined to be the primary beneficiary, these rights precluded us from consolidating the investment. The investment was recorded initially at cost as an investment in Zenverge, and subsequently was adjusted for equity in net income and cash contributions and distributions. As described in Note 2, during the three months ended June 30, 2013, we recorded an impairment charge of $4.8 million relating to our investment. As of September�30, 2014, our investment in Zenverge was $0.
Warranty Accrual
We generally provide a warranty on our products for a period of one year; however, it may be longer for certain customers. Accordingly, we establish provisions for estimated product warranty costs at the time revenue is recognized based upon our historical activity and, additionally, for any known product warranty issues. Warranty provisions are recorded as a cost of net revenues. The determination of such provisions requires us to make estimates of product return rates and expected costs to replace or rework the products under warranty. When the actual product failure rates, cost of replacements and rework costs differ from our estimates, revisions to the estimated warranty accrual are made. Actual claims are charged against the warranty reserve.
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Guarantees and Indemnifications
In the ordinary course of business, we have entered into agreements with customers that include indemnity provisions. To date, there have been no known events or circumstances that have resulted in any significant costs related to these indemnification provisions and, as a result, no liabilities have been recorded in the accompanying financial statements.
Software Development Costs
Software development costs are capitalized beginning when technological feasibility has been established and ending when a product is available for sale to customers. To date, the period between achieving technological feasibility and when the software is made available for sale to customers has been relatively short and software development costs qualifying for capitalization have not been significant. As such, all software development costs have been expensed as incurred in research and development expense.
Stock-Based Compensation
We have equity incentive plans under which incentive stock options have been granted to employees and restricted stock units, or RSUs, and non-qualified stock options have been granted to employees and non-employees. We also have an employee stock purchase plan for all eligible employees.
Our stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award using either the Black-Scholes option pricing model for stock options with service-based vesting, Monte Carlo simulations for awards with market-based vesting, or the grant date fair value of the stock on the date of the grant for RSUs, and is recognized as an expense over the employee's requisite service or performance period, as applicable. In June 2014, we granted performance stock units, or PSUs, to certain members of our executive management team which vest over a three year period, subject to performance of our stock price (see Note 7). In July 2013, we granted performance based equity awards which vest over a 15 month period, or earlier upon the achievement of certain milestones (see Note 3). These awards fully vested prior to the achievement of the milestones. The stock-based compensation expense attributable to awards under our 2007 Employee Stock Purchase Plan, or ESPP, was determined using the Black-Scholes option pricing model.
We recognize excess tax benefits associated with stock-based compensation to stockholders' equity only when realized. When assessing whether excess tax benefits relating to stock-based compensation have been realized, we follow the with and without approach excluding any indirect effects to be realized until after the utilization of all other tax benefits available to us.
Income Taxes
We estimate income taxes based on the various jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. We estimate the current tax liability and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are reflected in our balance sheets. We then assess the likelihood that deferred tax assets will be realized. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. When a valuation allowance is established or increased, we record a corresponding tax expense in our statements of operations. When a valuation allowance is decreased, we record the corresponding tax benefit in our statements of operations. We review the need for a valuation allowance each interim period to reflect uncertainties about whether we will be able to utilize deferred tax assets before they expire. The valuation allowance analysis is based on estimates of taxable income for the jurisdictions in which we operate and the periods over which our deferred tax assets will be realizable.
We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount that has more than a 50% chance of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis. The evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues.
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Recently Issued Accounting Standards
In April 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-08Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU raised the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. This ASU will be effective prospectively for the first quarter of fiscal year 2016. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued. We do not expect the adoption of this ASU to have a material impact on our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU requires an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In particular, this ASU addresses contracts with more than one performance obligation, as well as the accounting for some costs to obtain or fulfill a contract with a customer, and provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. This ASU will be effective beginning in the first quarter of fiscal year 2017. Early adoption of this ASU is not permitted. We are currently evaluating the impact of and method of adoption of this ASU on our financial statements.
There have been no other recent accounting standards, or changes in accounting standards, during the nine months ended September�30, 2014, as compared to the recent accounting standards described in our Annual Report on Form 10-K, that are of material significance, or have potential material significance, to us.
2.� | Supplemental Financial Information |
Marketable Securities
We have marketable securities and financial instruments that are classified as either available-for-sale or trading securities. As of September�30, 2014, our short-term investment portfolio included $0.3 million of trading securities invested in a defined set of mutual funds directed by the participants in our non-qualified deferred compensation plan. As of September�30, 2014 these securities had net unrealized gains of $0.1 million and a cost basis of $0.2 million. As of September�30, 2014, our short-term investment portfolio also included $0.3 million of trading securities invested in principal and interest guaranteed bank and time deposit accounts.
The following tables summarize available-for-sale investments by security type as of September�30, 2014 and December�31, 2013 (in thousands):
As of September 30, 2014 | |||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair�Market Value | ||||||||||||
Available-for-sale securities: | |||||||||||||||
Corporate notes/bonds, short-term | 77,663 | 62 | (4 | ) | 77,721 | ||||||||||
Corporate notes/bonds, long-term | 18,853 | 3 | (39 | ) | 18,817 | ||||||||||
Total | $ | 96,516 | $ | 65 | $ | (43 | ) | $ | 96,538 | ||||||
As of December 31, 2013 | |||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair�Market Value | ||||||||||||
Available-for-sale securities: | |||||||||||||||
Commercial paper | $ | 7,493 | $ | 1 | $ | $ | 7,494 | ||||||||
Corporate notes/bonds | 63,591 | 48 | (3 | ) | 63,636 | ||||||||||
Total marketable securities, short-term | 71,084 | 49 | (3 | ) | 71,130 | ||||||||||
Corporate notes/bonds, long-term | 67,526 | 51 | (43 | ) | 67,534 | ||||||||||
U.S. treasury and agency notes/bonds, long-term | 2,000 | 2,000 | |||||||||||||
Total | $ | 140,610 | $ | 100 | $ | (46 | ) | $ | 140,664 | ||||||
10
Realized gains on our available-for-sale securities for the three months ended September�30, 2014 and 2013 and the nine months ended September�30, 2014 and 2013 were $1,000, $41,000, $1,000 and $50,000, respectively. As of September�30, 2014, we had no available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months.
We assess our marketable securities for impairment under the guidance provided by ASC Topic 320. Accordingly, we review the fair value of our marketable securities at least quarterly to determine if declines in the fair value of individual securities are other-than-temporary in nature. If we believe the decline in the fair value of an individual security is other-than-temporary, we write-down the carrying value of the security to its estimated fair value, with a corresponding charge against income. To determine if a decline in the fair value of an investment is other-than-temporary, we consider several factors, including, among others, the period of time and extent to which the estimated fair value has been less than cost, overall market conditions, the historical and projected future financial condition of the issuer of the security and our ability and intent to hold the security for a period of time sufficient to allow for a recovery of the market value. The unrealized losses related to our marketable securities held as of September�30, 2014 and December�31, 2013 were primarily caused by recent fluctuations in market interest rates, and not the credit quality of the issuer, and we have the ability and intent to hold these securities until a recoveries of fair value, which may be at maturity. As a result, we do not believe these securities to be other-than-temporarily impaired as of September�30, 2014.
The following table summarizes the contractual maturities of our available-for-sale securities (in thousands):
As of September 30, | |||
2014 | |||
Less than one year | $ | 77,721 | |
Due in one to five years | 18,817 | ||
Due after five years | |||
$ | 96,538 | ||
Fair Value of Financial Instruments
We determine a fair value measurement based on the assumptions a market participant would use in pricing an asset or liability. Accounting Standards Codification, or ASC, 820 establishes a three-level hierarchy making a distinction between market participant assumptions based on (i)�unadjusted quoted prices for identical assets or liabilities in an active market (Level�1), (ii)�quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability (Level�2), and (iii)�prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (Level�3).
Cash equivalents consist primarily of bank deposits with third-party financial institutions, highly liquid money market securities and commercial paper with original maturities at date of purchase of 90 days or less and are stated at cost which approximates fair value and are classified as Level 1 assets.
Marketable securities are recorded at fair value, defined as the exit price in the principal market in which we would transact, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Level�1 instruments are valued based on quoted market prices in active markets for identical instruments and include our investments in money market and mutual funds. Level�2 securities are valued using quoted market prices for similar instruments, non-binding market prices that are corroborated by observable market data, or discounted cash flow techniques and include our investments in corporate bonds and notes, U.S.�government agency securities, U.S.�treasury bills, state and municipal bonds and commercial paper.
Our non-qualified deferred compensation plan liability is classified as a Level�1 liability within the hierarchy. The fair value of the liability is directly related to the valuation of the short-term and long-term investments held in trust for the plan. Hence, the carrying value of the non-qualified deferred compensation liability represents the fair value of the investment assets.
Level�3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value. We have no assets classified as Level 3 instruments. There were no transfers between different levels during the nine months ended September�30, 2014.
11
The fair value measurements of our cash equivalents, marketable securities, employee stock-based compensation guarantees and non-qualified deferred compensation plan consisted of the following as of September�30, 2014 and December�31, 2013 (in thousands):
Fair�Value�Measurements�as�of�September 30, 2014 | |||||||||||||||
Total���� | Level�1���� | Level�2���� | Level�3���� | ||||||||||||
Assets: | |||||||||||||||
Cash equivalents | $ | 1,087 | $ | 1,087 | $ | $ | |||||||||
Short-term investments: | |||||||||||||||
Corporate notes/bonds | 77,721 | 77,721 | |||||||||||||
Mutual funds | 295 | 295 | |||||||||||||
Bank and time deposits | 315 | 315 | |||||||||||||
Long-term investments: | |||||||||||||||
Corporate notes/bonds | 18,817 | 18,817 | |||||||||||||
Total assets at fair value | $ | 98,235 | $ | 1,697 | $ | 96,538 | $ | ||||||||
Liabilities: | |||||||||||||||
Employee stock-based compensation guarantees | $ | 81 | $ | $ | $ | 81 | |||||||||
Non-qualified deferred compensation plan | 295 | 295 | |||||||||||||
Total liabilities at fair value | $ | 376 | $ | 295 | $ | $ | 81 | ||||||||
Fair�Value�Measurements�as�of�December�31,�2013 | |||||||||||||||
Total���� | Level�1���� | Level�2���� | Level�3���� | ||||||||||||
Assets: | |||||||||||||||
Cash equivalents | $ | 6,503 | $ | 6,503 | $ | $ | |||||||||
Short-term investments: | |||||||||||||||
Commercial paper | 7,494 | 7,494 | |||||||||||||
Corporate notes/bonds | 63,636 | 63,636 | |||||||||||||
Mutual funds | 352 | 352 | |||||||||||||
Bank and time deposits | 440 | 440 | |||||||||||||
Long-term investments: | |||||||||||||||
Corporate notes/bonds | 67,534 | 67,534 | |||||||||||||
U.S. treasury and agency notes/bonds | 2,000 | 2,000 | |||||||||||||
Total assets at fair value | $ | 147,959 | $ | 7,295 | $ | 140,664 | $ | ||||||||
Liabilities: | |||||||||||||||
Employee stock-based compensation guarantees | 77 | 77 | |||||||||||||
Non-qualified deferred compensation plan | 352 | 352 | |||||||||||||
Total liabilities at fair value | $ | 429 | $ | 352 | $ | $ | 77 | ||||||||
12
The following table represents the change in level 3 liabilities which relate to employee stock compensation guarantees (in thousands):
Fair Value Measurement Using Significant Unobservable Inputs (Level 3) | |||
Employee stock-based compensation guarantees | |||
Liability as of December 31, 2013 | $ | 77 | |
Adjustments to fair value | 156 | ||
Payments | (152 | ) | |
Liability as of September 30, 2014 | $ | 81 | |
The employee stock-based compensation guarantees represent compensation liability associated with certain RSU grants. Based on the terms of these grants, a cash payment is required to be made in the event that the stock price at the date of vesting falls below the grant date price. The fair value of this liability is evaluated quarterly using the Black-Scholes option pricing model which considers the potential payout, the remaining time until payout, volatility of the underlying shares, and the risk-free interest rate to calculate the liability that may be due under the arrangement.
Nonrecurring Fair Value Measurements
We measure certain assets and liabilities at fair value on a nonrecurring basis. These assets and liabilities include cost and equity method investments when they are deemed to be other-than-temporarily impaired, assets acquired and liabilities assumed in an acquisition or in a non-monetary exchange, operating lease termination liabilities and property, plant and equipment and intangible assets that are written down to fair value when they are held for sale or determined to be impaired. During the year ended December 31, 2013, we determined that we had incurred an other-than-temporary impairment of our investment in a privately held company and we wrote off the remainder of the investment of $4.8 million.
During the three and nine months ended September�30, 2014, accrued restructuring costs of $0.5 million related to operating lease terminations from our June 2014 restructuring activity were valued using a discounted cash flow model using internal estimates and assumptions. Significant assumptions used in determining the amount of the estimated liability include the estimated liabilities for future rental payments on vacant facilities as of their respective cease-use dates and the discount rate utilized to determine the present value of the future expected cash flows. If our assumptions regarding early terminations and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses or gains in our unaudited condensed consolidated statements of operations. Given that the restructuring charges were valued using our internal estimates using a discounted cash flow model, we have classified the accrued restructuring costs as Level 3 in the fair value hierarchy.
Additionally, in connection with the November 2014 restructuring plan discussed in Note 12, we evaluated the carrying value of our intangible and long-lived assets as of September�30, 2014. We performed an analysis of our licensed intellectual property utilized in the production and development of the STB assets, and because the majority of these technology licenses are not transferable and will have no useful applications for our remaining operations, we recorded an impairment charge of $4.3 million related to these licenses to reduce the carrying value of each affected asset to $0. Related to these licenses, we accrued $0.8 million related to contractually committed payments for the licensed intellectual property for which we will receive no future benefit. We additionally reviewed the IPR&D related to the STB assets and determined that the technology related to certain of these assets will not be utilized in the foreseeable future and has no alternative future use to our remaining operations, and we recorded an impairment charge of $1.6 million to reduce the carrying value of the IPR&D to $0.
Inventory
The components of inventory were as follows (in thousands):
September�30, 2014 | December�31, 2013 | ||||||
Work in process | $ | 8,330 | $ | 7,697 | |||
Finished goods | 6,162 | 5,806 | |||||
Total inventory | $ | 14,492 | $ | 13,503 | |||
13
Property and Equipment
Property and equipment consisted of the following (in thousands, except for years):
Useful Lives (in years) | September�30, 2014 | December�31, 2013 | |||||||
Office and laboratory equipment | 5 | $ | 26,219 | $ | 24,162 | ||||
Computer equipment | 3 - 5 | 8,069 | 7,165 | ||||||
Furniture and fixtures | 3 - 7 | 3,138 | 2,353 | ||||||
Leasehold improvements | Lease�term | 8,279 | 7,042 | ||||||
Software | 1 - 3 | 4,987 | 4,726 | ||||||
Construction in progress | 80 | 487 | |||||||
50,772 | 45,935 | ||||||||
Accumulated depreciation | (27,270 | ) | (27,941 | ) | |||||
Property and equipment, net | $ | 23,502 | $ | 17,994 | |||||
Depreciation expense for the three months ended September�30, 2014 and 2013 and the nine months ended September�30, 2014 and 2013 was $1.8 million, $2.2 million, $5.4 million and $6.3 million, respectively.
Investment in a Privately Held Company
In September 2011, we purchased shares of convertible preferred stock in Zenverge, a privately-held, venture capital funded technology company, for a total investment cost of $10.0 million, which at the time of the investment represented a 16.3% equity interest in the company. We also entered into a strategic partnership to co-develop an integrated chip that combines our MoCA functionality with this entity's independently developed technology. As a result of our joint development arrangement with this company and the appointment of our CEO as a member of the company's board of directors, we determined that the ability to exercise significant influence over the company existed and, accordingly, we accounted for this investment following the equity method. The investment was recorded initially at cost as an investment in a privately held company and was subsequently adjusted for our equity position in net operating results and cash contributions and distributions. In addition, we recorded a charge relating to our proportionate ownership percentage of the premium paid for our investment in excess of our share of their net worth. The fair value of this premium consisted of certain intangible asset and goodwill values as determined by a valuation calculation. These intangible assets represented the excess of the book value as compared to the valuation of Zenverge.
During the second quarter of 2013, we gave Zenverge notice of our intent to terminate the joint development arrangement and, in July 2013, our CEO resigned from the board of directors of Zenverge. As a result, we determined that the ability to exercise significant influence over Zenverge no longer existed and we no longer accounted for the investment under the equity method. As such, we no longer recognize any earnings from our investment in Zenverge.
Additionally, during the second quarter of 2013, our preferred stock investment was converted into common stock based on the terms of a financing in which Zenverge raised additional funds where we did not participate. We then reviewed the available information to determine if our investment in Zenverge's common stock had indicators of possible impairment. As a result of the liquidation preferences held by the remaining preferred stockholders, we concluded that our common stock investment did not have any value and as a result, we had incurred an other-than-temporary impairment of our investment in Zenverge; we wrote off the remainder of the investment of $4.8 million in June 2013. As a result, as of September�30, 2014, our investment in Zenverge was $0.
14
Accrued Warranty
The following table presents a roll forward of our product warranty liability, which is included within accrued expenses and other current liabilities in the unaudited condensed consolidated balance sheets (in thousands):
Nine Months Ended September 30, | |||
2014 | |||
Beginning balance | $ | 50 | |
Accruals for warranties issued during the period | 85 | ||
Settlements made during the period | (33 | ) | |
Expirations | (54 | ) | |
Ending balance | $ | 48 | |
Accrued Bonuses
During the nine months ended September�30, 2014 we received approval from our board of directors to allocate $1.0 million on a discretionary basis to participants in the management bonus plan on or about February 15, 2015. The payment of the bonus is entirely discretionary and is not tied to achievement of any operational, financial or business metrics. The $1.0 million will be settled in fully vested common stock of the company in February 2015. As of September�30, 2014 we had accrued $0.8 million for these management bonuses.
Restructuring Activity
In June 2014, we announced a corporate restructuring plan to accelerate our path to profitability. The restructuring plan includes the reduction, closure or consolidation of several global facilities including facilities located in Austin, Texas; India; Taiwan and Israel. Approximately 150 positions are expected to be eliminated in connection with the restructuring plan, which represented about 23% of our work force as of June 30, 2014.
In connection with this plan, we expect to incur total employee related charges of approximately $3.8 million through the end of 2014 consisting of severance, retention and relocation costs. During the three and nine months ended September 30, 2014 we incurred $1.8 million and $3.4 million, respectively, in employee related charges and we expect to incur an additional $0.4 million of employee related charges during the remainder of 2014.
Our restructuring plan also includes reducing capacity at or vacating certain facilities and terminating operating leases and other contract costs. We record these costs as restructuring costs in the period when we cease to use rights conveyed by the contract. Additionally, costs such as attorney fees incurred as a result of this activity will be charged as restructuring costs as they are incurred. We expect to incur a total of $1.5 million in facility exit costs and $0.6 million in impairment charges. During the three and nine months ended September�30, 2014, we recorded facility exit costs of $0.5 million and non-cash charges of $0.3 million for deferred rent previously recorded for this property. Additionally, during the three and nine months ended September�30, 2014, we recorded asset impairment charges of $0.5 million and $0.6 million, respectively. Further, as a result of the restructuring plan, we no longer intend to permanently reinvest the undistributed earnings of certain foreign subsidiaries. No tax on the undistributed earnings has been provided for as we maintain a full valuation allowance against our deferred tax assets.
Total cash payments related to the restructuring plan are expected to be approximately $5.4 million. As of September�30, 2014, $2.1 million in cash payments had been made in connection with the plan.
The above costs are recorded in the "Restructuring charges (recoveries)" line of our unaudited condensed consolidated statements of operations.
15
The following table presents a rollforward of our restructuring liability as of September�30, 2014 which is included in accrued expenses and other current liabilities and accrued payroll and benefits in our unaudited condensed consolidated balance sheets (in thousands):
Operating Lease Commitments | Employee Separation Expenses | Total | ||||||||||
Liability as of December�31, 2013 | $ | $ | $ | |||||||||
Additions | 536 | 3,446 | 3,982 | |||||||||
Non-cash charges | 332 | 332 | ||||||||||
Cash payments | (2,101 | ) | (2,101 | ) | ||||||||
Liability as of September 30, 2014 | $ | 868 | $ | 1,345 | $ | 2,213 | ||||||
Deferred Compensation
We have a non-qualified deferred compensation plan that permits certain key employees to defer portions of their compensation, subject to annual deferral limits, and have it credited to one or more investment options in the plan. At September�30, 2014, we had marketable securities totaling $0.3 million related to investments in equity securities that are held in a rabbi trust established under our non-qualified deferred compensation plan. The total related deferred compensation liability was $0.3 million at September�30, 2014, all of which was classified as a non-current liability and recorded in our unaudited condensed consolidated balance sheets under other long-term liabilities.
Purchase Commitments
We had firm purchase order commitments for the acquisition of inventory as of September�30, 2014 and December�31, 2013 of $11.1 million and $16.8 million, respectively.
3. | Business Combinations |
Mobius Semiconductor
On June 5, 2013, we acquired the assets of Mobius Semiconductor, Inc., or Mobius, a leading product development company focused on low power, high performance analog mixed-signal semiconductor solutions for a total cash consideration of $13.0 million. The acquired technology will enable Entropic to provide cable and satellite operators with solutions that encompass system designs that are low power, broadband, high-speed, and which capture the full bandwidth of the signal payload - to drive more entertainment streams and IP services to more connected devices in the home. This technology can also be leveraged by global satellite service providers to migrate to digital single-wire communications.
In connection with the completion of the Mobius transaction, certain Mobius personnel entered into employment arrangements with Entropic. On July 18, 2013 we granted RSUs for an aggregate 3.2 million shares of common stock as long-term retention grants to certain employees of Mobius who joined Entropic. The RSUs had an estimated value of $14.0 million on the grant date. The terms of the RSUs for approximately 0.9 million of the 3.2 million RSUs provided for full vesting upon either the achievement of certain milestones or over a 15 month period through August 2014 and the remaining 2.3 million RSUs vest over a 3 year period ending August 2016. These RSUs are being accounted for as compensation expense over the vesting periods. The performance based milestones related to the 0.9 million RSUs were not achieved prior to the 15 month service period and were fully vested in August 2014.
16
On the acquisition date, we allocated the total consideration to the following assets (in thousands):
Allocation of Purchase Price | |||
Intangible assets | $ | 12,239 | |
Goodwill | 752 | ||
Prepaid expenses | 25 | ||
Property and equipment, net | 9 | ||
Total purchase price | $ | 13,025 | |
The allocation of the purchase price to the net assets acquired and liabilities assumed resulted in the recognition of the following intangible assets (in thousands, except for years):
Amount | Estimated Useful Life (in years) | ||||
In-process research and development | $ | 12,136 | * | ||
Non-compete agreement | 103 | 2 | |||
Total intangible assets | $ | 12,239 | |||
*Upon completion of each project, the related in-process research and development, or IPR&D, asset will be amortized over its estimated useful life. If any of the projects are abandoned or the forecast of the project indicates that the fair value is less than the carrying amount, we will be required to write down the related IPR&D asset.
Under the purchase method of accounting, the identifiable net assets acquired and liabilities assumed were recognized and measured as of the acquisition date based on their estimated fair values. In the determination of the fair value of the in-process research and development, or IPR&D, various factors were considered, such as future revenue contributions, additional licensing costs associated with the underlying technology, and contributory asset charges. The fair value of the IPR&D was calculated using an income approach and the rate utilized to discount net future cash flows to their present values was based on a weighted average cost of capital of 21%. This discount rate was determined after considering our cost of debt adjusted for a risk premium that market participants would require in an investment in companies that are at similar stages of development as Mobius.
IPR&D will not be amortized until the product is complete, at which time it will be amortized over the estimated useful life of the developed technology. The useful life of the IPR&D will be estimated as the period over which the asset is expected to contribute directly or indirectly to our future cash flows. Up to the point that the product is complete, we will assess the IPR&D annually for impairment, or more frequently if certain indicators are present.
The excess of the fair value of the total consideration over the estimated fair value of the net assets was recorded as goodwill. We allocated $0.8 million of the total consideration to goodwill. We consider the acquired business an addition to our product development effort and not an additional reporting unit or operating segment. The goodwill recognized is expected to be deductible for income tax purposes.
4.����Goodwill and Intangible Assets
On June�5, 2013, we acquired the intellectual property assets of Mobius and recognized $0.8 million of goodwill in connection with the acquisition.
On July�6, 2012, we acquired specific direct broadcast satellite intellectual property and corresponding technologies from PLX Technology, Inc., or PLX, and recognized $0.7 million of goodwill in connection with the acquisition.
