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IKANOS COMMUNICATIONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[November 10, 2014]

IKANOS COMMUNICATIONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q, particularly in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended or, the Exchange Act. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and to future events with respect to our business and industry in general. Statement that include the words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "potential," or the negative of these terms, or other similar expressions, identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, the following: our ability to raise additional capital in the future; our history of losses; our utilization and our ability to amend our credit facility with Silicon Valley Bank; the risk that our common stock will be delisted; the volatility of our common stock; our expectations regarding any potential collaboration with Alcatel Lucent ("ALU"); the benefits and attributes of our products; our expectations with respect to time-to-production of our products; our ability to access $10.0 million loan from ALU; the opinions of the securities analysts that publish reports regarding our Company; our ability to develop and achieve market acceptance of new products and technologies as we transition away from maturing products; our dependence on a relatively small number of customers; the intensity of the competition we face in the semiconductor industry and the broadband communications market; general macroeconomic declines could reduce demand for our products; cyclical and unpredictable decreases in demand for our semiconductors; our ability to adequately forecast demand for our products; the length of our sales cycle; that the selling prices of our products are subject to decline over time and may do so more rapidly than we anticipate; our reliance on subcontractors to manufacture, test, and assemble our products; our dependence on and qualification of foundries to manufacture our products; changes in our product sales mix; our ability to secure production capacity; our ability to recruit and retain personnel, including our senior management team; the fluctuations in our operating results and expenses; our reliance on third-party technologies in our products; the development and future growth of the broadband digital subscriber line, or DSL and communications processing markets in general; the defense of third-party claims of infringement and the protection of our own intellectual property; currency fluctuations; undetected defects, errors, or failures in our products; the significant number of shares held by a single group of investors; rapidly changing technologies, standards, and regulations; and the effectiveness of our accounting policies and disclosure controls.



The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this Quarterly Report on Form 10-Q, including under the caption "Risk Factors" in Part II, Item 1A.

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


16 -------------------------------------------------------------------------------- Table of Contents The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1, above, and with our financial statements and notes thereto for the year ended December 29, 2013, contained in our Annual Report on Form 10-K filed on February 28, 2014.

In this Quarterly Report on Form 10-Q, references to "Ikanos," "we," "us," "our" or the "Company" means Ikanos Communications, Inc. and our subsidiaries except where it is made clear that the term means only the parent company.

Overview We provide semiconductor products and software for delivering high speed broadband and networking solutions to the connected home. Our broadband digital subscriber line, or DSL, processors and other semiconductor offerings power carrier infrastructure for the central office, or CO, which we also refer to as Access, and customer premises equipment, or CPE, which we also refer to as Gateway, for network equipment manufacturers, or NEMs, serving leading telecommunications service providers, or telcos. Our products are at the core of DSL access multiplexers, or DSLAMs, optical network terminals, or ONTs, concentrators, modems, voice over Internet Protocol, or VoIP, terminal adapters, integrated access devices, or IADs, and residential gateways, or RGs. Our products have been deployed by service providers in Asia, Europe, and North and South America and are also actively being evaluated and scheduled to be evaluated by other service providers for deployment in their networks.

Our products reflect advanced designs in silicon, systems, and firmware and are programmable and highly-scalable. Our expertise in integration of our digital signal processor, or DSP, algorithms with advanced digital, analog, and mixed signal semiconductors enables us to offer high-performance, high-density, and low-power asymmetric DSL, or ADSL, and very-high bit rate DSL, or VDSL, products that offer vectoring and bonding to increase speeds of existing telecom carrier copper and hybrid-fiber copper infrastructure. We believe these products support high speed broadband service providers' multi-play deployment plans to the connected home, while keeping their capital and operating expenditures relatively low compared to competing frameworks. Our broadband DSL products consist of high performance Access and Gateway chips. We have demonstrated through our internal testing an aggregate downstream and upstream rate of 300 megabits per second, or Mbps, over a single pair copper line at a distance of up to 200 meters, and 150Mbps aggregate data rate up to a distance of 500 meters.

These performance numbers are among the highest rate and reach capabilities currently available in the market using VDSL technology. Our next generation G.fast products for the ultra-broadband market, which are currently in development, will be designed to achieve speeds up to 1Gbps.

