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PEREGRINE SEMICONDUCTOR CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part II, Item 1A, "Risk Factors." The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 28, 2013 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in our Annual Report on Form 10-K filed with the SEC on February 19, 2014. This Quarterly Report on Form 10-Q, including this "Management's Discussion and Analysis of Financial Condition and Results of Operations", includes a number of forward-looking statements that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words "would," "could," "will," "may," "expect," "believe," "should," "anticipate," "outlook," "if," "future," "intend," "plan," "estimate," "predict," "potential," "targets," "seek" or "continue" and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this Quarterly Report on Form 10-Q. These factors include, but are not limited to, the risks described under Item 1A of Part II - "Risk factors," Item 2 of Part I - "Management's Discussion and Analysis of Financial Condition and Results of Operations," elsewhere in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the SEC. We make these forward-looking statements based upon information available on the date of this Quarterly Report on Form 10-Q, and we have no obligation (and expressly disclaim any such obligation) to update or alter any forward-looking statements, whether as a result of new information or otherwise except as otherwise required by securities regulations. Overview We are a fabless provider of high performance radio frequency integrated circuits, or RFICs. Our solutions leverage our proprietary UltraCMOS technology, which enables the design, manufacture, and integration of multiple radio frequency, or RF, mixed signal, and digital functions on a single chip. We believe our products deliver an industry leading combination of performance and monolithic integration. Our solutions target a broad range of applications in the space and military, broadband, industrial, mobile device, test and measurement equipment, and wireless infrastructure markets. We have shipped over two billion RFICs based on our UltraCMOS technology. Our UltraCMOS technology combines the ability to achieve the high levels of performance of traditional specialty processes, with the fundamental benefits of standard complementary metal oxide semiconductor, or CMOS, the most widely used semiconductor process technology. UltraCMOS technology utilizes an insulating substrate to provide greatly reduced unwanted electrical interaction between the RFIC and the substrate (referred to as parasitic capacitance), which enables high signal isolation and excellent signal fidelity with low distortion over a broad frequency range (referred to as broadband linearity). These technical attributes result in RF devices with excellent high-frequency and power handling performance, as well as, reduced crosstalk between frequencies. In addition, increased broadband linearity enables faster data throughput and greater subscriber capacity over a wireless network, resulting in enhanced network efficiency. UltraCMOS technology also provides the benefits of standard CMOS, such as high levels of integration, low power consumption, reusable circuit libraries, widely available design tools and outsourced manufacturing capacity, and the ability to scale to smaller geometries. We own fundamental intellectual property, or IP, in UltraCMOS technology consisting of more than 180 U.S. and international issued and pending patents, and over 300 documented trade secrets covering basic circuit elements, RF circuit designs, manufacturing processes, and design know-how. We leverage our extensive RF design expertise and systems knowledge to develop RFIC solutions that meet the stringent performance, integration, and reliability requirements of the rapidly evolving wireless markets. As of June 28, 2014, we offer a broad portfolio of more than 215 high performance RFICs including switches, digital attenuators, mixers / upconverters, prescalers, digitally tunable capacitors, or DTCs, and DC-DC converters, and we are currently developing power amplifiers, or PAs. During the year ended December 28, 2013, our products were sold to more than 1,600 module manufacturers, original equipment manufacturers, or OEMs, contract manufacturers, and other customers. We believe our RFICs are included in products sold by many of the leading mobile handset OEMs. Our net revenue was $47.1 million and $88.4 million for the three and six months ended June 28, 2014, respectively and $52.4 million and $99.0 million for the three and six months ended June 29, 2013, respectively. As of June 28, 2014, we had an accumulated deficit of $240.9 million. 15-------------------------------------------------------------------------------- Table of Contents Under Jumpstart Our Business Startups Act of 2012, or the JOBS Act, "emerging growth companies" can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourself of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not "emerging growth companies." Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions, including without limitation, providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and complying with any requirements that may be adopted regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (auditor discussion and analysis). These exemptions will apply for a period of up to five years following the completion of our IPO, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Key Financial Measures Net Revenue. Our net revenue is comprised of product net revenue and other net revenue and is derived primarily from the sale of our products, which include both our application specific standard products and customer specific standard products. We develop application specific standard products from our own specifications, and we sell these products using our direct sales force, our network of sales representatives, and our distributors. For higher volume markets, we also develop customer specific standard products to meet the specialized requirements of individual customers, and we sell these products using our direct and indirect sales organization. We sell our products worldwide through our direct sales force and field applications engineering staff, our network of domestic and international independent sales representatives, and both worldwide and regional distribution partners. Each of these channels is supported by our customer service and marketing organizations. Prior to a customer's selection and purchase of our products, our direct sales force and field applications engineers provide our customers technical assistance in the use of our RFICs for the design of their products. Our network of sales representatives and distributors have been selected based on their focus on and knowledge of RFICs, their ability to provide a high level of field application engineering support or their regional logistical support capabilities. We provide ongoing technical training for new products to our sales representatives and distributors to keep them informed of product enhancements and new product releases. We share product information and technical specifications with our customers using web-based tools. We plan to expand our direct sales and support capabilities and our network of independent sales representatives in key regions domestically and internationally. To sell our products, we use various sales channels depending on the type of customer (module manufacturer, OEM, or contract manufacturer), the volume and types of products purchased by the customer, and the location of the customer. For larger module manufacturer and OEM customers, we sell our products through both our direct sales force and our sales representatives. For sale of products to Asia-based customers, we use a logistics provider and distributor to facilitate local stocking of our products to meet changes in demand, and to facilitate the billing, customs, and duties administration for these transactions. For customers that order less frequently, we use distributors on a worldwide basis as our sales channel. We monitor the purchase levels of the end customers of our distributors, and from time-to-time we may convert these end customers to direct customers to the extent that their unit volume and sales support requirements justify selling to them directly. Our net revenue has grown rapidly in previous years, but this growth has slowed and our net revenue remained flat in fiscal 2013 compared to fiscal 2012. Our net revenue for the three and six months ended June 28, 2014 decreased by 10% and 11%, compared to the corresponding periods in 2013. The principal driver of our net revenue growth has been the increased volume of sales of our products, which is attributable to the increasing breadth and diversity of our product offerings, the growing market demand of products we introduced in prior periods, and the expansion of our domestic and international sales efforts. More recently, our net revenue declined due to increased product diversity, resulting in an overall reduction in our average selling prices. Our customers generally do not enter into long-term contracts with us. Our commercial relationships with our customers vary from single small low volume purchases of our products through a distributor to large volume purchases of our products directly from us. Large volume customers typically provide longer term forecasts of their expected needs. These forecasts do not commit the customer to minimum purchases, and generally may be revised without penalty. A significant portion of our net revenue in each quarter is attributable to purchase orders for products that are received and fulfilled within the same quarter, often including a large number of orders from diverse customers and end markets. Our forecasting of sales of products takes into account a number of factors, including historical sales patterns for each individual product, our assessment of overall market conditions, and our knowledge of the current requirements and purchasing practices of our larger customers. 16-------------------------------------------------------------------------------- Table of Contents Although we believe we have multiple opportunities for additional net revenue growth and are planning our business accordingly, our future net revenue levels will be impacted by our ability to achieve design wins with module manufacturers and OEMs, as well as the success of OEM devices that incorporate our products. A large portion of our shipments are made to intermediary manufacturers, such as module manufacturers and contract manufacturers, who incorporate our product into their products, which are in turn sold to OEMs. OEMs have a variety of alternative solutions available to meet their needs, and often diversify their supply chain by ordering products from more than one module or contract manufacturer, and shifting demand between them to achieve cost reductions and performance improvements. As the end markets where our products are used are very competitive, we expect to experience shifts in our net revenue between customers and regions where we ship products, and changes in demand for