On April�12, 2012, we completed our acquisition of assets from Trident Microsystems, Inc. and certain of its subsidiaries, collectively Trident, used in or related to Trident's set-top box business, or STB business, and recognized $4.0 million of goodwill in connection with the acquisition. During the nine months ended September 30, 2013, we finalized the acquisition related hold back payments with Trident. The finalization of these amounts resulted in a decrease to goodwill of $0.7 million. As of September�30, 2014, the goodwill related to the acquisition of Trident was $3.3 million.
17
Intangible assets consisted of the following (in thousands, except for years):
Estimated Useful Life (in years) | As of September 30, 2014 | ||||||||||||
Gross | Accumulated Amortization | Net | |||||||||||
Developed technology | 4 | $ | 43,475 | $ | (23,577 | ) | $ | 19,898 | |||||
In-process research and development | * | 12,136 | 12,136 | ||||||||||
Customer relationships | 7 | 6,800 | (2,308 | ) | 4,492 | ||||||||
Non-compete agreement | 2 | 1,603 | (1,568 | ) | 35 | ||||||||
Total intangible assets | $ | 64,014 | $ | (27,453 | ) | $ | 36,561 | ||||||
Estimated Useful Life (in years) | As of December 31, 2013 | ||||||||||||
Gross | Accumulated Amortization | Net | |||||||||||
Developed technology | 4 | $ | 43,475 | $ | (15,426 | ) | $ | 28,049 | |||||
In-process research and development | * | 13,761 | 13,761 | ||||||||||
Customer relationships | 7 | 6,800 | (1,579 | ) | 5,221 | ||||||||
Non-compete agreement | 2 | 1,603 | (1,308 | ) | 295 | ||||||||
Customer backlog | 1 | 2,000 | (2,000 | ) | |||||||||
Total intangible assets | $ | 67,639 | $ | (20,313 | ) | $ | 47,326 | ||||||
*Upon completion of each project, the related IPR&D asset will be amortized over its estimated useful life. If any of the projects are abandoned or the forecast of the project indicates that the fair value is less than the carrying amount, we will be required to write down the related IPR&D asset.
Amortization expense related to intangible assets was recorded as follows in our unaudited condensed consolidated statements of operations (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Cost of revenues | $ | 2,717 | $ | 2,425 | $ | 8,151 | $ | 6,882 | |||||||
Amortization of intangibles | 256 | 443 | 989 | 1,868 | |||||||||||
Total amortization expense | $ | 2,973 | $ | 2,868 | $ | 9,140 | $ | 8,750 | |||||||
As of September�30, 2014, the estimated future amortization expense of intangible assets is as follows, excluding in-process research and development intangible assets that have not reached technological feasibility (in thousands):
Years Ending December�31, | Estimated Amortization | |||
2014 (remaining three months) | $ | 2,973 | ||
2015 | 11,863 | |||
2016 | 6,013 | |||
2017 | 2,242 | |||
2018 | 971 | |||
Thereafter | 363 | |||
$ | 24,425 | |||
18
In connection with the November 2014 restructuring plan discussed in Note 12, we evaluated the carrying value of our intangible and long-lived assets as of September�30, 2014. We performed an analysis of our licensed intellectual property utilized in the production and development of the set-top box system-on-a-chip ( STB SoC ) assets, and because the majority of these technology licenses are not transferable and will have no useful applications for our remaining operations, we recorded an impairment charge of $4.3 million related to these licenses to reduce the carrying value of each affected asset to $0. Related to these licenses, we accrued $0.8 million related to contractually committed payments for the licensed intellectual property for which we will receive no future benefit. We additionally reviewed the IPR&D related to the STB SoC assets and determined that the technology related to certain of these assets will not be utilized in the foreseeable future and has no alternative future use to our remaining operations, and we recorded an impairment charge of $1.6 million to reduce the carrying value of the IPR&D to $0.
The impairment charges were recorded in "Impairment of Assets" in our unaudited condensed consolidated statements of operations for the three and nine months ended September�30, 2014.
5. | Derivative Instruments |
Certain of our foreign operations have expenses transacted in currencies other than the U.S. dollar. In order to mitigate foreign currency exchange risk, we use forward contracts to lock in exchange rates associated with a portion of our forecasted international expenses. Our policy is to enter into foreign currency forward contracts with maturities generally less than 12 months that mitigate the effect of rate fluctuations on certain local currency denominated operating expenses. All derivative instruments are recorded at fair value in either prepaid expenses and other current assets or accrued liabilities. Gains or losses arising from the remeasurement of these contracts to fair value each period are recorded in other income, net. We use quoted prices to value our derivative instruments. During the three months ended September�30, 2014 and 2013 and the nine months ended September�30, 2014 and 2013, we recorded a gain (loss) of $52,000, $0.1 million, $(0.2) million and $31,000, respectively, related to these fair value hedging contracts. As of September�30, 2014, we had outstanding contracts to purchase $9.4 million of Chinese yuan and $0.3 million of Indian rupees which settle during the course of the next 12 months.
6. | Income Taxes |
In order to determine our quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which we operate. Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
During the second quarter of 2013, we evaluated our net deferred income tax assets, including an assessment of the cumulative income or loss over the prior three-year period and future periods, to determine if a valuation allowance is required. A significant negative factor in our assessment was the expectation that we may be in a three-year historical cumulative loss as of the end of the first quarter of fiscal 2014 and through the near term, as profitable quarters in the earlier years are removed from the rolling three-year calculation. After considering our recent history of losses and management's expectation of additional near-term losses, during the second quarter of 2013, we recorded a valuation allowance of $26.7 million on our net deferred tax assets with a corresponding charge to our income tax provision. We continue to assess the need for a valuation allowance on deferred tax assets by evaluating both positive and negative evidence that may exist.
Income tax expense for the three months ended September�30, 2014 was $0.1 million compared to a benefit of $0.9 million for the three months ended September�30, 2013, or 0% and 7% of pre-tax loss, respectively. The effective tax rate for the three months ended September�30, 2014 differs from the federal statutory rate primarily due to taxes in the foreign jurisdictions in which we operate and withholding taxes for jurisdictions in which we are no longer indefinitely reinvested, partially offset by a federal net operating loss carryback and changes in valuation allowance against our domestic net deferred tax assets. The effective tax rate for the three months ended September�30, 2013 differs from the federal statutory rate primarily due to the establishment of the valuation allowance against our net deferred tax assets in the second quarter of 2013.
19
Income tax expense for the nine months ended September�30, 2014 was $0.5 million compared to $21.7 million for the nine months ended September�30, 2013, or (1)% and (67)% of pre-tax loss, respectively. The effective tax rate for the nine months ended September�30, 2014 differs from the federal statutory rate primarily due to taxes in the foreign jurisdictions in which we operate and withholding taxes for jurisdictions in which we are no longer indefinitely reinvested, partially offset by a federal net operating loss carryback and changes in valuation allowance against our domestic net deferred tax assets. The effective tax rate for the nine months ended September�30, 2013 differs from the federal statutory rate primarily due to the establishment of the valuation allowance against our net deferred tax assets in the second quarter of 2013.
We file U.S., state and international income tax returns in jurisdictions with various statutes of limitations. During the second quarter of 2014, we were notified by the Internal Revenue Service that our 2012 consolidated federal tax return is currently under examination. It is possible that within the next twelve months, ongoing tax examinations in the U.S. may be resolved, that new tax exams may commence and that other issues may be effectively settled. However, we are unable to make a reasonably reliable estimate as to when or if cash settlements with taxing authorities may occur. Although audit outcomes and the timing of audit payments are subject to uncertainty, we do not anticipate that the resolution of these tax matters or any events related thereto will result in a material adverse change to our consolidated financial position, results of operations or cash flows.
7. | Stockholders' Equity |
Stock-Based Compensation
We have in effect equity incentive plans under which incentive stock options, non-qualified stock options and restricted stock units have been granted to employees, directors and consultants to purchase shares of our common stock at a price not less than the fair market value of the stock at the date of grant, except for certain options assumed in connection with a business combination. These equity plans include the 2007 Non-Employee Directors Stock Option Plan, under which we continue to grant non-qualified stock options, and the 2007 Equity Incentive Plan and 2012 Inducement Award Plan under which we continue to grant non-qualified stock options and restricted stock units. These plans are further described in our Annual Report on Form 10-K.
We also grant stock awards under our ESPP. Under the terms of the ESPP, eligible employees may purchase shares of our common stock at 85% of the fair market value of our common stock on the offering date or the purchase date, whichever is less. Purchase dates occur twice each year, with a look-back period of up to 12 months to determine the lowest common stock valuation date, either the offering date or the purchase date.
Stock-based compensation expense recognized in our unaudited condensed consolidated statements of operations for the three and nine months ended September�30, 2014 and 2013 includes compensation expense for stock-based options and awards based on the grant date fair value. For options and awards granted with service-based vesting, expenses are amortized under the straight-line method. Stock-based compensation expense recognized in the unaudited condensed consolidated statements of operations has been reduced for estimated forfeitures of options that are subject to vesting. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We allocated stock-based compensation expense as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Cost of net revenues | $ | 116 | $ | 227 | $ | 371 | $ | 658 | |||||||
Research and development | 2,898 | 2,766 | 9,635 | 6,730 | |||||||||||
Sales and marketing | 633 | 510 | 1,967 | 1,324 | |||||||||||
General and administrative | 955 | 1,089 | 3,059 | 3,109 | |||||||||||
Total stock-based compensation expense | $ | 4,602 | $ | 4,592 | $ | 15,032 | $ | 11,821 | |||||||
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Equity Incentive Plans
As part of our continual evaluation of the calculation of our stock-based compensation expense, we reviewed and updated our forfeiture rate, expected term and volatility assumptions during the three and nine months ended September�30, 2014 and there was no significant impact. The risk-free interest rate is based on zero coupon U.S. Treasury instruments with maturities similar to those of the expected term of the award being valued. Through June 30, 2013, we used a combination of our historical experience, the contractual term and the average option term of a comparable peer group to determine the expected life of our option grants. The peer group historical term was used due to the limited trading history of our common stock. The estimated volatility incorporated historical volatility of similar entities whose share prices are publicly available. Effective July 1, 2013, we no longer incorporated peer group data in determining our expected life and volatility assumptions since we have sufficient trading history. The expected dividend yield was based on our expectation of not paying dividends on common stock for the foreseeable future.
The fair value of stock options granted to employees and directors was estimated at the grant date using the following assumptions:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||
2014 | 2013 | 2014 | 2013 | ||||||
Expected life (years) | 5.4 | 5.4 | 5.4 | 5.3 - 5.4 | |||||
Risk-free interest rate | 1.71 | % | 1.52 | % | 1.71% to 1.87% | 0.79% to 1.52% | |||
Expected volatility | 70 | % | 89 | % | 70% to 85% | 89% to 90% | |||
Expected dividend yield | |||||||||
As of September 30, 2014, we estimated there were $22.2 million in total unrecognized compensation costs related to employee equity incentive agreements, which are expected to be recognized over a weighted-average period of 1.2 years.
For the three and nine months ended September�30, 2014 and 2013, the fair value of expected shares to be issued under the ESPP was estimated using the following assumptions:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2014 | 2013 | 2014 | 2013 | ||||
Expected life (years) | 0.5 to 1.0 | 0.5 to 1.0 | 0.5 to 1.0 | 0.5 to 1.0 | |||
Risk-free interest rate | 0.05% to 0.10% | 0.08% to 0.18% | 0.05% to 0.11% | 0.08% to 0.19% | |||
Expected volatility | 35% to 43% | 47% to 63% | 35% to 55% | 47% to 84% | |||
Expected dividend yield | |||||||
For the three months ended September�30, 2014 and 2013 and the nine months ended September�30, 2014 and 2013 we recorded stock-based compensation expense related to awards under the ESPP totaling $0.5 million. $0.5 million, $1.2 million and $1.2 million, respectively. As of September�30, 2014 we estimated there were $0.5 million of unrecognized compensation costs related to the shares expected to be purchased through the ESPP, which are expected to be recognized over a remaining weighted-average period of 0.4 years.
Stock Options
During the three and nine months ended September�30, 2014, we granted stock options to purchase 0.2 million and 1.0 million shares of our common stock, respectively. During the three and nine months ended September�30, 2014, stock options to purchase 0.1 million and 0.3 million shares of common stock were exercised, respectively. During the three and nine months ended September�30, 2014, options to purchase 0.6 million and 0.8 million shares of common stock, respectively were forfeited or expired. As of September�30, 2014, we had outstanding options to purchase 9.5 million shares of common stock.
Restricted Stock Units
During the three and nine months ended September�30, 2014, 1.8 million and 2.8 million shares of our common stock vested and were released, respectively, pursuant to outstanding RSUs. As of September�30, 2014, we had 6.6 million shares of common stock subject to RSUs outstanding.
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During the three and nine months ended September�30, 2014, 1.3 million and 3.5 million RSUs were granted, respectively, and 0.6 million and 0.9 million RSUs were forfeited, respectively. Generally, RSUs vest annually with a term of one year to four years from the date of the grant on the anniversary date of the grant or on a predetermined quarterly vesting date following the anniversary date of the grant. The related compensation expense of RSUs with service-based vesting is generally recognized ratably over the service period.
Included in the 3.5 million RSUs granted during the nine months ended September�30, 2014 were 1.6 million PSUs granted to certain members of the executive management team. The PSUs will be earned, if at all, based on our total shareholder return compared to that of a determined market index and over a three year performance period. The PSUs will vest between 0% and 300% with the full vesting of 1.6 million shares earned only if our stock price achieves a 90th percentile or higher ranking compared to the market index. No shares are vested below a 30th percentile ranking and approximately 0.5 million shares will vest upon the attainment of a 50th percentile ranking, with vesting beginning at the 30th percentile floor. A portion of the shares vest annually upon the achievement of the targets measured at two interim measurement periods.
Share Repurchase Program
In September 2013, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $30.0 million of our common stock. Purchases under this program may be made from time to time through 10b5-1 programs, open market purchases, or privately negotiated transactions. The number of shares ultimately repurchased, and the timing of the purchases, depend on market conditions, share price, and other factors. Purchases under this program were approved to be made until September 30, 2014, however, the program could have been discontinued at any time.
During the three and nine months ended September�30, 2014, $2.8 million and $14.1 million, respectively, of purchases were made under this program. Total purchases made under this program were $19.5 million as of September�30, 2014.
8. ����Net Loss Per Common Share
We compute basic net loss per share of common stock by dividing net loss by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share is computed using the weighted average number of shares of common stock and dilutive common equivalent shares outstanding for the period. Common equivalent shares from stock options and other common stock equivalents are excluded from the computation when their effect is antidilutive. We were in a loss position for all periods presented and, accordingly, there is no difference between basic loss per share and diluted loss per share.
For the three months ended September�30, 2014 and 2013 and the nine months ended September�30, 2014 and 2013, basic and diluted weighted average common shares outstanding were 89.3 million, 91.1 million, 89.5 million and 90.2 million, respectively. For the three months ended September�30, 2014 and 2013 and the nine months ended September�30, 2014 and 2013, potentially dilutive stock options and RSUs for 16.1 million, 17.1 million, 16.7 million and 14.8 million shares of our common stock, respectively, were outstanding but not included in the diluted net loss per share calculations because they would be antidilutive.
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9. | Significant Customer and Geographic Information |
Customers
Based on direct shipments, customers that exceeded 10% of total net revenues or accounts receivable were as follows:
Net Revenues | Net Revenues | Accounts�Receivable | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | As of September 30, | As of December 31, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Actiontec Electronics, Inc. | 17 | % | * | 13 | % | * | 13 | % | * | ||||||||
CyberTAN Technology, Inc. | * | * | 11 | % | * | * | * | ||||||||||
Foxconn Electronics, Inc. | * | 23 | % | 10 | % | 17 | % | * | 12 | % | |||||||
MTI Laboratory, Inc. | 11 | % | * | 12 | % | * | 14 | % | * | ||||||||
Wistron NeWeb Corporation | 30 | % | 21 | % | 24 | % | 17 | % | 28 | % | 24 | % | |||||
���������������������������������������������
* | Customer accounted for less than 10% of total net revenues or accounts receivable, as applicable, for the period indicated. |
Geographic Information
Net revenues are allocated to the geographic region based on the shipping destination of customer orders. Net revenues by geographic region were as follows (in thousands):
�
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Asia | $ | 39,931 | $ | 44,620 | $ | 139,049 | $ | 171,384 | |||||||
Europe | 604 | 686 | 1,832 | 2,927 | |||||||||||
United States | 567 | 2,246 | 4,483 | 5,644 | |||||||||||
North America, other | 2,076 | 8,824 | 3,669 | 21,490 | |||||||||||
Total | $ | 43,178 | $ | 56,376 | $ | 149,033 | $ | 201,445 | |||||||
As of September�30, 2014 and December�31, 2013, long-lived assets, which represent property, plant and equipment, net of accumulated depreciation, and lease deposits, located outside of the United States were $6.4 million and $7.4 million, respectively.
10. | Legal Matters |
From time to time, we may be subject to various legal proceedings and claims arising in the ordinary course of business. We assess contingencies to determine the degree of probability and range of possible loss for potential accrual in our financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
In our prior Quarterly Reports on Form 10-Q, we had described ongoing legal proceedings between us and ViXS Systems, Inc. and its subsidiary ViXS USA, Inc., collectively ViXS. On September 15, 2014, Entropic and ViXS entered into a settlement agreement of all outstanding litigation and entered into a cross-license of the patents at issue in such litigation. No fees or royalties were payable by either party in connection with such settlement.
11. Related Party Transactions
In February�2014, we entered into a contractor services agreement with Semitech Semiconductor Pty Ltd., or Semitech, a privately-funded semiconductor company, to provide development consulting services to us. Our Senior Vice President of Global Marketing is a co-founder, former Chief Executive Officer and current shareholder in Semitech. The agreement calls for Entropic to pay up to $0.3 million to Semitech upon Semitech completing certain development deliverables. During the nine months ended September�30, 2014, $0.2 million was paid to Semitech for the first phase of the development project.
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12. Subsequent Event
On November 6, 2014, the Companys Board of Directors approved the implementation of a corporate restructuring plan to pull in the time for the Company to achieve profitability.
The restructuring plan will include discontinuing the development of new STB SoC products, and the closure of several global facilities which were primarily involved in the development of new STB SoC products, including facilities located in Shanghai, China; Belfast, Northern Ireland; and San Jose, California. We expect that approximately 200 positions will be eliminated in connection with the restructuring plan, representing about 40% of our work force. In connection with this plan, we expect to incur total employee related charges between $5.5 million and $6.5 million through the end of 2014 consisting primarily of severance and retention costs.
We will record the costs associated with reducing capacity, vacating, or terminating operating leases and other contract costs at these facilities as restructuring costs in the period when we cease to use rights conveyed by the related contracts. Additionally, costs such as attorney fees incurred as a result of this activity will be charged as restructuring costs as they are incurred. We expect to incur between $0.5 million and $1.0 million in facility exit costs. In connection with the restructuring we expect to incur between $3.0 million and $3.5 million in asset impairment charges related to fixed assets for which the carrying value may not be recoverable based upon our estimated future cash flows.
Total cash payments related to the restructuring plan are expected to be between $6.0 million and $7.5 million.
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Item�2.����Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, or Quarterly Report, and our consolidated financial statements and related notes as of and for the year ended December 31, 2013 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form�10-K, or Annual Report, filed with the Securities and Exchange Commission, or SEC, on February 21, 2014.
Forward-Looking Statements
All statements included in this Quarterly Report, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements concerning our ability to return to profitability; our acquisitions or plans for future acquisitions; the competitive nature of the markets in which we compete and the effect of competing products and technologies; the demand for our solutions; the adoption of our technologies and the Multimedia over Coax Alliance, or MoCA, standard; the competitive nature of service providers; our dependence on manufacturers, sales representatives, distributors and other third parties; our ability to create and introduce new solutions and technologies; our ability to effectively manage our growth; our ability to successfully acquire companies or technologies that would complement our business; our ability to successfully pursue strategic alternatives to enhance stockholder value; the ability of our contract manufacturers to produce and deliver products in a timely manner and at satisfactory prices; our ability to protect our intellectual property and avoid infringement of the intellectual property of others; our reliance on our key personnel; the effects of government regulation; our ability to obtain sufficient capital to expand our business; our ability to manage our business in the midst of a fragile economy; the cyclical nature of our industry; our ability to effectively transact business in foreign countries; and our ability to maintain effective internal control over financial reporting in accordance with Section�404 of the Sarbanes-Oxley Act of 2002.
The forward-looking statements contained in this Quarterly Report are based on our current expectations, estimates, approximations and projections about our industry and business, managements beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as anticipates, expects, intends, plans, predicts, believes, seeks, estimates, may, will, should, would, could, potential, continue, ongoing and similar expressions, and variations or negatives of these words. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under Part II, Item�1A, Risk Factors and elsewhere in this Quarterly Report, and in our other filings with the SEC. These forward-looking statements reflect our managements belief and views with respect to future events and are based on estimates and assumptions as of the date of this Quarterly Report . We operate in a very competitive and rapidly changing environment. 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 in this Quarterly Report or in our other filings with the SEC.
In addition, past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report.
In this Quarterly Report, Entropic Communications, Inc., Entropic Communications, Entropic, the Company, we, us and our refer to Entropic Communications, Inc. and its subsidiaries, taken as a whole, unless otherwise noted.
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Overview
Entropic is a world leader in semiconductor solutions for the connected home. We transform how traditional HDTV broadcast and Internet Protocol, or IP, -based streaming video content is seamlessly, reliably, and securely delivered, processed, and distributed into and throughout the home. Our next-generation Set-top Box, or STB, System-on-a-Chip, or SoC, and home connectivity, or Connectivity, solutions enable global Pay-TV operators to offer consumers more captivating whole-home entertainment experiences by evolving the way digital entertainment is delivered, connected and consumed - in the home and on the go.
We are recognized as the only pure-play platform semiconductor company in connected home entertainment. Our platform semiconductor solutions provide a unified vision for how our core silicon can be leveraged in reference hardware and software coupled with middleware and applications to enhance consumers' overall digital entertainment experiences. Our platform solutions power next-generation TV engagement experiences by:
" | Reliably delivering broadcast and IP content into the home with our end-to-end Satellite and Broadband Access solutions; |
" | Seamlessly connecting digital entertainment to consumer devices throughout the home via a dependable MoCA� (Multimedia over Coax Alliance) backbone; and |
" | Ensuring consumers can securely consume rich digital entertainment with our advanced, open standards-based media processing SoC solutions. |
Our platform is at the heart of the digital entertainment ecosystem - connecting technologies, applications, services and people. Looking specifically at products, we offer a diverse portfolio of STB SoC and Connectivity solutions that includes the following:
" | STB SoC Solutions: We added STB SoC solutions to our product offerings in April 2012, when we completed the acquisition of assets related to the STB business of Trident Microsystems, Inc., or Trident. The STB product portfolio is comprised of a comprehensive suite of digital STB components and system solutions for the worldwide satellite, terrestrial, cable and IP television, or IPTV, markets. Our STB products primarily consist of STB SoCs, but also include DOCSIS modems, interface devices and media processors. In addition to traditional standard-definition, or SD, STBs and advanced high-definition, or HD, STBs, many of these products feature ARM � application processor-based SoCs that have been optimized for leading Web technologies. |
" | Connectivity Solutions: Our Connectivity solutions enable access to broadcast and IPTV services as well as deliver and distribute other media content, such as movies, music, games and photos, throughout the home and include: |
� | Home networking solutions based on the MoCA standard which use existing coaxial cable to create a robust IP-based network for easy sharing of HD video and other multimedia content throughout the�home; |
� | High-speed broadband access solutions which use coaxial cable infrastructure to deliver last few hundred meter connectivity for high-speed broadband access to single-family homes and multiple dwelling units; and |
� | Direct Broadcast Satellite outdoor unit, or DBS ODU, solutions which consist of our band translation switch, or BTS, and channel stacking switch, or CSS, products which simplify the installation required to support simultaneous reception of multiple channels from multiple satellites over a single cable. Our DBS ODU offerings provide an accelerated roadmap for our digital channel stacking switch, or dCSS, semiconductor product, which will ultimately lead toward highly-integrated products that incorporate broadband capture and IP output. |
In June 2013, we enhanced our analog mixed signal expertise, ultimately strengthening our competitive product offering in both the cable and satellite markets through the acquisition of certain assets of Mobius Semiconductor, Inc., or Mobius. Mobius' technology blends signal processing with analog circuit design to dramatically reduce power dissipation while attaining leading-edge performance. The addition of the Mobius technology will enable us to provide cable and satellite operators with solutions that encompass system designs that are low power, broadband, high-speed, and which capture the full bandwidth of the signal payload - to drive more entertainment streams and IP services to more connected devices in the home. This technology can also be leveraged by global satellite service providers to migrate to digital single-wire communications.
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Our products allow service providers, including telecommunications carriers, cable operators, DBS ODU, over-the-air, and over-the-top, or OTT, service providers to enhance and expand their service offerings and reduce deployment costs in an increasingly competitive environment. Our STB SoC and Connectivity solutions are now being deployed into consumer homes to support advanced services such as multi-room DVR, HD video calling, and OTT content delivery. Our products are deployed by major Pay-TV service providers globally, including Comcast, Cox Communications, DIRECTV, DISH Network, OCN (China), Time Warner Cable, Topway (China), UPC (Netherlands) and Verizon, as well as by a number of smaller service providers.