We also offer a line of communications processors, or CPs, for residential gateways that support a variety of WAN topologies for telecom carriers and cable multiple system operators, or MSOs, including Ethernet and gigabit Ethernet, passive optical network, or PON, hybrid-fiber-copper network, and wireless broadband. While the majority of our silicon solutions are deployed in xDSL networks at global telcos, our CPs are also currently deployed in both cable and fiber-to-the-home, or FTTH, networks. Our CPs are an important part of our diversification strategy to expand our target market beyond xDSL.

In addition to our xDSL and CPs, in 2013 we announced inSIGHT, our suite of CPE-based monitoring and analytics software products. inSIGHT offers carriers the ability to remotely monitor and diagnose line impairments and noise issues to facilitate fast and cost-effective discovery and resolution of service disruptions. While monitoring and diagnostics solutions are not new, we have taken a different approach to the problem by deploying this capability inside the home, on the gateway itself, versus the traditional network-based solutions.

We believe our approach will provide several advantages to telcos, including higher accuracy of impairment detection and faster resolution, which in turn could translate to lower operating expenses for the telcos.

In our 2013 Annual Report on Form 10-K, we provided estimates of the time to production for certain products. The production of our new VX58x family which taped-out during the second quarter of 2014 is now scheduled for 2015 to allow for additional features and testing. The production of our new Vx57x family has been rescheduled to 2015. Our Velocity-3 solution continues in carrier trials and is expected to reach production in 2015. We no longer expect Velocity-Uni to reach production as a result of a change in customer requirements. Our new inSIGHT monitoring and diagnostic software is in field trials, but is expected to be in production in 2015.

On September 29, 2014, we entered into a collaboration with Alcatel-Lucent USA, Inc. (along with Alcatel-Lucent Participations collectively known as "ALU") on ultra-broadband products. We executed a term sheet that outlines certain requirements, deliverables, milestones, payments, and other funding under the collaboration agreement as well as certain pricing terms pursuant to which ALU would purchase products from us. While the term sheet is, for the most part, binding, the terms of the collaboration will be further detailed in one or more definitive agreements, and entry into such definitive agreements is one of several conditions necessary in order for us to receive the payments and other funding. We will seek to increase our share in the Access market by benefiting from the ALU Access customer relationships in order to deploy our products and to increase carrier interest in minimizing interoperability risk when deploying new gear in consumer homes, which include our corresponding Gateway products.

End-to-end products from a single silicon vendor also provide an additional opportunity for customized features that allow carriers to differentiate the services they offer their customers.

17-------------------------------------------------------------------------------- Table of Contents We outsource all of our semiconductor fabrication, assembly, and test functions, which allows us to focus on the design, development, sales, and marketing of our products and reduces the level of our capital investment. In 2012, we expanded our outsourced model by transitioning a majority of our day-to-day supply chain management, production test engineering, and production quality engineering functions, or Master Services, to eSilicon Corporation, or eSilicon, under a Master Services and Supply Agreement, or Service Agreement. Pursuant to the Service Agreement, we place orders for our finished goods with eSilicon, which, in turn, contracts with wafer foundries and the assembly and test subcontractors and manages these operational functions for us on a day-to-day basis.

We incurred a net loss of $10.3 million and $32.9 million, respectively, for the quarter and nine months ended September 28, 2014 and had an accumulated deficit of $359.0 million as of September 28, 2014. On September 29, 2014, in connection with the collaboration agreement described above, we entered into a series of related agreements with and among ALU and the Tallwood Group for a combined financial commitment of up to $45.0 million that is described below under "Liquidity, Capital Resources, and Going Concern." Further, on October 20, 2014, we filed a Registration Statement on Form S-1 to register and sell up to 18.9 million shares of common stock at $0.41 per share in a rights offering to stockholders on September 26, 2014. We intend to commence a rights offering pursuant to which stockholders of record on September 26, 2014 may purchase shares of the Company's common stock (the "Rights Offering"). There can be no assurance that we will raise additional capital in the Rights Offering, other than the Tallwood Group's commitment as discussed above. The registration statement will be amended and the maximum shares issuable increased to 144.9 million if stockholders approve an increase in our authorized common stock at a Special Meeting of Stockholders scheduled for November 21, 2014.

