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AMBARELLA INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto for the year ended January 31, 2012 and management's discussion and analysis of our financial condition and results of operations included in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the "Securities Act") with the U.S. Securities and Exchange Commission (SEC) on October 10, 2012 (the "Prospectus"). This Quarterly Report on Form 10-Q, including this "Management's discussion and analysis of financial condition and results of operations", includes a number of forward-looking statements that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words "would," "could," "will," "may," "expect," "believe," "should," "anticipate," "outlook," "if," "future," "intend," "plan," "estimate," "predict," "potential," "targets," "seek" or "continue" and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. Such statements include, but are not limited to, statements concerning our market opportunity, our ability to develop new solutions, our future financial and operating performance, sales and marketing strategy, investment strategy, research and development, customer and supplier relationships, industry trends, our cash needs and capital requirements, expectations about seasonality, taxes, and operating expenses. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this Quarterly Report on Form 10-Q. These factors include, but are not limited to, the risks described under Item 1A of Part II - "Risk factors," Item 2 of Part I - "Management's discussion and analysis of financial condition and results of operations," elsewhere in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the SEC. We make these forward-looking statements based upon information available on the date of this Quarterly Report on Form 10-Q, and we have no obligation (and expressly disclaim any such obligation) to update or alter any forward-looking statements, whether as a result of new information or otherwise except as otherwise required by securities regulations. Overview We are a leading developer of semiconductor processing solutions for video that enable high-definition, or HD, video capture, sharing and display. We combine our processor design capabilities with our expertise in video and image processing, algorithms and software to provide a technology platform that is designed to be easily scalable across multiple applications and enable rapid and efficient product development. Our system-on-a-chip, or SoC, designs fully integrate HD video processing, image processing, audio processing and system functions onto a single chip, delivering exceptional video and image quality, differentiated functionality and low power consumption. We sell our solutions to leading original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs, globally. We refer to ODMs as our customers and OEMs as our end customers, except as otherwise indicated or as the context otherwise requires. In the camera market, our solutions 27-------------------------------------------------------------------------------- Table of Contents enable the creation of high-quality video content for wearable sports cameras, automotive aftermarket cameras, Internet Protocol, or IP, security cameras, digital still cameras, or DSCs, telepresence cameras, camcorders and pocket video cameras. In the infrastructure market, our solutions efficiently manage IP video traffic, broadcast encoding and IP video delivery applications. Our sales cycles typically require a significant investment of time and a substantial expenditure of resources before we can realize revenue from the sale of our solutions, if any. Our typical sales cycle consists of a multi-month sales and development process involving our customers' system designers and management and our sales personnel and software engineers. If successful, this process culminates in a customer's decision to use our solutions in its system, which we refer to as a design win. Our sales efforts are typically directed to the OEM of the product that will incorporate our video and image processing solution, but the eventual design and incorporation of our SoC into the product may be handled by an ODM on behalf of the OEM. Volume production may begin within six to 18 months after a design win, depending on the complexity of our customer's product and other factors upon which we may have little or no influence. Once one of our solutions has been incorporated into a customer's design, we believe that our solution is likely to remain a component of the customer's product for its life cycle because of the time and expense associated with redesigning a product or substituting an alternative solution . Conversely, a design loss to a competitor will likely preclude any opportunity for future revenue from such customer's product. On October 15, 2012, we closed our initial public offering ("IPO") of 6,000,000 ordinary shares inclusive of 1,095,349 ordinary shares sold by certain shareholders of the Company. The public offering price of the shares sold in the offering was $6.00 per share. The total gross proceeds from the offering to us were $29.4 million and, after deducting underwriting discounts and commissions and offering expenses, the