We have extensive core competencies in video communications, networking algorithms and protocols, SoC design, embedded software, analog and high-speed mixed signal, radio frequency integrated circuit design and systems and communications. We use our considerable experience with service provider-based deployments to create solutions that address the complex requirements associated with delivering multiple streams of HD video into and throughout the home and processing those video streams for display on televisions or other devices in the home.
Since inception, we have invested heavily in product development. We achieved profitability on an annual basis in fiscal years 2010 through 2012, with net income of $64.7 million, $26.6 million and $4.5 million, respectively. However, for the year ended December 31, 2013 and the nine months ended September�30, 2014, we had a net loss of $66.2 million and $72.7 million, respectively. In 2013, our net revenues decreased to $259.4 million from $321.7 million in 2012. The decrease in net revenues during the year ended December�31, 2013 compared to the year ended December�31, 2012 was due to a decrease in demand for our Connectivity solutions. Our net revenues were $149.0 million for the nine months ended September�30, 2014 compared to $201.4 million for the nine months ended September�30, 2013. The decrease in net revenues during the nine months ended September�30, 2014 compared to the nine months ended September�30, 2013 was primarily due to a decrease in the demand for our Connectivity solutions. As of September�30, 2014, we had an accumulated deficit of $285.0 million.
We generate the majority of our revenues from sales of our semiconductor solutions to original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs, that provide customer premises equipment to service providers. We price our products based on market and competitive conditions and generally reduce the price of our products over time, as market and competitive conditions change, and as manufacturing costs are reduced. Our markets are generally characterized by declining average selling prices over the life of a product and, accordingly, we must reduce costs and successfully introduce new products and enhancements to maintain our gross margins.
We rely on a limited number of customers for a significant portion of our net revenues. Sales to these customers are in turn driven by service providers that purchase our customers' products which incorporate our semiconductor solutions. A substantial percentage of our net revenues are dependent upon six major service providers: Comcast, Cox Communications, DIRECTV, DISH Network, Time Warner Cable and Verizon. In addition, we are dependent on sales outside of the United States for almost all of our net revenues and expect that to continue in the future.
We use third-party foundries and assembly and test contractors to manufacture, assemble and test our products. This outsourced manufacturing approach allows us to focus our resources on the design, sales and marketing of our semiconductor solutions and avoid the cost associated with owning and operating our own manufacturing facility. A significant portion of our cost of net revenues consists of payments for the purchase of wafers and for manufacturing, assembly and test services.
As a result of the corporate restructuring plan approved on November 6, 2014, we expect our operating expenses in future years to decrease in total dollars and to fluctuate over the course of the year based on the timing of our development tools and supply costs, which include outside services, masks costs and software licenses. Due to the lengthy sales cycles that we face, we may experience significant delays from the time we incur research and development and sales and marketing expenses until the time, if ever, that we generate sales from the related products.
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Results of Operations
The following table sets forth selected condensed consolidated statements of operations data as a percentage of total net revenues for each of the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Net revenues | 100 | �% | 100 | �% | 100 | �% | 100 | �% | |||
Cost of net revenues | 48 | 51 | 52 | 52 | |||||||
Gross profit | 52 | 49 | 48 | 48 | |||||||
Operating expenses: | |||||||||||
Research and development | 67 | 51 | 64 | 42 | |||||||
Sales and marketing | 14 | 11 | 13 | 9 | |||||||
General and administrative | 13 | 10 | 12 | 9 | |||||||
Amortization of intangibles | 1 | 1 | 1 | 1 | |||||||
Restructuring charges (recoveries) | 5 | 3 | 1 | ||||||||
Impairment of assets | 17 | 5 | |||||||||
Total operating expenses | 100 | 73 | 93 | 62 | |||||||
Loss from operations | (48 | ) | (24 | ) | (45 | ) | (14 | ) | |||
Loss related to equity method investment | (1 | ) | |||||||||
Impairment of investment | (2 | ) | |||||||||
Other income, net | 1 | 1 | |||||||||
Loss before income taxes | (48 | ) | (23 | ) | (45 | ) | (16 | ) | |||
Income tax provision | (2 | ) | 11 | ||||||||
Net loss | (48 | )% | (21 | )% | (45 | )% | (27 | )% | |||
Comparison of Three and Nine Months Ended September�30, 2014 and 2013
(Tables presented in thousands, except percentage amounts)
Net Revenues
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2014 | 2013 | % Change | 2014 | 2013 | % Change | ||||||||||||||||
Net revenues | $ | 43,178 | $ | 56,376 | (23 | )% | $ | 149,033 | $ | 201,445 | (26 | )% | |||||||||
Our net revenues for the three months ended September�30, 2014 were $43.2 million compared to net revenues of $56.4 million during the same period in 2013, a decrease of $13.2 million or 23%. The decrease in net revenues during the three months ended September�30, 2014 compared to the same period in 2013 was primarily due to a decrease in the demand for our Connectivity solutions during the three months ended September�30, 2014.
Our net revenues for the nine months ended September�30, 2014 were $149.0 million compared to net revenues of $201.4 million during the same period in 2013, a decrease of $52.4 million or 26%. The decrease in net revenues during the nine months ended September�30, 2014 compared to the same period in 2013 was primarily due to a decrease in the demand for our Connectivity solutions during the nine months ended September�30, 2014.
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Gross Profit
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2014 | 2013 | % Change | 2014 | 2013 | % Change | ||||||||||||||||
Gross profit | $ | 22,569 | $ | 27,513 | (18 | )% | $ | 72,169 | $ | 96,608 | (25 | )% | |||||||||
% of net revenues | 52 | % | 49 | % | 48 | % | 48 | % | |||||||||||||
Gross profit for the three months ended September�30, 2014 was $22.6 million, a decrease of $4.9 million, or 18%, from gross profit of $27.5 million during the same period in 2013. The decrease in gross profit during the three months ended September�30, 2014 compared to the three months ended September�30, 2013 was due to an overall decrease in product sales and a $0.3 million increase in the amortization expense of acquired developed technology, partially offset by a favorable product mix from a higher allocation of sales of higher margin products during the three months ended September�30, 2014.
Gross profit for the nine months ended September�30, 2014 was $72.2 million, a decrease of $24.4 million, or 25%, from gross profit of $96.6 million during the same period in 2013. The decrease in gross profit during the nine months ended September�30, 2014 compared to the nine months ended September�30, 2013 was due to an overall decrease in product sales and a $1.3 million increase in the amortization expense of acquired developed technology, partially offset by a favorable product mix from a higher allocation of sales of higher margin products during the nine months ended September�30, 2014.
As a result of our acquisition of the STB business from Trident in April 2012 and PLX Technology, Inc., or PLX, in July 2012, during the three months ended September�30, 2014 and 2013 and the nine months ended September�30, 2014 and 2013, we recorded amortization expense of $2.7 million, $2.4 million, $8.2 million, $6.9 million, respectively, relating to certain intangible assets acquired. This expense negatively impacted gross margins by approximately 6%, 4%, 5% and 3% during the three months ended September�30, 2014 and 2013 and the nine months ended September�30, 2014 and 2013, respectively.
Cost of net revenues for the three months ended September�30, 2014 and 2013 and the nine months ended September�30, 2014 and 2013 included net charges for excess and obsolete inventory of $0.2 million, $2.6 million, $0.3 million and $3.5 million, respectively.
Research and Development Expenses
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2014 | 2013 | % Change | 2014 | 2013 | % Change | ||||||||||||||||
Research and development | $ | 29,073 | $ | 28,510 | 2 | % | $ | 95,555 | $ | 84,914 | 13 | % | |||||||||
% of net revenues | 67 | % | 51 | % | 64 | % | 42 | % | |||||||||||||
Research and development expenses increased by $0.6 million, or 2%, to $29.1 million during the three months ended September�30, 2014 from $28.5 million during the same period in 2013. This increase was due to an increase of $0.5 million in non-personnel related research and development expenditures primarily related to additional wafer and tape-out costs incurred with our new product development and existing product enhancement initiatives undertaken during the three months ended September�30, 2014 as compared to the same period in 2013, as well as an increase in facility and overhead allocation expenses of $0.3 million. These items were partially offset by a decrease in personnel costs, including stock-based compensation expense, of $0.1 million, primarily attributable to our restructuring activities, and a decrease in travel and other costs of $0.1 million during the three months ended September�30, 2014 compared to the same period in 2013.
Research and development expenses increased by $10.7 million, or 13%, to $95.6 million during the nine months ended September�30, 2014 from $84.9 million during the same period in 2013. This increase was due to an increase of $9.1 million in non-personnel related research and development expenditures primarily related to additional wafer and tape-out costs incurred with our new product development and existing product enhancement initiatives undertaken during the nine months ended September�30, 2014 as compared to the same period in 2013. Stock based compensation expense increased by $2.9 million during the nine months ended September�30, 2014 as compared to the same period in 2013. These increases were offset by a $0.8 million decrease in personnel costs, primarily attributable to our restructuring activities, and a $0.5 million decrease in facility costs and overhead allocation expenses during the nine months ended September�30, 2014 compared to the same period in 2013.
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Sales and Marketing Expenses
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2014 | 2013 | % Change | 2014 | 2013 | % Change | ||||||||||||||||
Sales and marketing | $ | 5,923 | $ | 6,137 | (3 | )% | $ | 19,246 | $ | 18,609 | 3 | % | |||||||||
% of net revenues | 14 | % | 11 | % | 13 | % | 9 | % | |||||||||||||
Sales and marketing expenses decreased by $0.2 million, or 3%, to $5.9 million during the three months ended September�30, 2014 from $6.1 million during the same period in 2013. The decrease was due to a decrease in personnel costs of $0.1 million, primarily attributable to our restructuring activities, a decrease in marketing and trade show expenses of $0.1 million, and a decrease in overhead allocated costs of $0.2 million. These decreases were partially offset by an increase in stock based compensation expense of $0.1 million during the three months ended September�30, 2014 compared to the same period in 2013.
Sales and marketing expenses increased by $0.6 million, or 3%, to $19.2 million during the nine months ended September�30, 2014 from $18.6 million during the same period in 2013. The increase was due to an increase in general customer support, marketing and trade show related costs of $0.5 million and an increase in stock based compensation expense of $0.6 million during the nine months ended September�30, 2014 compared to the same period in 2013. These increases were offset by a decrease in personnel costs of $0.3 million, primarily attributable to our restructuring activities, and a decrease in overhead allocations of $0.1 million during the nine months ended September�30, 2014 compared to the same period in 2013.
General and Administrative Expenses
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2014 | 2013 | % Change | 2014 | 2013 | % Change | ||||||||||||||||
General and administrative | $ | 5,435 | $ | 5,751 | (5 | )% | $ | 17,688 | $ | 17,290 | 2 | % | |||||||||
% of net revenues | 13 | % | 10 | % | 12 | % | 9 | % | |||||||||||||
General and administrative expenses decreased by $0.4 million, or 5%, to $5.4 million during the three months ended September�30, 2014 from $5.8 million during the three months ended September�30, 2013. The decrease in general and administrative expenses was primarily due to a decrease in personnel costs, including stock based compensation expense, of $0.3 million, primarily attributable to our restructuring activities, and a decrease in professional and other fees of $0.5 million. These decreases were partially offset by an increase in legal fees of $0.6 million during the three months ended September�30, 2014 related to intellectual property litigation as compared to the same period in 2013.
General and administrative expenses increased by $0.4 million, or 2%, to $17.7 million during the nine months ended September�30, 2014 from $17.3 million during the same period in 2013. The increase in general and administrative expenses was primarily due to an increase in legal fees of $1.4 million related to intellectual property litigation during the nine months ended September�30, 2014 as compared to the same period in 2013. This increase was offset by a decrease in personnel costs, including stock based compensation expense, of $0.7 million, primarily attributable to our restructuring activities, a decrease in professional and other fees of $0.1 million and a decrease in overhead allocation costs of $0.2 million during the nine months ended September�30, 2014 as compared to the same period in 2013.
Restructuring charges (recoveries)
Restructuring charges (recoveries) were $2.2 million and $4.0 million for the three and nine months ended September�30, 2014, respectively. These amounts relate entirely to the restructuring plan implemented in June 2014.
Restructuring charges (recoveries) were $(0.1) million and $1.7 million for the three and nine months ended September�30, 2013, respectively. These amounts relate entirely to the restructuring plan implemented in June 2013.
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Impairment of assets
During the three and nine months ended September�30, 2014, we recorded an impairment of assets charge of $7.4 million. This amount relates entirely to the decision in November 2014 to discontinue development of new STB SoC assets.
Loss related to equity method investment
During the nine months ended September�30, 2013, we recorded expense of $1.1 million related to our investment in Zenverge, Inc., or Zenverge, a privately held venture capital funded technology company which was accounted for under the equity method of accounting. Under the equity method of accounting, the change in the carrying value of our investment in Zenverge is reflected as an increase (decrease) in our investment account and is also recorded as equity investment income (loss). The change in the value of the investment is comprised of our proportionate share of Zenverge's losses plus a charge relating to the amortization of the intangible asset associated with the premium paid on our investment. During the second quarter of 2013, we wrote off the remaining balance of our investment in Zenverge since we had incurred an other-than temporary impairment of our investment.
Impairment of investment
During the nine months ended September�30, 2013, we recorded an impairment charge of $4.8 million against the carrying value of our investment balance in Zenverge. This impairment charge represents a full write down of the carrying value of our preferred stock investment, which had been converted into common stock based on the terms of a financing in which Zenverge raised additional funds where we did not participate. The impairment charge was recorded as we had determined that our investment in Zenverge had incurred an other-than-temporary impairment.
Other income, net
Other income, net, which is primarily made up of interest income earned on our marketable securities and cash equivalents, was $0.2 million during the three months ended September�30, 2014 compared to $0.5 million during the same period in 2013. Other income, net, for the three months ended September�30, 2014 was primarily related to interest income earned on our marketable securities and cash equivalents. During the three months ended September�30, 2013, in addition to interest income of $0.3 million, other income, net also included a gain of $0.2 million related to the fair value of outstanding hedging contracts.
Other income, net, which is primarily made up of interest income earned on our marketable securities and cash equivalents, was $0.4 million during the nine months ended September�30, 2014 compared to $1.1 million during the same period in 2013. During the nine months ended September�30, 2013, in addition to interest income of $0.8 million, other income, net also included a gain of $0.1 million related to fair value reassessment of the PLX contingent consideration milestone payment, a gain of $0.1 million related to the disposal of property and equipment and a gain of $0.1 million related to the fair value of outstanding hedging contracts.
Income taxes
Income tax expense for the three months ended September�30, 2014 was $0.1 million compared to a benefit of $0.9 million for the three months ended September�30, 2013, or 0% and 7% of pre-tax loss, respectively. The effective tax rate for the three months ended September�30, 2014 differs from the federal statutory rate primarily due to taxes in the foreign jurisdictions in which we operate and withholding taxes for jurisdictions in which we are no longer indefinitely reinvested, partially offset by a federal net operating loss carryback and changes in valuation allowance against our domestic net deferred tax assets. The effective tax rate for the three months ended September�30, 2013 differs from the federal statutory rate primarily due to the establishment of the valuation allowance against our net deferred tax assets which was recorded during the second quarter of 2013.
Income tax expense for the nine months ended September�30, 2014 was $0.5 million compared to $21.7 million for the nine months ended September�30, 2013, or (1)% and (67)% of pre-tax loss, respectively. The effective tax rate for the nine months ended September�30, 2014 differs from the federal statutory rate primarily due to taxes in the foreign jurisdictions in which we operate and withholding taxes for jurisdictions in which we are no longer indefinitely reinvested, partially offset by a federal net operating loss carryback and changes in valuation allowance against our domestic net deferred tax assets. The effective tax rate for the nine months ended September�30, 2013 differs from the federal statutory rate primarily due to the establishment of the valuation allowance against our net deferred tax assets which was recorded during the second quarter of 2013.
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During the second quarter of 2013, we evaluated our gross deferred income tax assets, including an assessment of the cumulative income or loss over the prior three-year period and future periods, to determine if a valuation allowance was required. A significant negative factor in our assessment was the expectation that we may be in a three-year historical cumulative loss as of the end of the first quarter of fiscal 2014 and through the near term, as profitable quarters in the earlier years are removed from the rolling three-year calculation. After considering our recent history of losses and management's expectation of additional near-term losses, during the second quarter of 2013, we recorded a valuation allowance of $26.7 million on our gross deferred tax assets with a corresponding charge to our income tax provision. We continue to assess the need for a valuation allowance on deferred tax assets by evaluating both positive and negative evidence that may exist.
Liquidity and Capital Resources
As of September�30, 2014 and December�31, 2013, we had cash, cash equivalents and investments of $107.5 million and $157.8 million, respectively. At September�30, 2014 and December�31, 2013, we had $6.4 million and $7.8 million, respectively, of cash, cash equivalents and investments which were held outside of the United States. The cash held outside the United States is needed to meet local working capital requirements for our foreign subsidiaries.
In September 2013, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $30.0 million of our common stock. Purchases under this program could be made from time to time through 10b5-1 programs, open market purchases, or privately negotiated transactions. The number of shares ultimately repurchased, and the timing of the purchases, depended on market conditions, share price, and other factors. Purchases under this program were approved to be made until September 30, 2014; however, the program could have been discontinued at any time. During the three and nine months ended September�30, 2014, $2.8 million and $14.1 million, respectively, of purchases were made under this program. Total purchases made under this program prior to its expiration on September�30, 2014 were $19.5 million.
In connection with our restructuring plans implemented in June 2014 and November 2014, we expect to incur cash expenditures between $11.4 million and $12.9 million. As of September�30, 2014, $2.1 million in cash payments had been made in connection with the plans.
The following table summarizes our condensed consolidated statements of cash flows for the nine months ended September�30, 2014 and 2013�(in thousands):
Nine Months Ended September 30, | |||||||
2014 | 2013 | ||||||
Net cash (used in) provided by operating activities | $ | (22,920 | ) | $ | 14,768 | ||
Net cash provided by (used in) investing activities | 30,868 | (3,901 | ) | ||||
Net cash used in financing activities | (13,992 | ) | (236 | ) | |||
Net effect of exchange rates on cash | 96 | 64 | |||||
Net decrease in cash and cash equivalents | $ | (5,948 | ) | $ | 10,695 | ||
Operating Activities
Net cash used in operating activities for the nine months ended September�30, 2014 of $22.9 million was primarily attributable to a net loss of $72.7 million, partially offset by by non-cash charges of $39.2 million and changes in operating assets and liabilities of $10.6 million. The non-cash charges for the nine months ended September�30, 2014 were primarily related to depreciation, amortization of intangible assets, impairment of assets, deferred taxes, stock-based compensation, amortization of premiums on investments and provision for excess and obsolete inventory.
Net cash provided by operating activities for the nine months ended September�30, 2013 of $14.8 million was primarily attributable to non-cash charges of $65.0 million and changes in operating assets and liabilities of $4.0 million, partially offset by a net loss of $54.3 million. The non-cash charges for the nine months ended September�30, 2013 were primarily related to depreciation, amortization of intangible assets, deferred taxes, stock-based compensation, amortization of premiums on investments, provision for excess and obsolete inventory, loss related to equity method investment and impairment of investment.
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Investing Activities
Net cash provided by investing activities was $30.9 million for the nine months ended September�30, 2014 due to proceeds from sales and maturities of available-for-sale securities of $65.4 million, partially offset by purchases of available-for-sale securities of $22.7 million and purchases of property and equipment of $11.8 million.
Net cash used in investing activities was $3.9 million for the nine months ended September�30, 2013 due to cash payments in connection with our acquisition of intellectual property assets from Mobius of $13.0 million, purchases of available-for-sale securities of $93.4 million and purchases of property and equipment of $6.5 million. Cash used in investing activities was partially offset by proceeds from sales and maturities of available-for-sale securities of $109.0 million.
Financing Activities
Net cash used in financing activities was $14.0 million for the nine months ended September�30, 2014, due to the repurchase of our common stock of $14.1 million, offset by proceeds from the issuance of common stock in connection with stock option exercises of $0.1 million.
Net cash used in financing activities was $0.2 million for the nine months ended September�30, 2013, due to $2.2 million of excess tax expense from share-based payment arrangements, offset by proceeds from the issuance of common stock in connection with stock option exercises of $1.9 million.
We believe that our cash, cash equivalents and investments of $107.5 million as of September�30, 2014, will be sufficient to fund our projected operating requirements for at least the next 12 months.
We intend to continue spending substantial amounts in connection with the growth of our business and we may need to obtain additional financing to pursue our business strategy, develop new products, respond to competition and market opportunities, and possibly acquire complementary businesses or technologies.
Indemnities
In the ordinary course of business, we have entered into agreements that include indemnity provisions with certain customers. Based on historical experience and information known as of September�30, 2014, we have not recorded any indemnity obligations.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and the results of operations are based on our financial statements which have been prepared in accordance with United States generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are discussed in our Annual Report and there have been no material changes to such policies.
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Recent Accounting Standards
In April 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-08Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU raised the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. This ASU will be effective prospectively for the first quarter of fiscal year 2016. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued. We do not expect the adoption of this ASU to have a material impact on our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU requires an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.�In particular, this ASU addresses contracts with more than one performance obligation, as well as the accounting for some costs to obtain or fulfill a contract with a customer, and provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. This ASU will be effective beginning in the first quarter of fiscal year 2017. Early adoption of this ASU is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We are currently evaluating the impact of and method of adoption of this ASU on our financial statements.
There have been no other recent accounting standards or changes in accounting standards during the nine months ended September�30, 2014, as compared to the recent accounting standards described in our Annual Report on Form 10-K, that are of material significance, or have potential material significance, to us.
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Item�3. | Quantitative and Qualitative Disclosures About Market Risk |
Foreign Currency Risk
Our sales have been historically denominated in U.S. dollars and an increase in the value of the U.S. dollar relative to the currencies of the countries in which our customers operate could materially affect the demand of our products by non-U.S. customers, leading to a reduction in orders placed by these customers, which would adversely affect our business. However, we are exposed to foreign currency exchange rate risks inherent in conducting business globally in numerous currencies. We are primarily exposed to foreign currency fluctuations related to operating expenses denominated in currencies other than the U.S. dollar. The most significant currencies other than the U.S. dollar to our operations for the nine months ended September�30, 2014 were the Chinese yuan, the British pound, the Taiwanese dollar, the Indian rupee, the Israeli shekel and the South Korean won. We have established a foreign currency risk management program to protect against the volatility of future cash flows caused by changes in foreign currency exchange rates. This program reduces, but does not eliminate, the impact of foreign currency exchange rate movements. Our foreign currency risk management program includes foreign currency derivatives that utilize foreign currency forward contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. These instruments generally have a maturity of less than one year. The fair value of these contracts is reflected as other assets or other liabilities and the change in fair value of these balance sheet hedge contracts is recorded into earnings as a component of other income, net to largely offset the change in fair value of the foreign currency denominated monetary assets and liabilities which is also recorded in other income, net.
At September�30, 2014, we had foreign currency forward contracts in place that amounted to a net purchase in U.S. dollar equivalent of $9.7 million to partially hedge our expected future expenses related to funding our China, India and UK operations costs. The maturities of these contracts were less than 12 months. Relative to foreign currency exposures existing at September�30, 2014, a 10% unfavorable movement in foreign currency exchange rates over the course of the year would expose us to $2.6 million in losses in earnings or cash flows.
Interest Rate Risk
We typically maintain an investment portfolio of various holdings, types and maturities. We do not use derivative financial instruments. We place our cash investments in deposits and money market funds with major financial institutions, U.S. government obligations and debt securities of corporations with strong credit ratings in a variety of industries that meet high credit quality standards, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument.
All of our fixed income investments are classified as available-for-sale and therefore reported on the balance sheet at market value. The fair value of our cash equivalents and investments are subject to change as a result of changes in market interest rates and investment risk related to the issuers' credit worthiness. We do not utilize financial contracts to manage our exposure in our investment portfolio to changes in interest rates. We place our cash investments in instruments that meet credit quality standards, as specified in our investment policy guidelines. We have established guidelines relative to diversification and maturities that attempt to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of interest rate trends. We generally do not utilize derivatives to hedge against increases in interest rates which decrease market values.
At September�30, 2014, we had $107.5 million in cash, cash equivalents and investments, all of which were stated at fair value. A 100 basis point increase or decrease in market interest rates over a three month period would not be expected to have a material impact on the fair value of the $10.4 million of cash and cash equivalents held as of September�30, 2014, as these consisted of securities with maturities of less than three months. A 100 basis point increase or decrease in interest rates would, however, decrease or increase, respectively, the fair value of the $96.5 million of our investments by $0.6 million.
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Item�4. | Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, prior to filing this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report.