our products as a result of module manufacturer or OEM changes in designs and supply chain decisions. Although we have shipped our products to a large number of customers, we have historically depended on a small number of customers for a significant percentage of our annual net revenue. The composition of this group can change from year-to-year. Net revenue derived from our three largest direct customers as a percentage of our annual net revenue was 81% and 84% for the three months ended June 28, 2014 and June 29, 2013, respectively and 79% and 83% for the six months ended June 28, 2014 and June 29, 2013, respectively. Included in these percentages for our three largest direct customers are sales to two of our distributors. Based on records from our distributors of shipments to their customers, net revenue derived from our three largest end customers as a percentage of annual net revenue was 73% and 75% for the three months ended June 28, 2014 and June 29, 2013, respectively, and 70% for the six months ended June 28, 2014 and June 29, 2013. While the composition of our top customers varies from year-to-year, we expect that shipments to a limited number of customers will continue to account for a significant percentage of our net revenue for the foreseeable future. Our largest customers typically use our products in multiple systems or programs for different OEM end customers, each having differing product life cycles, end users, and market dynamics. Cost of Net Revenue. Cost of net revenue consists primarily of the cost of purchasing substrates, wafer processing, and testing and packaging. Cost of net revenue also includes manufacturing related personnel costs, which include stock-based compensation expenses, facilities, supplies and equipment costs, and quality assurance costs. One of our most important objectives is maintaining and improving our gross margin, which we define as gross profit expressed as a percentage of our net revenue. Our total gross margin in any period can be materially affected by product mix, that is, the percentage of our net revenue in that period that is attributable to higher or lower margin products, and by other factors, some of which are not under our control. Due to these factors, our gross margins have fluctuated from quarter-to-quarter. The factors that can influence the gross margins of any individual product, include the following: • the pricing that the features and performance of our products can command; • the volume of products produced using the same manufacturing overhead structure for procurement, test, and quality support, and their related costs; • write-downs of inventory; • the competitive pressures on the pricing of our products from similar product offerings from other semiconductor manufacturers; • the costs and yields of semiconductor wafers, packages, and other materials used in manufacturing our products; fabrication costs; assembly and test costs; factory equipment utilization; warranty costs; and operating efficiencies; and • the change in the mix of products sold. Research and Development. Research and development expense consists primarily of personnel-related expenses of our research and development organization, which include stock-based compensation expense, and costs for development wafers and mask sets, license fees for computer-aided design software, costs of development testing and evaluation, and allocated facilities costs. We incur research and development costs for the development of our products and for improvements of our UltraCMOS technology. Selling, General and Administrative. Selling, general and administrative expense includes personnel related costs, which include stock-based compensation expense, and sales commissions paid to our independent sales representatives, costs of advertising and corporate marketing promotions, travel costs, professional and consulting fees, legal fees, allocated facilities costs and other corporate expenses. Interest Expense. Interest expense is associated with our borrowings and imputed interest on capital leases and customer deposit financing arrangement. 17-------------------------------------------------------------------------------- Table of Contents Other Income (Expense). Other income (expense) consists of currency gains (losses) on conversion of non-U.S. dollar transactions into U.S. dollars and other income (expense) generated from minor non-operating transactions. Provision for Income Taxes. The provision for income taxes consists of our estimated federal, state and foreign income taxes based on our pre-tax income. We have recorded a valuation allowance for the full amount of our domestic net deferred tax assets, as the realization of our domestic net deferred tax assets is uncertain. At December 28, 2013, the Company had U.S. federal and state net operating loss (NOL) carryforwards of approximately $147.5 million and $102.5 million, respectively, after taking into consideration the impact of Internal Revenue Code section 382 as discussed below. The federal net loss carryforwards will expire between 2018 and 2031, unless previously utilized. The state net loss carryforwards will expire between 2014 and 2031, unless previously utilized. Pursuant to Code Sections 382 and 383, annual use of our NOL and research and development tax credit carryforwards may be limited in the event a cumulative change in ownership of 50% of certain stockholders occurs within a three year period. An ownership change may limit the amount of NOL and research tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an "ownership change" as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders. We completed a study to assess whether an ownership change has occurred since our formation through December 28, 2013. There were no significant transactions that would be expected to effect ownership changes from December 28, 2013 through our quarter ended June 28, 2014. Based upon this study, we believe that several ownership changes have occurred. We have reduced our deferred tax assets related to the NOL and research tax credit carryovers that are anticipated to expire unused as a result of the ownership changes. These tax attributes have been excluded from deferred tax assets with a corresponding reduction of the valuation allowance with no net effect on income tax expense or the effective tax rate. Future ownership changes may further limit our ability to utilize our remaining tax attributes. Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 will be effective for us beginning in its first quarter of 2017. Early adoption 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 adopting the new revenue standard on its consolidated financial statements and whether it will be adopted retrospectively to each period presented or with the cumulative effect as of the date of adoption. Critical Accounting Policies and Estimates There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 28, 2013, with the exception of the following: 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 net 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 revenue. 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. 18-------------------------------------------------------------------------------- Table of Contents Results of Operations Comparison of the three months ended June 28, 2014 and June 29, 2013 The following table sets forth our operating results for the three months ended June 28, 2014 and June 29, 2013. Three Months Ended June 28, % of Net June 29, % of Net Change 2014 revenue 2013 revenue amount Change % (in thousands) Net revenue $ 47,060 100 % $ 52,365 100 % $ (5,305 ) (10 )% Cost of net revenue 28,987 62 31,646 60 (2,659 ) (8 ) Gross profit 18,073 38 20,719 40 (2,646 ) (13 ) Operating expense: Research and development 9,095 19 10,476 20 (1,381 ) (13 ) Selling, general and administrative 14,902 32 10,557 20 4,345 41 Total operating expense 23,997 51 21,033 40 2,964 14 Loss from operations (5,924 ) (13 ) (314 ) - (5,610 ) * Interest income (expense), net 33 - (59 ) - 92 * Other income (expense), net 44 1 (15 ) - 59 * Loss before income taxes (5,847 ) (12 ) (388 ) - (5,459 ) * Income tax expense 117 1 60 - 57 95 Net loss $ (5,964 ) (13 )% $ (448 ) - % $ (5,516 ) * * Not meaningful Net Revenue A significant portion of our net revenue results from the sale of our antenna and broadband switches used in mobile wireless device, wireless infrastructure, broadband, industrial and other markets. The remainder of our product sales being derived from digital attenuators, phase-locked loops (PLL), mixers / upconverters, and prescalers used in broadband, industrial, wireless infrastructure, test and measurement equipment, and space and military markets. Net revenue consists of product and other net revenue. For the three months ended June 28, 2014, our product net revenue decreased by $5.7 million, or 11%, from $52.2 million to $46.4 million compared to the same quarter in fiscal 2013. Product net revenue from switches used in handset antenna applications decreased $5.0 million compared to the same quarter in fiscal 2013, as we sold a greater quantity of less complex RF antenna switches resulting in lower net revenue. Other changes in net revenue from the same period in prior year were due to various fluctuations within other product families. We market and sell our products worldwide. We attribute net revenue to the geographic region where the customer, or its business unit that makes the purchase, is based. Our net revenue by geographic region for the periods indicated was as follows: Three Months Ended June 28, June 29, 2014 2013 (in thousands)Japan $ 32,357 69 % $ 37,428 71 % United States 8,238 17 8,136 16 All other 6,465 14 6,801 13 $ 47,060 100 % $ 52,365 100 % Cost of Net Revenue and Gross Profit Cost of net revenue for the three months ended June 28, 2014 decreased by $2.7 million compared to the same quarter in fiscal 2013, primarily due to our lower net revenues. Gross margin for the three months ended June 28, 2014 decreased to 38% from 40% compared to the same quarter in fiscal 2013. The gross margin reduction of 2% was due primarily to more lower margin RF antenna switch products sold and overall product mix. We expect our gross margin will fluctuate 19-------------------------------------------------------------------------------- Table of Contents from quarter to quarter in the future based on changes in the mix of products we sell, the impact of competitive pricing pressure, variations in our manufacturing costs, write-down of inventory, or market volatility leading to fluctuations in the volumes we ship. Research and Development Research and development expense for the three months ended June 28, 2014 decreased by $1.4 million compared to the same quarter in fiscal 2013. The decrease was in part due to decreased compensation expense as a result of lower headcount due to our corporate restructuring during the first half of fiscal 2014. This decrease in compensation costs more than offset the increases in wafer and tape-out costs of $0.7 million incurred with our new product development. We expect our research and development expense to increase slightly due to new product development activities. Selling, General and Administrative