Item 1B.
Unresolved Staff Comments
None.
Our primary facilities and headquarters are located in San Diego, California in three leased buildings totaling 96,384 square feet. These facilities house our manufacturing and supply chain organization, research and design function, as well as the majority of our marketing, sales and administration functions. The lease expires at the end of December 2015. In addition, we lease facilities in the following locations: Arlington Heights, Illinois for product development, marketing, and sales; Reading, United Kingdom for product development, marketing and sales; and Seoul, Korea for marketing and sales. We believe that our leased facilities are adequate to meet our current needs and that additional facilities will be available on suitable, commercially reasonable terms to accommodate future needs.
Item 3.
Item 3.
Legal Proceedings
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 alleges the infringement of five of our patents relating to RFICs and switching technology by RFMD. The lawsuit alleges that certain of RFMD’s products infringe our patents relating to SOI design technology for RFICs and seeks, 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 alleging 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. On December 12, 2013, RFMD filed a counterclaim alleging that we violate a patent owned or licensed by RFMD. Pursuing these actions is costly and could impose a significant burden on management and employees. We may receive unfavorable interim rulings in the course of this litigation and there can be no assurance that a favorable outcome will ultimately be obtained. We believe the outcome of this pending litigation will not have, individually or in the aggregate, a material adverse effect on our consolidated financial statements.
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). Based on this review we could be subject to continued investigation and potential regulatory consequences related to these violations 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, it is not currently possible to estimate the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome.
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 its consolidated financial position or results of operations.
Item 4.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
Market Information
Our common stock has been listed on the Nasdaq Global Market under the symbol “PSMI” since August 8, 2012. Prior to that date, there was no public trading market for our common stock. The following table sets forth for the periods indicated the high and low sales prices per share of our common stock as reported on the Nasdaq Global Market:
As of December 28, 2013, we had approximately1,342 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid cash dividends on our common or preferred stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to compliance with certain covenants under our loan facility with Silicon Valley Bank, which restrict or limit our ability to pay dividends, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant.
Equity Compensation Plan Information
For equity compensation plan information refer to Item 12 in Part III of this Annual Report on Form 10-K. Such information will be included in our Proxy Statement, which is incorporated herein by reference.
Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Peregrine Semiconductor Corporation under the Securities Act of 1933, as amended, or the Securities Act.
The following graph shows a comparison from August 8, 2012 (the date our common stock commenced trading on the Nasdaq Global Market) through December 28, 2013 of the cumulative total return for our common stock, the Nasdaq Composite Index, and the Philadelphia Semiconductor Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the Nasdaq Composite Index and the Philadelphia Semiconductor Index assume reinvestment of dividends. The graph assumes an investment of $100 on August 8, 2012, and the reinvestment of dividends. All returns are reported as of our fiscal month end, except for August 8, 2012, which was the date of our initial public offering.
Item 6.
Item 6.
Selected Financial Data
The following tables set forth selected consolidated financial data. We derived the selected consolidated statement of operations data for the years ended December 28, 2013, December 29, 2012, and December 31, 2011 and the selected consolidated balance sheet data as of December 28, 2013 and December 29, 2012 from our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected for any future period.
The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
(1)
Includes stock-based compensation expense related to options granted to employees and others as follows:
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related Notes thereto included in Part IV, Item 15 of this Report and the “Risk Factors” included in Part I, Item 1A of this Report, as well as other cautionary statements and risks described elsewhere in this Report, before deciding to purchase, hold or sell our common stock.
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 170 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 December 28, 2013, we offer a broad portfolio of more than 230 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 1,700 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 $202.3 million, $203.9 million, and $107.8 million for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively. We recorded net income of $7.3 million and $3.8 million for the years ended December 29, 2012 and December 25, 2010, respectively, and a net loss of $4.1 million and $9.7 million for the year ended December 28, 2013 and December 31, 2011, respectively. As of December 28, 2013, we had an accumulated deficit of $225.0 million.
Under the 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.
We also receive a portion of our net revenue from customer or government sponsored research and development activities, and from wafer services provided to third-parties who develop their own ICs using our UltraCMOS processes, both of which we refer to as “other net revenue.” Research and development activities range from development activities to investigate technological capabilities, in which we receive funded research for IC design techniques or new semiconductor technologies at the request of a customer, to custom development projects in which we are paid to enhance or modify an existing product or develop a new product to meet a customer’s specifications. The amount of this type of net revenue we record in any period is not expected to be significant, and the amount recorded will vary from period to period depending on the timing of third-party development activity opportunities, and the related effort we incur in each period.
Our net revenue has grown rapidly in previous years, but this growth has slowed and our net revenue declined in fiscal 2013 compared to fiscal 2012. 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 reductions in our average selling prices and changes to our end markets. 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.
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 83%, 85%, and 68% for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, 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%, 73%, and 49% for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively. 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 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. For example, gross margin was negatively impacted during the quarter ended December 28, 2013 due to a reduction in the carrying value of inventory as a result of a lower of cost or market valuation and excess and obsolete inventory write-downs.
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 absorbing 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; and
•
the costs and yields of wafers, packages, and other materials used in manufacturing our products; fabrication costs; assembly and test costs; factory equipment utilization; and operating efficiencies.
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, Net. Interest expense, net reflects interest expense associated with borrowings, imputed interest on capital leases and customer deposit financing arrangement, and changes in fair value of warrant liabilities, offset by interest income earned on our cash, cash equivalent, and marketable securities balances.
Other Expense, Net. Other expense, net consists of currency gains and 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, we have U.S. federal and state NOL carryforwards of approximately $147.6 million and $102.5 million, respectively, after taking into consideration the impact of Code Section 382 as discussed below. The federal NOL carryforwards will expire between 2018 and 2031, unless previously utilized. The state NOL carryforwards will expire between 2014 and 2031, unless previously utilized. We have federal and state research tax credit carryforwards of approximately $7.2 million and $9.9 million, respectively, at December 28, 2013. The federal credits will begin to expire in 2024. The state credits do not expire.
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 the our formation through December 28, 2013. 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.
Restructuring. On January 30, 2014, we approved a restructuring plan. The plan consists of a reduction in force which will be substantially completed by the end of the first quarter of 2014. The total charge resulting from this plan is expected to be approximately $1.5 million to $2.0 million.
Critical Accounting Policies and Estimates
Our consolidated financial statements and related notes included elsewhere in this Form 10-K are prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenue, and expenses, and any related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and our actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
We believe that the following accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
Our net revenue is primarily generated from sales of RFICs. We recognize net revenue when each of the following have occurred: (1) there is persuasive evidence that an arrangement with our customer exists, which is generally a customer purchase order; (2) the products are delivered, which generally occurs when the products are shipped and title and risk of loss has been transferred to the customer; (3) the selling price is fixed or determinable; and (4) collection of the customer receivable is deemed reasonably assured.
We record revenue based on facts available at the time of sale. Amounts that are not probable of collection once the product has shipped and title has transferred to the customer are deferred until the amount that is probable of collection can be determined. Items that are considered when determining the amounts that will be ultimately collected are the customer’s overall creditworthiness and payment history.
