INPHI Corp - FORM S-1/A - July 21, 2010

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As filed with the Securities and Exchange Commission on July 21, 2010

Registration No. 333-167564

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

Form S-1

REGISTRATION STATEMENT

 

Under

THE SECURITIES ACT OF 1933

 

 

INPHI CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware		3674		77-0557980
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

 

1154 Sonora Court

Sunnyvale, California 94086

(408) 636-2700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

Young K. Sohn

Chief Executive Officer and President

1154 Sonora Court

Sunnyvale, California 94086

(408) 636-2700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

Jorge del Calvo, Esq. Allison Leopold Tilley, Esq. Davina K. Kaile, Esq. Noelle Matteson, Esq. Pillsbury Winthrop Shaw Pittman LLP 2475 Hanover Street Palo Alto, CA 94304 (650) 233-4500 (650) 233-4545 facsimile		Bruce K. Dallas, Esq. Davis Polk & Wardwell LLP 1600 El Camino Real Menlo Park, CA 94025 (650) 752-2000 (650) 752-2111 facsimile

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and smaller reporting company in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer		¨		Accelerated		¨
Non-accelerated filer		x  (Do not check if a smaller reporting company)		Smaller reporting company		¨

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

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The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

 

Issued July 21, 2010

 

             Shares

 

 

COMMON STOCK

 

 

 

Inphi Corporation is offering              shares of its common stock and the selling stockholders are offering              shares of common stock. We will not receive any of the proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $              and $              per share.

 

 

 

We intend to apply to list our common stock on The New York Stock Exchange under the symbol “IPHI.”

 

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 9.

 

 

 

PRICE $              A SHARE

 

 

 

		Price to Public		Underwriting Discounts and Commissions		Proceeds to Inphi		Proceeds to Selling Stockholders
Per Share		$		$		$		$
Total		$		$		$		$

 

We and the selling stockholders have granted the underwriters the right to purchase up to an additional              shares of our common stock to cover over-allotments.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2010.

 

 

 

MORGAN STANLEY		DEUTSCHE BANK SECURITIES		JEFFERIES & COMPANY

 

STIFEL NICOLAUS WEISEL		NEEDHAM & COMPANY, LLC

 

                    , 2010

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TABLE OF CONTENTS

 

		Page
Prospectus Summary		1
Risk Factors		9
Special Note Regarding Forward-Looking Statements		29
Use of Proceeds		30
Dividend Policy		30
Capitalization		31
Dilution		33
Selected Consolidated Financial Data		35
Management’s Discussion and Analysis of Financial Condition and Results of Operations		37
Business		60
Management		76
Executive Compensation		84
Related Party Transactions		100
Principal and Selling Stockholders		102
Description of Capital Stock		104
Shares Eligible for Future Sale		108
Material U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders		110
Underwriters		113
Legal Matters		117
Experts		117
Where You Can Find Additional Information		117
Index to Consolidated Financial Statements		F-1

 

Neither we, the selling stockholders nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Until                     , 2010 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

For investors outside the United States: Neither we, the selling stockholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below before making a decision to buy our common stock. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition, results of operations or growth prospects could be harmed. In that case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also impair our business operations. You should also refer to the other information set forth in this prospectus, including our financial statements and the related notes.

 

Risks Related to Our Business

 

Our revenue and operating results can fluctuate from period to period, which could cause our share price to fluctuate.

 

Our revenue and operating results have fluctuated in the past and may fluctuate from period to period in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following factors, as well as other factors described elsewhere in this prospectus:

 

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the receipt, reduction or cancellation of orders by customers;

 

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fluctuations in the levels of component inventories held by our customers;

 

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the gain or loss of significant customers;

 

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market acceptance of our products and our customers’ products;

 

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our ability to develop, introduce and market new products and technologies on a timely basis;

 

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the timing and extent of product development costs;

 

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new product announcements and introductions by us or our competitors;

 

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incurrence of research and development and related new product expenditures;

 

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fluctuations in sales by module manufacturers who incorporate our semiconductor solutions in their products, such as memory modules;

 

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cyclical fluctuations in our markets;

 

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fluctuations in our manufacturing yields;

 

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significant warranty claims, including those not covered by our suppliers;

 

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changes in our product mix or customer mix;

 

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intellectual property disputes; and

 

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loss of key personnel or the inability to attract qualified engineers.

 

As a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indications of our future revenue or operating performance. Fluctuations in our revenue and operating results could cause our share price to decline.

 

We have an accumulated deficit and have incurred net losses in the past. We may incur net losses in the future.

 

As of March 31, 2010, we had an accumulated deficit of $48.8 million. We have incurred net losses in each year through 2008. We generated net income (loss) of $(5.3 million), $(3.4 million) and $7.3 million for the years ended December 31, 2007, 2008 and 2009, respectively. We generated net income (loss) of $(461,000) and $12.0 million for the three months ended March 31, 2009 and 2010, respectively. We may incur net losses in the future.

 

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We depend on a limited number of customers for a substantial portion of our revenue, and the loss of, or a significant reduction in orders from, one or more of our major customers could negatively impact our revenue and operating results. In addition, if we offer more favorable prices to attract or retain customers, our average selling prices and gross margins would decline.

 

In the quarter ended March 31, 2010, our 10 largest customers collectively accounted for 79% of our total revenue. Sales directly to Samsung accounted for 36% and 34% of our total revenue and sales directly and through distributors to Micron accounted for 17% and 17% of our total revenue for the year ended December 31, 2009 and the three months ended March 31, 2010, respectively. Some of our customers, including Samsung and Micron, use our products primarily in high-speed memory devices. We believe our operating results for the foreseeable future will continue to depend on sales to a relatively small number of customers. In the future, these customers may decide not to purchase our products at all, may purchase fewer products than they did in the past or may alter their purchasing patterns.

 

In addition, our relationships with some customers may deter other potential customers who compete with these customers from buying our products. To attract new customers or retain existing customers, we may offer these customers favorable prices on our products. In that event, our average selling prices and gross margins would decline. The loss of a key customer, a reduction in sales to any key customer or our inability to attract new significant customers could negatively impact our revenue and materially and adversely affect our results of operations.

 

We do not have long-term purchase commitments from our customers and if our customers cancel or change their purchase commitments, our revenue and operating results could suffer.

 

Substantially all of our sales to date, including sales to Samsung and Micron, have been made on a purchase order basis. We do not have any long-term commitments with any of our customers. As a result, our customers may cancel, change or delay product purchase commitments with little or no notice to us and without penalty. This in turn could cause our revenue to decline and materially and adversely affect our results of operations.

 

We may face claims of intellectual property infringement, which could be time-consuming, costly to defend or settle and result in the loss of significant rights and which could harm our relationships with our customers and distributors.

 

The semiconductor industry is characterized by companies that hold patents and other intellectual property rights and that vigorously pursue, protect and enforce intellectual property rights. From time to time, third parties may assert against us and our customers and distributors their patent and other intellectual property rights to technologies that are important to our business.