Selling, general and administrative expense for the three months ended June 28, 2014 increased by $4.3 million compared to the same quarter in fiscal 2013 and was mainly due to increased professional fees of $5.3 million related to litigation, our export compliance investigations, accounting and other professional fees. These increases were partially offset by reductions in compensation and related costs of $1.0 million due to a reduction in headcount. We expect our selling, general and administrative expense to decrease as a result of decreases in legal fees. Other Income (Expense) Interest income (expense), net for the three months ended June 28, 2014 decreased by $0.1 million for the same quarter in fiscal 2013. This decrease was primarily due to repayment of deposits received under the Murata agreement from $1.0 million as of June 29, 2013 to $0 million as of June 28, 2014. Other income (expense), net consists primarily of realized foreign exchange gains and losses. Other expense, net for the three months ended June 28, 2014 decreased $0.1 million compared to the same quarter in fiscal 2013, primarily due to higher realized foreign exchange gains. 20-------------------------------------------------------------------------------- Table of Contents Results of Operations Comparison of the six months ended June 28, 2014 and June 29, 2013 The following table sets forth our operating results for the six months ended June 28, 2014 and June 29, 2013. Six Months Ended June 28, % of Net June 29, % of Net Change 2014 revenue 2013 revenue amount Change % (in thousands) Net revenue $ 88,378 100 % $ 98,990 100 % $ (10,612 ) (11 )% Cost of net revenue 55,562 63 58,454 59 (2,892 ) (5 ) Gross profit 32,816 37 40,536 41 (7,720 ) (19 ) Operating expense: Research and development 20,479 23 20,640 21 (161 ) (1 ) Selling, general and administrative 28,263 32 21,277 21 6,986 33 Total operating expense 48,742 55 41,917 42 6,825 16 Loss from operations (15,926 ) (18 ) (1,381 ) (1 ) (14,545 ) * Interest income (expense), net 68 - (138 ) - 206 * Other income (expense), net 63 - (49 ) - 112 * Loss before income taxes (15,795 ) (18 ) (1,568 ) (1 ) (14,227 ) * Income tax expense 162 - 88 - 74 84 Net loss $ (15,957 ) (18 )% $ (1,656 ) (1 )% $ (14,301 ) * * Not meaningful Net Revenue A significant portion of our net revenue results from the sale of our antenna and broadband switches used in mobile wireless device, wireless infrastructure, broadband, industrial and other markets. The remainder of our product sales being derived from digital attenuators, phase-locked loops (PLL), mixers / upconverters, and prescalers used in broadband, industrial, wireless infrastructure, test and measurement equipment, and space and military markets. Net revenue consists of product and other net revenue. For the six months ended June 28, 2014, our product net revenue decreased by $11.2 million, or 11%, from $98.8 million to $87.6 million compared to the same period in fiscal 2013. Product net revenue from switches used in handset antenna applications decreased $10.4 million compared to the same period in fiscal 2013, as we sold a greater quantity of less complex RF antenna switches resulting in lower net revenue. Other changes in net revenue from the same period in prior year were due to various fluctuations within other product families. We market and sell our products worldwide. We attribute net revenue to the geographic region where the customer, or its business unit that makes the purchase, is based. Our net revenue by geographic region for the periods indicated was as follows: Six Months Ended June 28, June 29, 2014 2013 (in thousands) Japan $ 57,840 65 % $ 67,373 68 % United States 17,297 20 17,855 18 All other 13,241 15 13,762 14 $ 88,378 100 % $ 98,990 100 % 21-------------------------------------------------------------------------------- Table of Contents Cost of Net Revenue and Gross Profit Cost of net revenue for the six months ended June 28, 2014 decreased by $2.9 million compared to the same quarter in fiscal 2013, primarily due to our lower net revenues. Gross margin for the six months ended June 28, 2014 decreased to 37% from 41% compared to the same quarter in fiscal 2013. The gross margin reduction of 4% was due primarily to more lower margin RF antenna switch products sold, overall product mix, and reductions in the carrying value of certain inventories. During the six months ended June 28, 2014, our product costs were negatively impacted by $2.7 million in write-downs of inventory, mainly due to changes in customer forecasted demand from one of our distributors, as well as additional reductions to carrying value of inventories necessary to answer competitive pricing pressures for certain products. We expect our gross margin will fluctuate from quarter to quarter in the future based on changes in the mix of products we sell, the impact of competitive pricing pressure, variations in our manufacturing costs, write-down of inventory, or market volatility leading to fluctuations in the volumes we ship. Restructuring During December 2013 and January 2014, we approved a restructuring plan. The plan consisted of a reduction in force of approximately 60 employees and a consolidation of office locations, which was completed in the second quarter of fiscal 2014. During the six months ended June 28, 2014, we recorded restructuring expense of $2.0 million. Research and Development Research and development expense for the six months ended June 28, 2014 decreased by $0.2 million compared to the same quarter in fiscal 2013. The decrease was in part due to decreased compensation expense as a result of