As a result of our recurring losses from operations and the need to stay in compliance with certain debt covenants, if we are unable to raise sufficient additional capital through the Rights Offering or through alternative debt or equity arrangements, there will be uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt as to our ability to continue as a going concern. There can be no assurance that such additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to us.

Beginning on January 31, 2014, our common stock began to trade below $1.00 per share on The NASDAQ Capital Market, or "NASDAQ". On March 18, 2014, we received notification from NASDAQ indicating that we were not in compliance with Nasdaq Marketplace Rule 5550(a)(2), which Rule provides that securities listed by NASDAQ must maintain a minimum closing bid price of $1.00 per share and that based upon the closing bid price for our securities for the previous 30 consecutive business days, we no longer meet this requirement. NASDAQ further notified the us that, in accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we will be provided 180 calendar days, or until September 15, 2014, to regain compliance by achieving a closing bid price of our securities of at least $1.00 per share for a minimum of ten consecutive business days at any time during the 180 calendar day period. On September 2, 2014, as we did not anticipate regaining compliance by September 15, 2014, we requested NASDAQ grant to the Company a second 180 day compliance period. We did not regain compliance by September 15, 2014. On September 16, 2014, NASDAQ notified us that we were eligible for a second 180 calendar day compliance period, or until March 16, 2015, to regain compliance, based on having met the continued listing requirements for market value of publicly held shares and all other applicable requirements for initial listing on NASDAQ, with the exception of the bid price requirement, and written notice of our intention to cure the bid price deficiency during the second compliance period by effecting a reverse stock split, if necessary. However, there can be no guarantee that we will be able to regain compliance with the continued listing requirement of Nasdaq Marketplace Rule 5550(a)(2) within this second 180 calendar day compliance period.

Our industry is continually transitioning to new technologies and products.

Large industry transitions are unpredictable due to factors including, but not limited to, extended product trials, qualifications, and the transformation of existing platforms to new platforms. Furthermore, the environment in which we market and sell our products has become increasingly competitive and cost sensitive. Our competitors may also be able to provide higher degrees of integration due to their broader range of products.

We generally sell our products to NEMs through a combination of our direct sales force, third-party sales representatives, and distributors. Sales are generally made under short-term, non-cancelable purchase orders. We have also entered into volume purchase agreements with certain customers who provide us with non-binding forecasts. Although certain NEM customers may provide us with rolling forecasts, our ability to predict future sales in any given period is limited and subject to change based on demand for our NEM customers' systems and their supply chain decisions. Historically, a small number of NEM customers, the composition of which has varied over time, have accounted for a substantial portion of our revenue, and we expect that significant customer concentration will continue for the foreseeable future. However, our sales strategy is to seek out a broader customer base.

Quarterly revenue fluctuations are characteristic for our industry and affect our business, especially due to the concentration of our revenue among a few customers and the limited number of products that we offer. These quarterly fluctuations can result from a variety of factors, including a mismatch of supply and demand. Specifically, service providers purchase equipment based on planned deployment. However, service providers may deploy equipment more slowly than initially planned, while NEMs continue for a time to manufacture equipment at rates higher than the rate at which equipment is deployed. As a result, periodically and usually without significant notice, service providers will reduce orders with NEMs for new equipment, and NEMs, in turn, will reduce orders for our products, which will adversely impact the quarterly demand for our products, even when deployment rates may be generally increasing.

Our cost of revenue consists primarily of the cost of silicon wafers purchased from third-party foundries and third-party costs associated with assembling and testing our semiconductors. Because we do not have formal, long-term pricing agreements with our outsourcing partners, our wafer costs and services are subject to price fluctuations based on the cyclical demand for semiconductors, among other factors. In addition, after we purchase wafers from foundries, we also incur yield loss related to manufacturing these wafers 18-------------------------------------------------------------------------------- Table of Contents into usable die. The manufacturing yield is the percentage of acceptable product resulting from the manufacturing process, as identified when the product is tested. When our manufacturing yields decrease, our cost per unit increases, which could have a significant adverse impact on our cost of revenue. Cost of revenue also includes accruals for actual and estimated warranty obligations and write-downs of excess and obsolete inventories, payroll and related personnel costs, licensed third-party intellectual property, depreciation of equipment, stock-based compensation expenses, and amortization of acquisition-related intangibles.