aggregate net proceeds received by us was approximately $25.4 million. We did not receive any proceeds from shares sold by the selling shareholders. Upon the closing of the IPO, all of our outstanding convertible preference shares converted into ordinary shares on a one-to-one basis and all outstanding warrants to purchase redeemable convertible preference shares converted into warrants to purchase ordinary shares. On November 6, 2012, a total of 900,000 ordinary shares were sold to our IPO underwriters in connection with their exercise of the over-allotment option. The total gross proceeds to us from the sale of the over-allotment shares were $5.4 million and, after deducting underwriting discounts and commissions, the net proceeds received by us was approximately $5.0 million. Our total revenue was $35.7 million and $89.5 million for the three and nine months ended October 31, 2012, respectively, and $28.8 million and $72.7 million for the three and nine months ended October 31, 2011, respectively. Our net income was $6.7 million and $14.5 million for the three and nine months ended October 31, 2012, respectively, and $5.0 million and $8.0 million for the three and nine months ended October 31, 2011, respectively. A substantial portion of our revenue is derived from sales through our logistics provider, Wintech Microelectronics Co., Ltd., ("Wintech"), who serves as our non-exclusive sales representative in all of Asia other than Japan. For the three and nine months ended October 31, 2012, approximately 60% and 68% of our revenue, respectively, was derived from sales through Wintech. For the three and nine months ended October 31, 2011, approximately 82% and 81% of our revenue, respectively, was derived from sales through Wintech. Beginning in fiscal year 2013, we directly sell our solutions to Chicony 28-------------------------------------------------------------------------------- Table of Contents Electronics Co., Ltd., ("Chicony"), the ODM of certain of our end customers. For the three and nine months ended October 31, 2012, approximately 18% and 12% of our revenue, respectively, was derived from sales to Chicony. We anticipate that a significant portion of our revenue will continue to be derived from sales through Wintech and Chicony for the foreseeable future. Factors Affecting Our Performance Design Wins. We closely monitor design wins by customer and end market. We consider design wins to be critical to our future success, although the revenue generated by each design win can vary significantly. Our long-term sales expectations are based on forecasts from customers and internal estimations of customer demand factoring in the expected time to market for end customer products incorporating our solutions and associated revenue potential. Pricing, Product Cost and Margins. Our pricing and margins depend on the volumes and the features of the solutions we provide to our customers. Additionally, we make significant investments in new solutions for both cost improvements and new features that we expect to drive revenue and maintain margins. In general, solutions incorporated into more complex configurations, such as those used in the infrastructure market, have higher prices and higher gross margins as compared to solutions sold into the camera market. Our average selling price, or ASP, can vary by market and application due to market-specific supply and demand, the maturation of products launched in previous years and the launch of new products. We continually monitor the cost of our solutions. As we rely on third-party manufacturers for the production of our products, we maintain a close relationship with these suppliers to continually monitor production yields, component costs and design efficiencies. Shifting Consumer Preferences. Our revenue is subject to consumer preferences, regarding form factor and functionality, and how those preferences impact the video and image capture electronics that we support. For example, improved smartphone video capture capabilities, and rapid adoption by consumers, has led to the decline of pocket video cameras aimed at the video and image capture market. The current video and image capture market is now characterized by a greater volume of more specialized video and image capture devices that are less likely to be replaced with smartphones, such as wearable sports cameras, automotive aftermarket cameras, IP security cameras, high-end DSCs and enterprise telepresence cameras. This increasing specialization of video capture devices has changed our customer base and end markets and has impacted our revenue. In the future, we expect further changes in the market to continue to impact our business performance. Continued Concentration of Revenue by End Market. Historically, our revenue has been significantly concentrated in a small number of end markets. In fiscal year 2010, the majority of our revenue came from the pocket video, camcorder and infrastructure markets. Over the last two years, we have continued to provide solutions for the camcorder, infrastructure and pocket video markets, but also have expanded our focus to include the wearable sports camera, automotive aftermarket camera, IP security camera, DSC and telepresence camera markets. We believe