 

Claims that our products, processes or technology infringe third-party intellectual property rights, regardless of their merit or resolution, could be costly to defend or settle and could divert the efforts and attention of our management and technical personnel. For example, Netlist, Inc. filed suit against us in the United States District Court, Central District of California, in September 2009, alleging that our iMB^™ and certain other memory module components infringe three of Netlist’s patents. For more details, see “Business—Legal Proceedings.”

 

Infringement claims also could harm our relationships with our customers or distributors and might deter future customers from doing business with us. We do not know whether we will prevail in these proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If any pending or future proceedings result in an adverse outcome, we could be required to:

 

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cease the manufacture, use or sale of the infringing products, processes or technology;

 

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pay substantial damages for infringement;

 

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expend significant resources to develop non-infringing products, processes or technology, which may not be successful;

 

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license technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms, or at all;

 

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cross-license our technology to a competitor to resolve an infringement claim, which could weaken our ability to compete with that competitor; or

 

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pay substantial damages to our customers or end users to discontinue their use of or to replace infringing technology sold to them with non-infringing technology, if available.

 

Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.

 

Winning business is subject to lengthy competitive selection processes that require us to incur significant expenditures prior to generating any revenue or without any guarantee of any revenue related to this business. Even if we begin a product design, a customer may decide to cancel or change its product plans, which could cause us to generate no revenue from a product. If we fail to generate revenue after incurring substantial expenses to develop our products, our business and operating results would suffer.

 

We are focused on winning more competitive bid processes, known as “design wins,” that enable us to sell our high-speed analog semiconductor solutions for use in our customers’ products. These selection processes typically are lengthy and can require us to incur significant design and development expenditures and dedicate scarce engineering resources in pursuit of a single customer opportunity. We may not win the competitive selection process and may never generate any revenue despite incurring significant design and development expenditures. Failure to obtain a design win could prevent us from offering an entire generation of a product. This could cause us to lose revenue and require us to write off obsolete inventory, and could weaken our position in future competitive selection processes. Even after securing a design win, we may experience delays in generating revenue from our products as a result of the lengthy development cycle typically required. Our customers generally take a considerable amount of time to evaluate our products. Our design cycle from initial engagement to volume shipment is typically two to three years.

 

The delays inherent in these lengthy sales cycles increase the risk that a customer will decide to cancel, curtail, reduce or delay its product plans or adopt a competing design from one of our competitors, causing us to lose anticipated revenue. In addition, any delay or cancellation of a customer’s plans could materially and adversely affect our financial results, as we may have incurred significant expense without generating any revenue. Finally, our customers’ failure to successfully market and sell their products could reduce demand for our products and materially and adversely affect our business, financial condition and results of operations. If we were unable to generate revenue after incurring substantial expenses to develop any of our products, our business would suffer.

 

Our customers require our products and our third-party contractors to undergo a lengthy and expensive qualification process which does not assure product sales. If we are unsuccessful in or delayed in qualifying any of our products with a customer, our business and operating results would suffer.

 

Prior to purchasing our products, our customers require that both our products and our third-party contractors undergo extensive qualification processes, which involve testing of our products in the customers’ systems, as well as testing for reliability. This qualification process may continue for several months. However, qualification of a product by a customer does not assure any sales of the product to that customer. Even after successful qualification and sales of a product to a customer, a subsequent revision in our third party contractors’ manufacturing process or our selection of a new supplier may require a new qualification process with our customers, which may result in delays and in our holding excess or obsolete inventory. After our products are qualified, it can take several months or more before the customer commences volume production of components or systems that incorporate our products. Despite these uncertainties, we devote substantial resources, including design, engineering, sales, marketing and management efforts, to qualifying our products with customers in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, sales of those products to the customer may be precluded or delayed, which may impede our growth and cause our business to suffer.

 

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The complexity of our products could result in undetected defects and we may be subject to warranty claims and product liability, which could result in a decrease in customers and revenue, unexpected expenses and loss of market share. In addition, our product liability insurance may not adequately cover our costs arising from products defects or otherwise.

 

Our products are sold as components or as modules for use in larger electronic equipment sold by our customers. A product usually goes through an intense qualification and testing period performed by our customers before being used in production. We inspect and test parts, or have them inspected and tested in order to screen out parts that may be weak or potentially suffer a defect incurred through the manufacturing process. From time to time, we are subject to warranty or product liability claims that may require us to make significant expenditures to defend these claims or pay damage awards. Generally, our agreements seek to limit our liability to the replacement of the part or to the revenue received for the product, but these limitations on liability may not be effective or sufficient in scope in all cases. If a customer’s equipment fails in use, the customer may incur significant monetary damages including an equipment recall or associated replacement expenses, as well as lost revenue. The customer may claim that a defect in our product caused the equipment failure and assert a claim against us to recover monetary damages. The process of identifying a defective or potentially defective product in systems that have been widely distributed may be lengthy and require significant resources, and we may incur significant replacement costs and contract damage claims from our customers as well as harm to our reputation. In certain situations, circumstances might warrant that we consider incurring the costs or expense related to a recall of one of our products in order to avoid the potential claims that may be raised should the customer reasonably rely upon our product only to suffer a failure due to a design or manufacturing process defect. Defects in our products could harm our relationships with our customers and damage our reputation. Customers may be reluctant to buy our products, which could harm our ability to retain existing customers and attract new customers and our financial results. In addition, the cost of defending these claims and satisfying any arbitration award or judicial judgment with respect to these claims could harm our business prospects and financial condition. Although we carry product liability insurance, this insurance may not adequately cover our costs arising from defects in our products or otherwise.

 

We rely on our relationships with industry and technology leaders to enhance our product offerings and our inability to continue to develop or maintain such relationships in the future would harm our ability to remain competitive.

 

We develop many of our semiconductor products for applications in systems that are driven by industry and technology leaders in the communications and computing markets. We also work with OEMs, system manufacturers and standards bodies to define industry conventions and standards within our target markets. We believe these relationships enhance our ability to achieve market acceptance and widespread adoption of our products. If we are unable to continue to develop or maintain these relationships, our semiconductor solutions would become less desirable to our customers, our sales would suffer and our competitive position could be harmed.

 

If we fail to accurately anticipate and respond to market trends or fail to develop and introduce new or enhanced products to address these trends on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be harmed.