Our future revenue growth depends on the successful qualification and adoption of our new product platforms. In addition to these qualifications, our operations may be adversely affected by our customers' transition strategies from existing systems that use our products to systems that may not use our products. As is customary in our industry, we may elect to end-of-life certain products and, as a result, certain customers may enter into last time buy arrangements which could impact future revenues. In some cases, products may also become mature or uncompetitive causing customers to transition to solutions from other manufacturers, in whole or in part.

It is inherently difficult to predict: (1) if and when platforms will pass qualification; and (2) when service providers will begin to deploy the equipment, and at what rate, because we do not control the qualification criteria or process and the NEMs and service providers do not always share all of the information available to them regarding qualification and deployment criteria. Additionally, we have limited visibility into the buying patterns of our NEMs, which, in turn, are affected by changes in the buying and roll out patterns of the service provider market. To the extent that we manufacture inventory to a forecast, we may have excess inventory if the forecast differs from actual results.

Critical Accounting Policies and Estimates In preparing our unaudited condensed consolidated financial statements, we make assumptions, judgments, and estimates that can have a significant impact on amounts reported. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments, and estimates and make changes accordingly.

We also discuss our critical accounting estimates with the Audit Committee of our Board of Directors. We believe that the assumptions, judgments, and estimates involved in the accounting for revenue, cost of revenue, marketable securities, accounts receivable, inventories, warranty, income taxes, impairment of goodwill and related intangibles, acquisitions, and stock-based compensation expense have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies.

Historically, our assumptions, judgments, and estimates relative to our critical accounting policies have not differed materially from actual results.

The critical accounting policies are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year ended December 29, 2013, and have not changed materially during the nine months ended September 28, 2014.

Results of Operations Revenue Our revenue is derived from sales of our semiconductor products. Revenue from product sales is generally recognized upon shipment, net of sales returns, rebates, and allowances. Product sales to distributors are recognized based on contractual terms. As is typical in our industry, the selling prices of our products generally decline over time. Therefore, our ability to increase revenue is dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in greater quantities. Our ability to increase unit sales volume is primarily dependent upon our ability to increase and fulfill current customer demand obtain new customers and increase our new product design win pipeline. The rate at which broadband infrastructure may be upgraded could be slow or new broadband programs could be delayed.

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

Revenue for the third quarter of 2014 declined by $5.8 million, or 34%, to $11.1 million from $16.9 for the third quarter of 2013 and $0.2 million or, 2%, from the second quarter of 2014, primarily due to lower legacy product sales. Our four largest customers accounted for approximately 74% of our revenue in the third quarter of 2014, while our four largest customers accounted for 64% of our revenue in the third quarter of 2013. Revenue for the first nine months of 2014 declined by $25.3 million, or 41%, to $36.8 million from 19-------------------------------------------------------------------------------- Table of Contents $62.2 million for the first nine months of 2013. Our four largest customers accounted for approximately 71% of our revenue in the first nine months of 2014, while our three largest customers accounted for 49% of our revenue in the first nine months of 2013. Sales from our next generation Gateway product chipsets (Fusiv Vx185, Vx183, Vx175, and Vx173) continues to grow as a percentage of total revenue. However, even with the introduction of these new products, we continue to be adversely affected by the decline in sales of our legacy products and the slower than forecasted adoption of our new products.

The following direct customers accounted for more than 10% of our revenue for the periods indicated. Indirect sales, such as sales made to OEMs, are based on information that we receive at the time of ordering.

Three Months Ended Nine Months Ended September 28, September 29, September 28, September 29, Our Direct Customer 2014 2013 2014 2013 Sagemcom SAS 28 % 32 % 26 % 25 % Amod Technology Co., Ltd.** 22 * 25 * Amicko Technology, Inc. 12 * * * Paltek Corporation 12 11 13 10 NEC Asia Pacific Pte. Ltd. * 10 * * Askey Computer Corporation*** * * * 14 AVM Computer Systems * 11 * * * Less than 10% ** Amod is a distributor whose purchases from us are contracted to its end customer, Askey.