our entry into these new markets will continue to facilitate revenue growth and customer diversification. While we will continue to expand our end market exposure, we anticipate that sales to a limited number of end markets will continue to 29 -------------------------------------------------------------------------------- Table of Contents account for a significant percentage of our total revenue for the foreseeable future. Our end market concentration may cause our financial performance to fluctuate significantly from period to period based on the success or failure of video capture markets in which we compete. Ability to Capitalize on Connectivity Trends. Mobile connected devices are ubiquitous today and play an increasingly prominent role in consumers' lives. The constant connectivity provided by these devices has created a demand for connected electronic peripherals such as video and image capture devices. Our ability to capitalize on these trends by supporting our end customers in the development of connected peripherals that seamlessly cooperate with other connected devices and allow consumers to distribute and share video and images with online media platforms is critical for our success. We have added wireless communication functionality into our solutions for wearable sports cameras, IP security cameras and DSCs. The combination of our compression technology with wireless connectivity enables wireless video streaming and the uploading of videos and images to the Internet. Our solutions enable IP security camera systems to stream video content to either cloud infrastructure or connected mobile devices, and our solutions for wearable sports cameras allow consumers to quickly stream or upload video and images to social media platforms. Sales Volume. A typical design win can generate a wide range of sales volumes for our solutions, depending on the end market demand for our customers' products. This can depend on several factors, including the reputation of the end customer, market penetration, product capabilities, size of the end market that the product addresses and our end customers' ability to sell their products. In certain cases, we may provide volume discounts on sales of our solutions, which may be offset by lower manufacturing costs related to higher volumes. In general, our customers with greater market penetration and better branding tend to develop products that generate larger volumes over the product life cycle. Customer Product Life Cycle. We estimate our customers' product life cycles based on the customer, type of product and end market. In general, products launched in the camera market have shorter life cycles than those sold into the infrastructure market. We typically commence commercial shipments from six to 15 months following a design win; however, in some markets, more lengthy product and development cycles are possible, depending on the scope and nature of the project. A portable consumer device typically has a product life cycle of six to 18 months. In the infrastructure market, the product life cycle can range from 24 to 60 months. Results of Operations Revenue We derive substantially all of our revenue from the sale of HD video and image processing SoC solutions to OEMs and ODMs, either directly or through our logistics providers. Our SoC solutions have been used in the camera and infrastructure markets, and we expect these will be the primary markets for our solutions for the foreseeable future. We derive a substantial portion of our revenue from sales made indirectly through our logistics provider, Wintech. We typically experience seasonal fluctuations in our quarterly revenue with our third fiscal quarter normally being the highest revenue quarter. This fluctuation has been driven primarily by 30-------------------------------------------------------------------------------- Table of Contents increased sales into the camera market as our customers build inventory in preparation for the holiday shopping season. More generally, our average selling prices fluctuate based on the mix of our solutions sold in a period which reflects the impact of both changes in unit sales of existing solutions as well as the introduction and sales of new solutions. Our solutions are typically characterized by a life cycle that begins with higher average selling prices and lower volumes, followed by broader market adoption, higher volumes and average selling prices that are lower than initial levels. The end markets into which we sell our products have seen significant changes as consumer preferences have evolved in response to new technologies. As a result, the composition of our revenue may differ meaningfully during periods of technology or consumer preference changes. We expect shifts in consumer use of video capture to continue to change over time, as more specialized use cases emerge and video capture continues to proliferate. Cost of Revenue and Gross Margin Cost of revenue includes the cost of materials such as wafers processed by third-party foundries, costs associated with packaging, assembly and test, and our manufacturing support operations such as logistics, planning and quality assurance. Cost of revenue also includes indirect costs such as warranty, inventory valuation