 

We operate in industries characterized by rapidly changing technologies and industry standards as well as technological obsolescence. We have developed products that may have long product life cycles of 10 years or more, as well as other products in more volatile high growth or rapidly changing areas, which may have shorter life cycles of only two to three years. We believe that our future success depends on our ability to develop and introduce new technologies and products that generate new sources of revenue to replace, or build upon, existing product revenue streams that may be dependent upon limited product life cycles. If we are not able to repeatedly introduce, in successive years, new products that ship in volume, our revenue will likely not grow and may decline significantly and rapidly. In 2007 and 2008, there were no products that represented more than 10% of our total revenue. In 2009, we successfully introduced and began to ship a new product in production, which

 

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integrated a new phase lock loop, or PLL, along with a new register buffer. Sales of this newly introduced part comprised 43% of our total revenue in 2009. As we continue to grow our business in 2010, this product has now matured. As a result, sales of this product are now declining in volume. We currently expect that by 2011 the new product introduced in 2009 will no longer be material to our total revenue. This underscores the importance of the need for us to continually develop and introduce new products to diversify our revenue base as well as generate new revenue to replace and build upon the success of previously introduced products which may be rapidly maturing.

 

To compete successfully, we must design, develop, market and sell new or enhanced products that provide increasingly higher levels of performance and reliability while meeting the cost expectations of our customers. The introduction of new products by our competitors, the delay or cancellation of a platform for which any of our semiconductor solutions are designed, the market acceptance of products based on new or alternative technologies or the emergence of new industry standards could render our existing or future products uncompetitive from a pricing standpoint, obsolete and otherwise unmarketable. Our failure to anticipate or timely develop new or enhanced products or technologies in response to technological shifts could result in decreased revenue and our competitors winning design wins. In particular, we may experience difficulties with product design, manufacturing, marketing or certification that could delay or prevent our development, introduction or marketing of new or enhanced products. Although we believe our products are fully compliant with applicable industry standards, proprietary enhancements may not in the future result in full conformance with existing industry standards under all circumstances. Due to the interdependence of various components in the systems within which our products and the products of our competitors operate, customers are unlikely to change to another design, once adopted, until the next generation of a technology. As a result, if we fail to introduce new or enhanced products that meet the needs of our customers or penetrate new markets in a timely fashion, and our designs do not gain acceptance, we will lose market share and our competitive position, very likely on an extended basis, and operating results will be adversely affected.

 

If sufficient market demand for 100G solutions does not develop or develops more slowly than expected, or if we fail to accurately predict market requirements or market demand for 100G solutions, our business, competitive position and operating results would suffer.

 

We are currently investing significant resources to develop semiconductor solutions supporting 100G data transmission rates in order to increase the number of such solutions in our product line. If we fail to accurately predict market requirements or market demand for 100G semiconductor solutions, or if our 100G semiconductor solutions are not successfully developed or competitive in the industry, our business will suffer. If 100G networks are deployed to a lesser extent or more slowly than we currently anticipate, we may not realize any benefits from our investment. As a result, our business, competitive position, market share and operating results would suffer.

 

Our target markets may not grow or develop as we currently expect and are subject to market risks, any of which could materially harm our business, revenue and operating results.

 

To date, a substantial portion of our revenue has been attributable to demand for our products in the communications and computing markets and the growth of these overall markets. These markets have fluctuated in size and growth in recent times. Our operating results are impacted by various trends in these markets. These trends include the deployment and broader market adoption of next generation technologies, such as 40 gigabits per second (Gbps), or 40G, and 100G, in communications and enterprise networks, timing of next generation network upgrades, the introduction and broader market adoption of next generation server platforms, timing of enterprise upgrades and the introduction and deployment of high-speed memory interfaces in computing platforms. We are unable to predict the timing or direction of the development of these markets with any accuracy. For example, we expect that the deployment of different types of memory devices for which our iMB^™ product is designed will be substantially dependent on the development of next generation server platforms. We have not generated any significant revenue from our iMB^™ product to date, and if the development or adoption

 

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of next generation server platforms is delayed, or if these server platforms do not interoperate with memory devices for which our iMB^™ product is designed, we may not realize revenue from our iMB^™ product. In addition, because some of our products are not limited in the systems or geographic areas in which they may be deployed, we cannot always determine with accuracy how, where or into which applications our products are being deployed. If our target markets do not grow or develop in ways that we currently expect, demand for our semiconductor products may decrease and our business and operating results could suffer.

 

We rely on a limited number of third parties to manufacture, assemble and test our products, and the failure to manage our relationships with our third-party contractors successfully could adversely affect our ability to market and sell our products and our reputation. Our revenue and operating results would suffer if these third parties fail to deliver products or components in a timely manner and at reasonable cost or if manufacturing capacity is reduced or eliminated as we may be unable to obtain alternative manufacturing capacity.

 

We operate an outsourced manufacturing business model. As a result, we rely on third-party foundry wafer fabrication and assembly and test capacity. We also perform testing in our Westlake Village, California, facility. We generally use a single foundry for the production of each of our various semiconductors. Currently, our principal foundries are Global Communications Semiconductors, Inc., or GCS, Sumitomo Electric Device Innovations Inc., Taiwan Semiconductor Manufacturing Company Ltd., or TSMC, TowerJazz Semiconductor Ltd. and United Monolithic Semiconductors S.A.S., or UMS. We also use third-party contract manufacturers for a significant majority of our assembly and test operations, including Kyocera Corporation, Natel Engineering Co., Inc., Orient Semiconductor Electronics Ltd., or OSE, Signetics Korea Co., Ltd. and STATS ChipPAC Ltd.

 

Relying on third-party manufacturing, assembly and testing presents significant risks to us, including the following:

 

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failure by us, our customers or their end customers to qualify a selected supplier;

 

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capacity shortages during periods of high demand;

 

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reduced control over delivery schedules and quality;

 

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shortages of materials;

 

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misappropriation of our intellectual property;

 

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limited warranties on wafers or products supplied to us; and

 

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potential increases in prices.

 

The ability and willingness of our third-party contractors to perform is largely outside our control. If one or more of our contract manufacturers or other outsourcers fails to perform its obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example, if that manufacturing capacity is reduced or eliminated at one or more facilities, including as a response to the recent worldwide decline in the semiconductor industry, or any of those facilities are unable to keep pace with the growth of our business, we could have difficulties fulfilling our customer orders and our revenue could decline. In addition, if these third parties fail to deliver quality products and components on time and at reasonable prices, we could have difficulties fulfilling our customer orders, our revenue could decline and our business, financial condition and results of operations would be adversely affected.

 

Additionally, as many of our fabrication and assembly and test contractors are located in the Pacific Rim region, principally in Taiwan, our manufacturing capacity may be similarly reduced or eliminated due to natural disasters, political unrest, war, labor strikes, work stoppages or public health crises, such as outbreaks of H1N1 flu. This could cause significant delays in shipments of our products until we are able to shift our manufacturing, assembly or test from the affected contractor to another third-party vendor. There can be no assurance that alternative capacity could be obtained on favorable terms, if at all.

 

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Our costs may increase substantially if the wafer foundries that supply our products do not achieve satisfactory product yields or quality.

 

The wafer fabrication process is an extremely complicated process where the slightest changes in the design, specifications or materials can result in material decreases in manufacturing yields or even the suspension of production. From time to time, our third-party wafer foundries have experienced, and are likely to experience manufacturing defects and reduced manufacturing yields related to errors or problems in their manufacturing processes or the interrelationship of their processes with our designs. In some cases, our third-party wafer foundries may not be able to detect these defects early in the fabrication process or determine the cause of such defects in a timely manner. We may incur substantial research and development expense for prototype or development stage products as we qualify the products for production.