*** Askey is a contract manufacturer for Sagemcom.

Revenue by Country as a Percentage of Total Revenue Three Months Ended Nine Months Ended September 28, September 29, September 28, September 29, 2014 2013 2014 2013 Taiwan 42 % 12 % 37 % 18 % France 28 33 27 26 Japan 12 21 20 18 China 2 6 2 6 Germany 8 12 6 10 Korea 3 10 2 9 United States 1 4 1 2 Other 4 2 5 11 The table above reflects sales to our direct customers based on the country in which the customer's headquarters is located. It does not necessarily reflect carrier deployment of our products as we do not sell directly to carriers.

France, Taiwan, and Japan continue to be the countries to which we sell the majority of our products. Actual sales to each country declined in the third quarter and for the first nine months of 2014 as compared to the same periods of 2013, due to the decline in sales of our legacy products and the slower than forecasted adoption of our new products.

Revenue by Product Family as a Percentage of Total Revenue Three Months Ended Nine Months Ended September 28, September 29, September 28, September 29, 2014 2013 2014 2013 Gateway 85 % 78 % 77 % 76 % Access 15 22 23 24 We track our products within two product families: Gateway and Access. The Gateway product family includes a variety of processors and software to be incorporated into devices deployed at the customer premises. Gateway products enable service providers to offer their subscribers a variety services, including internet access, voice, over-the-top content, and security, among others. The Access product family consists of semiconductor and software products that power the carrier infrastructure, as well as any node in a hybrid-fiber-copper network where fiber is terminated and copper is used to reach the consumer premises. During the three and nine months ended September 28, 2014, the percentage of revenues associated with our Access product family decreased primarily due a decrease in revenues associated with legacy products that has not been offset by the introduction of our new products that are currently expected to ship in 2015.

20-------------------------------------------------------------------------------- Table of Contents Cost and Operating Expenses Three Months Ended Nine Months Ended September 28, September 29, % September 28, September 29, % 2014 2013 Change 2014 2013 Change Cost of revenue $ 6,227 $ 8,263 (25 )% $ 19,438 $ 30,272 (36 )% Research and development 10,822 12,455 (13 ) 36,906 38,572 (4 ) Sales, general and administrative 4,000 4,589 (13 ) 12,926 14,227 (9 ) Cost and Operating Expenses as a Percentage of Total Revenue: Three Months Ended Nine Months Ended September 28, September 29, September 28, September 29, 2014 2013 2014 2013 Cost of revenue 56 % 49 % 53 % 49 % Research and development 98 74 100 62 Sales, general and administrative 36 27 35 23 Cost of revenue Cost of revenue was $6.2 million for the three months ended September 28, 2014, compared to $8.3 million for the three months ended September 29, 2013. Cost of revenue was $19.4 million for the nine months ended September 28, 2014, compared to $30.3 million for the nine months ended September 29, 2013. The decline in gross profit for both the three and nine month periods is directly related to our lower revenues in 2014 as compared to 2013. Gross margin was 44% for the third quarter of 2014 compared to 51% for the third quarter of 2013. The third quarter decline in gross margin is directly related to sales mix as total revenue consisted of a higher percentage of lower margin Gateway products as compared to the same period in 2013. In addition, there was a higher proportion of lower margin distributor revenue in the third quarter of 2014 as compared to the third quarter of 2013. Gross margins were 47% for the first nine months of 2014 as compared to 51% for the first nine months of 2013. The decline in gross margin for the first nine months of 2014 compared to the same period in 2013 is directly related to the recognition of $2.5 million of revenue in the 2013 period related to certain software obligations that we completed and delivered in the first quarter of 2013 and changes in the product mix of our products.

Additionally, there was a higher proportion of lower margin distributor revenue for the first nine months of 2014 as compared to the first nine months of 2013.

Research and development All research and development, or R&D, expenses are charged to earnings as incurred. R&D expenses generally consist of compensation and related expenses for employees (including stock-based compensation) and contractors engaged in R&D; tape-out expenses; reference board development; development testing, evaluation kits and tools; amortization of acquisition-related intangibles; and depreciation expense. Before releasing new products, we incur charges for mask sets, prototype wafers, mask set revisions, bring-up boards, and other qualification materials, which we refer to collectively as tape-out expenses.

These tape-out expenses may cause our R&D expenses to fluctuate because they are not incurred uniformly every quarter.