For distributors with rights of return, revenue is not recognized until product is shipped to the end customer of the distributor and the amount that will ultimately be collected is determinable. We offer our distributors limited stock rotation, price protection, and in some situations, credits on pricing depending on their end customer (ship and debit credits). For these
distributors revenue is not recognized until product is shipped to the end customer of the distributor and the amount that will ultimately be collected is determinable. On shipments where net revenue is not recognized, we record an accounts receivable and deferred revenue for the selling price as there is a legally enforceable right to payment. Inventory at distributors remains on our books at carrying value until sold by the distributor at which time we recognize the net revenue and cost of net revenue. Revenues to these distributors are recorded net of any pricing adjustments for price protection or ship and debit credits in the same period as the sale of goods to their customers. The amount of any pricing adjustment is based on the difference between the price at which the distributor originally purchased our inventory and either: (1) a lower distribution price then being offered on those products for price protection; or (2) a special price offered to the distributor in order to meet competitive pressures in the marketplace for ship and debit credits. We do not currently offer rebates or other pricing incentives, except for volume purchase pricing at the time of sale, to direct customers or distributors.
We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required.
Inventory Valuation
We continually assess the recoverability of our inventory based on assumptions about demand and market conditions. Forecasted demand is determined based on historical sales and expected future sales. We state our inventory at the lower of cost or market value, with cost determined on a first-in, first-out basis. We record reductions to the carrying value of our inventory to account for its obsolescence or lack of marketability. Reductions are calculated as the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Determination of the market value may be complex, and therefore requires management to make assumptions and to apply judgment. In order for management to make the appropriate determination of market value, the following items are commonly considered: inventory turnover statistics; inventory quantities on hand in our facilities and customer inventories; unfilled customer order quantities; forecasted customer demand; competitive pricing; seasonality factors; consumer trends; and performance of similar products or accessories. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded reserves. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that may adversely affect our operating results. If actual market conditions are more favorable, we may have higher gross profits when products are sold.
Income Taxes
We account for income taxes under the asset and liability approach. We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. We are in a three-year cumulative loss position, and have concluded that a full valuation allowance against our net deferred tax assets is appropriate given our recent history of losses and uncertainties regarding our ability to generate future taxable income sufficient to utilize existing deferred tax assets prior to their expiration. In foreign jurisdictions we do not have cumulative losses, and we have not recorded a valuation allowance to reduce our net deferred tax assets. Realization of our deferred tax assets is dependent primarily upon our future U.S. taxable income. Our judgments regarding our future profitability may change due to the trend of our operating results, future market conditions, changes in U.S. or international tax laws, and other factors. These changes, if any, may require possible material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.
We are subject to income taxes in the U.S. and foreign countries, and to routine corporate income tax audits in many of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities could challenge certain positions, which may not be fully sustained. However, our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgment and estimates. We believe that our provision for uncertain tax positions, including related interest and penalties, is adequate based on information currently available to us. The amount ultimately paid upon resolution of audits could be materially different from the amounts previously included in income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. Our overall provision requirement could change due to the issuance of new regulations or new case law, negotiations with tax authorities, resolution with respect to individual audit issues, or the entire audit, or the expiration of statutes of limitations.
Stock-Based Compensation
We measure stock-based compensation cost at the grant date, based on the estimated fair value of the award. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires us to estimate certain key assumptions including future stock price volatility, expected term of the options, risk free interest rates, and dividend yields. The resulting cost is recognized over the period during which the employee is required to provide services in exchange for the award, which is usually the vesting period. We recognize compensation expense over the vesting period using the straight-line method and classify these amounts in the statement of operations based on the department to which the related employee is assigned.
Stock options issued to non-employees are accounted for at their estimated fair value determined using the Black-Scholes option pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered.
For the years ended December 28, 2013, December 29, 2012, and December 31, 2011, we estimated the grant date fair value of stock options using the Black-Scholes option pricing model with the following weighted-average assumptions:
We based our expected volatility on the expected volatilities of a peer group of public companies within the semiconductor industry that are similar except for having publicly traded securities. We also utilize data of peer companies to determine the weighted average expected term in an effort to better align the expected term of our options with the term experienced by our peers. When making the selections of our industry peer companies to be used in our expected term and volatility determination, we also considered the stage of development, size, and financial leverage of such peer companies. We derived the risk-free interest rate assumption from the yield as of the grant date for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. We based the assumed dividend yield on the expectation that we will not pay cash dividends in the foreseeable future. We will continue to use judgment in evaluating the expected term, volatility, and risk-free interest rate related to our stock-based compensation on a prospective basis and incorporating these factors in the Black-Scholes option pricing model.
We estimated forfeitures at the time of grant and will revise these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We utilized our historical forfeiture rates to estimate our future forfeiture rate. We will continue to evaluate the appropriateness of estimating the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. Quarterly changes in the estimated forfeiture rate can have a significant effect on stock-based compensation expense as the cumulative effect of adjusting the rate for all stock-based compensation expense amortization is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the consolidated financial statements. The effect of forfeiture adjustments during fiscal 2013, 2012 and 2011 was insignificant.
If in the future we determine that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by authoritative guidance, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected award lives result in an increase to stock-based compensation expense determined at the date of grant. Stock-based compensation expense affects our cost of net revenue, research and development expense, and our selling, general and administrative expense.
As a result of our fair value calculations using Black-Scholes option pricing model and the allocation of value to the vesting periods using the straight-line vesting attribution method, we recognized employee stock-based compensation in the statements of operations as follows:
The total compensation cost related to unvested stock option grants not yet recognized as of December 28, 2013 was $13.1 million, and the weighted-average period over which these grants are expected to vest is 2.1 years.
The intrinsic value of stock options outstanding at December 28, 2013 was $19.9 million, of which $19.7 million and $0.2 million related to stock options that were vested and unvested, respectively, at that time.
Accounting Periods
We use a 52- or 53-week fiscal year ending on the last Saturday in December. Fiscal 2013 and 2012 were 52-week years ending on December 28, 2013 and December 29, 2012, respectively. Fiscal 2011 was a 53-week year ending on December 31, 2011.
Results of Operations
The following table sets forth certain Consolidated Statements of Operations data expressed as a percentage of net revenue for the periods indicated:
Comparison of the years ended December 28, 2013, December 29, 2012, and December 31, 2011
Net Revenue
A significant portion of our net revenue results from the sale of our antenna switches used in mobile devices and broadband and general purpose RF switches used in wireless infrastructure, broadband, industrial and other markets. The balance 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. For the year ended December 28, 2013, our product net revenue decreased by $1.8 million, or 0.9% compared to the same period in fiscal 2012, as higher volumes of switch products used in handset applications were more than offset by reductions in our average selling prices as a result of our increased product diversity in handset applications. Our overall average unit selling price for switches used in mobile devices in fiscal 2013 were also impacted by declines in the average selling prices associated with products introduced in prior years. Product net revenue from switches used in mobile devices decreased by $1.0 million compared to fiscal 2012. Product net revenue also decreased as a result of lower shipments of digital attenuators used in the wireless infrastructure and test and measurement markets was partially offset by an increase of PLLs sold into our space and military market. Other net revenue for the year ended December 28, 2013 increased by $0.2 million compared to fiscal 2012, primarily due to additional development contracts in the current year.