 

Generally, in pricing our semiconductors, we assume that manufacturing yields will continue to increase, even as the complexity of our semiconductors increases. Once our semiconductors are initially qualified with our third-party wafer foundries, minimum acceptable yields are established. We are responsible for the costs of the wafers if the actual yield is above the minimum. If actual yields are below the minimum we are not required to purchase the wafers. The minimum acceptable yields for our new products are generally lower at first and increase as we achieve full production. Unacceptably low product yields or other product manufacturing problems could substantially increase the overall production time and costs and adversely impact our operating results on sales of our products. Product yield losses will increase our costs and reduce our gross margin. In addition to significantly harming our operating results and cash flow, poor yields may delay shipment of our products and harm our relationships with existing and potential customers.

 

We do not have any long-term supply contracts with our contract manufacturers or suppliers, and any disruption in our supply of products or materials could have a material adverse affect on our business, revenue and operating results.

 

We currently do not have long-term supply contracts with any of our third-party contract manufacturers. We make substantially all of our purchases on a purchase order basis, and our contract manufacturers are not required to supply us products for any specific period or in any specific quantity. We expect that it would take approximately nine to 12 months to transition from our current foundry or assembly services to new providers. Such a transition would likely require a qualification process by our customers or their end customers. We generally place orders for products with some of our suppliers several months prior to the anticipated delivery date, with order volumes based on our forecasts of demand from our customers. Accordingly, if we inaccurately forecast demand for our products, we may be unable to obtain adequate and cost-effective foundry or assembly capacity from our third-party contractors to meet our customers’ delivery requirements, or we may accumulate excess inventories. On occasion, we have been unable to adequately respond to unexpected increases in customer purchase orders and therefore were unable to benefit from this incremental demand. None of our third-party contract manufacturers have provided any assurance to us that adequate capacity will be available to us within the time required to meet additional demand for our products.

 

Our foundry vendors and assembly and test vendors may allocate capacity to the production of other companies’ products while reducing deliveries to us on short notice. In particular, other customers that are larger and better financed than us or that have long-term agreements with our foundry vendor or assembly and test vendors may cause our foundry vendor or assembly and test vendors to reallocate capacity to those customers, decreasing the capacity available to us. We do not have long-term supply contracts with our third-party contract manufacturers and if we enter into costly arrangements with suppliers that include nonrefundable deposits or loans in exchange for capacity commitments, commitments to purchase specified quantities over extended periods or investment in a foundry, our operating results could be harmed. We may not be able to make any such arrangement in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility, and not be on terms favorable to us. Moreover, if we are able to secure foundry capacity, we may be obligated to use all of that capacity or incur penalties. These penalties may be expensive and could harm our financial results.

 

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To date, we have not entered into such arrangements with our suppliers. If we need another foundry or assembly and test subcontractor because of increased demand, or if we are unable to obtain timely and adequate deliveries from our providers, we might not be able to cost effectively and quickly retain other vendors to satisfy our requirements.

 

Many of our customers depend on us as the sole source for a number of our products. If we are unable to deliver these products as the sole supplier or as one of a limited number of suppliers, our relationships with these customers and our business would suffer.

 

A number of our customers do not have alternative sources for our semiconductor solutions and depend on us as the sole supplier or as one of a limited number of suppliers for these products. Since we outsource our manufacturing to third-party contractors, our ability to deliver our products is substantially dependent on the ability and willingness of our third-party contractors to perform, which is largely outside our control. A failure to deliver our products in sufficient quantities or at all to our customers that depend on us as a sole supplier or as one of a limited number of suppliers may be detrimental to their business and, as a result, our relationship with the customer would be negatively impacted. If we are unable to maintain our relationships with these customers after such failure, our business and financial results may be harmed.

 

If we are unable to attract, train and retain qualified personnel, particularly our design and technical personnel, we may not be able to execute our business strategy effectively.

 

Our future success depends on our ability to attract and retain qualified personnel, including our management, sales and marketing, and finance, and particularly our design and technical personnel. We do not know whether we will be able to retain all of these personnel as we continue to pursue our business strategy. Historically, we have encountered difficulties in hiring qualified engineers because there is a limited pool of engineers with the expertise required in our field. Competition for these personnel is intense in the semiconductor industry. As the source of our technological and product innovations, our design and technical personnel represent a significant asset. The loss of the services of one or more of our key employees, especially our key design and technical personnel, or our inability to attract and retain qualified design and technical personnel, could harm our business, financial condition and results of operations.

 

We may not be able to effectively manage our growth, and we may need to incur significant expenditures to address the additional operational and control requirements of our growth, either of which could harm our business and operating results.

 

To effectively manage our growth, we must continue to expand our operational, engineering and financial systems, procedures and controls and to improve our accounting and other internal management systems. This may require substantial managerial and financial resources, and our efforts in this regard may not be successful. Our current systems, procedures and controls may not be adequate to support our future operations. If we fail to adequately manage our growth, or to improve our operational, financial and management information systems, or fail to effectively motivate or manage our new and future employees, the quality of our products and the management of our operations could suffer, which could adversely affect our operating results.

 

We face intense competition and expect competition to increase in the future. If we fail to compete effectively, it could have an adverse effect on our revenue, revenue growth rate, if any, and market share.

 

The global semiconductor market in general, and the communications and computing markets in particular, are highly competitive. We compete or plan to compete in different target markets to various degrees on the basis of a number of principal competitive factors, including product performance, power budget, features and functionality, customer relationships, size, ease of system design, product roadmap, reputation and reliability, customer support and price. We expect competition to increase and intensify as more and larger semiconductor companies enter our markets. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could materially and adversely affect our business, revenue and operating results.

 

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Currently, our competitors range from large, international companies offering a wide range of semiconductor products to smaller companies specializing in narrow markets. Our primary competitors include Broadcom Corporation, Hittite Microwave Corporation, Integrated Device Technology, Inc. and Texas Instruments Incorporated, as well as other analog signal processing companies. We expect competition in the markets in which we participate to increase in the future as existing competitors improve or expand their product offerings. In addition, as we develop our 100G semiconductor solution, we may face competition from companies such as Broadcom and NetLogic Microsystems, Inc.

 

Our ability to compete successfully depends on elements both within and outside of our control, including industry and general economic trends. During past periods of downturns in our industry, competition in the markets in which we operate intensified as our customers reduced their purchase orders. Many of our competitors have substantially greater financial and other resources with which to withstand similar adverse economic or market conditions in the future. These developments may materially and adversely affect our current and future target markets and our ability to compete successfully in those markets.

 

We use a significant amount of intellectual property in our business. Monitoring unauthorized use of our intellectual property can be difficult and costly and if we are unable to protect our intellectual property, our business could be adversely affected.