An evaluation was also performed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of any change in our internal control over financial reporting that occurred during our fiscal quarter ended September�30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our fiscal quarter ended September�30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
Item�1.��������Legal Proceedings
From time to time, we may be subject to various legal proceedings and claims arising in the ordinary course of business.
In our prior Quarterly Reports on Form 10-Q, we had described ongoing legal proceedings between us and ViXS Systems, Inc. and its subsidiary ViXS USA, Inc., collectively ViXS. On September 15, 2014, Entropic and ViXS issued a joint press release announcing the settlement of all outstanding litigation and a cross-license of the patents at issue in such litigation. As disclosed in the press release, no fees or royalties were payable by either party in connection with such settlement. Other terms of the settlement were not disclosed.
Item�1A.����Risk Factors
Investing in our common stock involves a high degree of risk. Before deciding to purchase, hold or sell our common stock, you should carefully consider the following information, the other information in this Quarterly Report on Form 10-Q, or Quarterly Report, and information contained in our Annual Report and in our other filings with the Securities and Exchange Commission, or SEC. If any of these risks were to occur, our business, financial condition, results of operations or prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose all or part of your investment. These risks and uncertainties may be interrelated or co-related, and as a result, the occurrence of one risk might directly affect other risks described below, make them more likely to occur or magnify their impact. Moreover, the risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.
The risk factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes from the risk factors previously disclosed in our Annual Report.
Risks Related to Our Business
Our review, in consultation with Barclays, of strategic alternatives may not result in an increase in our stock price or in improvements to our operating results, liquidity or financial condition or in the consummation of any strategic transaction, such as a sale of the Company. Moreover, this review and any related pursuit of a strategic transaction could distract our management and employees and create substantial uncertainty among customers, suppliers and other third parties with whom we conduct business, any of which could adversely affect our business, operating results, or financial condition. There can be no assurance that we will identify or complete a strategic transaction as a result of our review of strategic alternatives.*
On September 16, 2014, we issued a press release announcing that we have engaged Barclays to assist us in evaluating various strategic alternatives available to our company. Elements of this strategic review are continuing as of the date of this report. The review of strategic alternatives requires the expenditure of significant time and resources by our company and management team and may not result in the identification or consummation of a transaction, an increase in stockholder value, or in improvements to our operating results or financial condition. The strategic review could also distract our executives, employees, and board of directors from other matters relating to the operation of our businesses and affect our ability to attract and retain new executives or key employees. In addition, our announcement of the strategic review may have created and may continue to create uncertainty among current and potential employees, suppliers and customers. In particular, our suppliers and customers could question our commitment to particular products or markets or operating as an independent business. As a result of these factors, the announcement and the ongoing portions of our review could potentially undermine our business and have a material adverse effect on our results of operations or financial condition. In addition, the announcement and subsequent developments could cause increased volatility in our stock price.
There can be no assurance that our evaluation of strategic alternatives will result in the identification and completion of a strategic transaction, such as a sale of the Company. If we fail to complete a strategic transaction, our stock price may decline as investors who were anticipating such a transaction sell their shares. If a strategic transaction is pursued but not ultimately completed, our stockholders may be subjected to a number of other risks, including:
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" | the diversion of managerial, financial and other resources from our business operations; |
" | the loss of key personnel and business relationships; |
" | the potential disruption of our ongoing business; and |
" | the incurrence of non-recurring or other charges, which could be significant. |
Even if we do complete a strategic transaction, such as a sale of our company, such transaction could subject us and our stockholders to a number of additional risks, including:
" | the value of the stock received in the transaction being illiquid or not increasing over time; |
" | our stockholders owning less than a majority ownership interest in the surviving entity; |
" | changes in our board of directors and management; |
" | changes in our business strategy and focus; |
" | difficulties associated with assimilating and integrating the business and operations of the two companies; and |
" | the inability of the surviving company to successfully develop and commercialize products and generate revenue sufficient to meet our objectives in undertaking such a transaction. |
Our restructuring activities may result in operational disruptions, management distractions and other problems which could adversely affect our business, operating results, or financial condition. There can be no assurance that the anticipated benefits of our restructuring activities will be achieved.*
In June 2014, we announced a restructuring of our business and related reduction in employee headcount and closure of several offices in order to streamline our business, increase operating efficiencies and reduce operating expenses. On November 10, 2014, we announced another business restructuring to reduce operating expenses and cease development of new STB SoC products. We cannot guarantee that we will be successful in implementing our restructuring initiatives, or that such efforts will not interfere with our ability to achieve our business objectives. For example, our restructuring activities could disrupt our ongoing engineering initiatives, which could adversely affect our ability to introduce new products and to deliver products both on a timely basis and in accordance with customer requirements, the effect of which could delay revenues or result in lost business opportunities. To the extent that we are unable to effectively reallocate employee responsibilities, the reductions in our workforce associated with our restructuring activities may impact our ability to accurately forecast future financial results or deliver on our financial projections. Moreover, reductions in force can be difficult to manage, may cause concerns from current and potential customers, suppliers and other third parties with whom we do business which may cause them to delay or curtail doing business with us, may increase the likelihood of key employees leaving the company or make it more difficult to recruit new employees, and may have an adverse impact on our business. Employees whose positions were eliminated in connection with these restructuring activities may seek employment with our competitors, customers or suppliers. Although our employees are required to sign a confidentiality agreement at the time of hire, the confidential nature of certain proprietary information may not be maintained in the course of any such future employment. In addition, the implementation of expense reduction programs may result in the diversion of efforts of our executive management team and other key employees, which could adversely affect our business, and the potential disruptions caused by our restructuring activities may make it more difficult to identify and consummate a strategic transaction or reduce the value our shareholders could receive in such a transaction.
Our November 2014 restructuring may have other adverse impacts on portions of our business that were not targeted in the restructuring. For example, in connection with the November restructuring, we are ceasing development of new STB SoC products. One potential consequence is that customers may curtail or stop purchasing our existing STB SoC products and move to alternate suppliers that offer a more complete future STB SoC product roadmap. This may make it difficult to accurately predict future sales of our products or achieve or sustain profitability. We may also be forced to reduce the selling prices of our existing STB SoC products in order to retain customers or win new designs for those products, which would result in reduced revenues and gross margins from our existing STB SoC products. In addition, by stopping the development of future STB SoC products, we will forego potential future revenues in 2016 and beyond that would have been associated with those products had they been successfully commercialized. We will need to replace those prospective future sales with revenue from other sources if we expect to continue to increase our revenue in future years.
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We depend on key personnel to operate our business, and if we are unable to retain our current personnel and hire additional qualified personnel, our ability to develop and successfully market our solutions could be harmed.*
We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering and sales and marketing personnel. There is significant competition for qualified personnel in the markets in which we compete and in the geographical locations in which we operate. Our inability to return to profitability or grow our revenues, or any adverse perception of our company, our products or our financial position, may negatively affect our perceived reputation and make it more difficult or expensive to attract and retain highly skilled personnel. In addition, our efforts to restructure our business, including reductions in our workforce, may add to uncertainty regarding our future business which may make it difficult to attract and retain employees. Our ongoing review of strategic alternatives, the pursuit of any strategic transaction, and recent or prospective changes in our executive management team also add to uncertainty and may make it more difficult to attract or retain employees. We do not have employment agreements with most of our executive or key employees and the unexpected loss of any key employees, including our president and chief executive officer, other members of our senior management or our senior engineering personnel, or an inability to attract additional qualified personnel, including engineers and sales and marketing personnel, could delay the development, introduction and sale of our solutions and our ability to execute our business strategy may suffer. In addition, in the event that there is a loss of any of our key personnel, there is a potential for loss of important knowledge that may delay or negatively impact development or sale of our solutions and our ability to execute on our business strategy. We do not currently have any key person life insurance covering any executive officer or employee.
We have had net operating losses for most of the time we have been in existence, had an accumulated deficit of $285.0 million as of September�30, 2014 and we are unable to predict if or when we will return to profitability.*
We were incorporated in 2001, did not commence shipping production quantities of our home connectivity, or Connectivity, solutions until December 2004 and while we were profitable on an annual basis from 2010 through 2012, we incurred a net loss in 2013 and during the first three quarters of 2014. Consequently, any predictions about future performance of our going forward operations may not be as accurate as they could be if we had a longer history of successfully commercializing our Connectivity solutions and the more recently acquired STB SoC solutions, and of profitable operations. You should not rely on our operating results for any prior quarterly or annual periods as an indication of our future operating performance.
For the year ended December�31, 2013 we generated a net loss of $66.2 million, while during the years ended 2012 and 2011 we generated net income of $4.5 million and $26.6 million, respectively. During the nine months ended September�30, 2014 we incurred a net loss of $72.7 million. While we have some recent history of profitability, we have incurred substantial net losses since our inception. As of September�30, 2014, we had an accumulated deficit of $285.0 million and we may incur additional operating losses in the future.
Our ability to return to profitability depends on the extent to which we can increase revenue and control our costs in order to, among other things, counter any unforeseen difficulties, complications, product delays or other unknown factors that may require additional expenditures, or unforeseen difficulties or costs associated with the integration of acquired assets or businesses. Because of the numerous risks and uncertainties associated with our growth prospects, product development, sales and marketing and other efforts, we are unable to predict the extent of our future losses. If we are unable to achieve adequate growth or adequately control our expenses, we may not return to profitability.
We face intense competition and expect competition to increase in the future, with many of our competitors being larger, more established and better capitalized than we are.
The markets for our STB SoC and Connectivity solutions are extremely competitive and have been characterized by rapid technological change, evolving industry standards, rapid changes in customer requirements, short product life cycles and frequent introduction of next generation and new solutions, as well as competing technologies. This competition could make it more difficult for us to sell our solutions and result in increased pricing pressure, reduced gross profit as a percentage of revenues or gross margins, increased sales and marketing expenses and failure to increase or the loss of market share or expected market share. Semiconductor solutions in particular have a history of declining prices driven by customer insistence on lower prices as the cost of production is reduced and as demand falls when competitive products or newer, more advanced, products are introduced. If market prices decrease faster than product costs, our gross margins and operating margins would be adversely affected.
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Moreover, we expect increased competition from other established and emerging companies both domestically and internationally. In particular, we currently face, or in the future expect to face, competition from companies such as Broadcom Corporation, or Broadcom, STMicroelectronics N.V., or STMicro, Sigma Designs, Inc., MStar Semiconductor, Inc., Intel Corporation, Marvell Technology Group Ltd., MaxLinear, Inc., or MaxLinear, Qualcomm Incorporated, or Qualcomm, Lantiq Deutschland GmbH and Vixs Systems, Inc., in the sale of MoCA compliant chipsets and technology, and from companies such as Broadcom, NXP Semiconductors N.V., MaxLinear and STMicro, in the sale of direct broadcast satellite outdoor unit, or DBS ODU, products and from companies such as Broadcom, STMicro, MediaTek Inc., MStar Semiconductor, Inc., Sigma Designs, Inc., Marvell, AMlogic, Abilis, Intel, Qualcomm, HiSilicon Technologies and Vixs in the sale of STB SoCs and other STB solutions. Consolidation by industry participants could result in competitors with further increased market share, larger customer bases, greater diversified product offerings and greater technological and marketing expertise, which would allow them to compete more effectively against us. In addition, current and potential competitors may establish cooperative relationships among themselves or with third parties. If so, competitors or alliances that include our competitors may emerge and could acquire significant market share. Further, our current and potential competitors may also enter into licensing arrangements with third parties with respect to MoCA chipsets or other technology on licensing terms that are more favorable than the licensing terms that we would be able to offer through the direct licensing of our MoCA chipsets and other technology to such third parties. We expect these trends to continue as companies attempt to strengthen or maintain their market positions in an evolving industry. In addition, our competitors could develop solutions or technologies that cause our solutions and technologies to become non-competitive or obsolete, or cause us to substantially reduce our prices.
In addition to direct competitors, we also face competition from a number of established companies that offer products based on competing technologies. For example, our Connectivity products compete with home networking and access products based on other technologies, such as DOCSIS, versions of DSL, Ethernet, HomePNA, HomePlug AV, Broadband over Power Line, High Performance Network Over Coax, Wi-Fi and LTE solutions. Although some of these competing technologies were not originally designed to operate over coaxial cables, our competitors have modified certain technologies, including HomePNA, HomePlug AV, Broadband over Power Line and Wi-Fi, to work on the same in-home coaxial cables that our Connectivity solutions use. We also expect to face competition from companies that offer products based on G.hn technology in the future. Many of our competitors and potential competitors are substantially larger and have longer operating histories, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. Given their capital resources, many of these larger organizations are in a better position to withstand any significant reduction in customer purchases or market downturns. Many of our competitors also have broader product lines and market focus, allowing them to bundle their products and services and effectively use other products to subsidize lower prices for those products that compete with ours or to provide integrated product solutions that offer cost advantages to their customers. In addition, many of our competitors have been in operation much longer than we have and therefore have better name recognition and more long-standing and established relationships with service providers, original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs.
Our ability to compete depends on a number of factors, including:
" | the adoption of our solutions and technologies by service providers, ODMs and OEMs; |
" | the performance and cost effectiveness of our solutions relative to our competitors products; |
" | our ability to deliver high quality and reliable solutions in large volumes and on a timely basis; |
" | our ability to build and maintain close relationships with service providers, ODMs, OEMs, retailers and consumer electronics manufacturers; |
" | our success in developing and utilizing new technologies to offer solutions and features previously not available in the marketplace that are technologically superior to those offered by our competitors; |
" | our ability to identify new and emerging markets and market trends; |
" | our ability to reduce our product costs and receive favorable pricing from our suppliers; |
" | our ability to recruit design and application engineers and other technical personnel; |
" | our ability to protect our intellectual property and obtain licenses to the intellectual property of others on commercially reasonable terms; |
" | our ability to transition our customers from older to newer generations of our solutions; |
" | our ability to expand our market penetration and revenue growth outside of the United States; and |
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" | our ability to create a retail market for our Connectivity solutions in consumer electronics devices, such as televisions. |
Our inability to address any of these factors effectively, alone or in combination with others, could seriously harm our business, operating results and financial condition.
We depend on a limited number of customers, and ultimately service providers, for a substantial portion of our revenues, and the loss of, or a significant shortfall in, orders from any of these parties could significantly impair our financial condition and results of operations.*
We derive a substantial portion of our revenues from a limited number of customers. For example, during the year ended December�31, 2013, Wistron NeWeb Corporation, or Wistron, and Foxconn Electronics, Inc., or Foxconn, accounted for approximately 18% and 16% of our net revenues, respectively; for the year ended December�31, 2012, Wistron and Motorola Mobility Inc., or Motorola, accounted for 21% and 13% of our net revenues, respectively; and for the year ended December�31, 2011, Wistron and Motorola accounted for 25% and 17% of our net revenues, respectively. More recently, during the nine months ended September�30, 2014, Wistron, Actiontec Electronics, Inc., MTI Laboratory, Inc. CyberTAN Technology, Inc. and Foxconn accounted for approximately 24%, 13%, 12%, 11% and 10% of our net revenues, respectively. Our inability to generate anticipated revenues from our key existing or targeted customers, or a significant shortfall in sales to certain of these customers would significantly reduce our revenues and adversely affect our operating results. Our operating results in the foreseeable future will continue to depend on our ability to sell our solutions to our existing and prospective large customers.
Further, we depend on a limited number of service providers that purchase products from our customers which incorporate our solutions. Our ability to build and maintain close relationships with service providers is a key factor affecting the deployment and purchase of our solutions. If these service providers, or other service providers that elect to use our solutions, delay, reduce or eliminate purchases of our customers products which incorporate our solutions, this would significantly reduce our revenues and adversely affect our operating results. In addition, any delayed launch or any sudden or unexpected slowdown in deployments by service providers that incorporate our solutions may lead to an inventory buildup by service providers or by our customers who may, in turn, postpone taking delivery of our solutions or wait to clear their existing inventory before ordering more solutions from us, which, in turn, may adversely affect our results. Our operating results for the foreseeable future will continue to depend on a limited number of service providers demand for products which incorporate our solutions.
We may have conflicts with our customers, including customers we have acquired as part of our 2012 acquisition of the STB business from Trident Microsystems, Inc. and certain of its subsidiaries, collectively Trident, with whom we have a limited history, or the service providers that purchase products from our customers that incorporate our solutions. Any such conflict could result in events that have a negative impact on our business, including:
" | reduced purchases of our solutions or our customers products that incorporate them; |
" | uncertainty regarding ownership of intellectual property rights; |
" | litigation or the threat of litigation; or |
" | settlements or other business arrangements imposing obligations on us or restrictions on our business, including obligations to license intellectual property rights or make cash payments. |
If we fail to develop and introduce new or enhanced solutions on a timely basis, our ability to attract and retain customers could be impaired, and our competitive position may be harmed.
The industries in which we compete are volatile and highly competitive. In order to compete effectively, we must continually introduce new products or enhance existing products and accurately anticipate customer requirements for new and upgraded products. The introduction of new products by our competitors, the market acceptance of solutions based on new or alternative technologies, or the emergence of new industry standards could render our existing or future solutions obsolete. Our failure to anticipate or timely develop new or enhanced solutions or technologies in response to technological shifts or changes in customer requirements could result in decreased revenues and an increase in design wins by our competitors.
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New product development or the enhancement of existing products is subject to a number of risks and uncertainties. We may experience difficulties with solution design, manufacturing or certification that could delay or prevent the introduction of new or enhanced solutions. Alternatively, even if technical engineering hurdles can be overcome, we must successfully anticipate customer requirements regarding features and performance, the new or enhanced products must be competitively priced, and they must become available during the window of time when customers are ready to purchase our solutions.
Even after new or enhanced products are developed, we must be able to successfully bring them to market. The success of new product introductions depends on a number of factors including, but not limited to, timely and successful product development, market acceptance, our ability to manage the risks associated with new product production ramp-up issues, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and costs to meet anticipated demand, and the risk that new products may have quality or other defects in the early stages of introduction. Accordingly, we cannot determine in advance the ultimate effect of new product introductions and transitions, and any failure to manage new product introduction risks could adversely affect our business.
Our results could be adversely affected if our customers or the service providers who purchase their products are unable to successfully compete in their respective markets. Our results could also be adversely affected due to industry consolidation involving our customers or service providers who buy products from our customers.*
Our customers and the service providers that purchase products from our customers face significant competition from their competitors. We rely on these customers and service providers ability to develop products and/or services that meet the needs of their customers in terms of functionality, performance, availability and price. If these customers and service providers do not successfully compete, they may lose market share, which would negatively impact the demand for our solutions. For example, for our Connectivity solutions there is intense competition among service providers to deliver video and other multimedia content into and throughout the home. For the sale of our Connectivity solutions, we are currently dependent on the ability of a limited number of service providers to compete in the market for the delivery of high-definition television-quality video, or HD video, and other multimedia content. Therefore, factors influencing the ability of these service providers to compete in this market, such as competition from alternative content providers or laws and regulations regarding local cable franchising or satellite broadcasting rights, could have an adverse effect on our ability to sell Connectivity solutions. In addition, our digital broadcast satellite outdoor unit solutions are primarily supplied to digital broadcast satellite service providers by our ODM and OEM customers. Digital broadcast satellite service providers are facing significant competition from telecommunications carriers and cable service operators as they compete for customers in terms of video, voice and data services. Moreover, ODMs and OEMs who market cable and satellite STBs are competing with a variety of Internet protocol-based video delivery solutions, including versions of DSL technology and certain fiber optic-based solutions. Many of these technologies compete effectively with cable and satellite STBs. If our customers and the service providers who purchase products from our customers that incorporate our solutions do not successfully compete, they may lose market share, which would reduce demand for our solutions.
Because we are dependent on a limited number of customers and service providers for the sale of our products, industry consolidation involving our customers and the service providers who buy products from our customers could materially affect our business. For example, AT&T has announced its intention to acquire our largest service-provider end-user customer, DirecTV. AT&T does not deploy MoCA home networking technology to its video subscribers. If the contemplated merger is completed, AT&T could require DirecTV to move away from the use of MoCA, or specifically our MoCA solutions, for home networking. Even if that does not happen, we could see a slowdown in the sale of our products to DirecTV while the operations of DirecTV and AT&T are being integrated. As another example, Comcast has announced its intention to acquire Time-Warner Cable. Both Comcast and Time-Warner Cable are service-provider end-user customers of ours. However, if this merger is completed, it is difficult to predict the net impact of such merger on our sales to the combined entity in the short-term and the long-term.
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If the market for HD video and other multimedia content delivery solutions does not continue to develop as we anticipate, our revenues may decline or fail to grow, which would adversely affect our operating results.*
We derive, and expect to continue to derive for the foreseeable future, a significant portion of our revenues from sales of our Connectivity solutions based on the MoCA standard. The market for multimedia content delivery solutions based on the MoCA standard is relatively new, still evolving and difficult to predict. Currently, the growth of the MoCA-based multimedia content delivery market is largely driven by the adoption and deployment of existing and future generations of the technology by service providers, ODMs and OEMs and, to a lesser extent, by consumer adoption of such technology which is dependent on upgrades from standard definition television services to high-definition television services, or HD services, and on the availability of over-the-top, or OTT, services that directly deliver Internet video content into the home. It is difficult to predict whether the MoCA standard will continue to achieve and sustain high levels of demand and market acceptance by service providers or consumers, the rate at which consumers will upgrade to HD services, whether the availability of OTT services will continue to grow or whether consumers beyond the early technology adopters will embrace OTT services in increasing numbers, if at all. Even if MoCA solutions continue to proliferate, it is difficult to anticipate the specifications and features that service providers will require for MoCA-based products purchased for their deployments. Failure to accurately make such predictions may have a material adverse effect on revenue and expense projections. Even if products incorporating our MoCA solutions are ultimately selected by service providers, the timing and speed of deployments of such products by service providers are subject to variables outside of our control which make it difficult to accurately predict revenues for any given period.
With regard to Connectivity solutions, some service providers, ODMs and OEMs have adopted, and others may adopt, multimedia content delivery solutions that rely on technologies other than the MoCA standard or may choose to wait for the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, MoCA-based solutions. The alternative technology solutions which compete with MoCA-based solutions include Ethernet, HomePNA, HomePlug AV and Wi-Fi. It is critical to our success that additional service providers, including telecommunications carriers, digital broadcast satellite service providers and cable operators, adopt the MoCA standard for home networking and deploy MoCA solutions to their customers. If the market for MoCA-based solutions does not continue to develop or develops more slowly than we expect, or if we make errors in predicting adoption and deployment rates for these solutions, our revenues may be significantly adversely affected. Our operating results may also be adversely affected by any delays in consumer upgrade to HD services, delays in consumer adoption of OTT services, or if the market for OTT services develops more slowly than we expect.
Many of these same market dynamics apply to advanced STB SoCs which we acquired when we purchased the STB business of Trident. The future success of our STB solutions may depend on the adoption and deployment of advanced STB features by service providers and the availability of OTT services that deliver Internet video content into the home. As with our Connectivity solutions, it is difficult to predict the levels of demand and market acceptance of advanced STB solutions, and therefore, it may be difficult to predict future revenues and our investment return from STB solutions that offer advanced features.
Even if service providers, ODMs and OEMs adopt multimedia content delivery solutions based on the MoCA standard, we may not compete successfully in the market for MoCA-compliant chipsets.
As a member of MoCA, we are required to license any of our patent claims that are essential to implement the MoCA specifications to other MoCA members on reasonable and non-discriminatory terms. As a result, we are required to license some of our important intellectual property to other MoCA members, including other semiconductor manufacturers that may compete with us in the sale of MoCA-compliant chipsets. Furthermore, there may be disagreements among MoCA members as to specifically which of our patent claims we are required to license to them. If we are unable to differentiate our MoCA-compliant chipsets from other MoCA-compliant chipsets by offering superior pricing and features outside MoCA specifications, we may not be able to compete effectively in the market for such chipsets. Moreover, although we are currently and actively involved in the ongoing development of the MoCA standard, we cannot guarantee that future MoCA specifications will incorporate technologies or product features we are developing or that our solutions will be compatible with future MoCA specifications. As additional members, including our competitors, continue to join MoCA, they and existing members may exert greater influence on MoCA and the development of the MoCA standard in a manner that is adverse to our interests. If our Connectivity solutions fail to comply with future MoCA specifications, the demand for these solutions could be severely reduced.
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The semiconductor and communications industries are highly cyclical and subject to rapid change and evolving industry standards and, from time to time, have experienced significant downturns in customer demand as well as unexpected increases in demand resulting in production capacity constraints. These factors could impact our operating results, financial condition and cash flows and may increase the volatility of the price of our common stock.