For the year ended December 29, 2012, our product net revenue increased by $98.8 million, or 94%, compared to fiscal 2011. Product net revenue from switches used in handset antenna applications increased by $94.1 million compared to fiscal 2011, as products sold through one of our distributors in Asia (Macnica) significantly increased. This increase in volume of our antenna switches resulted from additional design wins by a module manufacturer (Murata) who incorporates our products into their modules which are then sold to OEMs. Product net revenue also increased by $4.0 million from sales of antenna and broadband switches used in broadband applications due to increased shipments through both North American and Asian distributors. The remaining increase in our product net revenue of $0.7 million was due to increases in our mixers / upconverters and prescalers. Other net revenue for the year ended December 29, 2012 decreased by $2.7 million compared to fiscal 2011, primarily due to the completion of a government research and development contract in the second quarter of fiscal 2011 and the fact that we entered into fewer and smaller development contracts.
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:
Cost of Net Revenue and Gross Profit
Cost of net revenue for the year ended December 28, 2013 decreased by $3.2 million, or 2.6%, compared to fiscal 2012 primarily due to reduced product costs through improvements in our production yields, and engineering efforts to reduce part costs, particularly those used in our high volume handset applications. Gross margin for the year ended December 28, 2013 increased to 40% from 39% compared to fiscal 2012. The gross margin improvement of 1% was mainly due to reduced product cost and a change in the mix of products sold, partially offset by additional inventory write-downs and costs associated with our corporate restructuring. In fiscal 2013, our product costs were negatively impacted by inventory write-downs of $7.8 million. These write-downs were mainly due to changes in customer forecasted demand from one of our distributors. In fiscal 2012, our product cost was negatively impacted by inventory write-downs of $1.9 million related to excess inventory during the fourth quarter of fiscal 2012. 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 pressures from customers, variations in our manufacturing costs, or market volatility leading to fluctuations in the volumes we ship.
Cost of net revenue for the year ended December 29, 2012 increased by $53.2 million, or 75%, compared to fiscal 2011 primarily due to higher volume shipments of our antenna switches used in handsets. Gross margin for the year ended December 29, 2012 increased to 39% from 34% compared to fiscal 2011. The gross margin improvement of 5% was mainly due to reduced product cost, volume increase and a change in the mix of products sold. In fiscal 2011, our product cost was negatively impacted by inventory write-downs of $3.4 million during the second half of fiscal 2011. These write-downs were the result of lower than anticipated yields of certain wafers in new manufacturing processes. In fiscal 2012, the increased gross margin was partially offset by inventory write-downs of $1.9 million related to forecasted excess inventory during the fourth quarter of fiscal 2012.
Research and Development
Research and development expense for the year ended December 28, 2013 increased by $8.1 million compared to fiscal 2012. The increase was in part due to increased compensation expense of $5.5 million as a result of higher headcount. Other non-personnel related research and development expenditures increased by $2.6 million due to the number of new product development and existing product enhancement initiatives undertaken, as we released more than 40 new products during the year ended December 28, 2013. We expect our research and development expense to remain materially consistent as a percentage of net revenue.
Research and development expense for the year ended December 29, 2012 increased by $11.4 million compared to fiscal 2011. The increase was in part due to increased compensation expense of $5.2 million as a result of higher headcount. Other non-personnel related research and development expenditures increased by $6.2 million due to the number of new product development and existing product enhancement initiatives undertaken during the year ended December 29, 2012.
Selling, General and Administrative
Selling, general and administrative expense for the year ended December 28, 2013 increased by $6.2 million compared to fiscal 2012. The increase was in part attributable to additional compensation costs of $3.8 million mainly as a result of an increase in sales headcount compared to the prior year period and severance costs of $0.3 million associated with our corporate restructuring. Other increases included additional professional fees of $1.4 million and insurance costs of $0.5 million due to the full year effect of being a public company, as well as additional sales and marketing expense of $0.4 million and training and recruiting expense of $0.1 million. We expect our selling, general and administrative expense to remain materially consistent in absolute dollars, consisting of expected increases in professional fees offset by decreases in compensation costs.
Selling, general and administrative expense for the year ended December 29, 2012 increased by $13.7 million compared to fiscal 2011. The increase was in part attributable to additional compensation costs of $4.3 million mainly as a result of an increase in sales headcount compared to the prior year period. Other increases included additional professional fees of $6.5 million, sales commissions of $0.5 million, travel expense of $0.3 million, insurance expense of $0.3 million, and a number of other smaller increases.
Other Income (Expense)
Interest expense, net for the year ended December 28, 2013 consisted primarily of interest associated with the Murata supply and prepayment agreement, entered into during 2012. The decrease in interest expense, net compared to fiscal 2012 was due to repaying deposits received under the Murata agreement from $13.0 million to $0.9 million as of the end of fiscal 2013, as well as the absence of interest expense on warrants which were converted into common stock as part of our initial public offering (IPO), and the absence of interest expense on our line of credit, our notes payable, and certain capital leases which were paid off following our IPO in 2012. Other income (expense), net for the year ended December 28, 2013 decreased by $0.2 million compared to fiscal 2012, primarily due to higher realized foreign exchange gains.
Interest expense, net for the year ended December 29, 2012 increased by $1.0 million compared to fiscal 2011 mainly due to the change in fair value of our warrant liability of $0.6 million and imputed interest on our customer deposit financing arrangement of $0.4 million. The details of this arrangement are discussed in “Liquidity and Capital Resources.” Other expense, net consists primarily of realized foreign exchange gains and losses. Other expense, net for the year ended December 29, 2012 increased by $0.1 million compared to fiscal 2011, primarily due to higher realized foreign exchange losses.
Liquidity and Capital Resources
Our principal source of liquidity as of December 28, 2013 consisted of our cash, cash equivalents, and both short-term and long-term marketable securities totaling $63.2 million. We have historically financed our operations primarily through the sale of preferred and common stock, equipment term notes, leases, a credit facility, and more recently by proceeds from our initial public offering, a customer deposit financing arrangement, and during fiscal 2012 from cash generated from operations. We continue to focus on monitoring our cash usage, controlling operating expense growth, and satisfying future expected liquidity requirements. As of December 28, 2013, we have an accumulated deficit of $225.0 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 upon obtaining adequate debt or equity financing to fulfill our obligations as they become due.
During fiscal years 2012 and 2013, our cash from operating activities was impacted primarily due to the following transactions:
•
In March 2012, we entered into a supply and prepayment agreement with Murata for an initial term of 18 months. Under the terms of the agreement, Murata agreed to prepay on certain purchase orders placed through a third party distributor (Macnica) and to pay us a total deposit of $13.0 million, which were included in customer deposits as of December 29, 2012. During the year ended December 28, 2013, we have repaid $12.1 million under the supply and prepayment agreement with Murata resulting in a remaining customer deposit of $0.9 million.