 

Our success depends in part upon our ability to protect our intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, copyrights, trademarks and trade secrets in the United States and in selected foreign countries where we believe filing for such protection is appropriate. Effective protection of our intellectual property rights may be unavailable, limited or not applied for in some countries. Some of our products and technologies are not covered by any patent or patent application, as we do not believe patent protection of these products and technologies is critical to our business strategy at this time. A failure to timely seek patent protection on products or technologies generally precludes us from seeking future patent protection on these products or technologies. We cannot guarantee that:

 

•

any of our present or future patents or patent claims will not lapse or be invalidated, circumvented, challenged or abandoned;

 

•

our intellectual property rights will provide competitive advantages to us;

 

•

our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties;

 

•

any of our pending or future patent applications will be issued or have the coverage originally sought;

 

•

our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak;

 

•

any of the trademarks, copyrights, trade secrets or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned; or

 

•

we will not lose the ability to assert our intellectual property rights against or to license our technology to others and collect royalties or other payments.

 

For example, we filed a complaint against Netlist in Federal District Court in November 2009 alleging that Netlist infringes two of our patents. Netlist asserts in its amended answer to the complaint that it does not infringe the patents, that the patents are invalid and that one of the patents is unenforceable due to inequitable conduct before the USPTO. For more details, see “Business—Legal Proceedings.”

 

In addition, our competitors or others may design around our protected patents or technologies. Effective intellectual property protection may be unavailable or more limited in one or more relevant jurisdictions relative to those protections available in the United States, or may not be applied for in one or more relevant jurisdictions.

 

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If we pursue litigation to assert our intellectual property rights, an adverse decision in any of these legal actions could limit our ability to assert our intellectual property rights, limit the value of our technology or otherwise negatively impact our business, financial condition and results of operations.

 

Monitoring unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual property may have occurred or may occur in the future. Although we have taken steps to minimize the risk of this occurring, any such failure to identify unauthorized use and otherwise adequately protect our intellectual property would adversely affect our business. Moreover, if we are required to commence litigation, whether as a plaintiff or defendant, not only would this be time-consuming, but we would also be forced to incur significant costs and divert our attention and efforts of our employees, which could, in turn, result in lower revenue and higher expenses.

 

We also rely on contractual protections with our customers, suppliers, distributors, employees and consultants, and we implement security measures designed to protect our trade secrets. We cannot assure you that these contractual protections and security measures will not be breached, that we will have adequate remedies for any such breach or that our suppliers, employees or consultants will not assert rights to intellectual property arising out of such contracts.

 

In addition, we have a number of third-party patent and intellectual property license agreements. Some of these license agreements require us to make one-time payments or ongoing royalty payments. We cannot guarantee that the third-party patents and technology we license will not be licensed to our competitors or others in the semiconductor industry. In the future, we may need to obtain additional licenses, renew existing license agreements or otherwise replace existing technology. We are unable to predict whether these license agreements can be obtained or renewed or the technology can be replaced on acceptable terms, or at all.

 

Average selling prices of our products often decrease over time, which could negatively impact our revenue and gross margins.

 

Our operating results may be impacted by a decline in the average selling prices of our semiconductors. If competition increases in our target markets, we may need to reduce the average unit price of our products in anticipation of competitive pricing pressures, new product introductions by us or our competitors and for other reasons. If we are unable to offset any reductions in our average selling prices by increasing our sales volumes or introducing new products with higher margins, our revenue and gross margins will suffer. To maintain our revenue and gross margins, we must develop and introduce new products and product enhancements on a timely basis and continually reduce our costs as well as our customers’ costs. Failure to do so would cause our revenue and gross margins to decline.

 

We are subject to order and shipment uncertainties, and differences between our estimates of customer demand and product mix and our actual results could negatively affect our inventory levels, sales and operating results.

 

Our revenue is generated on the basis of purchase orders with our customers rather than long-term purchase commitments. In addition, our customers can cancel purchase orders or defer the shipments of our products under certain circumstances. Our products are manufactured using semiconductor foundries according to our estimates of customer demand, which requires us to make separate demand forecast assumptions for every customer, each of which may introduce significant variability into our aggregate estimates. It is difficult for us to forecast the demand for our products, in part because of the complex supply chain between us and the end-user markets that incorporate our products. Due to our lengthy product development cycle, it is critical for us to anticipate changes in demand for our various product features and the applications they serve to allow sufficient time for product development and design. We have limited visibility into future customer demand and the product mix that our customers will require, which could adversely affect our revenue forecasts and operating margins. Moreover, because some of our target markets are relatively new, many of our customers have difficulty accurately

 

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forecasting their product requirements and estimating the timing of their new product introductions, which ultimately affects their demand for our products. Our failure to accurately forecast demand can lead to product shortages that can impede production by our customers and harm our customer relationships. Conversely, our failure to forecast declining demand or shifts in product mix can result in excess or obsolete inventory. The rapid pace of innovation in our industry could also render significant portions of our inventory obsolete. Excess or obsolete inventory levels could result in unexpected expenses or increases in our reserves that could adversely affect our business, operating results and financial condition. In contrast, if we were to underestimate customer demand or if sufficient manufacturing capacity were unavailable, we could forego revenue opportunities, potentially lose market share and damage our customer relationships. In addition, any significant future cancellations or deferrals of product orders or the return of previously sold products due to manufacturing defects could materially and adversely impact our profit margins, increase our write-offs due to product obsolescence and restrict our ability to fund our operations.

 

We rely on third-party sales representatives and distributors to assist in selling our products. If we fail to retain or find additional sales representatives and distributors, or if any of these parties fail to perform as expected, it could reduce our future sales.

 

In 2009, we derived 78% of our total revenue from sales by our direct sales team and third-party sales representatives. In addition, in 2009 and the three months ended March 31, 2010, approximately 22% and 28% of our sales were made through third-party distributors, respectively. Two of our distributors, which sell solely to Micron, accounted for 12% and 17% of our total revenue in 2009 and the three months ended March 31, 2010, respectively. We are unable to predict the extent to which these third-party sales representatives and distributors will be successful in marketing and selling our products. Moreover, many of these third-party sales representatives and distributors also market and sell competing products, which may affect the extent to which they promote our products. Even where our relationships are formalized in contracts, our third-party sales representatives and distributors often have the right to terminate their relationships with us at any time. Our future performance will also depend, in part, on our ability to attract additional third-party sales representatives and distributors who will be able to market and support our products effectively, especially in markets in which we have not previously sold our products. If we cannot retain our current distributors or find additional or replacement third-party sales representatives and distributors, our business, financial condition and results of operations could be harmed. Additionally, if we terminate our relationship with a distributor, we may be obligated to repurchase unsold products. We record a reserve for estimated returns and price credits. If actual returns and credits exceed our estimates, our operating results could be harmed.

 

The facilities of our third-party contractors and distributors are located in regions that are subject to earthquakes and other natural disasters.