lower headcount due to our corporate restructuring during the first half of fiscal 2014. This decrease in compensation more than offset the $1.1 million costs associated with our corporate restructuring and increases in wafer and tape-out costs incurred with our new product development of $0.5 million. We expect our research and development expense to increase slightly due to new product development activities. Selling, General and Administrative Selling, general and administrative expense for the six months ended June 28, 2014 increased by $7.0 million compared to the same quarter in fiscal 2013 and was mainly due to increased professional fees of $7.1 million related to litigation, export compliance investigations, accounting and other professional fees, and $0.8 million associated with our corporate restructuring. These increases were partially offset by reductions in compensation costs of $0.6 million due to a reduction in headcount and decreases in training and recruiting expenses of $0.3 million. We expect our selling, general and administrative expense to decrease as a result of decreases in legal fees. Other Income (Expense) Interest income (expense), net for the six months ended June 28, 2014 decreased by $0.2 million for the same quarter in fiscal 2013. This decrease was primarily due to repayment of deposits received under the Murata agreement from $1.0 million as of June 29, 2013 to $0 million as of June 28, 2014. Other income (expense), net consists primarily of realized foreign exchange gains and losses. Other expense, net for the six months ended June 28, 2014 decreased $0.1 million compared to the same quarter in fiscal 2013, primarily due to higher realized foreign exchange gains. Liquidity and Capital Resources Our principal source of liquidity as of June 28, 2014 consisted of our cash, cash equivalents, and both short-term and long-term marketable securities of $68.6 million compared to $63.2 million as of December 28, 2013. We continue to focus on monitoring our cash usage, controlling operating expense growth, and satisfying liquidity requirements. As of June 28, 2014, we have an accumulated deficit of $240.9 million. We believe our cash, cash equivalents, and marketable securities together with our access to existing debt facility will be sufficient to meet our liquidity requirements for the foreseeable future. Our future growth is dependent upon increasing revenues and managing working capital to a level that is adequate to support our increased cost structure or obtaining adequate debt or equity financing to fulfill our obligations as they become due. We use cash primarily to fund operating expenses, purchase inventory, acquire property and equipment, and in fiscal 2013, the repayment of customer deposits received and the elimination of a prepayment arrangement. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses as reflected in the change in our outstanding 22-------------------------------------------------------------------------------- Table of Contents accounts payable and accrued expenses and excludes the impact of non-cash items such as depreciation and stock-based compensation. Our primary source of cash is receipts from shipments of products to customers. Net cash collections of accounts receivable are impacted by the efficiency of our cash collection process, which can vary from period to period depending on the payment cycles of our major customers. Below is a summary of our cash flows used in operating activities, investing activities, and financing activities for the periods indicated: Six Months Ended June 28, June 29, 2014 2013 (in thousands) Net cash provided by (used in) operating activities $ 6,779 $ (28,292 ) Net cash provided by (used in) investing activities (3,004 ) 6,936 Net cash used in financing activities (245 ) (4,159 ) Effect of exchange rates on cash and cash equivalents (49 ) (1 ) Net increase (decrease) in cash and cash equivalents $ 3,481 $ (25,516 ) Net cash provided by operating activities was $6.8 million during the six months ended June 28, 2014. This was primarily attributable to changes in our operating assets and liabilities of $14.4 million. Cash provided by operating assets and liabilities were partially offset by our net loss of $16.0 million adjusted for non-cash items of $8.3 million. Non-cash adjustments mainly consisted of stock-based compensation of $4.0 million, depreciation and amortization of $3.6 million, and loss on disposal of assets of $0.6 million. The net increase in operating assets and liabilities was primarily attributable to decreases in inventory of $13.6 million, and increases in deferred revenue of $4.1 million, partially offset by increases in accounts receivable of $1.2 million, and other immaterial fluctuations. During the six months ended June 28, 2014, inventory decreased primarily as a result of consuming previously purchased raw materials, lower levels of inventory staged in our supply chain, and reduced levels of finished goods. Deferred revenue increased due to our North American and Asian distributors who carried higher finished goods inventory balances. Accounts receivable increased as we began selling directly to Murata, which has longer payment terms than our Asian distributor. Net cash used in investing activities during the six months ended June 28, 2014 consisted primarily of maturities of marketable securities, net of purchases, which used $2.1 million, increased by purchases of property and equipment of $0.9 million. The majority of our capital expenditures for the six months ended June 28, 2014 related to new testing machinery and equipment. Net cash