•
As of December 29, 2012, we had received prepayments on purchase orders from Macnica of $11.4 million, which were included in customer deposits. During the year ended December 28, 2013, our customer deposits decreased as we received the remaining prepayments on purchases from Macnica during the first half of fiscal 2013. As of December 28, 2013, we had no prepayments as the agreement concluded on March 31, 2013 and the deposit was fully utilized in April of 2013.
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 accounts payable and accrued expenses and excludes the impact of non-cash items such as depreciation and stock-based compensation.
One of our primary sources of cash is receipts from shipments of products to customers. Aside from the growth in amounts billed to our 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, investing, and financing activities for the years indicated:
Net cash provided by (used in) operating activities
Net cash used in operating activities in fiscal 2013 of $13.6 million was primarily attributable to fully utilizing the $11.4 million net deposits received from Macnica during fiscal 2012 for shipments in the future. The remaining $2.2 million consisted of our net loss of $4.1 million adjusted for non-cash expenses of $13.5 million, offset by changes of our operating assets and liabilities of $11.6 million, excluding the Macnica deposit. The net decrease in operating assets and liabilities was primarily attributable to decreases in accounts payable and accrued liabilities of $12.6 million, deferred revenue of $6.2 million, and an increase in accounts receivable of $3.6 million, partially offset by decreases in prepaid expenses and other current assets of $7.3 million and inventory of $3.5 million. Non-cash expenses of $13.5 million consisted primarily of depreciation and amortization of $6.6 million and stock-based compensation of $6.6 million. Accounts payable and accrued liabilities decreased due to lower manufacturing activity and timing of vendor payments during the period. Accounts receivable increased due to timing of cash collections. Deferred revenue decreased due to our distributor (Macnica) who carried lower inventory balances. Inventory decreased as of a result of lower levels of finished goods. Prepaid expenses and other current assets decreased by $7.3 million mainly due to deposit repayments from our suppliers of $3.8 million, as well as reductions in non-trade receivables from suppliers of $3.5 million.
Net cash used in investing activities
Net cash used in investing activities during the year ended December 28, 2013 consisted of purchases of marketable securities of $39.1 million and purchases of property and equipment of $5.9 million, offset by sales of marketable securities of $41.0 million. The majority of our capital expenditures in the year ended December 28, 2013 related to new testing machinery and equipment.
Net cash provided by (used in) financing activities
Net cash used in financing activities amounted to $10.3 million during the year ended December 28, 2013, and was primarily attributable to $12.1 million returned to Murata under the supply and prepayment agreement, partially offset by proceeds from exercising stock options provided $1.8 million during the year ended December 28, 2013.
During the year ended December 29, 2012 we repaid our line of credit, our notes payable and the majority of our capital leases. At December 28, 2013, there was no outstanding balance under the line of credit and the note payable and there was $19.2 million available, respectively. We were in compliance with our financial loan covenants at December 28, 2013.
Contractual Obligations, Commitments, and Contingencies
The following table summarizes our outstanding contractual obligations as of December 28, 2013 and the effect those obligations are expected to have on our liquidity and cash flows in future periods:
As of December 28, 2013, we had recorded liabilities of $5.7 million for uncertain tax positions, which is not included in the table because we are unable to reliably estimate the amount of payments in individual years that will be made in connection with these uncertain tax positions.
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 alleges the infringement of five of our patents relating to RFICs and switching technology by RFMD. The lawsuit alleges that certain of RFMD’s products infringe our patents relating to SOI design technology for RFICs and seeks, 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 alleging 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. On December 12, 2013, RFMD filed a counterclaim alleging that we violate a patent owned or licensed by RFMD. Pursuing these actions is costly and could impose a significant burden on management and employees. We may receive unfavorable interim rulings in the course of this litigation and there can be no assurance that a favorable outcome will ultimately be obtained. Pursuing these actions is costly and could impose a significant burden on management and employees. We may receive unfavorable interim rulings in the course of this litigation and there can be no assurance that a favorable outcome will ultimately be obtained. We believe the outcome of this pending litigation will not have, individually or in the aggregate, a material adverse effect on our consolidated financial statements.
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). Based on this review we could be subject to continued investigation and potential regulatory consequences related to these violations 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, it is not currently possible to estimate the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome.
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.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk in the ordinary course of business, which consists primarily of interest rate risk associated with our cash and cash equivalents, our debt, and foreign exchange rate risk.
Interest rate risk. The primary objective of our investment activity is to preserve principal, provide liquidity, and capture a market rate of return based on our investment policy parameters and market conditions. We do not enter into investments for trading or speculative purposes. Our investments have limited exposure to market risk. To minimize exposure to interest rate risk, we maintain a portfolio of short-term U.S. Treasuries money market funds, U.S. agency securities, certificates of deposit, commercial paper, and corporate notes and bonds. Our investments are stated at fair value. In the event that there are differences between fair value and cost in any of our available-for-sale securities, unrealized gains and losses on these investments are reported as a separate component of accumulated other comprehensive income (loss). The interest rates are variable and fluctuate with current market conditions. Changes in U.S. interest rates affect the interest earned on our cash, cash equivalents, and marketable securities and the fair value of those securities.
The Company’s exposure to changes in interest rates relates primarily to our investment portfolio. We typically invest in highly rated securities and its policy generally limits the amount of credit exposure to any one issuer. Our investment policy requires instruments to meet certain minimum credit ratings.
Foreign currency risk. Our sales to international customers, as well as our purchases of material from international suppliers, are denominated primarily in U.S. dollars. Accordingly, we have limited exposure to foreign currency exchange rates and do not enter into foreign currency hedging transactions. The functional currency of our foreign operations in Europe and Asia is the local currency, and as such, any fluctuation in the exchange rates of these net assets, denominated in local currency, would be reflected in the translation gains or losses, which are accounted for in other comprehensive income in our statements of changes in equity. Our inventory purchases are also denominated in U.S. dollars. We do not believe that a change of 10% in the foreign currency exchange rates would have a material impact on our financial position or results of operations.
Item 8.
Item 8.
Financial Statement and Supplementary Data
The financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Report.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 28, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 28, 2013, our Chief Executive Officer and Chief Financial Officer concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended December 28, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies and emerging growth companies.
Limitations on the Effectiveness of Controls
Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected, and misstatements due to error or fraud may occur and not be detected.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this Item will be contained in our Proxy Statement and is incorporated herein by reference.
The information required by this Item will be contained in our Proxy Statement and is incorporated herein by reference.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will be contained in our Proxy Statement and is incorporated herein by reference.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be contained in our Proxy Statement and is incorporated herein by reference.
Item 14.
Item 14.
Principal Accounting Fees and Services
The information required by this Item will be contained in our Proxy Statement and is incorporated herein by reference.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
(a) 1. Financial Statements.
The following Peregrine consolidated financial statements, and related notes thereto, and the related Report of our Independent Registered Public Accounting Firm are filed as part of this Form 10-K:
2. Financial Statement Schedules.
The financial statement schedules have been omitted because they are not applicable or not required, or the information is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits.
The exhibits listed on the accompanying index to exhibits immediately following the financial statements are filed as part of, or hereby incorporated by reference into, this report.