 

The facilities of our third-party contractors and distributors are subject to risk of catastrophic loss due to fire, flood or other natural or man-made disasters. A number of our facilities and those of our contract manufacturers are located in areas with above average seismic activity and also subject to typhoons and other Pacific storms. Several foundries that manufacture our wafers are located in Taiwan, Japan and California, and all of the third-party contractors who assemble and test our products are located in Asia. In addition, our headquarters are located in California. The risk of an earthquake in the Pacific Rim region or California is significant due to the proximity of major earthquake fault lines. For example, in 2002 and 2003, major earthquakes occurred in Taiwan. Any catastrophic loss to any of these facilities would likely disrupt our operations, delay production, shipments and revenue and result in significant expenses to repair or replace the facility. In particular, any catastrophic loss at our California locations would materially and adversely affect our business.

 

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We rely on third-party technologies for the development of our products and our inability to use such technologies in the future would harm our ability to remain competitive.

 

We rely on third parties for technologies that are integrated into our products, such as wafer fabrication and assembly and test technologies used by our contract manufacturers, as well as licensed architecture technologies. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner or at all, and our ability to remain competitive would be harmed. In addition, if we are unable to successfully license technology from third parties to develop future products, we may not be able to develop such products in a timely manner or at all.

 

Our business would be adversely affected by the departure of existing members of our senior management team and other key personnel.

 

Our success depends, in large part, on the continued contributions of our senior management team, in particular, the services of Young K. Sohn, our President and Chief Executive Officer, and Dr. Gopal Raghavan, one of our founders and our Chief Technical Officer, as well as other key personnel, including Dr. Loi Nguyen, one of our founders and our Vice President of Networking, Communications and Multi-Market Products. In addition, we have not entered into non-compete agreements with members of our senior management team. The loss of any member of our senior management team or key personnel could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate.

 

Potential future acquisitions could be difficult to integrate, divert attention of key personnel, disrupt our business, dilute stockholder value and impair our operating results.

 

As part of our business strategy, we have pursued and may continue to pursue acquisitions in the future that we believe will complement our business, semiconductor solutions or technologies. For example, we recently acquired Winyatek Technology, Inc., a Taiwanese company. Any acquisition involves a number of risks, many of which could harm our business, including:

 

•

difficulties in integrating the operations, technologies, products, existing contracts, accounting and personnel of the target company;

 

•

realizing the anticipated benefits of any acquisition;

 

•

difficulties in transitioning and supporting customers, if any, of the target company;

 

•

diversion of financial and management resources from existing operations;

 

•

the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;

 

•

potential loss of key employees, customers and strategic alliances from either our current business or the target company’s business;

 

•

assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company’s products;

 

•

inability to generate sufficient revenue to offset acquisition costs;

 

•

dilutive effect on our stock as a result of any equity-based acquisitions;

 

•

inability to successfully complete transactions with a suitable acquisition candidate; and

 

•

in the event of international acquisitions, risks associated with accounting and business practices that are different from applicable U.S. practices and requirements.

 

Acquisitions also frequently result in the recording of goodwill and other intangible assets that are subject to potential impairments, which could harm our financial results. As a result, if we fail to properly evaluate

 

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acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.

 

Tax benefits that we receive may be terminated or reduced in the future, which would increase our costs.

 

In 2010, we began to expand our international presence to take advantage of the opportunity to recruit additional engineering design talent, as well as to more closely align our operations geographically with our customers and suppliers in Asia. In certain international jurisdictions, we have also entered into agreements with local governments to provide us with, among other things, favorable local tax rates if certain minimum criteria are met. These agreements may require us to meet several requirements as to investment, headcount and activities to retain this status. We currently believe that we will be able to meet all the terms and conditions specified in these agreements. However, if adverse changes in the economy or changes in technology affect international demand for our products in an unforeseen manner or if we fail to otherwise meet the conditions of the local agreements, we may be subject to additional taxes, which in turn would increase our costs.

 

Changes in our effective tax rate may harm our results of operations. A number of factors may increase our future effective tax rates, including:

 

•

the jurisdictions in which profits are determined to be earned and taxed;

 

•

the resolution of issues arising from tax audits with various tax authorities;

 

•

changes in the valuation of our deferred tax assets and liabilities and in deferred tax valuation allowances;

 

•

changes in the value of assets or services transferred or provided from one jurisdiction to another;

 

•

adjustments to income taxes upon finalization of various tax returns;

 

•

increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairments of goodwill in connection with acquisitions;

 

•

changes in available tax credits;

 

•

changes in tax laws or the interpretation of such tax laws, and changes in U.S. generally accepted accounting principles; and

 

•

a decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes.

 

We will be subject to additional regulatory compliance requirements, including Section 404 of the Sarbanes-Oxley Act of 2002, as a result of becoming a public company and our management has limited experience managing a public company.

 

We have never operated as a public company and will incur significant legal, accounting and other expenses that we did not incur as a private company. The individuals who constitute our management team have limited experience managing a publicly traded company, and limited experience complying with the increasingly complex and changing laws pertaining to public companies. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives and we may not successfully or efficiently manage our transition into a public company. We expect rules and regulations such as the Sarbanes-Oxley Act of 2002 to increase our legal and finance compliance costs and to make some activities more time-consuming and costly. We will need to hire a number of additional employees with public accounting and disclosure experience in order to meet our ongoing obligations as a public company. For example, section 404 of the Sarbanes-Oxley Act of 2002 requires that our management report on, and our independent registered public accounting firm attest to, the effectiveness of our internal control over financial reporting in our annual report on Form 10-K for the fiscal year ending December 31, 2011. Section 404 compliance may divert internal resources and will take a

 

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significant amount of time and effort to complete. We may not be able to successfully complete the procedures and certification and attestation requirements of Section 404 by the time we will be required to do so. If we fail to do so, or if in the future our Chief Executive Officer, Chief Financial Officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we could be subject to sanctions or investigations by The New York Stock Exchange, or NYSE, the Securities and Exchange Commissions, or the SEC, or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the market price of our stock. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors.

 

Our insiders who are significant stockholders may control the election of our board and may have interests that conflict with those of other stockholders.

 

Our directors and executive officers, together with members of their immediate families and affiliated funds, beneficially owned, in the aggregate, more than 68.3% of our outstanding capital stock as of May 31, 2010, and will beneficially own, in the aggregate, more than     % of our outstanding capital stock immediately after this offering. In addition, entities affiliated with Walden International, Tallwood I, L.P. and Mayfield Fund beneficially owned 20.8%, 20.5% and 18.6%, respectively, of our outstanding capital stock as of May 31, 2010, and will beneficially own, in the aggregate, more than     % of our outstanding capital stock immediately after this offering. Lip-Bu Tan, Diosdado Banatao and David Ladd, who are affiliated with Walden International, Tallwood I, L.P. and Mayfield Fund, respectively, are currently three of the eight members of our board of directors. As a result, acting together, this group has the ability to exercise significant control over most matters requiring our stockholders’ approval, including the election and removal of directors and significant corporate transactions.