The semiconductor and communications industries are highly cyclical and subject to rapid change and evolving industry standards and, from time to time, have experienced significant downturns in customer demand. These downturns are characterized by decreases in product demand, excess customer inventories and accelerated erosion of prices; factors which have caused, and could continue to cause, substantial fluctuations in our net revenue and in our operating results. Any downturns in the semiconductor and communications industries may be severe and prolonged, and any failure of these industries to fully recover from downturns could harm our business. For example, because a significant portion of our expense is fixed in the near term or is incurred in advance of anticipated sales, during these downturns we may not be able to decrease our expenses rapidly enough to offset unanticipated shortfalls in revenues during industry downturns, which would adversely affect our operating results. Even as the industry recovers from a downturn, some OEMs and ODMs may continue to slow down their research and development activities, cancel or delay new product development, reduce their inventories and/or take a cautious approach to acquiring products, which may negatively impact our business.
The semiconductor and communications industries also periodically experience increased demand and production capacity constraints, which may affect the ability of companies such as ours to ship products to customers. Any factor adversely affecting either the semiconductor or communications industries in general, or the particular segments of any of these industries that our solutions target, may adversely affect our ability to generate revenue and could negatively impact our operating results, cash flow and financial condition. The semiconductor and communications industries may experience supply shortages due to sudden increases in demand beyond foundry capacity. In addition to capacity issues, during periods of increased demand these industries may also experience difficulty obtaining sufficient manufacturing, assembly and test resources from manufacturers. If, as a result of these industry issues or other factors that cause capacity constraints at our suppliers, we are unable to meet our customers' increased demand for our solutions, we would miss opportunities for additional revenue and could experience a negative impact on our relationships with affected customers.
Our operating results have fluctuated significantly in the past and we expect them to continue to fluctuate in the future, which could lead to volatility in the price of our common stock.*
Our operating results have fluctuated in the past and are likely to continue to fluctuate, on an annual and a quarterly basis, as a result of a number of factors, many of which are outside of our control. For example, while we were profitable in 2010 through 2012, we incurred a net loss in 2013 and during the first three quarters of 2014. These fluctuations in our operating results may cause our stock price to fluctuate as well. The primary factors that are likely to affect our quarterly and annual operating results include:
" | the success of our plan to pursue strategic alternatives to enhance stockholder value; |
" | the success of our recently announced business restructuring; |
" | changes in demand for our solutions or products offered by service providers and our customers; |
" | the timing and amount of orders, especially from significant service providers and customers; |
" | the seasonal nature of the sales of products that incorporate our solutions by certain service providers which may affect the timing of orders for our solutions; |
" | the level and timing of capital spending of service providers, both in the United States and in international markets; |
" | competitive market conditions, including pricing actions by us or our competitors; |
" | adverse perception of our company, our solutions and our products or their features by service providers or our customers, or in the market generally; |
" | any delay in the development, certification or adoption associated with new MoCA standards by the alliance, OEMs or service providers; |
" | any cut backs or delayed deployments of products that include our solutions by service providers; |
" | our unpredictable and lengthy sales cycles; |
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" | the mix of solutions and solution configurations sold; |
" | our ability to successfully define, design and release new solutions on a timely basis that meet customers or service providers needs; |
" | costs related to acquisitions of complementary products, technologies or businesses; |
" | new solution introductions and enhancements, or the market anticipation of new solutions and enhancements, by us or our competitors; |
" | the timing of revenue recognition on sales arrangements, which may include multiple deliverables and the effect of our use of inventory hubbing arrangements; |
" | unexpected changes in our operating expenses; |
" | general economic conditions and political conditions in the countries where we operate or our solutions are sold or used; |
" | our ability to attain and maintain production volumes and quality levels for our solutions, including adequate allocation of wafer, assembly and test capacity for our solutions by our subcontractors; |
" | our customers ability to obtain other components needed to manufacture their products; |
" | the cost and availability of components and raw materials used in our solutions, including, without limitation, the price of gold and copper; |
" | changes in manufacturing costs, including wafer, test and assembly costs, manufacturing yields and solution quality and reliability; |
" | productivity of our sales and marketing force; |
" | long, engineering-intensive product development and testing cycles, including expensive third-party "tape-out" costs required to bring parts to production, which make it difficult to quickly adjust expenses in response to changes in revenue or revenue outlook; |
" | fixed expenses and long-term commitments that also limit our ability to reduce operating expenses in a particular quarter if revenues for that quarter fall below expectations; |
" | future accounting pronouncements and changes in accounting policies; |
" | disputes between content owners and service providers that result in the delay or elimination of the sale of products using our technology; |
" | costs associated with litigation; and |
" | domestic and international regulatory changes. |
Unfavorable changes in any of the above factors, many of which are beyond our control, could significantly harm our business and results of operations. You should not rely on the results of prior periods as an indication of our future performance.
Our sales are subject to seasonality, which may cause our revenue to fluctuate from quarter to quarter.
Many of our solutions are incorporated into consumer electronic devices, which are subject to seasonality and other fluctuations in demand. As a result, we tend to have slower sales in the first quarter of each year and, to a lesser extent, in the second quarter of each year as compared to the third and fourth quarters when manufacturers prepare for the major holiday selling season at the end of each year, which is traditionally the biggest quarter for consumer electronic retail sales. This seasonal trend may or may not continue in the future. Accordingly, our results of operations may vary significantly from quarter to quarter.
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Our business, financial condition and results of operations could be adversely affected by political and economic conditions in the countries in which we conduct business and our solutions are sold.
We are exposed to general global economic and market conditions, particularly those impacting the semiconductor industry. Uncertainty about current global economic conditions may cause businesses to continue to postpone spending in response to tighter credit, unemployment or negative financial news. This uncertainty has adversely affected, and may continue to adversely affect, our business as service providers cut back or delay deployments that include our solutions and to the extent that consumers decrease their discretionary spending for enhanced video offerings from service providers, which may in turn lead to cautious or reduced spending by service providers and, in turn, may lead to a decrease in orders for our solutions, thereby adversely affecting our operating results. Our operating results may also be adversely affected by changes in tax laws as governments react to address the gap between their spending outflows and tax revenue inflows.
We may also experience adverse conditions in our cost base due to changes in foreign currency exchange rates that reduce the purchasing power of the U.S. dollar, increase research and development expenses and otherwise harm our business. These conditions may harm our margins and prevent us from sustaining profitability if we are unable to increase the selling prices of our solutions or reduce our costs sufficiently to offset the effects of effective increases in our costs. Our attempts to offset the effects of cost increases through controlling our expenses, passing cost increases on to our customers or any other method may not succeed.
We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates, credit markets and prices of marketable equity and fixed-income securities. The primary objective of most of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, a majority of our marketable investments are investment grade, liquid, fixed-income securities and money market instruments denominated in U.S. dollars. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could materially harm our results of operations and financial condition. Moreover, the performance of certain securities in our investment portfolio is affected by the credit condition of the U.S. financial sector. Although there have been recent signs of improvement within the U.S. financial sector, the sector remains fragile and conditions may deteriorate rapidly, which could adversely affect the value, realized or unrealized, of our investments and cause us to record significant impairment losses.
The success of our DBS ODU solutions depends on the demand for our solutions within the satellite digital television market and the growth of this overall market.
We derive a significant portion of our revenues from sales of our DBS ODU solutions into markets served by digital broadcast satellite providers and their ODM and OEM partners, the deployment of which may also increase demand for our MoCA-compliant Connectivity solutions. These revenues result from the demand for HD based TV's and DVR's within single family households, multi-dwelling units and hospitality establishments that receive their video from digital broadcast satellites. The digital broadcast satellite market may not grow in the future as anticipated or a significant market slowdown may occur, which would in turn reduce the demand for applications or devices, such as multi-switch and low-noise block converters that rely on our digital broadcast satellite outdoor unit solutions. Because of the intense competition in the satellite, terrestrial and cable digital television markets, the unproven technology of many products addressing these markets and the short product life cycles of many consumer applications or devices, it is difficult to predict the potential size and future growth rate of the markets for our digital broadcast satellite outdoor unit solutions. If the demand for our digital broadcast satellite outdoor unit solutions is not as great as we expect, or if we are unable to produce competitive solutions to meet that demand, our revenues could be adversely affected.
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The market for our broadband access solutions is limited and these solutions may not be widely adopted.
Our broadband access solutions are designed to meet broadband access requirements in areas characterized by fiber optic network deployments that terminate within one kilometer of customer premises. We believe the primary geographic markets for our broadband access solutions are currently in China and in parts of Europe where there are many multi-dwelling units and fiber optic networks that extend to or near a customer premises. We do not expect to generate significant revenues from sales of our broadband access solutions in North America, which is generally characterized by low-density housing, or in developing nations that do not generally have extensive fiber optic networks. To the extent our efforts to sell our broadband access solutions into currently targeted markets are unsuccessful, the demand for these solutions may not develop as anticipated or may decline, either of which could adversely affect our future revenues. Moreover, these markets have a large number of service providers and varying regulatory standards, both of which may delay any widespread adoption of our solutions and increase the time during which competing technologies could be introduced and displace our solutions.
In addition, if areas characterized by fiber optic networks that terminate within one kilometer of customer premises do not continue to grow, or we are unable to develop broadband access solutions that are competitive outside of these areas, the demand for our broadband access solutions may not grow and our revenues may be limited. Even if the markets in which our broadband access solutions are targeted continue to grow or we are able to serve additional markets, customers and service providers may not adopt our technology. There are a growing number of competing technologies for delivering high-speed broadband access from the service providers network to the customers premises. For example, our broadband access solutions face competition from products using DOCSIS, versions of DSL, Ethernet, fiber to the home and LTE solutions. Moreover, there are many other access technologies that are currently in development including some low cost proprietary solutions. If service providers adopt competing products or technologies, the demand for our broadband access solutions will decline and we may not be able to generate significant revenues from these solutions.
We may not be able to effectively manage our growth, and we may need to incur significant expenditures to address the additional operational and control requirements of our growth, either of which could harm our business and operating results.*
As we continue to expand our business, we expect to grow the overall size of our operations. To effectively manage our growth, we must continue to expand our operational, financial and management controls, reporting systems and procedures. We intend to continue to grow our business geographically and also to develop new solution offerings and pursue new customers. If we fail to adequately manage our growth the quality of our products and the management of our operations could suffer, which could adversely affect our operating results. Our success in managing our growth will be dependent upon our ability to:
" | enhance our operational, financial and management controls, reporting systems and procedures; |
" | expand our facilities and equipment and develop new sources of supply for the manufacture, assembly and testing of our semiconductor solutions when and as needed and on commercially reasonable terms; |
" | successfully hire, train, motivate and productively deploy employees, including technical personnel; and |
" | expand our international resources. |
Our inability to address effectively any of these factors, alone or in combination with others, could harm our ability to execute our business strategy. In addition, in 2013 we transitioned to a new enterprise resource planning, or ERP, system and we are continuing to expand the capabilities of that system. If the new ERP system is deficient or inadequate in any material respect, it could impede our ability to manufacture products, order materials, generate management reports, invoice customers, and comply with laws and regulations. Any of these types of disruptions could have a material adverse effect on our net sales and profitability.
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Our product and technology development and licensing arrangements with customers, companies that we have investments in and other third parties may not be successful.*
We have entered into development, product collaboration and technology licensing arrangements with customers, companies we have investments in and other third parties, and we expect to enter into new arrangements of these kinds from time to time in the future. We have various obligations and commitments to third parties related to these arrangements. Such arrangements can magnify several risks for us, including loss of control over the development and development timeline of jointly developed products. Accordingly, we face increased risk that our development activities with or for third parties may result in products or technologies that are not commercially successful or that are not available in a timely fashion. In addition, any third party with whom we enter into a development, product collaboration or technology licensing arrangement may fail to commit sufficient resources to the project, change its policies or priorities and abandon or fail to perform its obligations related to the collaboration. The failure to timely develop commercially successful products through our development activities with their parties as a result of any of these and other challenges could have a material adverse effect on our business, results of operations, and financial condition.
Any acquisition, strategic relationship, joint venture or investment could disrupt our business and harm our financial condition.
We will continue to pursue acquisitions, strategic relationships, joint ventures, collaborations, technology licenses and investments that we believe may allow us to complement our growth strategy, increase market share in our current markets or expand into adjacent markets, or broaden our technology and intellectual property.
Such transactions, including our 2012 acquisitions of the STB business from Trident and our 2013 acquisition of assets from Mobius Semiconductor, Inc., or Mobius, are often complex, time consuming and expensive. We will need to overcome challenges, some of which may be significant, in order to realize the benefits or synergies from the acquisitions we have completed to date and any acquisitions we may complete from time to time in the future. Such acquisitions present numerous challenges and risks including:
" | difficulties in assimilating any acquired workforce and merging operations; |
" | attrition and the loss of key personnel or the impairment of relationships with employees, suppliers and customers; |
" | creating uniform standards, controls, procedures, policies and information systems; |
" | an acquired company, asset or technology, or a strategic collaboration or licensed asset or technology not furthering our business strategy as anticipated; |
" | uncertainty related to the value, benefits or legitimacy or intellectual property or technologies acquired in such transaction; |
" | the acquisition of a partner with which we have a joint venture, investment or strategic relationship by an unaffiliated third party that either delays or jeopardizes the original intent of the partnering relationship or investment; |
" | our overpayment for a company, asset or technology or changes in the economic or market conditions or assumptions underlying our decision to make an acquisition may subsequently make the acquisition less profitable or strategic than originally anticipated; |
" | our inability to liquidate an investment in a privately held company when we believe it is prudent to do so which results in a significant reduction in value or loss of our entire investment; |
" | difficulties entering and competing in new product categories or geographic markets and increased competition, including price competition; |
" | significant problems or liabilities, including increased intellectual property and employment related litigation exposure, associated with acquired businesses, assets or technologies; |
" | the need to use a significant portion of our available cash or issue additional equity securities that would dilute the then-current stockholders percentage ownership in connection with any such transaction, or make unanticipated follow-on investments or incur substantial debt or contingent liabilities in an effort to preserve value in the initial transaction; |
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" | requirements to devote substantial managerial and engineering resources to any strategic relationship, joint venture or collaboration, which could detract from our other efforts or significantly increase our costs; |
" | lack of control over the actions of our business partners in any strategic relationship, joint venture, collaboration or investment, which could significantly delay the introduction of planned solutions or otherwise make it difficult or impossible to realize the expected benefits of such relationship; and |
" | requirements to record substantial charges and amortization expense related to certain intangible assets, deferred stock-based compensation and other items. |
Any one of these challenges or risks could impair our ability to realize any benefit from our acquisitions, strategic relationships, joint ventures or investments after we have expended resources on them. The inability to integrate successfully any businesses we acquire, or any significant delay in achieving integration, could delay introduction of new solutions and require expenditure of additional resources to achieve integration. Further, acquisitions also frequently result in the recording of goodwill and other intangible assets that are subject to potential impairments, which could harm our financial results.
We may enter into negotiations for acquisitions, relationships, joint ventures or investments that are not ultimately consummated. These negotiations could result in significant diversion of our management's time, as well as substantial out-of-pocket costs, which could materially and adversely affect our operating results during the periods in which such costs are incurred.
We cannot forecast the number, timing or size of future acquisitions, strategic relationships, joint ventures or investments, or the effect that any such transactions might have on our operating or financial results. Any such transaction could disrupt our business and harm our operating results and financial condition.
We may not realize the anticipated financial and strategic benefits from the businesses we acquire or be able to successfully integrate such businesses with ours.
We will need to overcome challenges, some of which may be significant, in order to realize the benefits or synergies from the acquisitions we have completed to date and any acquisitions that we may complete from time to time in the future. These challenges include the following:
" | integrating businesses, operations and technologies; |
" | retaining and assimilating key personnel; |
" | retaining existing customers and attracting additional customers; |
" | creating uniform standards, controls, procedures, policies and information systems, including with respect to our expanded international operations; |
" | obtaining intellectual property rights, contractual rights or other rights or resources from third parties necessary to achieve the anticipated benefits and synergies associated with the acquired business; |
" | meeting the challenges inherent in efficiently managing an increased number of employees who may be located at geographic locations distant from our headquarters and senior management; and |
" | implementing appropriate systems, policies, benefits and compliance programs. |
Integration in particular may involve considerable risks and may not be successful. These risks include the following:
" | the potential disruption of our ongoing business and distraction of our management; |
" | the potential strain on our financial and managerial controls and reporting systems and procedures; |
" | unanticipated expenses and potential delays related to integration of the operations, technology and other resources of the acquired companies; |
" | the impairment of relationships with employees, suppliers and customers; and |
" | potential unknown or contingent liabilities. |
The inability to integrate successfully any businesses we acquire, or any significant delay in achieving integration, could delay introduction of new solutions and require expenditure of additional resources to achieve integration.
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Investors should not rely on attempts to combine our historical financial results with those of any of our acquired businesses as separate operating entities to predict our future results of operations as a combined entity.
The average selling prices of our solutions have historically decreased over time and will likely do so in the future, which may reduce our revenues and gross margin.
Our solutions and products sold by other companies in our industry have historically experienced a decrease in average selling prices over time. We anticipate that the average selling prices of our solutions will continue to decrease in the future in response to competitive pricing pressures, increased sales discounts and new product introductions from our competitors. For example, we expect that other chipset manufacturers who are members of MoCA will produce competing chipsets and create pricing pressure for such solutions. Broadcom's and others announcements about the availability of competing discrete MoCA chipsets and integrated MoCA SoCs in certain applications will put further pressure on pricing. Our future operating results may be harmed due to the decrease of our average selling prices. To maintain our current gross margins or increase our gross margins in the future, we must develop and introduce on a timely basis new solutions and solution enhancements, continually reduce our solution costs and manage solution transitions in a timely and cost-effective manner. Our failure to do so would likely cause our revenues and gross margins to decline, which could have a material adverse effect on our operating results and cause the value of our common stock to decline.
Fluctuations in the mix of solutions we sell may adversely affect our financial results.
Because of differences in selling prices and manufacturing costs among our solutions, the mix and types of solutions sold affect the average selling price of our solutions and have a substantial impact on our revenues and profit margins. To the extent our sales mix shifts toward increased sales of our relatively lower-margin solutions, our overall gross margins will be negatively affected. Fluctuations in the mix and types of our solutions sold may also affect the extent to which we are able to recover our costs and expenditures associated with a particular solution, and as a result, can negatively impact our financial results.
Our solution development efforts are time-consuming, require substantial research and development expenditures and may not generate an acceptable return.*
Our solution development efforts require substantial research and development expense. Our research and development expense was $95.6 million and $84.9 million for the nine months ended September�30, 2014 and 2013, respectively. There can be no assurance that we will achieve an acceptable return on our research and development efforts.
The development of our solutions is also highly complex. Due to the relatively small size of our solution design teams, our research and development efforts in our core technologies may lag behind those of our competitors, some of whom have substantially greater financial and technical resources. In the past, we have occasionally experienced delays in completing the development and introduction of new solutions and solution enhancements, and we could experience delays in the future. Unanticipated problems in developing solutions could also divert substantial engineering resources, which may impair our ability to develop new solutions and enhancements and could substantially increase our costs. Furthermore, we may expend significant amounts on a research and development program that may not ultimately result in a commercially successful solution, and we have in the past terminated ongoing research and development programs before they could be brought to successful conclusions. As a result of these and other factors, we may be unable to develop and introduce new solutions successfully and in a cost-effective and timely manner, and any new solutions we develop and offer may never achieve market acceptance or an acceptable return on our investment. Any failure to develop future solutions that are commercially successful would have a material adverse effect on our business, financial condition and results of operations.
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We continually evaluate the benefits, on a solution-by-solution basis, of migrating to higher performance or lower cost process technologies in order to produce higher performance, more efficient or better integrated circuits because we believe this migration is required to remain competitive. Other companies in our industry have experienced difficulty in migrating to new process technologies and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. We may experience similar difficulties. Moreover, we are dependent on our relationships with subcontractors and the products of electronic design automation tool vendors to successfully migrate to newer or better process technologies. Our third-party manufacturers may not make newer or better process technologies available to us on a timely or cost-effective basis, if at all. If our third-party manufacturers do not make newer or better manufacturing process technologies available to us on a timely or cost-effective basis, or if we experience difficulties or delays in migrating to these processes, it could have a material adverse effect on our competitive position and business prospects.
Our solutions typically have lengthy sales cycles, which may cause our operating results to fluctuate, and a service provider, ODM or OEM customer may decide to cancel or change its service or product plans, which could cause us to lose anticipated sales and expected revenue.*
Our solutions typically have lengthy sales cycles. Before deciding to deploy a product containing one of our solutions, a service provider must first evaluate our solutions. This initial evaluation period can vary considerably based on the service provider and solution being evaluated, and could take a significant amount of time to complete. Solutions incorporating new technologies generally require longer periods for evaluation. After this initial evaluation period, if a service provider decides to adopt our solutions, that service provider and the applicable ODM or OEM customers will need to further test and evaluate our solutions prior to completing the design of the equipment that will incorporate our solutions. Additional time is needed to begin volume production of equipment that incorporates our solutions. Due to these lengthy sales cycles, we may experience significant delays from the time we incur research and development and sales expenses until the time, if ever, that we generate sales and revenue from these solutions. The delays inherent in these lengthy sales cycles increase the risk that a customer will decide to cancel or change its product plans. We regularly experience changes, delays and cancellations in the purchase plans of service providers or our customers. A cancellation or change in plans by a service provider, ODM or OEM customer could prevent us from realizing anticipated sales and the associated revenue. In addition, our anticipated sales could be lost or substantially reduced if a significant service provider, ODM or OEM customer reduces or delays orders during our sales cycle or chooses not to release equipment that contains our solutions. We may invest significant time and effort in marketing to a particular customer that does not ultimately result in a sale to that customer. As a result of these lengthy and uncertain sales cycles for our solutions, it is difficult for us to predict if or when our customers may purchase solutions in volume from us, our projected financial results may fluctuate and prove inaccurate, and our actual operating results may vary significantly from quarter to quarter, which may negatively affect our operating results for any given quarter.
We have limited control over the indirect channels of distribution we utilize, which makes it difficult to accurately forecast orders and could result in the loss of certain sales opportunities.*
A portion of our revenue is realized through independent resellers and distributors that are not under our control. For the year ended December�31, 2013, 3% of our net revenues were through these entities. For the nine months ended September�30, 2014, 2% of our net revenues were through these entities. These independent sales organizations generally represent product lines offered by several companies and thus could reduce their sales efforts applied to our products or terminate their representation of us. Our revenues could be adversely affected if our relationships with resellers or distributors were to deteriorate or if the financial condition of one or more significant resellers or distributors were to decline. In addition, as our business grows, there may be an increased reliance on indirect channels of distribution. There can be no assurance that we will be successful in maintaining or expanding these indirect channels of distribution. This uncertainty could result in the loss of certain sales opportunities. Furthermore, our reliance on indirect channels of distribution may reduce visibility with respect to future business opportunities, thereby making it more difficult to accurately forecast orders. Further, we use the sell-through accounting policy model which recognizes revenue only upon shipment of the merchandise from our distributor to the final customer. Because we use the sell-through methodology, we may have variability in our revenue from quarter to quarter.
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If we do not achieve additional design wins in the future or if we do not complete our design-in activities before a customers design window closes, our future sales and revenues could be adversely affected and our customer relationships could be harmed.
To achieve design wins with OEM customers and ODMs, we must define and deliver cost-effective, innovative and high performance solutions on a timely basis, before our competitors do so. In addition, the timing of our design-in activities with key customers and prospective customers may not align with their open design windows, which may or may not be known to us, making design win predictions more difficult. If we miss a particular customers design window, we may be forced to wait an entire year or even longer for the next opportunity to compete for the customers next design. The loss of a particular design opportunity could eliminate or substantially delay revenues from certain target customers and markets, which could have a material adverse effect on our results of operations and future prospects as well as our customer relationships. Even after a design win, customers are not obligated to purchase our products and can choose at any time to reduce or cease use of our products, for example, if its own products are not commercially successful, or for any other reason. We may not continue to achieve design wins or to convert design wins into actual sales, and failure to do so could materially and adversely affect our operating results.
Our solutions must interoperate with many software applications and hardware found in service providers networks and other devices in the home, and if they do not interoperate properly our business would be harmed.
Our solutions must interoperate with service providers networks and other devices in the home, which often have varied and complex specifications, utilize multiple protocol standards, software applications and products from multiple vendors, and contain multiple generations of products that have been added over time. As a result, we must continually ensure that our solutions interoperate properly with existing and planned future networks. To meet these requirements, we must undertake development efforts that involve significant expense and the dedication of substantial employee resources. We may not accomplish these development efforts quickly or cost-effectively, if at all. If we fail to maintain or anticipate compatibility with products, software or equipment found in our customers networks, we may face substantially reduced demand for our solutions, which would adversely affect our business, operating results and financial condition.
From time to time, we may enter into collaborations or interoperability arrangements with equipment and software vendors providing for the use, integration or interoperability of their technology with our solutions. These arrangements would give us access to and enable interoperability with various products or technologies in the connected home entertainment market. If these relationships fail to achieve their goals, we would have to devote substantially more resources to the development of alternative solutions and the support of our existing solutions, or the addressable market for our solutions may become limited. In many cases, these parties are either companies that we compete with directly in other areas or companies that have extensive relationships with our existing and potential customers and may have influence over the purchasing decisions of these customers. A number of our competitors have stronger relationships than we do with some of our existing and potential customers and, as a result, our ability to have successful arrangements with these companies may be harmed. Our failure to establish or maintain key relationships with third-party equipment and software vendors may harm our ability to successfully sell and market our solutions. We are currently devoting significant resources to the development of these relationships. Our operating results could be adversely affected if these efforts do not result in the revenues necessary to offset these investments.