reserves and other general overhead costs. Gross profit is revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. We expect that our gross margin may fluctuate from period to period as a result of changes in average selling price, product mix and the introduction of new products by us or our competitors. In general, solutions incorporated into more complex configurations, such as those used in the infrastructure market, have higher prices and higher gross margins, as compared to solutions sold into the camera market. As semiconductor products mature and unit volumes sold to customers increase, their average selling prices typically decline. These declines may be paired with improvements in manufacturing yields and lower wafer, packaging and test costs, which offset some of the margin reduction that could result from lower selling prices. We believe that our gross margin will decline in the future as we continue to penetrate the highly competitive camera market and as we launch our solutions into new markets. Research and Development Research and development expense consists primarily of personnel costs, including salaries, stock-based compensation and employee benefits. The expense also includes costs of development incurred in connection with our collaborations with our foundry vendors, costs of licensing intellectual property from third parties for product development, costs of development for software and hardware tools, cost of fabrication of mask sets for prototype products, and allocated depreciation and facility expenses. All research and development costs are expensed as incurred. We expect our research and development expense to increase in absolute dollars as we continue to enhance and expand our product features and offerings. 31-------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Selling, general and administrative expense consists primarily of personnel costs, including salaries, stock-based compensation and employee benefits for our sales, marketing, finance, human resources, information technology and administrative personnel. The expense also includes professional service costs related to accounting, tax, legal services, and allocated depreciation and facility expenses. We expect our selling expense to increase in absolute dollars as we expand the size of our sales and marketing organization to support our anticipated growth. We expect our general and administrative expense to increase in absolute dollars and as a percent of revenue as we develop the infrastructure necessary to operate as a public company, which includes increased audit and legal fees, costs to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations applicable to companies listed on The NASDAQ Stock Market, investor relations costs, as well as higher insurance premiums. Other Income (Loss), Net Other income (loss), net consists primarily of gain and loss from foreign currency transactions and remeasurements. It also includes gain and loss from revaluation of fair value of warrants to purchase our redeemable convertible preference shares and interest earned from investing in money market funds. Upon the completion of our IPO, all outstanding warrants to purchase convertible preference shares converted into warrants to purchase ordinary shares. As a result, there is no future impact to net income from the revaluation of warrants. Provision (Benefit) for Income Taxes We are incorporated in the Cayman Islands and conduct business in several countries such as the United States, China, Taiwan, Hong Kong, South Korea and Japan, and we are subject to taxation in those jurisdictions. As such, our worldwide operating income is subject to varying tax rates and our effective tax rate is highly dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations in each geographical region. Consequently, we have experienced lower effective tax rates as a substantial percentage of our operations are conducted in lower-tax jurisdictions. If our operational structure was to change in such a manner that would increase the amount of operating income subject to taxation in higher-tax jurisdictions, or if we were to commence operations in jurisdictions assessing relatively higher tax rates, our effective tax rate could fluctuate significantly on a quarterly basis and/or be adversely affected. 32-------------------------------------------------------------------------------- Table of Contents The following table sets forth a summary of our statement of operations for the periods indicated: Three Months Ended October 31, Nine Months Ended October 31, 2012 2011 2012 2011 (in thousands) Revenue $ 35,669 $ 28,778 $ 89,548 $ 72,686 Cost of revenue 12,679 10,093 28,821 24,656 Gross profit 22,990 18,685 60,727 48,030 Operating expenses: Research and development 10,802 9,169 31,631 27,611 Selling, general and administrative 4,603 3,806 12,812 11,261 Total operating expenses 15,405 12,975 44,443 38,872 Income from operations 7,585 5,710 16,284 9,158 Other income (loss), net 137 3 139 (21 ) Income before income taxes 7,722 5,713 16,423 9,137 Provision for income taxes 1,005 665 1,878 1,093 Net income $ 6,717 $ 5,048 $ 14,545 $ 8,044 Three Months Ended October 31, Nine Months Ended October 31, 2012 2011 2012 2011 Revenue 100 % 100 % 100 % 