 

Risks Related to Our Industry

 

We may be unable to make the substantial and productive research and development investments which are required to remain competitive in our business.

 

The semiconductor industry requires substantial investment in research and development in order to develop and bring to market new and enhanced technologies and products. Many of our products originated with our research and development efforts and have provided us with a significant competitive advantage. Our research and development expense was $17.3 million in 2007, $17.5 million in 2008 and $17.8 million in 2009. We are committed to investing in new product development in order to remain competitive in our target markets. We do not know whether we will have sufficient resources to maintain the level of investment in research and development required to remain competitive. In addition, we cannot assure you that the technologies which are the focus of our research and development expenditures will become commercially successful.

 

Our business, financial condition and results of operations could be adversely affected by worldwide economic conditions, as well as political and economic conditions in the countries in which we conduct business.

 

Our business and operating results are impacted by worldwide economic conditions, including the current European debt crisis. Uncertainty about current global economic conditions may cause businesses to continue to postpone spending in response to tighter credit, unemployment or negative financial news. This in turn could have a material negative effect on the demand for our semiconductor products or the products into which our semiconductors are incorporated. Although the United States economy has recently shown signs of recovery, the strength and duration of any economic recovery will be impacted by the European debt crisis and the reaction to any efforts to address the crisis. Multiple factors relating to our international operations and to particular

 

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countries in which we operate could negatively impact our business, financial condition and results of operations. These factors include:

 

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changes in political, regulatory, legal or economic conditions;

 

•

restrictive governmental actions, such as restrictions on the transfer or repatriation of funds and foreign investments and trade protection measures, including export duties and quotas and customs duties and tariffs;

 

•

disruptions of capital and trading markets;

 

•

changes in import or export licensing requirements;

 

•

transportation delays;

 

•

civil disturbances or political instability;

 

•

geopolitical turmoil, including terrorism, war or political or military coups;

 

•

public health emergencies;

 

•

differing employment practices and labor standards;

 

•

limitations on our ability under local laws to protect our intellectual property;

 

•

local business and cultural factors that differ from our customary standards and practices;

 

•

nationalization and expropriation;

 

•

changes in tax laws;

 

•

currency fluctuations relating to our international operating activities; and

 

•

difficulty in obtaining distribution and support.

 

A significant portion of our products are manufactured, assembled and tested outside the United States. Any conflict or uncertainty in these countries, including due to natural disasters, public health concerns, political unrest or safety concerns, could harm our business, financial condition and results of operations. In addition, if the government of any country in which our products are manufactured or sold sets technical standards for products manufactured in or imported into their country that are not widely shared, it may lead some of our customers to suspend imports of their products into that country, require manufacturers in that country to manufacture products with different technical standards and disrupt cross-border manufacturing relationships which, in each case, could harm our business.

 

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

 

We are subject to export control laws, regulations and requirements that limit which products we sell and where and to whom we sell our products. In some cases, it is possible that export licenses would be required from U.S. government agencies for some of our products in accordance with various statutory authorities, including but not limited to the International Traffic in Arms Regulations, the Export Administration Act of 1979, the International Emergency Economic Powers Act of 1977, the Trading with the Enemy Act of 1917 and the Arms Export Control Act of 1976 and various country-specific trade sanctions legislation. In addition, various countries regulate the import of certain technologies and have enacted laws that could limit our ability to distribute our products. We may not be successful in obtaining the necessary export and import licenses. Failure to comply with these and similar laws on a timely basis, or at all, or any limitation on our ability to export or sell our products would adversely affect our business, financial condition and results of operations.

 

Changes in our products or changes in export and import laws and implementing regulations may create delays in the introduction of new products in international markets, prevent our customers from deploying our

 

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products internationally or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. In such event, our business and results of operations could be adversely affected.

 

We are subject to the cyclical nature of the semiconductor industry, which has suffered and may suffer from future recessionary downturns.

 

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards and wide fluctuations in product supply and demand. The industry experienced a significant downturn during the current global recession. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. The most recent downturn and any future downturns could negatively impact our business and operating results. Furthermore, any upturn in the semiconductor industry could result in increased competition for access to third-party foundry and assembly capacity. We are dependent on the availability of this capacity to manufacture and assemble our integrated circuits. None of our third-party foundry or assembly contractors has provided assurances that adequate capacity will be available to us in the future.

 

Our products must conform to industry standards in order to be accepted by end users in our markets.

 

Our products comprise only a part of larger electronic systems. All components of these systems must uniformly comply with industry standards in order to operate efficiently together. These industry standards are often developed and promoted by larger companies who are industry leaders and provide other components of the systems in which our products are incorporated. In driving industry standards, these larger companies are able to develop and foster product ecosystems within which our products can be used. We work with a number of these larger companies in helping develop industry standards with which our products are compatible. If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected, which would harm our business.

 

Some industry standards may not be widely adopted or implemented uniformly, and competing standards may still emerge that may be preferred by our customers. Products for communications and computing applications are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by other suppliers or make it difficult for our products to meet the requirements of certain OEMs. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins. We may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense.

 

Risks Related to this Offering and our Common Stock

 

Our share price may be volatile and you may be unable to sell your shares at or above the offering price.

 

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price for our shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of shares of our common

 

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stock could be subject to wide fluctuations in response to many risk factors listed in this prospectus and others beyond our control, including:

 

•

actual or anticipated fluctuations in our financial condition and operating results;

 

•

changes in the economic performance or market valuations of other companies that provide high-speed analog semiconductor solutions;

 

•

loss of a significant amount of existing business;

 

•

actual or anticipated changes in our growth rate relative to our competitors;

 

•

actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rates;

 

•

issuance of new or updated research or reports by securities analysts;

 

•

our announcement of actual results for a fiscal period that are higher or lower than projected results or our announcement of revenue or earnings guidance that is higher or lower than expected;

 

•

regulatory developments in our target markets affecting us, our customers or our competitors;

 

•

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

•

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

•

sales or expected sales of additional common stock;

 

•

terrorist attacks or natural disasters or other such events impacting countries where we or our customers have operations; and

 

•

general economic and market conditions.

 

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of shares of our common stock to decline. If the market price of shares of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

 

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

Substantial future sales of our common stock in the public market could cause our stock price to fall.

 

Additional sales of our common stock in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. Upon the completion of this offering, we will have              shares of common stock outstanding, assuming no exercise of our outstanding options. All shares sold in this offering will be freely transferable without restriction or additional registration

 

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under the Securities Act of 1933, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. The remaining 38,805,785 shares of common stock outstanding after this offering will be eligible for sale at various times beginning 180 days after the date of this prospectus upon the expiration of lock-up agreements as described below and subject to vesting requirements and the requirements of Rule 144 or Rule 701.