In addition, if we find errors in the software or hardware used in service providers networks or problematic network configurations or settings we may have to modify our solutions so that they will interoperate with these networks. This could cause longer installation times for our solutions and order cancellations, either of which would adversely affect our business, operating results and financial condition.
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We do not have long-term commitments from our customers and our customers may cancel their orders, change production quantities or delay production, and if we fail to forecast demand for our solutions accurately, we may incur solution shortages, delays in solution shipments or excess or insufficient solution inventory.
We sell our solutions to customers who integrate them into their products. We do not obtain firm, long-term purchase commitments from our customers. We have limited visibility as to the volume of our solutions that our customers are selling or carrying in their inventory. In addition, certain service providers are affected by seasonality in their deployment of products that incorporate our solutions, which may in turn impact the timing of our sales. Because production lead times often exceed the amount of time required to fulfill orders, we often must build inventory in advance of orders, relying on an imperfect demand forecast to project volumes and solution mix.
Our demand forecast accuracy, and our ability to manage our inventory carrying levels accurately, can be adversely affected by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, adverse changes in our solution order mix and demand for our customers products. We have in the past had customers dramatically decrease and increase their requested production quantities with little or no advance notice to us. Even after an order is received, our customers may cancel these orders, postpone taking delivery or request a decrease in production quantities. Any such cancellation, postponement of delivery or decrease in production quantity subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls, reduced profit margins and excess or obsolete inventory which we may be unable to sell to other customers or which we may be required to sell at reduced prices or write off entirely. Furthermore, changes to our customers' requirements may result in disputes with our customers which could adversely impact our future relationships with those customers. Alternatively, if we are unable to project customer requirements accurately, we may not build enough solutions, which could lead to delays in solution shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources of supply, which could affect our ongoing relationships with these customers and potentially reduce our market share. If we do not timely fulfill customer demands, our customers may cancel their orders and we may be subject to customer claims for cost of replacement.
Our ability to accurately predict revenues and inventory needs, and to effectively manage inventory levels, may be adversely impacted due to our use of inventory hubbing arrangements.
We are party to an inventory hubbing arrangement with Cisco and we may enter into similar arrangements with other customers in the future. Pursuant to these arrangements, we ship our solutions to a designated third-party warehouse, or hub, rather than shipping them directly to the customer. The solutions generally remain in the hub until the customer removes them for incorporation into its own products. In the absence of any hubbing arrangement, we generally recognize revenues on sales of our solutions upon shipment of those solutions to the buyer. Under a hubbing arrangement, however, we maintain ownership of our solutions in the hub, and therefore do not recognize the related revenue until the date our customer removes them from the hub. As a result, our ability to accurately predict future revenues recognized from sales to customers with which we implement hubbing arrangements may be impaired, and we may experience significant fluctuations in our quarterly operating results depending on when such customers remove our solutions from the hub, which they may do with little or no lead time. In the short term, we may experience an increase in operating expenses as we build and ship inventory to the hub and will not recognize revenues from sales of this inventory, if at all, until such customers remove it from the hub at a later time. Furthermore, because we continue to own but do not maintain control over our solutions after they are shipped to the hub, our ability to effectively manage inventory levels may be impaired as our shipments under the hubbing arrangement increase and we may be exposed to additional risk that the inventory in the hub becomes obsolete before sales are recognized.
We extend credit to our customers, sometimes in large amounts, but there is no guarantee every customer will be able to pay our invoices when they become due.
As part of our routine business, we extend credit to customers purchasing our solutions. While our customers may have the ability to pay on the date of shipment or on the date credit is granted, their financial condition could change and there is no guarantee that customers will ever pay the invoices. Rapid changes in our customers financial conditions and risks associated with extending credit to our customers can subject us to a higher financial risk and could have a material adverse effect on our business, financial condition and results of operations. This risk is exacerbated by our reliance on a limited number of customers who purchase our solutions.
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We depend on a limited number of third parties to manufacture, assemble and test our solutions which reduces our control over key aspects of our solutions and their availability.*
We do not own or operate a manufacturing, assembly or test facility for our solutions. Rather, we outsource the manufacture, assembly and testing of our solutions to third-party subcontractors including Taiwan Semiconductor Manufacturing Company, Ltd., Jazz Semiconductor, Inc. (a wholly owned subsidiary of Tower Semiconductor, Inc.), Amkor Technologies, Inc., Advance Semiconductor Engineering Group and Giga Solution Tech. Co., Ltd. Accordingly, we are greatly dependent on a limited number of suppliers to deliver quality solutions on time. Our reliance on sole or limited suppliers involves several risks, including susceptibility to increased manufacturing costs if competition for foundry capacity intensifies and reduced control over the following:
" | supply of our solutions available for sale; |
" | pricing, quality and timely delivery of our solutions; |
" | prices and availability of components for our solutions; and |
" | production capacity for our solutions, including shortages due to the difficulties of suppliers to meet production capacities because of unexpected increases in demand. |
Because we rely on a limited number of third-party manufacturers, if we elect to expand the number of third-party manufacturers to whom we outsource the manufacture, assembly or testing of our solutions, or if we are required to change contract manufacturers because any of our contract manufacturers become unable or unwilling to continue manufacturing our solutions for any reason, we may sustain lost revenues, increased costs and damage to our customer relationships or other harm to our business. Any engagement of new or alternative third-party manufacturers will require us to spend significant time and expense in identifying and qualifying such manufacturers and solutions manufactured by such manufacturers will, in turn, need to be qualified by our customers. The lead time required to establish a relationship with a new manufacturer is long, and it takes time to adapt a solution's design and technological requirements to a particular manufacturer's processes. In connection with our engagement of new or alternative third-party manufacturers, we may experience bugs and defects as we work through the process, which could result in delayed or decreased revenue and harm to our reputation and our relationship with our customers.
Manufacturing defects may not be detected by the testing process performed by our subcontractors. If defects are discovered after we have shipped our solutions, we may be exposed to warranty and consequential damages claims from our customers. Such claims may have an adverse impact on our revenues and operating results. Furthermore, if we are unable to deliver quality solutions, our reputation would be harmed, which could result in the loss of future orders and business with our customers.
When demand for manufacturing capacity is high, we may take various actions to try to secure sufficient capacity, which may be costly and negatively impact our operating results.
The ability of each of our supplier's manufacturing facilities to provide us with chipsets is limited by its available capacity and existing obligations. Although we may have purchase order commitments to supply products to our customers, we do not have a guaranteed level of production capacity from any of our suppliers facilities to produce our solutions. Facility capacity may not be available when we need it or at reasonable prices. In addition, our subcontractors may allocate capacity to the production of other companies products and thereby reduce deliveries to us on short notice.
In order to secure sufficient manufacturing facility capacity when demand is high and mitigate the risks associated with an inability to meet our customers demands for our solutions, we may enter into various arrangements with suppliers that could be costly and harm our operating results, including:
" | option payments or other prepayments to a supplier; |
" | nonrefundable deposits with or loans to suppliers in exchange for capacity commitments; |
" | contracts that commit us to purchase specified quantities of components over extended periods; and |
" | purchase of testing equipment for specific use at the facilities of our suppliers. |
We may not be able to make any such arrangements in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility and not be on terms favorable to us. Moreover, if we are able to secure capacity, we may be obligated to use all of that capacity or incur penalties. These penalties and obligations may be expensive and require significant capital and could harm our business.
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Our solutions may contain defects or errors which may adversely affect their market acceptance and our reputation and expose us to product liability claims.
Our solutions are very complex and may contain defects or errors, especially when first introduced, when in full production, or when new versions are released. Despite testing, errors may occur. Such errors may include manufacturing defects, design defects or software bugs. Such defects or errors could affect the performance of our solutions, delay the development or release of new solutions or new versions of solutions, adversely affect our reputation and our customers willingness to buy solutions from us, and adversely affect market acceptance of our solutions. Any such errors or delays in releasing new solutions or new versions of solutions or allegations of unsatisfactory performance could cause us to lose revenue or market share, increase our service costs, cause us to incur substantial costs in redesigning our solutions, subject us to liability for damages and divert our resources from other tasks. Our solutions must successfully interoperate with products from other vendors. As a result, when problems occur in a device or application in which our solution is used, it may be difficult to identify the sources of these problems. The occurrence of hardware and software errors, whether or not caused by our solutions, could result in the delay or loss of market acceptance of our solutions, and therefore delay our ability to recognize revenue from sales, and any necessary revisions may cause us to incur significant expenses. Moreover, problems with our solutions that are only discovered after they have been deployed by a service provider could result in a greater number of truck rolls, and this in turn could adversely affect our sales or increase the cost of remediation. The occurrence of any such problems could harm our business, operating results and financial condition.
The use of our solutions also entails the risk of product liability claims. Such claims may require us to incur additional development and remediation costs, pursuant to warranty and indemnification provisions in our customer contracts and purchase orders. We maintain insurance to protect against certain claims associated with the use of our solutions, but our insurance coverage may not cover any claim asserted against us adequately, or at all. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation which may divert our technical and other resources from solution development efforts and divert our managements time and other resources. Any limitation of liability provisions in our standard terms and conditions of sale may not fully or effectively protect us from claims as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries.
If we fail to comply with environmental regulations we could be subject to substantial fines or be required to suspend production or alter our manufacturing processes.
We are subject to a variety of international, federal, state, and local governmental regulations relating to the storage, discharge, handling, generation, disposal, and labeling of toxic or other hazardous substances that make up the composition of many of our solutions. If we fail to comply with these regulations, substantial fines could be imposed on us, and we could be required to suspend production or alter manufacturing processes, either of which could have a negative effect on our sales, income, and business operations. Failure to comply with environmental regulations could subject us to civil or criminal sanctions and property damage or personal injury claims. Furthermore, environmental laws and regulations could become more stringent over time, imposing even greater compliance costs and increasing risks and penalties associated with violations, which could seriously harm our financial condition and results of operations.
New rules related to conflict minerals disclosure could negatively impact our business.
The SEC has adopted disclosure rules for companies that use conflict minerals in their products, with substantial supply chain verification and reporting requirements in the event that the minerals and metals come from the Democratic Republic of the Congo or adjoining countries. These new rules and verification requirements impose additional costs on us and on our suppliers, and may limit the sources or increase the prices of materials used in our products. 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. Further, depending on the results of our due diligence and our resulting disclosure, we may face challenges with our customers, which could place us at a competitive disadvantage, and our reputation may be harmed.
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Certain of our customers products and service providers services are subject to governmental regulation.
Governmental regulation could place constraints on our customers and service providers services and, consequently, reduce our customers demand for our solutions. For example, the Federal Communications Commission has broad jurisdiction over products that emit radio frequency signals in the United States. Similar governmental agencies regulate these products in other countries. Moreover, laws and regulations regarding local cable franchising or satellite broadcasting rights could have an adverse effect on service providers ability to compete in the HD video and multimedia content delivery market. Although most of our solutions are not directly subject to current regulations of the Federal Communications Commission or any other federal or state communications regulatory agency, much of the equipment into which these solutions are incorporated is subject to direct governmental regulation. Accordingly, the effects of regulation on our customers or the industries in which they operate may, in turn, impede sales of our solutions. For example, demand for these solutions will decrease if equipment into which they are incorporated fails to comply with the specifications of the Federal Communications Commission.
Our effective tax rate may increase or fluctuate, and we may not derive the anticipated tax benefits from any expansion of our international operations.
Our effective tax rate could be adversely affected by various factors, many of which are outside of our control. Our effective tax rate is directly affected by the relative proportions of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. We are also subject to changing tax laws, regulations and interpretations in multiple jurisdictions in which we operate as well as the requirements of certain tax rulings. Changes in applicable tax laws may cause fluctuations between reporting periods in which the changes take place. If our business opportunities outside the United States continue to grow, we may expand our international operations and staff to better support our expansion into international markets. We anticipate that this expansion will include the implementation of an international organizational structure that could result in an increasing percentage of our consolidated pre-tax income being derived from, and reinvested in, our international operations. Moreover, we anticipate that this pre-tax income would be subject to foreign tax at relatively lower tax rates when compared to the U.S.�federal statutory tax rate and as a consequence, our future effective income tax rate may be lower than the U.S.�federal statutory rate. There can be no assurance that significant pre-tax income will be derived from or reinvested in our international operations, that our international operations and sales will result in a lower effective income tax rate, or that we will implement an international organizational structure. In addition, our future effective income tax rate could be adversely affected if tax authorities challenge any international tax structure that we implement or if the relative mix of U.S. and international income changes for any reason. Accordingly, there can be no assurance that our effective income tax rate will be less than the U.S. federal statutory rate.
Changes in valuation allowance of deferred tax assets may affect our future operating results.
We record a valuation allowance to reduce our net deferred tax assets to the amount that we believe is more-likely-than-not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practical tax planning strategies. On a periodic basis we evaluate our deferred tax asset balance for realizability. To the extent we believe it is more-likely-than-not that some portion of our deferred tax assets will not be realized, we will increase the valuation allowance against the deferred tax assets. Realization of our deferred tax assets is dependent primarily upon future taxable income in related tax jurisdictions. If our assumptions and consequently our estimates change in the future, the valuation allowances may be increased or decreased, resulting in a respective increase or decrease in income tax expense.
We assessed that it was more-likely-than-not that we will not realize our federal deferred tax assets based on the absence of sufficient positive objective evidence that we would generate sufficient taxable income in our United States tax jurisdiction to realize the deferred tax assets. Accordingly, we recorded a valuation allowance on our federal deferred tax assets during the second quarter of 2013.
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Our ability to utilize our net operating loss and tax credit carryforwards may be limited, which could result in our payment of income taxes earlier than if we were able to fully utilize our net operating loss and tax credit carryforwards.
As of December�31, 2013, we had federal and state net operating loss carryforwards of $0.3 million and $32.1 million, respectively, and federal and state research and development tax credit carryforwards of $18.8 million and $20.0 million, respectively. The tax benefits related to utilization of net operating loss and tax credit carryforwards�may be limited due to ownership changes or as a result of other events.�For example, Section�382 of the Internal Revenue Code of 1986, as amended, imposes an annual limitation on the amount of net operating loss carryforwards and tax credit carryforwards that may be used to offset federal taxable income and federal tax liabilities when a corporation has undergone a significant change in its ownership. While prior changes in our ownership of acquired entities have resulted in annual limitations on the amount of our net operating loss and tax credit carryforwards that may be utilized in the future, we do not anticipate that such annual limitations will preclude the utilization of substantially all the net operating loss and tax credit carryforwards described above in the event we remain profitable. However, to the extent our use of net operating loss and tax credit carryforwards is further limited by future offerings or transactions or by our implementation of an international tax structure or other future events, our income would be subject to cash payments of income tax earlier than it would be if we were able to fully utilize our net operating loss and tax credit carryforwards without such further limitation.
We may not be able to obtain the financing necessary to operate and grow our business.
We may require substantial funds to continue our research and development programs and to fulfill our planned operating goals. We anticipate that existing cash, cash equivalents, marketable securities, investments and working capital at September�30, 2014 should enable us to maintain current and planned operations. Our future capital requirements, however, may vary from what we currently expect. There are a number of factors that may affect our planned future capital requirements and accelerate our need for additional working capital, many of which are outside our control. We may seek additional funding through public or private financings of debt or equity although additional funding may not be available to us on acceptable terms, if at all. If we were to raise additional capital through further sales of our equity securities, our stockholders would suffer dilution of their equity ownership. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, prohibit us from paying dividends, prohibit us from repurchasing our stock or making investments or force us to maintain specified liquidity or other ratios, any of which could harm our business, operating results and financial condition.
Risks Related to Our Intellectual Property
Our ability to compete and our business could be jeopardized if we are unable to secure or protect our intellectual property.
We rely on a combination of patent, copyright, trademark and trade secret laws, maskworks, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Assuming the other requirements for patentability are met, currently, the first to file a patent application is generally entitled to the patent. However, prior to March 16, 2013, in the United States, the first to invent was entitled to the patent. Patent applications in the U.S. and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions. Our issued patents and those that may issue in the future may be challenged, invalidated, rendered unenforceable or circumvented, which could limit our ability to stop competitors from marketing related products.
Furthermore, although we have taken steps to protect our intellectual property and proprietary technology by entering into nondisclosure agreements and intellectual property assignment agreements with our employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. Moreover, we are required to license any of our patent claims that are essential to implement MoCA specifications to other MoCA members, who could potentially include our competitors, on reasonable and non-discriminatory licensing terms. In addition, in connection with commercial arrangements with our customers and the service providers who deploy equipment containing our solutions, we may be required to license our intellectual property to third parties, including competitors or potential competitors.
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Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our trademarks, copyrighted material, products or technology. Monitoring unauthorized use of our trademarks, copyrighted material and technology is difficult and we cannot be certain that the steps we have taken to prevent such unauthorized use will be successful, particularly in foreign countries where the laws may not protect our proprietary rights as comprehensively as in the United States. In addition, if we become aware of a third party's unauthorized use or misappropriation of our trademarks, copyrighted material or technology, it may not be practicable, effective or cost-efficient for us to enforce our intellectual property and contractual rights, particularly where the initiation of a claim might harm our business relationships or risk a costly and protracted lawsuit, including a potential countersuit by a competitor with patents that may implicate our solutions. If competitors engage in unauthorized use or misappropriation of our trademarks, copyrighted material or technology, our ability to compete effectively could be harmed.
Our participation in patent pools and standards setting organizations, or other business arrangements, may require us to license our patents to competitors and other third parties and limit our ability to enforce or collect royalties for our patents.
In addition to our existing obligations to license our patent claims that are essential to implement the MoCA specifications to other MoCA members, in the course of participating in patent pools and other standards setting organizations or pursuant to other business arrangements, we may agree to license certain of our technologies on a reasonable and non-discriminatory basis and, as a result, our control over the license of such technologies may be limited. We may also be unable to limit to whom we license some of our technologies and may be unable to restrict many terms of the license. Consequently, our competitors may obtain the right to use our technology. In addition, our control over the application and quality control of our technologies that are included in patent pools or otherwise necessary for implementing industry standards may be limited.
Any dispute with a MoCA member regarding what patent claims are necessary to implement MoCA specifications could result in litigation which could have an adverse effect on our business.
We are required to grant to other MoCA members a non-exclusive and world-wide license on reasonable and non-discriminatory terms to any of our patent claims that are essential to implement MoCA specifications. The meaning of reasonable and non-discriminatory has not been settled by the courts, and accordingly, it is not a well-defined concept. If we had a disagreement with a MoCA member regarding which of our patent claims are necessary to implement MoCA specifications or regarding whether the terms of any license by us under reasonable and non-discriminatory terms fall within the scope and meaning of reasonable and non-discriminatory, this could result in litigation. Any such litigation, regardless of its merits, could be time-consuming, expensive to resolve, divert our management's time and attention and harm our reputation. In addition, any such litigation could result in us being required to license on reasonable and non-discriminatory terms certain of our patent claims which we previously believed did not need to be licensed under our MoCA agreement. Significant disagreements or any litigation between us and any MoCA member regarding patent claims necessary to implement MoCA or the scope and meaning of our reasonable and non-discriminatory terms could have an adverse effect on our business and harm our competitive position.
Possible third-party claims of infringement of proprietary rights against us, our customers or the service providers that purchase products from our customers, or other intellectual property claims or disputes, could have a material adverse effect on our business, results of operations or financial condition.*
The semiconductor industry is characterized by a high level of litigation based on allegations of infringement of proprietary rights. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we are selling and developing solutions. Because patent applications take many years to issue, currently pending applications, known or unknown to us, may later result in issued patents that we infringe. In addition, third parties continue to actively seek new patents in our field. It is difficult or impossible to keep fully abreast of these developments and therefore, as we develop new and enhanced solutions, we may sell or distribute solutions that inadvertently infringe patents held by third parties.
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We have in the past received, and in the future we, our customers or the service providers that purchase products from our customers may receive, inquiries from other patent holders and may become subject to claims that we infringe their intellectual property rights. Furthermore, we are, and may in the future be, engaged in development projects with technology partners that will result in the incorporation of technology contributed by us and our technology partners into one or more jointly developed products. Accordingly, even if our own technology and stand-alone products do not infringe third party patents, the technology that is contributed by any of our technology partners, or the combination of our technology with that of our technology partners, may infringe third party patents, subjecting us through the use, manufacture, sale, offer for sale or importation of our solutions to claims that we infringe the intellectual property rights of others. Any intellectual property claim or dispute, regardless of its merits, could force us, our customers or the service providers that purchase our solutions from our customers to license the third-party's patents for substantial royalty payments or cease the sale of the alleged infringing products or use of the alleged infringing technologies, or force us to defend ourselves and possibly our customers or contract manufacturers in litigation. Any cessation of solution sales by us, our customers or the service providers that purchase products from our customers could have a substantial negative impact on our revenues. Any litigation, regardless of its outcome, could result in substantial expense and significant diversion of our management's time and other resources. Moreover, any such litigation could subject us, our customers or the service providers that purchase our solutions from our customers to significant liability for damages (including treble damages), temporary or permanent injunctions, or the invalidation of proprietary rights or require us, our customers or the service providers that purchase products from our customers to license the third-party patents for substantial royalty or other payments.
In addition, we may also be required to indemnify our customers and contract manufacturers under our agreements if a third party alleges or if a court finds that our products or activities have infringed upon, misappropriated or misused another party's proprietary rights. We have received requests from certain customers to include increasingly broad indemnification provisions in our agreements with them. These indemnification provisions may, in some circumstances, extend our liability beyond the products we provide to include liability for combinations of components or system level designs and for consequential damages and/or lost profits. Even if claims or litigation against us are not valid or successfully asserted, these claims could result in significant costs and diversion of the attention of management and other key employees to defend.
Finally, if another supplier to one of our customers, or a customer of ours itself, were found to be infringing upon the intellectual property rights of a third party, the supplier or customer could be ordered to cease the manufacture, import, use, sale or offer for sale of its infringing product(s) or process(es), either of which could result, indirectly, in a decrease in demand from our customers for our products. If such a decrease in demand for our products were to occur, it could have an adverse impact on our operating results.
Our use of open source software and third-party technologies, including software, could impose limitations on our ability to commercialize our solutions.
We incorporate open source software into our solutions, including certain open source code which is governed by the GNU General Public License, Lesser GNU General Public License and Common Development and Distribution License. These licenses state that any program licensed under them may be liberally copied, modified and distributed. It is possible that a court would hold these licenses to be unenforceable or that someone could assert a claim for proprietary rights in a program developed and distributed under them. . In such event, we could be required to seek licenses from third parties in order to continue offering our solutions, make our proprietary code generally available in source code form (for example, proprietary code that links in particular ways to certain open source modules), which could result in our trade secrets being disclosed to the public and the potential loss of intellectual property rights in our software, require us to re-engineer our solutions, discontinue the sale of our solutions if re-engineering cannot be accomplished on a cost-effective and timely basis, or become subject to other consequences, any of which could adversely affect our business, operating results and financial condition.
In addition to technologies we have already licensed, we may find that we need to incorporate certain proprietary third-party technologies, including software programs, into our solutions in the future. However, licenses to relevant third-party technologies may not be available to us on commercially reasonable terms, if at all. Therefore, we could face delays in solution releases until alternative technology can be identified, licensed or developed, and integrated into our current solutions. Such alternative technology may not be available to us on reasonable terms, if at all, and may ultimately not be as effective as the preferred technology. Any such delays or failures to obtain licenses, if they occur, could materially adversely affect our business, operating results and financial condition.
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Because we license some of our software source code directly to customers, we face increased risks that our trade secrets will be exposed through inadvertent or intentional disclosure, which could harm our competitive position or increase our costs.
We license some of our software source code to our customers, which increases the number of people who have access to some of our trade secrets and other proprietary rights. Contractual obligations of our licensees not to disclose or misuse our source code or not to reverse engineer our solutions may not be sufficient to prevent such disclosure or misuse. The costs of enforcing contractual rights could substantially increase our operating costs and may not be cost-effective, reasonable under the circumstances or ultimately succeed in protecting our proprietary rights. If our competitors access our source code or reverse engineer our solutions, they may gain further insight into the technology and design of our solutions, which would harm our competitive position.
Because we rely extensively on our information technology systems and network infrastructure, any disruption or infiltration of such systems could materially adversely affect our business.