(b) Financial Statement Schedules
All schedules have been omitted because the information required to be presented in them is not applicable or is shown in the consolidated financial statements or related notes.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Peregrine Semiconductor Corporation
We have audited the accompanying consolidated balance sheets of Peregrine Semiconductor Corporation as of December 28, 2013 and December 29, 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 28, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Peregrine Semiconductor Corporation at December 28, 2013 and December 29, 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 28, 2013, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
San Diego, California
February 19, 2014
Peregrine Semiconductor Corporation
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
See accompanying notes.
Peregrine Semiconductor Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
See accompanying notes.
Peregrine Semiconductor Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
See accompanying notes.
Peregrine Semiconductor Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
See accompanying notes.
Peregrine Semiconductor Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes.
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. Organization and Summary of Significant Accounting Policies
The Company
Peregrine Semiconductor Corporation (the Company) is a fabless provider of high performance radio frequency integrated circuits (RFICs). The Company’s solutions leverage its proprietary UltraCMOS technology which enables the design, manufacture, and integration of multiple RF, mixed signal, and digital functions on a single chip. The Company’s
solutions target a broad range of applications in the space and military, automotive, broadband, industrial, mobile device, test and measurement equipment, and wireless infrastructure markets.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated upon consolidation.
Accounting Periods
The Company uses a 52- or 53-week fiscal year ending on the last Saturday in December. Fiscal years 2013 and 2012 were 52-week years ending on December 28, 2013 and December 29, 2012, respectively. Fiscal year 2011 was a 53-week year ending on December 31, 2011.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements as well as the reported amounts of net revenue and expense during the reporting period. The Company regularly evaluates estimates and assumptions related to areas such as revenue recognition, allowances for doubtful accounts, warranty obligations, inventory valuation, stock-based compensation expense, deferred income tax valuation allowances, litigation and other loss contingencies. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.
Concentration of Credit Risk
Financial assets and liabilities, which potentially subject the Company to concentrations of credit risk, consist primarily of cash equivalents, marketable securities, and accounts receivable. The Company limits its exposure to credit loss by placing its cash in high credit quality financial investments. At times, such deposits may be in excess of insured limits. The Company has not experienced any significant losses on its investments.
Deferred Initial Public Offering Costs
Deferred IPO costs, consisting of direct legal, accounting, and other fees and costs, were capitalized and included in other assets on the Company’s consolidated balance sheet for the periods presented prior to August 2012. Upon closing of the Company’s IPO, the aggregate deferred offering costs of $4,494 were reclassified to stockholders’ equity.
Fair Value of Financial Instruments
The Company applies fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company’s financial instruments consist principally of cash and cash equivalents and marketable securities. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Level 1: Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.
Level 3: Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
The fair value of the Company’s cash equivalents was determined based on “Level 1” inputs. The fair value of marketable securities was determined based on “Level 2” inputs. The fair value of the Company’s “Level 2” instruments were valued based on the market approach technique which uses quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. The Company does not have any marketable securities in the “Level 3” category. The Company believes that the recorded values of all of the other financial assets and liabilities approximate their current fair values because of maturity and respective duration of these assets and liabilities.
Cash, Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments that are readily convertible into cash and have a maturity of three months or less at the time of purchase to be cash equivalents. The cost of these investments approximates their fair value. The Company maintains an investment portfolio of various security holdings, types and maturities. The Company defines marketable securities as income yielding securities that can be readily converted into cash. Marketable securities’ short-term and long-term classifications are based on remaining maturities at each reporting period. The Company’s marketable securities include U.S. agency securities, certificates of deposit, commercial paper, and corporate notes and bonds. The Company places its cash investments in instruments that meet various parameters, including credit quality standards as specified in the Company’s investment policy.
The Company accounts for marketable securities as available-for-sale. Management determines the appropriate classification of such securities at the time of purchase and re-evaluates such classification as of each balance sheet date. Cash equivalents and marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders’ equity, net of tax. The Company assesses whether its investments with unrealized loss positions are other than temporarily impaired. Unrealized gains and losses and declines in value judged to be other than temporary, if any, are determined based on the specific identification method and are reported in other income, net in the consolidated statements of operations.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. Inventory reserves or lower of cost or market allowances are established on a part specific basis for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions and reduce the carrying value of the related inventory. Such reductions establish a new cost basis for the specific parts. Shipping and handling costs are classified as a component of cost of net revenue in the consolidated statements of operations.
The Company continually assesses the recoverability of its inventory based on assumptions about demand and market conditions. Forecasted demand is determined based on historical sales and expected future sales. Determination of the market value may be complex, and therefore requires management to make assumptions and to apply judgment. In order for management to make the appropriate determination of market value, the following items are commonly considered: inventory turnover statistics, inventory quantities, unfilled customer order quantities, forecasted customer demand, competitive pricing, seasonality factors, consumer trends, and performance of similar products or accessories. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded reserves. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that may adversely affect the Company’s operating results. If actual market conditions are more favorable, the Company may have higher gross profits when products are sold.
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Property and Equipment
Property and equipment is carried at cost and is depreciated using the straight-line method over the useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the estimated life of the asset or term of the lease, whichever is shorter.
Impairment of Long-Lived Assets
The Company regularly reviews the carrying amount of its long-lived assets, as well as their useful lives, to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. An impairment loss would be recognized when the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset. Should impairment exist, the impairment loss would be measured based on the excess of the carrying amount of the asset over the asset’s fair value. The Company has not recognized any impairment losses through December 28, 2013.
Research and Development
Research and development costs are expensed as incurred.
Advertising Expense
The cost of advertising is expensed as incurred. The Company recognized advertising expense of $440, $288, and $185 for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively.
Revenue Recognition
The Company recognizes revenue when each of the following have occurred: (1) there is persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order; (2) the products are delivered, which generally occurs when the products are shipped and title and risk of loss has been transferred to the customer; (3) the selling price is fixed or determinable; and (4) collection of the customer receivable is deemed reasonably assured.
The Company records revenue based on facts available at the time of sale. Amounts that are not probable of collection once the product has shipped and title has transferred to the customer are deferred until the amount that is probable of collection can be determined. Items that are considered when determining the amounts that will be ultimately collected are the customer’s overall creditworthiness and payment history.
For distributors with rights of return, revenue is not recognized until product is shipped to the end customer of the distributor and the amount that will ultimately be collected is determinable. The Company offers its distributors limited stock rotation, price protection, and in some situations, credits on pricing depending on their end customer (ship and debit credits). For these distributors revenue is not recognized until product is shipped to the end customer of the distributor and the amount that will ultimately be collected is determinable. On shipments where net revenue is not recognized, the Company records an accounts receivable and deferred revenue for the selling price as there is a legally enforceable right to payment. Inventory at distributors remains on the Company’s books at carrying value until sold by the distributor at which time the Company recognizes the net revenue and cost of net revenue. Revenues to these distributors are recorded net of any pricing adjustments for price protection or ship and debit credits in the same period as the sale of goods to their customers. The amount of any pricing adjustment is based on the difference between the price at which the distributor originally purchased the Company’s inventory and either: (1) a lower distribution price then being offered on those products for price protection; or (2) a special price offered to the distributor in order to meet competitive pressures in the marketplace for ship and debit credits. The Company does not currently offer rebates or other pricing incentives, except for volume purchase pricing at the time of sale, to direct customers or distributors.