used in financing activities amounted to $0.2 million during the six months ended June 28, 2014, and was attributable to $0.9 million paid to Murata under a customer deposit financing arrangement and payments related to net share settlement of equity awards of $0.1 million. These amounts were partially offset by proceeds from exercising stock options of $0.8 million. As of June 28, 2014, there was no outstanding balance under the bank line of credit and note payable and there was $21.8 million available. The agreement contains certain financial covenants, including covenants relating to our required liquidity ratio and minimum tangible net worth. As of June 28, 2014, we were in compliance with our financial covenants and had no outstanding borrowings. Contractual Obligations, Commitments, and Contingencies In March 2012, we entered into a supply and prepayment agreement with Murata. The agreement was for an initial term of 18 months. Under the terms of the agreement, Murata paid us a total deposit of $13.0 million, which was included in customer deposits. During the year ended December 28, 2013, we repaid $12.1 million to Murata, resulting in a remaining customer deposit of $0.9 million. During the three months ended June 28, 2014, we made the final payment of $0.9 million, resulting in no remaining balance as of June 28, 2014. During 2012, we paid $4.0 million in deposits to suppliers to support production levels, which are included in prepaids and other assets. During the six months ended June 28, 2014, these supplier deposits decreased as we received the remaining repayments from suppliers of $0.2 million, resulting in no remaining balance as of June 28, 2014. 23-------------------------------------------------------------------------------- Table of Contents Contingencies On February 14, 2012, we filed a lawsuit in the U.S. District Court for the Central District of California, which was subsequently moved to the U.S. District Court for the Southern District of California. The action alleged the infringement of five of our patents relating to RFICs and switching technology by RF Micro Devices, Inc. (RFMD). The lawsuit alleged that certain of RFMD's products infringed our patents relating to silicon on insulator (SOI) design technology for RFICs and sought, in addition to damages, to permanently enjoin RFMD from further infringement. On March 26, 2013, we filed an additional lawsuit against RFMD in the U.S. District Court for the Southern District of California which alleged infringement of a sixth patent relating to RFICs and switching technology by RFMD. On April 25, 2013, we consolidated these two U.S. District Court actions into one lawsuit. On September 27, 2013, the U.S. District Court set a trial date for November 12, 2014 and, as a result of various consolidating actions and motions, we planned to assert two of our patents against RFMD at the trial. In addition, on December 12, 2013, RFMD filed a counterclaim alleging we violated a patent owned or licensed by RFMD. On July 22, 2014, we favorably settled all outstanding claims with RFMD and entered into a entered into a patent cross license agreement. On November 14, 2013, representatives of the U.S. Department of Homeland Security (DHS), in collaboration with the United States Attorney's Office for the Southern District of California (USAO), executed a federal search warrant at our San Diego facilities in connection with an investigation into exports and temporary imports of certain products sold in the aerospace market. We are cooperating fully with the USAO and DHS officials. No claims have been asserted and no amounts have been accrued for this contingency in the consolidated financial statements. The U.S. Department of State, Office of Defense Trade Controls Compliance (USDS), is conducting a review of our compliance with the Arms Export Control Act (AECA) and the AECA's implementation of International Traffic In Arms Regulations (ITAR). We are fully cooperating with the review and, on April 11, 2014, we submitted information requested by USDS. The agency has not responded to date. Based on this review we could be subject to continued investigation and potential regulatory consequences related to violations of the AECA ranging from a no-action letter, government oversight of facilities and export transactions, monetary penalties of up to $0.5 million per violation, and in certain cases, debarment from government contracting, denial of export privileges, and criminal penalties. No claims have been asserted and no amounts have been accrued for this contingency in the consolidated financial statements. Furthermore, due to the preliminary nature of the investigation and the USDS review, the Company believes it is not possible to estimate the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome. Responding to this investigation and review is costly and could impose a significant burden on management and employees. The Company may receive unfavorable interim rulings in the course of this review and there can be no assurance that a favorable outcome will ultimately be obtained. From time to time, we are subject to various claims and suits arising in the ordinary course of business, including commercial, employment and environmental matters. We do not expect that the resolution of these matters will have a material adverse effect on our consolidated financial position or results of operations. Off-Balance Sheet Arrangements During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest, or special purpose, which would have been established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties. |