We maintain and rely extensively on information technology systems and network infrastructures for the effective operation of our business. A disruption, infiltration or failure of our information technology systems or any of our data centers as a result of software or hardware malfunctions, computer viruses, cyber attacks, employee theft or misuse, power disruptions, natural disasters or accidents could cause breaches of data security and loss of critical data, which in turn could materially adversely affect our business. Our security procedures, such as virus protection software and our business continuity planning, such as our disaster recovery policies and back-up systems, may not be adequate or implemented properly to fully address the adverse effect of such events, which could adversely impact our operations. In addition, our business could be adversely affected to the extent we do not make the appropriate level of investment in our technology systems as our technology systems become out-of-date or obsolete and are not able to deliver the type of data integrity and reporting we need to run our business. Furthermore, when we implement new systems and or upgrade existing systems, we could be faced with temporary or prolonged disruptions that could adversely affect our business.
Risks Related to International Operations
A significant portion of our revenue comes from our international customers, most of our products are manufactured overseas and a significant portion of our employees live and work outside the United States. As a result, our business may be harmed by political and economic conditions in foreign markets and the challenges associated with operating internationally.*
We have derived, and expect to continue to derive, a significant portion of our revenues from international markets. Many of our customers in Asia incorporate our chipsets into their products that are then sold to U.S.-based service providers. Net revenues outside of the United States comprised 97% and 97% of our total revenues for the nine months ended September�30, 2014 and 2013, respectively. In addition, most of our products are manufactured overseas and a significant portion of our labor force is outside the United States. Our international presence has significantly increased in recent years as a result of our acquisition of the STB business from Trident in 2012 and as a result our exposure to the risks of international business activities has increased. Certain of these risks, include:
" | difficulties involved in the staffing and management of geographically dispersed operations; |
" | complying with local laws and regulations, which are interpreted and enforced differently across jurisdictions and which can change significantly over time; |
" | longer sales cycles in certain countries, especially on initial entry into a new geographical market; |
" | greater difficulty evaluating a customers ability to pay, longer accounts receivable payment cycles and greater difficulty in the collection of past-due accounts; |
" | general economic conditions in each country; |
" | challenges associated with operating in diverse cultural and legal environments; |
" | seasonal reductions in business activity specific to certain markets; |
" | loss of revenue, property and equipment from expropriation, natural disasters, nationalization, war, insurrection, terrorism and other political risks; |
" | foreign taxes and the overlap of different tax structures, including modifications to the U.S. tax code as a result of international trade regulations; |
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" | foreign technical standards; |
" | changes in currency exchange rates; and |
" | import and export licensing requirements, tariffs, and other trade and travel restrictions. |
To the extent our international sales are adversely affected by any of these risks or are otherwise unsuccessful, we could experience a reduction in revenue and our operating results could suffer.
Because we operate in jurisdictions in which local business practices may be inconsistent with international regulatory requirements, including anti-corruption and anti-bribery regulations prescribed under the U.S. Foreign Corrupt Practices Act, or FCPA, which, among other things, prohibits giving or offering to give anything of value with the intent to influence the awarding of government contracts. Although we believe that we have adequate policies and enforcement mechanisms to ensure legal and regulatory compliance with the FCPA and other similar regulations, it is possible that some of our employees, subcontractors, agents or partners may violate any such legal and regulatory requirements, which may expose us to civil and/or criminal penalties and other sanctions, which could have a material adverse effect on our business, financial condition and results of operations. If we fail to comply with legal and regulatory requirements, our business and reputation may be harmed.
In addition, the laws that govern the protection of intellectual property rights in certain foreign countries where we sell our solutions, such as China and Korea, can make recognition and enforcement of contractual and intellectual property rights more expensive and difficult than is the case in the United States. In particular, we may have difficulty preventing ODMs and OEMs in these countries from incorporating our inventions, technologies, copyrights or trademarks into their products without our authorization or without paying us licensing fees. We may also experience difficulty enforcing our intellectual property rights in these countries, where intellectual property rights are not as respected as they are in the United States, Japan and Europe. Unauthorized use of our technologies and intellectual property rights may dilute or undermine the strength of our brand. Further, if we are not able to adequately monitor the use of our technologies by foreign-based ODMs and OEMs, or enforce our intellectual property rights in foreign countries, our revenue potential could be adversely affected.
Our solutions are subject to export and import controls that could subject us to liability or impair our ability to compete in international markets.
Our solutions are subject to U.S. export controls and may be exported outside the United States only with the required level of export license or through an export license exception, in part because we incorporate encryption technology into our solutions. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute our solutions or could limit our customers ability to implement our solutions in those countries. Changes in our solutions or changes in export and import regulations may create delays in the introduction of our solutions in international markets, prevent our customers with international operations from deploying our solutions throughout their global systems or, in some cases, prevent the export or import of our solutions to certain countries altogether. Any change in export or import regulations or related legislation, or change in the countries, persons or technologies targeted by such regulations or legislation, could result in decreased use of our solutions by, or in our decreased ability to export or sell our solutions to, existing or potential customers internationally.
In addition, we may be subject to customs duties and export quotas, which could have a significant impact on our revenue and profitability. The future imposition of significant increases in the level of customs duties or export quotas could have a material adverse effect on our business.
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Substantially all of our solutions, and the products of many of our customers, are manufactured by third-party contractors located in the Pacific Rim, a region subject to earthquakes and other natural disasters, as well as economic and political instability. Any disruption to the operations of these contractors could cause significant delays in the production or shipment of our solutions.
Substantially all of our solutions are manufactured by third-party contractors located in the Pacific Rim. The risk of an earthquake in this area is significant due to the proximity of major earthquake fault lines to the facilities of our foundry, assembly and test subcontractors. The occurrence of earthquakes or other natural disasters, or the occurrence of other catastrophic events such as a pandemic in the region, could result in the disruption of our foundry or assembly and test capacity or in the ability of our customers to purchase the raw materials or parts necessary to manufacture products, such as digital video recorders, or DVRs, into which our solutions are incorporated. In addition, many countries within the Pacific Rim have experienced, and continue to experience, periods of economic and political instability. Any deterioration in the economic and political conditions in the Pacific Rim that disrupts the operations of our third-party contractors could also result in the disruption of our foundry or assembly and test capacity. Any disruption caused by an earthquake or other catastrophic event or from the deterioration of economic and political conditions could cause significant delays in the production or shipment of our solutions until we are able to shift our manufacturing, assembling or testing from the affected contractor to another third-party vendor. We may not, and our customers may not, be able to obtain alternate capacity on favorable terms, if at all.
As a result of our efforts to increase our sales in China, we are increasingly exposed to risks of doing business in China.
We expect to continue to expand our business and operations in China. Our success in the Chinese markets may be adversely affected by China's continuously evolving laws and regulations, including those relating to taxation, import and export tariffs, currency controls, cross-border capital flows, environmental regulations, indigenous innovation, and intellectual property rights and enforcement of those rights. Enforcement of existing laws or agreements may be inconsistent. In addition, changes in the political environment, governmental policies or U.S.-China relations could result in revisions to laws or regulations or their interpretation and enforcement, exposure of our proprietary intellectual property, increased taxation, restrictions on imports, import duties or currency revaluations, which could have an adverse effect on our business plans and operating results. Further, the evolving labor market and increasing labor unrest in China may have a negative impact on our customers which would result in a negative impact on our business and results of operations.
Risks Related to Ownership of Our Common Stock
Our stock price is volatile and may decline regardless of our operating performance, and you may not be able to resell your shares at or above the price at which you purchased such shares.
The market price for our common stock is volatile and may fluctuate significantly in response to a number of factors, most of which we cannot control, including:
" | price and volume fluctuations in the overall stock market; |
" | market conditions or trends in our industry or the economy as a whole; |
" | changes in operating performance and stock market valuations of other technology companies generally, or those that sell semiconductor products in particular; |
" | the timing of customer or service provider orders that may cause quarterly or other periodic fluctuations in our results that may, in turn, affect the market price of our common stock; |
" | the seasonal nature of the deployment of products that incorporate our solutions by certain service providers which may affect the timing of orders for our solutions; |
" | the timing of revenue recognition on sales arrangements, which may include multiple deliverables, and the effect of our use of inventory hubbing arrangements; |
" | the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; |
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" | changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock; |
" | the publics response to press releases or other public announcements by us or third parties impacting us or our business, including our filings with the SEC and announcements relating to solution development, litigation and intellectual property; |
" | the sustainability of an active trading market for our common stock; |
" | future sales of our common stock by our executive officers, directors and significant stockholders; |
" | announcements of mergers or acquisition transactions; |
" | market acceptance and understanding of our acquisitions; |
" | announcements of technical innovations, new products or design wins by our competitors or customers; |
" | other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to these events; and |
" | changes in accounting principles. |
In addition, the stock markets, and in particular NASDAQ, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.
Future sales of our common stock or the issuance of securities convertible into or exercisable for shares of our common stock may depress our stock price.
Sales of a substantial number of shares of our common stock by stockholders, the issuance by the company of securities convertible into or exercisable for shares of our common stock, or the expectation or perception in the market that the holders of a large number of our shares of common stock intend to sell their shares, could significantly reduce the market price of our common stock. Our common stock is less liquid than the stock of companies with broader public ownership and, as a result, the trading of a relatively small volume of our common stock may have a greater impact on the trading price for our stock and lead to increased volatility in our stock price.
Anti-takeover provisions in our charter documents and Delaware law might deter acquisition bids for us that you might consider favorable.
Our amended and restated certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:
" | establish a classified board of directors so that not all members of our board are elected at one time; |
" | authorize the issuance of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval, and which may include rights superior to the rights of the holders of common stock; |
" | prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; |
" | provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; |
" | establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; and |
" | provide that in addition to any vote required by law or by our amended and restated certificate of incorporation, the approval by holders of at least 66-2/3% of our then outstanding common stock is required to adopt, amend or repeal any provision of our amended and restated bylaws. |
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In addition, because we are incorporated in Delaware, we are governed by the provisions of Section�203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire.
Our principal stockholders, executive officers and directors have substantial control over the company, which may prevent you and other stockholders from influencing significant corporate decisions and may harm the market price of our common stock.*
As of September�30, 2014, our executive officers, directors and holders of five percent or more of our outstanding common stock, beneficially owned, in the aggregate, 28.6% of our outstanding common stock. These stockholders may have interests that conflict with our other stockholders and, if acting together, have the ability to influence the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. Accordingly, this concentration of ownership may harm the market price of our common stock by:
" | delaying, deferring or preventing a change of control; |
" | impeding a merger, consolidation, takeover or other business combination involving us; or |
" | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. |
We do not expect to pay any cash dividends for the foreseeable future.
The continued expansion of our business will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Investors seeking cash dividends in the foreseeable future should not purchase or hold our common stock.
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Item�2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Recent Sales of Unregistered Securities
The following sets forth information regarding all unregistered securities of the Company that were sold during the three months ended September�30, 2014:
(1) | As of June 30, 2014, options to purchase up to 588,540 shares of our common stock were outstanding under our 2001 Stock Option Plan, or 2001 Plan. Of these options, during the three months ended September�30, 2014, 4,462 of these options were canceled without being exercised and options to purchase 3,000 shares of common stock were exercised at a weighted average exercise price of $1.50 per share. As of September�30, 2014, options to purchase up to 581,078 shares of our common stock remained outstanding under the 2001 Plan. |
(2) | As of June 30, 2014, options to purchase up to 64,935 shares of our common stock were outstanding under our RF Magic, Inc. 2000 Incentive Stock Plan, or RF Magic Plan. During the three months ended September�30, 2014, none of these options were canceled without being exercised and no options to purchase shares of common stock were exercised. As of September�30, 2014, options to purchase up to 64,935 shares of our common stock remained outstanding under the RF Magic Plan. |
All of the offers, sales and issuances of the securities described in paragraphs (1)�and (2)�were deemed to be exempt from registration under the Securities Act of 1933, as amended, in reliance on Rule 701 in that the transactions were under compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities were our employees, directors or bona fide consultants and received the securities under the 2001 Plan or RF Magic Plan, as the case may be. Appropriate legends were affixed to the securities issued in these transactions to the extent required. Each of the recipients of securities in these transactions had adequate access, through employment, business or other relationships, to information about us.
Issuer Purchases of Equity Securities
Issuer purchases of equity securities during the third quarter of fiscal 2014 were:
Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs�(1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||
(in thousands) | (in thousands) | (in thousands) | |||||||||||
July 1 to July 31, 2014 | 839 | $ | 3.30 | 839 | $ | 10,491 | |||||||
August 1 to August 31, 2014 | 10,491 | ||||||||||||
September 1 to September 30, 2014 | |||||||||||||
Total | 839 | 3.30 | 839 | ||||||||||
(1) On September 26, 2013, we announced a share repurchase program authorizing us to repurchase up to $30.0 million of our common stock. Purchases under this program could be made until September 30, 2014, however, purchase activity, or the program itself, could have been discontinued at any time. On September�30, 2014, the $10.5 million remaining available for repurchase under this program expired.
Item 6.��������Exhibits
The exhibits listed in the accompanying Index to Exhibits are filed with, or incorporated by reference into, this Quarterly Report. The exhibit numbers on the Index to Exhibits that are followed by an asterisk (*)�indicate exhibits filed with this Quarterly Report. All other exhibit numbers indicate exhibits filed by incorporation by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENTROPIC�COMMUNICATIONS, INC. | ||
By: | � | /S/����David Lyle����� |
� | � | David Lyle Duly Authorized Officer and Principal Financial Officer |
Date: | November�10, 2014 | |
INDEX TO EXHIBITS
Exhibit Number | Description of Document | |
3.1(1) | Amended and Restated Certificate of Incorporation of the Registrant. | |
3.2(2) | Amended and Restated Bylaws of the Registrant. | |
4.1 | Reference is made to Exhibits 3.1 and 3.2. | |
4.2(3) | Form of Common Stock Certificate of the Registrant. | |
10.1* | David Lyle Compensation Changes Agreement, dated October 6, 2014. | |
10.2* | Mike Farese Compensation and Work Schedule Agreement, dated October 17, 2014 | |
31.1* | Certification of the Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of the Chief Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32* | Certification of the Chief Executive Officer and Chief Financial Officer, as required 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. | |
*����Filed herewith.
** | Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 460T, these interactive data files are deemed not filed and otherwise are not subject to liability. |
(1) | Incorporated herein by reference to the Registrants Current Report on Form 8-K filed with the SEC on December�13, 2007. |
(2) | Incorporated herein by reference to the Registrants Current Report on Form 8-K filed with the SEC on October 1, 2013. |
(3) | Incorporated herein by reference to the Registrants Registration Statement on Form S-1 (No. 333-144899), as amended, filed with the SEC. |
October 6, 2014
Mr. David Lyle
c/o Entropic Communications, Inc.
6350 Sequence Drive
San Diego, CA 92121
Re:����Compensation Adjustments
Dear David:
This letter agreement (the Agreement ) confirms the terms of the offer by Entropic Communications, Inc. (the Company ) to provide you with certain compensation and bonus opportunities described herein, as approved by the Companys board of directors on September 11, 2014. Please confirm your acceptance of the compensation and bonus opportunities described in this Agreement by returning a signed and dated copy to me.
Certain capitalized terms used in this Agreement are defined in Paragraph 4 below.
1.����Base Salary Increase. The Company will provide you with an increase in your base salary to $375,000 annually (or $15,625 per pay period) (the Base Salary Increase ) effective September 1, 2014.
2.����Cash Bonus Payment. The Company will provide you with a lump sum cash bonus payment of $300,000 (three hundred thousand dollars) payable on September 15, 2015 (the Cash Bonus ). You shall be eligible for the Cash Bonus if you:
(a)����Remain employed by the Company from the date of this Agreement through September 15, 2015;
(b)����Remain employed by the Company from the date of this Agreement through the effective date of a Change of Control; or
(c)����Are involuntarily terminated without Cause and thereafter deliver to the Company a signed release and waiver in the form substantially similar to the form attached hereto as Exhibit A (the Release and Waiver ) within the applicable time period set forth therein, but in no event
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later than forty-five (45) days following your termination, and permit it to become effective in accordance with its terms.
A termination of your employment for any reason other than an involuntary termination without Cause (e.g., involuntary termination for Cause, termination due to your death, Complete Disability, or a voluntary termination for any reason) prior to the earliest of the foregoing events shall result in your forfeiture of any right to receive the Cash Bonus.
The Cash Bonus shall replace the target annual incentive you would otherwise be eligible for in calendar year 2015 under the Companys 2015 Management Bonus Plan; you will revert back to eligibility under the Companys Management Bonus Plan at your target annual incentive (currently 60% of base salary) in calendar year 2016.
3. ����Equity Award. The Company will issue an award of a Restricted Stock Unit covering 100,000 (one hundred thousand) shares of the Companys Common Stock (the RSU Award ). The Vesting Commencement Date for the RSU Award shall be September 11, 2014. Subject to your Continuous Service, the RSU Award shall vest over a four-year period, vesting 25% annually on the first quarterly vesting date following the 1st, 2nd, 3rd and 4th anniversary of the Vesting Commencement Date. The RSU Award will be granted and subject to the terms of the of the Companys equity plan in effect on the date of grant and the Companys standard award agreement in effect on the date of grant, which you will be required to accept as a condition of receiving the RSU Award. Vesting shall be contingent upon your Continuous Service (in accordance with and as defined in the equity plan) from the date of this Agreement and through each vesting date. The RSU Award will be subject to accelerated vesting in certain conditions, as set forth in your Change of Control Agreement.
4.����Definitions. For purposes of this Agreement, the following definitions apply:
(a)���� Cause means you are terminated for any of the following reasons: (i) your conviction of, or plea of nolo contendere to, a felony; (ii) your theft or embezzlement, or attempted theft or embezzlement, of money or property or assets of the Company; (iii) your termination consistent with the provisions and procedures of the Companys drug policy; (iv) your continued neglect of your duties in connection with your employment by the Company (not due to a physical or mental illness), which continues for at least ten (10) days after written notice of demand for compliance is delivered to you by the Company, which demand identifies the manner in which the Company believes that you have not performed such duties and the steps required to cure such failure to perform; or (v) your intentional and willful engagement in misconduct which is materially injurious to the Company. Notwithstanding the foregoing clause (iv), you may not be terminated for Cause as a result of your failure or inability to perform assigned duties which are substantially inconsistent with your duties and responsibilities in effect during the year preceding any Change of Control. Notwithstanding the foregoing clauses, your employment shall not be deemed to be terminated for Cause, and no other action shall be taken by the Company which is adverse to you hereunder unless and until there shall have been delivered to you a copy of a statement of the basis for Cause, signed and approved by the Companys Chief Executive Officer.
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(b)���� Continuous Service means that the service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which you render service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which you render such service, provided that there is no interruption or termination of the service with the Company or an Affiliate, shall not terminate Continuous Service; provided, however, if the Entity for which services are rendered ceases to qualify as an Affiliate, as determined by the Board in its sole discretion, such Continuous Service shall be considered to have terminated on the date such Entity ceases to qualify as an Affiliate. To the extent permitted by law, the Board or the chief executive officer of the Company, in that partys sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of: (i) any leave of absence approved by the Board or the chief executive officer of the Company, including sick leave, military leave or any other personal leave; or (ii) transfers between the Company, an Affiliate, or their successors. Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for purposes of vesting in a Stock Award only to such extent as may be provided in the Companys leave of absence policy, in the written terms of any leave of absence agreement or policy applicable, or as otherwise required by law.
(c)���� Change of Control means (i) the direct or indirect sale or exchange in a single or series of related transactions by the Companys stockholders of more than fifty percent (50%) of the Companys voting stock; (ii) a merger or consolidation in which the Company is a party after which the Companys stockholders immediately prior to such transaction hold less than fifty percent (50%) of the voting securities of the surviving entity; (iii) the sale, exchange, or transfer of all or substantially all of the Companys assets after which the Companys stockholders immediately prior to such transaction hold less than fifty percent (50%) of the voting securities of the corporation or other business entity to which the Companys assets were transferred; or (iv) a liquidation or dissolution of the Company.
(d)���� Complete Disability means you are prevented from performing your employment duties by reason of any physical or mental incapacity that results in your satisfaction of all requirements necessary to receive benefits under the Companys long-term disability plan due to a total disability.
5.����At-Will Employment. Nothing in this Agreement is intended to or should be construed to contradict, modify or alter your at-will employment relationship with the Company. You shall remain an at-will employee, meaning that you or the Company may terminate your employment at any time for any reason, with or without cause, and with or without notice.
6.����Section 409A Compliance. Notwithstanding anything to the contrary herein, the following provisions apply to the extent severance benefits provided herein are subject to Section 409A of the Internal Revenue Code of 1986, as amended (the Code ) and the regulations and other guidance thereunder and any state law of similar effect (collectively Section 409A ). Severance benefits shall not commence until you have a separation from service for purposes of Section 409A. The severance benefits are intended to satisfy the exemptions from application of Section 409A provided under Treasury Regulations Sections 1.409A-1(b)(4) and 1.409A-1(b)(5). However, if such exemptions are not available and you are, upon separation from service, a specified employee
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for purposes of Section 409A, then, solely to the extent necessary to avoid adverse personal tax consequences under Section 409A, the timing of the severance benefits payments shall be delayed until the earlier of (i) six (6) months and one day after your separation from service, or (ii) your death.
7.����Section 280G. If it is determined that the amounts payable to you under this Agreement, when considered together with any other amounts payable to you as a result of a Change of Control (collectively, the Payment ) would (i) constitute a parachute payment within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the Code ), and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the Excise Tax ), then such Payment shall be equal to the Reduced Amount. The Reduced Amount shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in your receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting parachute payments is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the following order: reduction of cash payments; reduction of accelerated vesting of stock options; reduction of employee benefits. In the event that acceleration of vesting of stock option compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant.
The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Change of Control shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder.
The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to you and the Company within fifteen (15) calendar days after the date on which your right to a Payment is triggered (if requested at that time by you or the Company) or such other time as requested by you or the Company. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish you and the Company with an opinion reasonably acceptable to you that no Excise Tax will be imposed with respect to such Payment. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon you and the Company, except as set forth below.
If, notwithstanding any reduction described in this Section 7, the IRS determines that you are liable for the Excise Tax as a result of the receipt of the payment of benefits as described above, then you shall be obligated to pay back to the Company, within thirty (30) days after a final IRS determination or in the event that you challenge the final IRS determination, a final judicial determination, a portion of the payment equal to the Repayment Amount. The Repayment Amount with respect
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to the payment of benefits shall be the smallest such amount, if any, as shall be required to be paid to the Company so that your net after-tax proceeds with respect to any payment of benefits (after taking into account the payment of the Excise Tax and all other applicable taxes imposed on such payment) shall be maximized. The Repayment Amount with respect to the payment of benefits shall be zero if a Repayment Amount of more than zero would not result in your net after-tax proceeds with respect to the payment of such benefits being maximized. If the Excise Tax is not eliminated pursuant to this paragraph, you shall pay the Excise Tax.
Notwithstanding any either provision of this Section 7, if (i) there is a reduction in the payment of benefits as described in this section, (ii) the IRS later determines that you are liable for the Excise Tax, the payment of which would result in the maximization of your net after-tax proceeds (calculated as if your benefits had not previously been reduced), and (iii) you pay the Excise Tax, then the Company shall pay to you those benefits which were reduced pursuant to this section contemporaneously or as soon as administratively possible after you pays the Excise Tax so that your net after-tax proceeds with respect to the payment of benefits is maximized.
8.����Entire Agreement. This Agreement constitutes the complete, final and exclusive embodiment of the entire Agreement between you and the Company with regard to the subject matter hereof. The benefits provided under this Agreement shall be separate from and in addition to the benefits provided under any bonus plan or agreement applicable to you, including your Change of Control Agreement. This Agreement is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein. It may not be modified except in a writing signed by you and the President and Chief Executive Officer of the Company.
Dave, I am glad that we are able to provide this benefit to you.
Sincerely,
/s/ Suzanne C. Zoumaras
Suzanne Zoumaras
Senior Vice President, Human Resources
Accepted and Agreed:
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/s/ David Lyle��������Date: _____10/18/14__________
David Lyle
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EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In consideration of the payments and other benefits set forth in the Compensation Adjustments Agreement dated October 6, 2014 (the Agreement ) to which this form is attached, I, David Lyle hereby furnish Entropic Communications Incorporated, (the Company ), with the following release and waiver ( Release and Waiver ).
In exchange for the consideration provided to me by the Agreement that I am not otherwise entitled to receive, I hereby generally and completely release the Company and its directors, officers, employees, shareholders, partners, agents, attorneys, predecessors, successors, parent and subsidiary entities, insurers, affiliates, and assigns from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are in any way related to events, acts, conduct, or omissions occurring prior to my signing this Release and Waiver. This general release includes, but is not limited to all known claims or Unknown Claims (as further defined below): (1) arising out of or in any way related to my employment with the Company or the termination of that employment; (2) related to my compensation or benefits from the Company, including, but not limited to, salary, bonuses, commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership interests in the Company; (3)�for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing; (4)� tort claims, including, but not limited to, claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (5) all federal, state, and local statutory claims, including, but not limited to, claims for discrimination, harassment, retaliation, attorneys fees, or other claims arising under the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964 and the Americans with Disabilities Act, the Age Discrimination in Employment Act of 1967, as amended, the California Fair Employment & Housing Act (as amended), Worker Adjustment and Retraining Notification Act (WARN) Act, and all claims for attorneys fees, costs and expenses. Unknown Claims means any and all claims that Employee does not know or suspect to exist in Employees favor.