R&D expenses declined $1.6 million, or 13%, to $10.8 million for the three months ended September 28, 2014, compared to $12.5 million for the three months ended September 29, 2013. Personnel costs, including stock-based compensation costs were lower by $0.5 million in the second quarter of 2014 as compared to the comparable period in 2013 due to lower headcount in 2014 as compared to 2013. Consulting costs were lower by $0.4 million in the third quarter of 2014 as compared to the prior year's third quarter. As planned, actual tapeout costs declined by $0.7 million in the third quarter of 2014 as compared to the third quarter of 2013.

R&D expenses declined by $1.7 million, or 4%, to $36.9 million for the nine months ended September 28, 2014 compared to $38.6 million for the nine months ended September 29, 2013. As a result of the planned tapeout of our Vx58x product family during the first nine months of 2014, expenses increased by $1.6 million for the nine months ended September 29, 2014 versus the comparable 2013 period. More than offsetting this increase were lower costs in the following areas: personnel, $0.8 million; software and license fees, $0.7 million; consulting and contractor fees, $1.4 million; and depreciation expense, $0.2 million.

Our R&D personnel are currently located in the United States and India. At September 28, 2014, we had 180 people engaged in R&D, of which 115 were located in the United States and the remainder in India. At September 29, 2013, we had 204 people engaged in R&D, of which 138 were located in the United States, 63 in India, and three in China.

Selling, general and administrative Selling, general and administrative, or SG&A, expenses generally consist of compensation and related expenses for personnel; legal, recruiting, and auditing fees; and depreciation. SG&A expenses declined by $0.6 million, or 13%, to $4.0 million for the three months ended September 28, 2014, from $4.6 million for the three months ended September 29, 2013. Personnel costs, including recruiting costs, were lower by $0.3 million and outside professional fees, including audit and legal costs, were lower by $0.3 million while stock-based 21-------------------------------------------------------------------------------- Table of Contents compensation costs were higher by $0.1 million. For the nine months ended September 28, 2014, SG&A expenses declined by $1.3 million, or 9%, to $12.9 million from $14.2 million for the nine months ended September 29, 2013.

Personnel costs, including consulting and contractor costs, were lower by $0.6 million; outside professional fees, including audit and legal costs, were lower by $0.6 million; and the amortization of intangibles was lower by $0.3 million.

At September 28, 2014, SG&A headcount was 55 compared to 59 at September 29, 2013.

Interest and other expense, net Interest and other expense, net consists primarily of interest income earned on our short-term investments, interest expense, and foreign exchange gains and losses. Interest and other expense, net was a loss of $0.1 million for both the three months ending September 28, 2014 and September 29, 2013 as losses on foreign exchange offset interest income in both periods. For the nine months ended September 28, 2014, interest and other expense, net is zero as interest expense from certificates of deposit offset interest expense related to our line of credit. For the nine months ended September 29, 2013, interest and other expense, net was a loss of $0.5 million as losses on foreign exchange of $0.6 million and interest expense of $0.1 million, offset interest income of $0.2 million.

Provision for income taxes Income tax expense is recognized based on management's estimate of the annual income tax rate expected for the full year. The estimated annual tax rate we use for the year ending December 29, 2014 is 46%, which has been applied to the income before taxes for the three and nine month periods ended September 28, 2014. The tax rates for the three and nine months ended September 28, 2014 were 100.3% and 52.7%, respectively, with the increase due to a change in the annual forecasted tax provision that occurred in the third quarter of 2014. The provisions for income taxes were $0.2 million and $0.5 million, respectively, for the three and nine months ended September 28, 2014. The provisions for income taxes were $0.1 million and $0.3 million, respectively for the three and nine months ended September 29, 2013. The income tax expense for both 2014 and 2013 is primarily the result of income taxes in various profitable foreign jurisdictions.

Net loss As a result of the above factors, we had a net loss of $10.3 million for the three months ended September 28, 2014, as compared to a net loss of $8.7 million for the three months ended September 29, 2013. For the nine months ended September 28, 2014, we had a net loss of $32.9 million compared to a net loss of $21.8 million for the nine months ended September 29, 2013. Over the past several years, we have taken actions to reduce our operating expense structure such as consolidating locations, reducing capital expenditures, outsourcing our back-end physical design, reducing the number of development projects, and reducing overall headcount. As appropriate, we have restructured parts of our business due to changes in the nature of our business and the business environment in which we operate. In addition, we have reduced our unit manufacturing costs by working to achieve better wafer pricing based on a larger volume of purchases, consolidating business with vendors, and reducing other input costs.