The Company also maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required.
Warranty Accrual
The Company generally provides a product warranty for a period of one year; however, it may be longer for certain customers. Accordingly, the Company establishes provisions for estimated product warranty costs at the time net revenue is
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
recognized based upon 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 the Company 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 the original estimates, revisions to the estimated warranty accrual are made. Actual claims are charged against the warranty reserve.
Stock-Based Compensation
The Company has stock incentive plans under which options to purchase common stock have been granted to employees, consultants and directors. The stock options have been granted to employees with exercise prices equal to or above the fair value of the underlying stock, as determined by the board of directors on the date the equity award was granted up until the Company’s initial public offering in August 2012. The board of directors determined the value of the underlying stock by considering a number of factors, including historical and projected financial results, the risks the Company faced at the time, the preferences of the Company’s preferred stock, and the lack of liquidity of the Company’s common stock. The fair value of equity instruments expected to vest are recognized and amortized on a straight-line basis over the requisite service period of the award, which is generally four years.
Foreign Currency Translation
Functional currency of our international subsidiaries is the local currency. Resulting translation gains or losses are recognized as a component of other comprehensive income (loss). Transaction gains or losses related to balances denominated in a different currency than the functional currency are recognized in the statement of operations.
Other Income (Expense), net
Other income (expense), net consists primarily of foreign currency exchange gains and losses.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss), consist of foreign currency translation adjustments and unrealized gains and losses on investments, are reported, net of their related tax effect, to arrive at comprehensive income (loss).
Income Taxes
The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, as measured by applying currently enacted tax laws. A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Future realization of the deferred tax asset is dependent on the reversal of existing taxable temporary differences, carryback potential, tax-planning strategies and on us generating sufficient taxable income in future years as the deferred income tax charges become currently deductible for tax reporting purposes. For the years ended December 28, 2013, December 29, 2012, and December 31, 2011, the Company has recorded a full valuation allowance against its domestic net deferred tax assets due to uncertainty of future realization.
2. Net Income (Loss) per Share
Basic net income per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share is calculated on the basis of the weighted-average number of shares of common stock including the effect of potential dilution that could occur if securities to issue common stock were exercised or converted into common stock. The Company calculates diluted net income (loss) per share under the as-if-converted method unless the conversion of the preferred stock is anti-dilutive to basic net income (loss) per share. To the extent preferred stock is anti-dilutive, the Company calculates diluted net income (loss) per share under the two-class method.
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
3. Certain Financial Statement Information
Inventories consisted of the following:
During the years ended December 28, 2013 and December 29, 2012, the Company recorded inventory write-downs of $5,725 and $1,920, respectively, related to excess and obsolete inventory as a result of changes in customer forecasted demand from one of the Company's distributors. During the year ended December 28, 2013 and December 31, 2011, the Company also recorded reductions to carrying value of inventories of $2,041 and $3,355, respectively, as a result of a lower of cost or market valuation. The write-downs in fiscal 2013 were due to anticipated selling price reductions the Company believes necessary to stimulate customer demand for certain products. These write-downs for fiscal 2011 were the result of lower than anticipated yields of certain wafers in new manufacturing processes. These inventory reductions were recorded in cost of net revenue.
Included in the table are inventories held by others, which include distributors and third-parties in the Company’s supply chain, of $7,874 and $13,616 at December 28, 2013 and December 29, 2012, respectively.
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Property and equipment consisted of the following:
* Leasehold improvements are amortized over the estimated life of the asset or remaining term of the lease, whichever is shorter.
Depreciation and amortization expense was $6,589, $4,579, and $3,980 for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively.
Accrued liabilities consisted of the following:
Accrued inventory repurchase obligation represents raw materials sold to suppliers for processing. These raw
materials remain part of the Company’s total inventory and the transactions include only customary terms and conditions, such
as shipping and payment terms.
4. Financial Instruments
The following tables show the Company’s cash and marketable securities’ cost, unrealized gains, unrealized losses and fair value by significant investment category measured at fair value on a recurring basis and recorded as cash and cash equivalents or short- and long-term marketable securities as of December 28, 2013:
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
There were no transfers between Level 1, Level 2 or Level 3 securities in the year ended December 28, 2013. All of the long-term marketable securities had remaining maturities of between one and two years in duration at December 28, 2013.
As of December 28, 2013, the Company had 39 investments in marketable securities with a fair value of $23,361 that were in an unrealized loss position of $17 for less than 12 months and considers the declines in market value to be temporary in nature and does not consider any of its investments other-than temporarily impaired. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis.
The following table presents a summary of the Company’s financial instruments that are measured on a recurring basis as of December 29, 2012:
There were no transfers between Level 1, Level 2 or Level 3 securities in the year ended December 29, 2012.
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
5. Stockholders’ Equity
Preferred Stock
Immediately prior to the closing of the IPO in August 2012, all shares of the Company’s then-outstanding convertible preferred stock outstanding automatically converted into 22,412 shares of common stock. The Company initially recorded each series of convertible preferred stock at their fair values on the dates of issuance, net of issuance costs. A redemption event would only occur upon the liquidation or winding up of the Company, a greater than 50% change of control or sale of substantially all of the assets of the Company. As the redemption event was outside the control of the Company, all shares of convertible preferred stock were presented outside of permanent equity in accordance with accounting guidance for redeemable securities.
Warrants
In May 2012, holders of Series D1 convertible preferred stock warrants net settled 80 of their warrants for 19 shares of Series D1 convertible preferred stock. On the date of the settlement, the Company de-recognized the fair value of the preferred stock warrant liability of $477 against convertible preferred stock.
The Company’s certificate of incorporation includes provisions which, based on approval of the board of directors and a majority of the stockholders of the Company, allow for a sale of the assets of the business whereby the Company could be required to pay the liquidation preference on outstanding convertible preferred stock. As a result of these provisions, warrants to purchase convertible preferred stock were accounted for as liabilities. The Company adjusts the carrying value of such warrants to their estimated fair value at each reporting date and increases or decreases in the fair value of such warrants are recorded as interest expense in the consolidated statements of operations. The Company recorded changes to the fair value of the warrant liability of ($634) and $36 for the years ended December 29, 2012 and December 31, 2011, respectively. The changes in the warrant liability are recorded in interest expense.
Stock-Based Compensation
2004 Plan: The Company is authorized to issue 6,495 shares upon the exercise of options to purchase common shares to employees, directors and consultants under a stock option plan adopted in 2004, as amended (the 2004 Plan). The 2004 Plan provides for the issuance of both incentive stock options (ISOs) and nonstatutory stock options (NSOs). NSOs may be granted to employees, directors or consultants, while ISOs may be granted only to employees. Options granted vest over a maximum period of four years and expire ten years from the date of grant. New hire stock options generally vest over four years, 25% on the first anniversary of the date of grant and monthly thereafter for the remaining three years. Stock options are not participating in any dividends declared by the Company.