I also acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to any claims I may have against the Company.
I acknowledge that, among other rights, I am waiving and releasing any rights I may have under ADEA, that this Release and Waiver is knowing and voluntary, and that the consideration given for this Release and Waiver is in addition to anything of value to which I was already entitled as an executive of the Company. If I am 40 years of age or older upon execution of this Release and Waiver, I further acknowledge that I have been advised, as required by the Older Workers
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Benefit Protection Act, that: (a) the release and waiver granted herein does not relate to claims under the ADEA which may arise after this Release and Waiver is executed; (b) I should consult with an attorney prior to executing this Release and Waiver; (c) I have twenty-one (21) days in which to consider this Release and Waiver (although I may choose voluntarily to execute this Release and Waiver earlier); (d) I have seven (7) days following the execution of this Release and Waiver to revoke my consent to this Release and Waiver; and (e) this Release and Waiver shall not be effective until the eighth day after I execute this Release and Waiver and the revocation period has expired.
I acknowledge my continuing obligations under my Proprietary Information and Inventions Agreement. Pursuant to the Proprietary Information and Inventions Agreement I understand that among other things, I must not use or disclose any confidential or proprietary information of the Company and I must immediately return all Company property and documents (including all embodiments of proprietary information) and all copies thereof in my possession or control. I understand and agree that my right to the severance pay I am receiving in exchange for my agreement to the terms of this Release and Waiver is contingent upon my continued compliance with my Proprietary Information & Inventions Agreement.
This Release and Waiver constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein. This Release and Waiver may only be modified by a writing signed by both me and a duly authorized officer of the Company.
Date: __________________����By: __________________
���������������������������������������������������������������DAVID LYLE
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October 17, 2014
Mr. Michael Farese
c/o Entropic Communications Inc.
6350 Sequence Drive
San Diego, CA 92121
Re: Compensation and Work Schedule
Dear Mike:
This letter agreement (the Agreement ) confirms the terms of the agreement regarding your compensation and work schedule with Entropic Communications, Inc. (the Company ).
In accordance with your letter dated September 12, 2014, you have resigned your position as CTO with the Company effective December 31, 2014. You confirm that you are also resigning as an employee of the Company as of December 31, 2014. You acknowledge that, as a result of your resignation of employment, you will not receive any benefits under your Amended and Restated Change of Control Agreement for any Change of Control that occurs after December 31, 2014.
Effective September 26, 2014 you will reduce your work schedule to 80% of a full time schedule and your base salary will be reduced to $188,800 annually ($7,866.67 semi-monthly).
Your reduced work schedule will not impact your health and welfare benefits eligibility. However, your bonus eligibility and vacation time-off and sick leave accruals will be reduced commensurate with your reduced schedule, to 80% of your full time accruals, effective September 26, 2014.
Also, it is presently contemplated that you would make yourself available to provide consulting services to the Company for approximately six months after the effective date of your resignation. The Company is not obligated to engage you to provide consulting services, however, if you are engaged to provide such services then such engagement would be pursuant to a written agreement, duly authorized, executed and delivered in substantially the form attached hereto as Exhibit A. Absent such agreement neither you nor the Company will have any commitment related to such services.
As a reminder, your employment with the Company continues to be at will which means that you or the Company will be entitled to terminate the employment relationship at any time, for any reason, with or without Cause. Any contrary representations, which may have been made to you, are superseded by this Agreement. This is the full and complete agreement between you and the Company on this term. Although your job duties, title, compensation
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and benefits, as well as the Companys personnel policies and procedures may change from time to time, the at will nature of your employment may only be changed in an express written agreement signed by you and a duly authorized officer of the Company with Board of Directors approval.
This Agreement constitutes the complete, final and exclusive embodiment of the entire Agreement between you and the Company with regard to the subject matter hereof. The matters confirmed under this Agreement shall be separate from and in addition to any other agreements applicable to you, including your Change of Control Agreement. This Agreement is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein. It may not be modified except in a writing signed by you and duly authorized officer of the Company with Board of Directors approval.
Please confirm your acceptance of the changes described in this Agreement by returning a signed and dated copy to me.
Sincerely,
/s/Suzanne C. Zoumaras
Suzanne Zoumaras
Senior Vice President, Human Resources
Accepted and Agreed:
/s/ Michael Farese��������Date: ____10/28/14__________
Michael Farese
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��������������������������������������������������������������������������������������������������������������������DRAFTExhibit A
INDEPENDENT CONTRACTOR AGREEMENT
This Independent Contractor Agreement ( Agreement ) is made and entered into as of date by and between Entropic Communications, Inc. ( Entropic or Company ), having a principal place of business at 6290 Sequence Drive, San Diego, CA 92121, and Michael Farese ( Contractor or Consultant ).
1.Engagement of Services. Entropic hereby engages Contractor, and Contractor agrees to perform such services as are set forth on Exhibit�A (the Services ). The Services shall be performed at the direction of Patrick Henry, CEO, or other executive as designated. All Services shall be performed in a professional manner and in accordance with any mutually agreed upon specifications or descriptions of Services.
2.����Compensation.
2.1����Fees. In consideration for Services rendered hereunder, Entropic will pay Contractor the fees set forth on Exhibit�A. Contractor will invoice Entropic for Services rendered in accordance with the payment schedule set forth in Exhibit�A and Entropic shall pay such amounts no later than thirty�(30) days after Entropics receipt of such invoice.
2.2����Expenses. Company shall reimburse Contractor for reasonable expenses incurred in connection with Contractors performance of services under this Agreement, provided that the expenses are approved in advance by a Vice President of the Company and Contractor promptly provides documentation satisfactory to Company to support Contractors request for reimbursement.
3.����Independent Contractor Relationship. Contractors relationship with Company will be that of an independent contractor, and nothing in this Agreement is intended to, or should be construed to, create a partnership, agency, joint venture or employment relationship. Contractor will not be entitled to any of the benefits that Company may make available to its employees, including, but not limited to, group health, life insurance, profit-sharing or retirement benefits, paid vacation, holidays or sick leave. Contractor will not be authorized to make any representation, contract or commitment on behalf of Company unless specifically requested or authorized in writing to do so by the CEO of the Company. Contractor will be solely responsible for obtaining any business or similar licenses required by any federal, state or local authority. In addition, Contractor will be solely responsible for, and will file on a timely basis, all tax returns and payments required to be filed with, or made to, any federal, state or local tax authority with respect to the performance of services and receipt of fees under this Agreement. No part of Contractors compensation will be subject to withholding by Entropic for the payment of any social security, federal, state or any other employee payroll taxes. Entropic will regularly report amounts paid to Contractor by filing Form 1099MISC with the Internal Revenue Service as required by law.
3.1����Legal Right to Work in the United States. In accordance with immigration laws, Consultant warrants that he/she has the legal right to work in the United States for any company without the requirement for visa or other immigration sponsorship by the Company.
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3.2����Method of Performing Services; Results. In accordance with Companys objectives, Contractor will determine the method, details and means of performing the services required by this Agreement. Company shall have no right to, and shall not, control the manner or determine the method of performing Contractors services. Contractor shall provide the services for which Contractor is engaged to the reasonable satisfaction of Company.
3.3����Workplace, Hours and Instrumentalities. Contractor may perform the services required by this Agreement at any place or location and at such times as Contractor shall determine. Contractor agrees to provide all tools and instrumentalities, if any, required to perform the services under this Agreement; however, Company will/may at its convenience make available to Contractor suitable office space, computer equipment, and the like, to facilitate the efficient rendering of Contractors services to Company. Such facilities shall be used by Contractor, if at all, at Contractors discretion, unless otherwise stipulated in Exhibit A.
4.����Intellectual Property Rights.
4.1����Disclosure and Assignment of Innovations.
(a)����Innovations; Company Innovations. Innovations includes processes, machines, compositions of matter, improvements, inventions (whether or not protectable under patent laws), works of authorship, information fixed in any tangible medium of expression (whether or not protectable under copyright laws), moral rights, mask works, trademarks, trade names, trade dress, trade secrets, know-how, ideas (whether or not protectable under trade secret laws), and all other subject matter protectable under patent, copyright, moral right, mask work, trademark, trade secret or other laws, and includes without limitation all new or useful art, combinations, discoveries, formulae, manufacturing techniques, technical developments, discoveries, artwork, software, and designs. Company Innovations are Innovations that Contractor, solely or jointly with others, conceives, reduces to practice, creates, derives, develops or makes within the scope of Contractors work for Company under this Agreement.
(b)����Disclosure and Ownership of Company Innovations. Contractor agrees to make and maintain adequate and current records of all Company Innovations, which records shall be and remain the property of Company. Contractor agrees to promptly disclose to Company every Company Innovation. Contractor hereby does and will assign to Company, or Companys designee, Contractors entire worldwide right, title and interest in and to all Company Innovations and all associated records and intellectual property rights.
(c)����Assistance. Contractor agrees to execute upon Companys request a signed transfer of Company Innovations to Company in the form included with this Agreement for each of the Company Innovations, including, but not limited to, computer programs, notes, sketches, drawings and reports. Contractor agrees to assist Company in any reasonable manner to obtain, perfect and enforce, for Companys benefit, Companys rights, title and interest in any and all countries, in and to all patents, copyrights, moral rights, mask works, trade secrets, and other property rights in each of the Company Innovations. Contractor agrees to execute, when requested, for each of the Company Innovations (including derivative works, improvements, renewals, extensions, continuations, divisionals, continuations in part, or continuing patent applications thereof), (i)�patent, copyright, mask work or similar applications related to such Company Innovation, (ii)�documentation (including without limitation assignments) to permit Company to obtain, perfect and enforce Companys right, title and interest in and to such Company Innovation, and (iii)�any other lawful documents deemed necessary by Company to carry out the purpose of this Agreement. If called upon to render assistance under this paragraph, Contractor will be entitled to a fair and reasonable fee in addition to reimbursement of authorized expenses incurred at the prior written request of Company. In the
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event that Company is unable for any reason to secure Contractors signature to any document Contractor is required to execute under this Paragraph�4.1(c) ( Assistance ), Contractor hereby irrevocably designates and appoints Company and Companys duly authorized officers and agents as Contractors agents and attorneys-in-fact to act for and in Contractors behalf and instead of Contractor, to execute such document with the same legal force and effect as if executed by Contractor.
(d)����Out-of-Scope Innovations. If Contractor incorporates any Innovations relating in any way to Companys business or demonstrably anticipated research or development or business which were conceived, reduced to practice, created, derived, developed or made by Contractor either outside of the scope of Contractors work for Company under this Agreement or prior to the Effective Date set forth below (collectively, the Out-of-Scope Innovations ) into any of the Company Innovations, Contractor hereby grants to Company or Companys designees a royalty-free, irrevocable, worldwide, fully paid-up license (with rights to sublicense through multiple tiers of sublicensees) to practice all applicable patent, copyright, moral right, mask work, trade secret and other intellectual property rights relating to any Out-of-Scope Innovations which Contractor incorporates, or permits to be incorporated, in any Company Innovations. Contractor agrees that Contractor will not incorporate, or permit to be incorporated, any Innovations conceived, reduced to practice, created, derived, developed or made by others or any Out-of-Scope Innovations into any of the Company Innovations without Companys prior written consent.
4.2����Confidential Information.
(a)����Definition of Confidential Information. Confidential Information as used in this Agreement shall mean any and all technical and non-technical information including patent, copyright, trade secret, and proprietary information, techniques, sketches, drawings, models, inventions, know-how, processes, apparatus, equipment, algorithms, software programs, software source documents, and formulae related to the current, future and proposed products and services of Company, Companys suppliers and customers, and includes, without limitation, Company Innovations, Company Property (defined below), and Companys information concerning research, experimental work, development, design details and specifications, engineering, financial information, procurement requirements, purchasing manufacturing, customer lists, business forecasts, sales and merchandising and marketing plans and information.
(b)����Nondisclosure and Nonuse Obligations. Except as permitted in this paragraph, Contractor shall neither use nor disclose the Confidential Information. Contractor may use the Confidential Information solely to perform services for the benefit of Company. Contractor agrees that Contractor shall treat all Confidential Information of Company with the same degree of care as Contractor accords to Contractors own Confidential Information, but in no case less than reasonable care. If Contractor is not an individual, Contractor agrees that Contractor shall disclose Confidential Information only to those of Contractors employees who need to know such information, and Contractor certifies that such employees have previously agreed, either as a condition of employment or in order to obtain the Confidential Information, to be bound by terms and conditions substantially similar to those terms and conditions applicable to Contractor under this Agreement. Contractor agrees not to communicate any information to Company in violation of the proprietary rights of any third party. Contractor will immediately give notice to Company of any unauthorized use or disclosure of the Confidential Information and agrees to assist Company in remedying any such unauthorized use or disclosure of the Confidential Information.
(c)����Exclusions from Nondisclosure and Nonuse Obligations. Contractors obligations under Paragraph�4.2(b) ( Nondisclosure and Nonuse Obligations ) with
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respect to any portion of the Confidential Information shall not apply to any such portion which Contractor can demonstrate: (a)�was in the public domain at or subsequent to the time such portion was communicated to Contractor by Company through no fault of Contractor; or (b)�was rightfully in Contractors possession free of any obligation of confidence at or subsequent to the time such portion was communicated to Contractor by Company. A disclosure of Confidential Information by Contractor, either: (a)�in response to a valid order by a court or other governmental body; (b)�otherwise required by law; or (c)�necessary to establish the rights of either party under this Agreement, shall not be considered to be a breach of this Agreement or a waiver of confidentiality for other purposes; provided, however, that Contractor shall provide prompt prior written notice thereof to Company to enable Company to seek a protective order or otherwise prevent such disclosure.
4.3����Ownership and Return of Company Property. All materials (including, without limitation, documents, drawings, models, apparatus, sketches, designs, lists, all other tangible media of expression), equipment, documents, data, and other property furnished to Contractor by Company, whether delivered to Contractor by Company or made by Contractor in the performance of services under this Agreement (collectively, the Company Property ) are the sole and exclusive property of Company or Companys suppliers or customers, and Contractor hereby does and will assign to Company all rights, title and interest Contractor may have or acquire in the Company Property. Contractor agrees to keep all Company Property at Contractors premises unless otherwise permitted in writing by Company. At the end of this Agreement, or at Companys request, and no later than five (5)�days after the end of this Agreement or Companys request, Contractor shall destroy or deliver to Company, at Companys option: (a)�all Company Property; (b)�all tangible media of expression in Contractors possession or control which incorporate or in which are fixed any Confidential Information; and (c)�written certification of Contractors compliance with Contractors obligations under this subparagraph.
4.4����Observance of Company Rules. At all times while on Companys premises or representing the Company, Contractor will observe Companys rules and regulations with respect to conduct, health and safety and protection of persons and property.
5.����No Conflict of Interest. During the term of this Agreement, Contractor will not accept work, enter into a contract, or accept an obligation, inconsistent or incompatible with Contractors obligations, or the scope of services rendered for Company, under this Agreement. Contractor warrants that, to the best of Contractors knowledge, there is no other contract or duty on the part of Contractor that conflicts with or is inconsistent with this Agreement. This paragraph 5 does not prevent Contractor from performing services for clients other than Company so long as such services do not directly or indirectly conflict with Contractors obligations under this Agreement. During the term of this Agreement, Contractor will not accept work, enter into a contract, accept an obligation, recommend, or assist any company or entity other than Company with home networking or communication on coaxial cabling.
6.����Term and Termination.
6.1����Term. This Agreement is effective as of January 1, 2015 ( Effective Date ), and will end on June 15, 2015 unless sooner terminated in accordance with subparagraphs�6.2 or 6.3 below. There is a maximum of 176 hours allowable under this Agreement and there is no minimum number of hours committed to the Contractor under this Agreement. This Agreement is renewable upon the mutual consent of both parties. The terms of such renewal must be in writing and signed by both Company and Contractor.
6.2����Termination by Company. Company may terminate this Agreement immediately upon Contractors breach of Paragraph�4 ( Intellectual Property Rights ), 5�( No Conflict of Interest ) or 7�( Noninterference with Business ). For any other material breach of
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this Agreement by Contractor, Company may terminate this Agreement if Contractor has not cured the breach within ten (10)�days of receiving written notice from Company. Company may terminate this Agreement at any time, with termination effective fifteen (15)�days after Companys delivery to Contractor of written notice of termination.
6.3����Termination by Contractor. Contractor may terminate this Agreement at any time, with termination effective fifteen (15)�days after Contractors delivery to Company of written notice of termination
6.4����Duties Upon Termination. Upon termination of this Agreement for any reason, Contractor agrees to cease all work on behalf of Company and promptly deliver the results to Company. Company shall promptly pay Contractor all fees and approved expenses incurred by Contractor to the date of termination within thirty (30)�days after receiving Contractors final invoice.
7.����Noninterference With Business. During this Agreement, and for a period equal to the duration of the contractor Term immediately following this Agreements termination or expiration, Contractor agrees not to interfere with the business of Company in any manner. By way of example and not limitation, Contractor agrees not to: (1)�solicit or induce any employee or independent contractor to terminate or breach an employment, contractual or other relationship with Company; or (2)�interfere with, impair, disrupt or damage Companys relationship with any of its current or prospective customers by soliciting or encouraging others to solicit any of them for the purpose of diverting or taking away business from Company.
8.����General Provisions.
8.1����Successors and Assigns. The rights and obligations of Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Company. Contractor may not assign its rights, subcontract or otherwise delegate its obligations under this Agreement without Companys prior written consent.
8.2���� Agreement to Arbitrate. Contractor and Company agree to arbitrate any controversy, claim or dispute between them arising out of or in any way related to this Agreement, the independent contractor relationship between Contractor and Company, and any disputes upon termination of the independent contractor relationship, including claims for violation of any local, state or federal law, statute, regulation or ordinance or common law. The arbitration will be conducted in San Diego, California, by a single neutral arbitrator and in accordance with the American Arbitration Associations ( AAA ) then current rules for resolution of commercial disputes. The arbitrator shall have the power to enter any award that could be entered by a judge of the trial court of the State of California, and only such power, and shall follow the law. In the event the arbitrator does not follow the law, the arbitrator will have exceeded the scope of his or her authority and the parties may, at their option, file a motion to vacate the award in court. The parties agree to abide by and perform any award rendered by the arbitrator. Judgment on the award may be entered in any court having jurisdiction thereof.
8.3����Survival. The definitions contained in this Agreement and the rights and obligations contained in Paragraphs�4 ( Intellectual Property Rights ), 7�( Noninterference with Business ) and 8�( General Provisions ) will survive any termination or expiration of this Agreement.
8.4����Notices. Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows, with notice deemed given as indicated: (a)�by personal delivery, when delivered personally; (b)�by overnight courier, upon written verification of receipt; (c)�by telecopy or facsimile transmission, upon acknowledgment of receipt of electronic
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transmission; or (d)�by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to the addresses set forth above or to such other address as either party may specify in writing.
8.5����Governing Law. This Agreement shall be governed in all respects by the laws of the United States of America and by the laws of the State of California, as such laws are applied to agreements entered into and to be performed entirely within California between California residents. Each of the parties irrevocably consents to the exclusive personal jurisdiction of the federal and state courts located in California, as applicable, for any matter arising out of or relating to this Agreement, except that in actions seeking to enforce any order or any judgment of such federal or state courts located in California, such personal jurisdiction shall be nonexclusive.
8.6����Severability. If any provision of this Agreement is held by a court of law to be illegal, invalid or unenforceable, (i)�that provision shall be deemed amended to achieve as nearly as possible the same economic effect as the original provision, and (ii)�the legality, validity and enforceability of the remaining provisions of this Agreement shall not be affected or impaired thereby.
8.7����Waiver; Amendment; Modification. No term or provision hereof will be considered waived by Company, and no breach excused by Company, unless such waiver or consent is in writing signed by Company. The waiver by Company of, or consent by Company to, a breach of any provision of this Agreement by Contractor, shall not operate or be construed as a waiver of, consent to, or excuse of any other or subsequent breach by Contractor. This Agreement may be amended or modified only by mutual agreement of authorized representatives of the parties in writing.
8.8����Entire Agreement. This Agreement constitutes the entire agreement between the parties relating to this subject matter and supersedes all prior or contemporaneous oral or written agreements concerning such subject matter. The terms of this Agreement will govern all services undertaken by Contractor for Company.
IN WITNESS WHEREOF, the parties have executed this Agreement on the dates shown below.
ENTROPIC COMMUNICATIONS, INC.��������CONTRACTOR/CONSULTANT
By: ________________________________ | By: _____________________________ |
Suzanne Zoumaras | Michael Farese |
Title: Senior Vice President, Human Resources | Title: ___________________________ |
Date: ______________________________ | Date: ___________________________ |
Social Security Number or FEIN: ____________________________
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EXHIBIT�A
SERVICES AND FEES
Consultant Name: ����Michael Farese
Services:
Consultant is hereby retained as an independent contractor to consult with, advise and provide assistance to the Company for such services that may include, but are not limited to:
" | Support Standards and certification activities |
" | Support of technology evaluations |
" | Support CEO and CFO in business and corporate development activities |
" | Support Legal department with patent evaluations and activities |
" | Other responsibilities as assigned |
Consultant warrants that in rendering services pursuant to this Agreement, Consultant will be required to devote his/her best efforts to the performance of its duties and responsibilities under this Agreement. Consultant will determine the method, details and means of performing the above-described services.
Fees:
As full and complete compensation for the performance of all services and all other obligations undertaken by Consultant hereunder, the Company agrees to pay to Consultant at an hourly rate of $150.00, not to exceed $4,800/month during the Term of this Agreement ("Consulting Fee"). No minimum hours of services are guaranteed under this Agreement. The consultant shall invoice Company on a semi-monthly basis for the services rendered during the prior semi-monthly period. The invoice shall clearly describe the tasks performed and the hours allocated to those tasks. Invoices should be submitted to: Entropics Accounts Payable at [email protected] and the individual indicated in Paragraph 1, Engagement of Services, for approval.
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ASSIGNMENT OF COMPANY INNOVATIONS
For good and valuable consideration which has been received, the undersigned sells, assigns and transfers to Entropic Communications, Inc. ( Company ), and Companys successors and assigns, and Company accepts such sale, assignment and transfer of, all rights, title and interest of Michael Farese ( Contractor ), vested and contingent, in and to the Company Innovations, and all associated intellectual property rights (including, without limitation, patent, copyright, moral right, mask-work, and trade secret rights), which were conceived, reduced to practice, created, derived, developed or made during the course of the services performed under this Agreement. Such Company Innovations are more particularly identified in Schedule 1 hereto.
Entropic Communications, Inc. | Contractor/Consultant |
By:____________________________ Printed Name:____________________________�� | By:____________________________ Printed Name:____________________________�� |
Date:____________________________ | Date:____________________________ |
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SCHEDULE 1
ASSIGNMENT OF COMPANY INNOVATIONS
� Check this box and sign below if none
I attest this is true and accurate:
By:______________________________ �������������������������������Signature Printed Name:______________________________�� |
Date:______________________________� |
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE�13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT
TO SECTION�302 OF THE SARBANES-OXLEY ACT OF 2002
I, Patrick Henry, certify that:
1.�I have reviewed this Quarterly Report on Form�10-Q of Entropic Communications, Inc.;
2.�Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.�Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.�The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules�13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)�Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)�Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;�and
(d)�Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;�and
5.�The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)�All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;�and
(b)�Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
�
/s/ Patrick Henry |
Patrick Henry |
President and Chief Executive Officer |
(Principal Executive Officer) |
Date:�November�10, 2014
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
RULE�13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT
TO SECTION�302 OF THE SARBANES-OXLEY ACT OF 2002
�
I, David Lyle, certify that:
1.�I have reviewed this Quarterly Report on Form�10-Q of Entropic Communications, Inc.;
2.�Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.�Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.�The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules�13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)�Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)�Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;�and
(d)�Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;�and
5.�The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)�All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;�and
(b)�Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
�
/s/ David Lyle |
David Lyle |
Chief Financial Officer |
(Principal Financial Officer) |
Date:�November�10, 2014
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act ), and Section�1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. �1350), Patrick Henry, President and Chief Executive Officer of Entropic Communications, Inc. (the Company ), and David Lyle, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:
1. The Company's Quarterly Report on Form 10-Q for the quarterly period ended September�30, 2014, to which this Certification is attached as Exhibit 32 (the Report ) fully complies with the requirements of Section�13(a) or Section�15(d) of the Exchange Act; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
In Witness Whereof, the undersigned have set their hands hereto as of November�10, 2014.
�
/s/ Patrick Henry | �� | �� | /s/ David Lyle |
Patrick Henry President and Chief Executive Officer | �� | �� | David Lyle Chief Financial Officer |
�
�
* This certification accompanies the Report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company made under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, except to the extent that the Company specifically incorporates this certification by reference therein. |
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