Liquidity, Capital Resources, and Going Concern Cash, cash equivalents, and short-term investments declined by $32.9 million to $6.6 million at September 28, 2014, as compared to $39.5 million at December 29, 2013. Cash and short-term investments held by foreign subsidiaries were $1.9 million and $6.5 million at September 28, 2014 and December 29, 2013, respectively. We have funded our operations primarily through cash generated from the sale of our products, our revolving line of credit, cash from the sale of our common stock, and proceeds from the exercise of stock options. Our uses of cash include payroll and payroll-related expenses, manufacturing costs, and purchases of equipment, tools, and software, as well as operating expenses, such as tapeouts, marketing programs, travel, professional services, facilities, and other costs.

As a result of our recurring losses from operations and the need to stay in compliance with certain debt covenants, if we are unable to raise sufficient additional capital through the Rights Offering or through alternative debt or equity arrangements, there will be uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt as to our ability to continue as a going concern. There can be no assurance that such additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to us.

On September 29, 2014, we entered into a collaboration agreement with Alcatel-Lucent USA, Inc., along with Alcatel-Lucent Participations, collectively known as ALU, on the development of ultra-broadband products. In connection with the collaboration, ALU and a group of investors affiliated with Tallwood Venture Capital, the Tallwood Group, collectively agreed to up to a $45 million financial commitment, which consisted of the purchase of approximately 39.6 million shares of the our common stock, at $0.41 per share, for aggregate gross proceeds of $16.3 million, ALU's commitment to loan us up to $10.0 million following the satisfaction of certain conditions, the Tallwood Group's agreement to purchase an aggregate of an additional $11.2 million of our common stock at the same per share price in either the contemplated Rights Offering or as a standby purchaser, and ALU's agreement to provide an addition $7.5 million of other funding associated with the collaboration contingent upon entering into a definitive collaboration agreement.

22-------------------------------------------------------------------------------- Table of Contents We utilized a revolving line of credit under a Loan and Security Agreement, or the SVB Loan Agreement with Silicon Valley Bank, or SVB, to partially fund our operations. This facility is subject to certain affirmative, negative, and financial covenants. On April 30, 2014, we sought and received an amendment to the SVB Loan Agreement prospectively eliminating one of the covenants required to be met as of June 29, 2014 and modifying others. However, we were not in compliance with the covenants as of September 28, 2014. SVB agreed to forbear its enforcement of the covenant violation with a new facility with SVB could be completed.

On October 7, 2014, we entered into a First Amended and Restated Loan and Security Agreement, or Amended SVB Loan Agreement, with SVB. The Amended SVB Loan Agreement amends and restates the SVB Loan Agreement, originally dated January 14, 2011, and subsequently amended. Under the Amended SVB Loan Agreement we may borrow up to $20.0 million, subject to certain limitations. The Amended SVB Loan Agreement is collateralized by a first priority lien on all of our present and future assets, other than our intellectual property, and a second lien on our intellectual property. The Amended SVB Loan Agreement also requires that we maintain a minimum monthly Adjusted Quick Ratio requirement of 1.2 to 1.0, as defined in the Amended SVB Loan Agreement. We will need to continue to take further actions during the remainder of 2014 to generate adequate cash flows or earnings to ensure compliance with the Amended SVB Loan Agreement and fund our capital requirements.

Further, we filed a Registration Statement on Form S-1 to register and sell up to 18.9 million share of stock at $0.41. The registration statement will be amended and the maximum shares issuable increased to 144.9 million if stockholders approve an increase in our authorized common stock at a Special Meeting of Stockholders on November 21, 2014. We intend to commence a rights offering pursuant to which stockholders of record on September 26, 2014 may purchase shares of the Company's common stock (the "Rights Offering"). There can be no assurance that we will raise additional capital in the Rights Offering, other than the Tallwood Group's commitment as discussed above.

The following table summarizes our statement of cash flows for the nine months ended September 28, 2014 and September 29, 2013 (in millions):

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