2012 Plan: In April 2012, the Company’s board of directors adopted the 2012 Equity Incentive Plan (the 2012 Plan) and the stockholders approved it in May 2012. The 2012 Plan became effective on the completion of the IPO. The 2012 Plan authorizes the grant of ISOs, NSOs, stock appreciation rights, restricted stock, stock units, and performance cash awards.
2012 ESPP: In April 2012, the Company’s board of directors adopted the 2012 Employee Stock Purchase Plan (the 2012 ESPP) and the stockholders approved it in May 2012. The 2012 ESPP became effective on the completion of the IPO. A total of 1,000 shares of common stock will be made available for sale under the 2012 ESPP. The 2012 ESPP permits participants to purchase common stock at a discount through contributions of up to 15% of their eligible compensation. The 2012 ESPP will be implemented through offering periods of approximately six months in duration. The purchase price of shares will be 85% of the lower of the fair market value of the Company’s common stock on the first trading day of each offering period or on the purchase date. No offering periods have commenced to date with respect to the 2012 ESPP.
The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. The fair value of stock options was estimated at the grant date using the following weighted-average assumptions:
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
The risk-free interest rate assumption was based on the U.S. Treasury’s rates for U.S. Treasury constant maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The Company utilizes data of peer companies to determine the weighted average expected term in an effort to better align the expected term of the Company’s options with the term experienced by the Company’s peers. In addition, due to the Company’s limited historical data, the estimated volatility incorporates the historical volatility of comparable companies whose share prices are publicly available.
The following summarizes activity related to the Company’s stock options under the 2004 Plan and 2012 Plan at December 28, 2013:
Total stock-based compensation expense recognized during the years ended December 28, 2013, December 29, 2012, and December 31, 2011 was comprised of the following:
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
The total intrinsic value of stock options exercised was $6,926, $5,491 and $757 for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively. Upon exercise, the Company issues new shares of stock. As of December 28, 2013, the unrecognized estimated stock-based compensation related to nonvested stock options granted as of that date was $13,108, which is expected to be recognized over a weighted-average period of approximately 2.1 years. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional equity awards or assumes unvested equity awards in connection with acquisitions.
Shares Reserved for Future Issuance
The following common stock is reserved for future issuance at December 28, 2013 and December 29, 2012:
6. Income Taxes
Income (loss) before income tax consisted of the following for the years ended:
The provision (benefit) for income taxes is as follows for the years ended:
A reconciliation of the federal statutory rate to the effective rate is as follows:
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
The components of the Company’s deferred tax assets and liabilities are summarized as follows:
The valuation allowance has been established to offset domestic deferred tax assets, as realization of such assets is not considered to be more likely than not due to the Company’s recent history of losses and uncertainties regarding the Company’s ability to generate future taxable income sufficient to utilize the existing deferred tax assets prior to their expiration.
At December 28, 2013, the Company had U.S. federal and state net operating loss (NOL) carryforwards of approximately $147,545 and $102,481, 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.
During the year ended December 28, 2013, the Company generated excess tax benefits of approximately $1,654 from the settlement of certain stock awards. The tax benefit will be recorded as a credit to additional paid-in capital in the year the deduction reduces income tax payable.
The Company had tax credit carryforwards of approximately $7,226 for federal and $9,934 for state purposes at December 28, 2013. The federal credits will begin to expire in 2024. The state research and development tax credit does not expire.
Pursuant to Sections 382 and 383 of the Internal Revenue Code (the Code), annual use of the Company’s NOL and research 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 credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
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.
The Company completed a study to assess whether an ownership change has occurred since the Company’s formation through December 28, 2013. Based upon this study, the Company believes that several ownership changes have occurred. The Company has reduced its deferred tax assets related to the NOL and R&D 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 the Company’s ability to utilize its remaining tax attributes.
As of December 28, 2013, the Company has not provided for U.S. federal and state income taxes and foreign withholding taxes on approximately $237 of undistributed earnings of certain foreign subsidiaries as these earnings are considered indefinitely reinvested outside of the United States. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable due to the complexities of the hypothetical calculation. If management decides to repatriate such foreign earnings in future periods, the Company may incur incremental U.S. federal and state income taxes as well as foreign withholding taxes. However, the Company's intent is to keep these funds indefinitely reinvested outside the U.S. and its current plans do not demonstrate a need to repatriate them to fund U.S. operations. For certain earnings of foreign subsidiaries not considered indefinitely reinvested, such as Subpart F of the U.S. Internal Revenue Code (Subpart F), the Company has provided U.S. income taxes and foreign withholding taxes on these undistributed earnings. As of the year ended December 28, 2013, the Company recorded U.S. income taxes and foreign withholding taxes on $774 of undistributed earnings of foreign subsidiaries. During 2012, the Company recorded U.S. income taxes on approximately $900 of Subpart F earnings of foreign subsidiaries.
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
Approximately $68 and $261 of the total unrecognized tax benefits at December 29, 2012 and December 31, 2011, respectively, would reduce the Company’s annual effective tax rate if recognized, and the remainder would have no effect as long as the Company’s deferred tax assets remain subject to a valuation allowance.
The Company does not anticipate any increases or decreases in the unrecognized tax benefit over the next 12 months.
Due to the NOL and credit carryforwards, the U.S. federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for years 1998 through 2012. The foreign income tax returns are open to examination for the years 2011 through 2013.
The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. There was approximately $12 accrued interest and penalties associated with uncertain tax positions as of December 29, 2012 and no accrued interest as of December 28, 2013. The amount of interest and penalties recognized during the years ended December 28, 2013, December 29, 2012, and December 31, 2011 was $12, $85, and $20, respectively.
7. Commitments and Contingencies
Leases
The Company leases its primary operating facilities in San Diego, CA under operating lease agreements which expire on December 31, 2015. Future minimum annual payments under the operating lease for fiscal 2014 and 2015 are approximately $898 and $953, respectively. In addition, the Company leases certain equipment and software under operating lease agreements which expire between 2014 and 2016. Total operating lease and license expense was $4,045, $3,606, and $3,154 for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively.
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Annual future minimum obligations under operating leases and licensing agreements as of December 28, 2013, are as follows:
Long-term debt obligations
In May 2013, the Company amended its existing loan and security agreement, which increased the maximum line of credit availability up to $25,000 in accounts receivable financing. The Company is obligated to pay interest at the rate of LIBOR plus 2.0% to 2.5% subject to certain covenants. Interest is payable monthly with the principal due at the maturity date, December 31, 2015. At December 28, 2013 and December 29, 2012, there was no outstanding balance and there was $19,178 and $14,414 available, respectively. The agreement contains certain financial covenants, including covenants relating to our required liquidity ratio and minimum tangible net worth. The Company was in compliance with its financial covenants at December 28, 2013.
