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ENTROPIC COMMUNICATIONS 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 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, management's 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 management's 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. 25-------------------------------------------------------------------------------- Table of Contents 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. 26-------------------------------------------------------------------------------- Table of Contents 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. 27-------------------------------------------------------------------------------- Table of Contents 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. 28-------------------------------------------------------------------------------- Table of Contents 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. 29-------------------------------------------------------------------------------- Table of Contents 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. 30-------------------------------------------------------------------------------- Table of Contents 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. 31-------------------------------------------------------------------------------- Table of Contents 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. 32-------------------------------------------------------------------------------- Table of Contents 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. 33-------------------------------------------------------------------------------- Table of Contents Recent Accounting Standards In April 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-08-Presentation 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. 34-------------------------------------------------------------------------------- Table of Contents |