100 % Cost of revenue 36 35 32 34 Gross profit 64 65 68 66 Operating expenses: Research and development 30 32 35 38 Selling, general and administrative 13 13 14 15 Total operating expenses 43 45 49 53 Income from operations 21 20 19 13 Other income (loss), net - - - - Income before income taxes 21 20 19 13 Provision (benefit) for income taxes 3 2 2 2 Net income 18 % 18 % 17 % 11 % Comparison of the three months ended October 31, 2012 and October 31, 2011 Revenue Three Months Ended October 31, Change 2012 2011 Amount % (dollars in thousands) Revenue $ 35,669 $ 28,778 $ 6,891 24 % Revenue increased for the three months ended October 31, 2012 compared to the same period in the prior fiscal year primarily due to increased unit sales into the camera market. Camera market revenue expanded as a result of continuing adoption of our SoCs by current and new customers selling end products into the wearable sports camera, automotive aftermarket camera and IP security camera end markets. The increase in camera market revenue was partially offset by the loss of revenue from end 33 -------------------------------------------------------------------------------- Table of Contents products incorporating our older generation A5 SoCs in the pocket video market, which was heavily impacted by the closure of the Eastman Kodak Company camera division. Revenue also increased as a result of the renegotiation of purchase agreements with an infrastructure customer resulting in the release of $0.4 million of deferred revenue in the three months ended October 31, 2012. Cost of Revenue and Gross Margin Three Months Ended October 31, Change 2012 2011 Amount % (dollars in thousands) Cost of revenue $ 12,679 $ 10,093 $ 2,586 26 % Gross profit $ 22,990 $ 18,685 $ 4,305 23 % Gross margin 64 % 65 % - (1 )% Cost of revenue increased for the three months ended October 31, 2012 primarily due to the increased number of SoCs sold, partially offset by a reduction in cost of certain SoCs due to volume increases. Gross margin decreased for the three months ended October 31, 2012 due to a change in revenue mix with lower infrastructure revenues being offset by higher consumer product revenues at lower gross margins. The lower margin mix of products was partially offset by lower costs of our high volume SoC's. Research and Development Three Months Ended October 31, Change 2012 2011 Amount % (dollars in thousands) Research and development $ 10,802 $ 9,169 $ 1,633 18 % Research and development expense increased for the three months ended October 31, 2012 primarily due to an increase in engineering headcount and additional bonus and stock-based compensation associated with our IPO. Our research and development engineering headcount increased to 323 at October 31, 2012 compared to 302 at October 31, 2011, resulting in an increase in salary related expenses of approximately $0.8 million. In the third quarter of fiscal year 2013, we granted restricted stock units and offered participation in our new employee stock purchase plan upon completion of our IPO, resulting in an increase in stock-based compensation expense of approximately $0.4 million. We also accrued approximately $0.4 million additional bonus expense due to enhanced overall performance in fiscal year 2013 and approximately $0.4 million for a one-time IPO bonus to China employees. These increases were partially offset by decreased product development costs of approximately $0.4 million due to the timing of new product development efforts. 34-------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Three Months Ended October 31, Change 2012 2011 Amount % (dollars in thousands)Selling, general and administrative $ 4,603 $ 3,806 $ 797 21 % Selling, general and administrative expense increased for the three months ended October 31, 2012 primarily due to increases in facility costs and outside services to support our expanding business and operations, as well as our IPO. Other Income, Net Three Months Ended October 31, Change 2012 2011 Amount % (dollars in thousands) Other income, net $ 137 $ 3 $ 134 4467 % Other income, net increased for the three months ended October 31, 2012 primarily due to revaluation of warrants to purchase preference shares. The warrants converted into warrants to purchase ordinary shares upon our IPO and as a result, there will be no future impact to net income from the revaluation of warrants. Provision for Income Taxes Three Months Ended October 31, Change 2012 2011 Amount % (dollars in thousands) Income before income tax $ 7,722 $ 5,713 $ 2,009 35 % Provision for income taxes $ 1,005 $ 665 $ 340 51 % The effective tax rate increased to 13.0% for the three months ended October 31, 2012 compared to 11.6% for the three months ended October 31, 2011. Income tax expense for the three months ended October 31, 2012 increased by $0.3 million primarily due to the increase in pretax earnings combined with the expiration of the U.S. federal research credit on December 31, 2011, partially offset by a change in mix of earnings to lower tax jurisdictions. 