Legal Proceedings
On February 14, 2012, the Company 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 alleges the infringement of five of the Company’s patents relating to RFICs and switching technology by RF Micro Devices, Inc. (RFMD). The lawsuit alleges that certain of RFMD’s products infringe the Company’s patents relating to silicon on insulator (SOI) design technology for RFICs and seeks, in addition to damages, to permanently enjoin RFMD from further infringement. On March 26, 2013, the Company filed an additional lawsuit against RFMD in the U.S. District Court for the Southern District of California alleging infringement of a sixth patent relating to RFICs and switching technology by RFMD. On April 25, 2013, the Company 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. On December 12, 2013, RFMD filed a counterclaim alleging the Company violates a patent owned or licensed by RFMD. Pursuing these actions is costly and could impose a significant burden on management and employees. The Company may receive unfavorable interim rulings in the course of this litigation and there can be no assurance that a favorable outcome will ultimately be obtained. The Company believes the outcome of this pending litigation will not have, individually or in the aggregate, a material adverse effect on its consolidated financial statements.
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 the Company's San Diego facilities in connection with an investigation into exports and temporary imports of certain products sold in the aerospace market. The Company is 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 the Company’s compliance with the Arms Export Control Act (AECA) and the AECA’s implementation of International Traffic In Arms Regulations (ITAR). Based on this review the Company could be subject to continued investigation and potential regulatory consequences related to these violations ranging from a no-action letter, government oversight of facilities and export transactions, monetary penalties of up to $500 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.
The Company monitors the status of these and other contingencies on an ongoing basis to ensure amounts are recognized and/or disclosed in our financial statements and footnotes as required by ASC 450, Loss Contingencies. At the time of this filing, the Company had not recorded any accrual for loss contingencies associated with its legal proceedings as losses resulting from such matters were determined not to be probable.
Peregrine Semiconductor Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
From time to time, the Company is subject to various claims and suits arising in the ordinary course of business, including commercial, employment and environmental matters. The Company does not expect that the resolution of these matters will have a material adverse effect on its consolidated financial position or results of operations.
Commitments
The Company has open non-cancelable inventory purchase commitments of $12,345 as of December 28, 2013. Inventory purchase obligations represent purchase commitments for fixed prices and quantities of wafers, assembly, and test services. We expect to receive and pay for the majority of these materials and services during the next twelve months.
8. Supply and Prepayment Agreement
In March 2012, the Company entered into a supply and prepayment agreement with Murata Manufacturing Company, Ltd. (Murata). The agreement is for an initial term of 18 months. Under the terms of the original agreement, Murata agreed to prepay on certain purchase orders placed through a third party distributor and to pay the Company a total deposit of $14,000 between March and July 2012. On September 29, 2012, the Company and Murata agreed to reduce the deposits from $14,000 to $13,000. The Company has been repaying the deposit at a rate based on the number of RFICs purchased by Murata over the four quarters starting from the fourth quarter of fiscal 2012 of up to $13,000. As of December 28, 2013, the Company repaid $12,084 under the supply and prepayment agreement with Murata resulting in a remaining customer deposit of $916.
As of December 29, 2012, the Company received prepayments on purchases made by Macnica, which were applied against outstanding accounts receivable balances. There is no remaining prepayment as of December 28, 2013 as the agreement concluded on March 31, 2013 and the deposit was fully utilized in April 2013. As of December 29, 2012, customer deposits included in prepayments on purchase orders from Macnica totaled $11,425.
During 2012, the Company paid $4,000 in deposits to suppliers to support production levels. During the year ended December 28, 2013, the Company received $3,755 in deposit repayments from suppliers resulting in a remaining balance of $245, which is included in prepaids and other current assets.
9. Restructuring
During December 2013, the Company made adjustments to reduce operating expense. These actions included consolidating office locations and reduction in employees across the Company’s operations in the U.S. and Japan. The restructuring was driven by long-term strategic and operational decisions.
The following table summarizes the restructuring activity and related accrual at December 28, 2013:
The remaining restructuring accrual balance of $456 as of December 28, 2013 is included in accrued liabilities and is expected to be paid in the first quarter of fiscal 2014. The accrual balance approximates fair value due to the short-term payment period. During the year ended December 28, 2013, the Company recorded restructuring expense of $340 in cost of net revenues and $369 in selling, general and administrative.
Subsequent to the year ended December 28, 2013, on January 30, 2014, the Company approved a restructuring plan. The plan consists of a reduction in force which will be substantially completed by the end of the first quarter of 2014. The total charge resulting from this plan is expected to be approximately $1,500 to $2,000.
10. Employee Benefits
The Company has a defined contribution 401(k) plan for employees who are at least 21 years of age. Under the terms of the plan, employees may make voluntary contributions as a percent of compensation, but not in excess of the maximum amounts allowed under the Internal Revenue Code. The Company’s contributions to the plan are discretionary and no contributions were made by the Company for any of the periods presented.
11. Concentrations and Geographic Information
The Company sells a majority of its products throughout North America, Asia and Europe. The Company makes periodic evaluations of the credit worthiness of its customers and does not require collateral for credit sales. The Company recognizes an allowance for doubtful accounts relating to accounts receivable for amounts deemed uncollectible. The Company considers customer specific issues, such as financial stability and ability to pay, when determining collectability of accounts receivable and appropriate allowances to record. The Company’s allowance for doubtful accounts was $100 as of December 28, 2013 and December 29, 2012.
Customers that exceeded 10% of total net revenue were as follows:
Customers whose balance represented greater than 10% of accounts receivable were as follows:
* Less than 10% of accounts receivable for the respective period end
Net revenue is allocated to the geographic region where the customer, or its business unit that makes the purchase is geographically based, or where the services were provided. Net revenue by geographic region was as follows:
As of December 28, 2013 and December 29, 2012 substantially all of the Company’s long-lived tangible assets are located in the U.S.
In addition, four vendors supplied 95% and 98% of the Company’s raw material for the years ended December 28, 2013 and December 29, 2012, respectively.
12. Segment Information
The Company operates in one segment related to the design, manufacturing and marketing of high performance RFICs for the space and military, broadband, industrial, mobile device, test and measurement equipment, and wireless infrastructure markets. The Company’s chief operating decision-maker is its chief executive officer, who reviews operating results on an aggregate basis and manages the Company’s resources and operations as a single operating segment.
13. Quarterly Financial Data (Unaudited)
The following table presents our unaudited quarterly financial data. In our opinion, this information has been prepared on a basis consistent with that of our audited consolidated financial statements and all necessary material adjustments, consisting of normal recurring accruals and adjustments, have been included to present fairly the unaudited quarterly financial data. Our quarterly results of operations for these periods are not necessarily indicative of future results of operations.
* The sum of the four quarters may not agree to the year total due to rounding within a quarter or the inclusion or exclusion of common stock equivalents in certain periods.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PEREGRINE SEMICONDUCTOR CORPORATION
Date: February 19, 2014
By:
/s/ Jay Biskupski
Jay Biskupski
Chief Financial Officer
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James S. Cable and Jay Biskupski his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.
INDEX TO EXHIBITS
Incorporated by Reference
Filed
Herewith
†
Indicates a management contract or compensatory plan.
#
Registrant has omitted portions of the referenced exhibit pursuant to an order granting confidential treatment under the Securities Act, issued August 7, 2012.
##
Registrant has omitted portions of the referenced exhibit pursuant to a request for confidential treatment.
*
In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.