35-------------------------------------------------------------------------------- Table of Contents Comparison of the nine months ended October 31, 2012 and October 31, 2011 Revenue Nine Months Ended October 31, Change 2012 2011 Amount % (dollars in thousands) Revenue $ 89,548 $ 72,686 16,862 23 % Revenue increased for the nine months ended October 31, 2012 primarily due to increased unit sales into the camera market as well as the release of higher than normal deferred revenue attributable to the infrastructure market. Camera market revenue expanded as a result of continuing adoption of our SoCs by current and new customers selling end products into the wearable sports camera, automotive aftermarket camera and IP security camera end markets. The increase in camera market revenue was partially offset by the loss of revenue from end products incorporating our older generation A5 SoCs in the pocket video market, which was heavily impacted by the closure of the Eastman Kodak Company camera division. Infrastructure market revenue increased as a result of renegotiations of purchase agreements with an infrastructure customer resulting in the release of $3.4 million of deferred revenue in the nine months ended October 31, 2012. Cost of Revenue and Gross Margin Nine Months Ended October 31, Change 2012 2011 Amount % (dollars in thousands) Cost of revenue $ 28,821 $ 24,656 $ 4,165 17 % Gross profit $ 60,727 $ 48,030 $ 12,697 26 % Gross margin 68 % 66 % - 2 % Gross margin increased for the nine months ended October 31, 2012 primarily due to a change in mix of sales in the camera market with lower margin revenue in the pocket video market being replaced with revenues in the wearable sports camera, automotive aftermarket camera and IP security camera end markets, which typically have higher gross margins. In addition, the release of previously deferred revenue described above resulted in an increase in gross margin of approximately 1%. Research and Development Nine Months Ended October 31, Change 2012 2011 Amount % (dollars in thousands) Research and development $ 31,631 $ 27,611 4,020 15 % Research and development expense increased for the nine months ended October 31, 2012 primarily due to an increase in engineering headcount and additional bonus and stock-based compensation associated with our IPO. Our research and development engineering headcount increased to 323 at October 31, 2012 compared to 302 at October 31, 2011, resulting in an increase in salary related and stock-based compensation expenses of approximately $2.0 million. In the third quarter of fiscal year 2013, we granted restricted stock units and offered participation of our new employee stock purchase plan upon completion of our IPO, resulting in an increase in stock-based compensation expense of approximately $0.4 million. We also accrued approximately $0.8 million additional bonus expense due to enhanced overall performance in fiscal year 2013 and approximately 36 -------------------------------------------------------------------------------- Table of Contents $0.4 million for a one-time IPO bonus to China employees. For the nine months ended October 31, 2012, product development costs incurred at our foundry vendors also increased by $0.3 million compared to the prior year period due to timing of our development efforts. Selling, General and Administrative Nine Months Ended October 31, Change 2012 2011 Amount % (dollars in thousands) Selling, general and administrative $ 12,812 $ 11,261 1,551 14 % Selling, general and administrative expense increased for the nine months ended October 31, 2012 primarily due to increases in facility costs and outside services to support our expanding business and operations, as well as our IPO. Other Income, Net Nine Months Ended October 31, Change 2012 2011 Amount % (dollars in thousands) Other income (loss), net $ 139 $ (21 ) 160 -762 % Other income, net increased for the nine months ended October 31, 2012 primarily due to revaluation of warrants in the third quarter of fiscal year 2013. The warrants converted from warrants to purchase preference shares into warrants to purchase ordinary shares upon IPO and as a result, there will be no future impact to net income from the revaluation of warrants. Provision for Income Taxes Nine Months Ended October 31, Change 2012 2011 Amount % (dollars in thousands) Income before income tax $ 16,423 $ 9,137 7,286 80 % Provision for income taxes $ 1,878 $ 1,093 785 72 % The effective tax rate decreased to 11.4% for the nine months ended October 31, 2012 compared to 12.0% for the nine months ended October 31, 2011. Income tax expense for the nine months ended October 31, 2012 increased by $0.8 million primarily due to the increase in pretax earnings combined with the expiration of the U.S. federal research credit on December 31, 2011, partially offset by a change in mix of earnings to lower tax jurisdictions. 37-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources As of October 31, 2012, we had cash of $94.8 million. As of January 31, 2012, we had cash of $58.9 million. On October 15, 2012, we closed our IPO of 6,000,000 ordinary shares inclusive of 1,095,349 ordinary shares sold by certain shareholders of the Company. The public offering price of the shares sold in the offering was $6.00 per share. The total gross proceeds from the offering to us were $29.4 million and, after deducting underwriting discounts and commissions and offering expenses, the aggregate net proceeds received by us was approximately $25.4 million. We did not receive any proceeds from shares sold by the selling shareholders. On November 6, 2012, a total of 900,000 ordinary shares were sold to the Company's IPO underwriters in connection with their exercise of the over-allotment option, at which point all of the securities registered in the registration statement were sold and the offering terminated. The net proceeds to the Company from the sale of the shares in connection with the underwriter's exercise of the over-allotment option were approximately $5.0 million after deducting underwriting discounts and commissions. As of October 31, 2012, we had $5.0 million of operating lease obligations. Cash Flows The following table summarizes our cash flows for the periods indicated: Nine Months Ended October 31, 2012 2011 (in thousands) Net cash provided by operating activities $ 9,052 $ 5,739 Net cash used in investing activities (750 ) (1,236 ) Net cash provided by financing activities 27,574 1,177 Net increase in cash $ 35,876 $ 5,680 Net Cash Provided by Operating Activities The increase in cash flow from operating activities for the nine months ended October 31, 2012 compared to the same period in fiscal year 2012 was primarily due to increases in net income and additional adjustments for non-cash items such as stock-based compensation expense and depreciation and amortization expenses, which were partially offset by timing of cash receipt and inventory payment. The increase was also offset by the additional payment of the costs associated with our IPO in the third quarter of fiscal year 2013. Net Cash Used in Investing Activities Net cash used in investing activities decreased primarily due to a $0.6 million reduction in cash used in the purchase of intangible assets for the nine months ended October 31, 2012 compared to the nine months ended October 31, 2011. 38-------------------------------------------------------------------------------- Table of Contents Net Cash Provided by Financing Activities Net cash provided by financing activities increased primarily due to proceeds from our IPO completed on October 15, 2012, net of underwriting discounts and commissions and offering expenses. Operating and Capital Expenditure Requirements We have generated net income in each quarter beginning with the first quarter of fiscal year 2010, and we have generated cash from operations in each of fiscal years 2009 to 2012 and for the nine months ended October 31, 2012. We believe that our anticipated cash generated from operations and our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities and implement and enhance our information technology and enterprise resource planning systems. We expect our accounts receivable and inventory balances to increase, and to be partially offset by increases in accounts payable, which will result in a greater need for working capital. If our available cash balances are insufficient to satisfy our future liquidity requirements, we may in the future seek to sell equity or convertible debt securities or borrow funds commercially. The sale of equity and convertible debt securities may result in dilution to our shareholders and those securities may have rights senior to those of our ordinary shares. If we raise additional funds through the issuance of convertible debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available to us on reasonable terms, or at all. Our short- and long-term capital requirements will depend on many factors, including the following: • our ability to generate cash from operations; • our ability to control our costs; • the emergence of competing or complementary technologies or products; • the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, or participating in litigation-related activities; and • our acquisition of complementary businesses, products and technologies. 39 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations, Commitments and Contingencies The following table summarizes our outstanding contractual obligations as of October 31, 2012: Payment Due byPeriod as of October 31, 2012 (unaudited, in thousands) Less than More than All Total 1 Year 1-3 Years 3-5 Years 5 Years Other Contractual Obligations Facilities under operating leases $ 1,774 $ 325 $ 1,069 $ 380 $ - $ - Technology license or other obligations under operating leases 3,246 846 2,380 20 - - Noncancellable purchase obligations 21,055 21,055 - - - - Uncertain tax liabilities 1,038 - - - - 1,038 Total $ 27,113 $ 22,226 $ 3,449 $ 400 $ - $ 1,038 As of October 31, 2012, we had non-cancellable purchase obligations with our independent contract manufacturers of $21.1 million. Off-Balance Sheet Arrangements As of October 31, 2012, we did not engage in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities. Recent Authoritative Accounting Guidance See Note 1 to our unaudited consolidated financial statements for information regarding recently issued accounting pronouncements. Critical Accounting Policies and Significant Management Estimates There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our final prospectus filed on October 10, 2012 pursuant to Rule 424(b) with the SEC. 40 -------------------------------------------------------------------------------- Table of Contents |