 

Our directors, executive officers and substantially all of our stockholders have agreed with limited exceptions that they will not sell any shares of common stock owned by them without the prior written consent of Morgan Stanley & Co. Incorporated and Deutsche Bank Securities Inc., on behalf of the underwriters, for a period of 180 days from the date of this prospectus. At any time and without public notice, Morgan Stanley and Deutsche Bank may in their sole discretion release some or all of the securities from these lock-up agreements prior to the expiration of the lock-up period. As resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them. In addition, after this offering, the holders of approximately 33,860,930 shares of common stock, without taking into account any shares sold in this offering by the selling stockholders, but including shares to be issued upon the conversion of the preferred stock, and upon the exercise of warrants to purchase shares of our capital stock, will be entitled to contractual rights to cause us to register the sale of those shares under the Securities Act. All of these shares are subject to the 180-day lock-up period. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration statement. We also intend to file a registration statement on Form S-8 under the Securities Act to register approximately 2,000,000 shares under our 2010 Equity Incentive Plan.

 

As a new investor, you will experience immediate and substantial dilution.

 

Purchasers in this offering will immediately experience substantial dilution in net tangible book value. Because our common stock has in the past been sold at prices substantially lower than the initial public offering price that you will pay, you will suffer immediate dilution of $             per share in net tangible book value, based on an assumed initial offering price of $             per share of common stock, the mid-point of the range set forth on the cover page of this prospectus. The exercise of outstanding options and warrants may result in further dilution.

 

Management may apply our net proceeds from this offering to uses that do not increase our market value or improve our operating results.

 

We intend to use our net proceeds from this offering for general corporate purposes, including as yet undetermined amounts related to working capital and capital expenditures. Our management will have considerable discretion in applying our net proceeds and you will not have the opportunity, as part of your investment decision, to assess whether we are using our net proceeds appropriately. Until the net proceeds we receive are used, they may be placed in investments that do not produce income or that lose value. We may use our net proceeds for purposes that do not result in any increase in our results of operations, which could cause the price of our common stock to decline.

 

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We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders and our failure to raise capital when needed could prevent us from executing our growth strategy.

 

In the absence of this offering, we believe that our existing cash and cash equivalents, and cash flows from our operating activities, will be sufficient to meet our anticipated cash needs for at least the next 12 months. We operate in an industry, however, that makes our prospects difficult to evaluate. It is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, we may need additional financing to execute on our current or future business strategies, including to:

 

•

invest in our research and development efforts by hiring additional technical and other personnel;

 

•

expand our operating infrastructure;

 

•

acquire complementary businesses, products, services or technologies; or

 

•

otherwise pursue our strategic plans and respond to competitive pressures.

 

If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders, including those acquiring shares in this offering. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to incur interest expense. We have not made arrangements to obtain additional financing and there is no assurance that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products, or otherwise respond to competitive pressures could be significantly limited.

 

Delaware law and our corporate charter and bylaws will contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

 

Provisions in our certificate of incorporation and bylaws, that we intend to adopt before the completion of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

 

•

the right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors;

 

•

the classification of our board of directors so that only a portion of our directors are elected each year, with each director serving a three-year term;

 

•

the requirement for advance notice for nominations for election to our board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

 

•

the ability of our board of directors to alter our bylaws without obtaining stockholder approval;

 

•

the ability of our board of directors to issue, without stockholder approval, up to 10,000,000 shares of preferred stock with rights set by our board of directors, which rights could be senior to those of common stock;

 

•

the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action by written consent; and

 

•

the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written consent.

 

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In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit or restrict large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions will be in our certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in our market price being lower than it would without these provisions.

 

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

 

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

•

anticipated trends and challenges in our business and the markets in which we operate;

 

•

the capabilities, benefits and effectiveness of our products;

 

•

our plans for future products and enhancements of existing products;

 

•

our expectations regarding our expenses and revenue;

 

•

our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing;

 

•

our anticipated growth strategies;

 

•

our ability to retain and attract customers;

 

•

the anticipated costs and benefits of our pending acquisition;

 

•

our expectations regarding competition; and

 

•

possible sources of new revenue.

 

These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.

 

We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, governmental publications, reports by market research firms or other independent sources. Some data are also based on our good faith estimates.

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds from this offering of approximately $             million, based on an assumed initial public offering price of $             per share, the mid-point of the range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The principal purposes for this offering are to increase our working capital, create a public market for our common stock, facilitate our access to the public capital markets and increase our visibility in our markets.

 

We intend to use our proceeds from this offering for general corporate purposes, including working capital and capital expenditures. The amount and timing of these expenditures will vary depending on a number of factors, including competitive and technological developments and the rate of growth, if any, of our business. In addition, we also may use a portion of the net proceeds to acquire complementary businesses, products or technologies. However, we are not currently contemplating any such acquisitions other than our acquisition of Winyatek Technology, Inc., which closed on June 30, 2010.

 

As of the date of this prospectus, however, we have not determined all of the anticipated uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. The amount and timing of actual expenditures may vary significantly depending upon a number of factors, including the amount of cash generated from our operations, competitive and technological developments and the rate of growth, if any, of our business. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering. Pending use of the net proceeds as described above, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities.

 

We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on shares of our capital stock. The holders of our convertible preferred stock are entitled to noncumulative dividends per annum of $6.2 million when and if declared by our board of directors. After the $6.2 million per year dividend payments, if any, have been made in a full calendar year, the holders of all of our convertible preferred stock participate with the holders of our common stock on an as-converted common stock basis in dividends declared by our board of directors.

 

We expect to retain all of our earnings to finance the expansion and development of our business and we do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. Our board of directors will determine future dividends, if any.

 

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CAPITALIZATION

 

The following table describes our capitalization as of March 31, 2010:

 

•

on an actual basis;

 

•

on a pro forma basis to give effect to the issuance of 33,790,823 shares of common stock upon the conversion of all of our outstanding shares of preferred stock, and to give effect to the conversion of warrants to purchase convertible preferred stock into warrants to purchase common stock and the filing of our amended and restated certificate of incorporation upon the completion of this offering; and

 

•

on a pro forma as adjusted basis to give effect to the pro forma conversion described above and the sale of shares of common stock in this offering at an assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

		As of March 31, 2010
		Actual				Pro Forma				Pro Forma As Adjusted
		(in thousands, except share and per share data)
Preferred stock warrant outstanding		$	48			$	—			$	—
Convertible and redeemable convertible preferred stock, $0.001 par value per share; 33,875,385 shares authorized; 33,790,823 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted			77,616				—				—
Stockholders’ equity (deficit):
Preferred stock, $0.001 par value per share; no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted			—				—				—
Common stock, $0.001 par value per share; 52,000,000 shares authorized; 5,014,962 shares issued and outstanding, actual; 500,000,000 shares authorized, 38,805,785 shares issued and outstanding, pro forma; and             shares issued and outstanding, pro forma as adjusted			5				39
Additional paid-in capital			6,503				84,133
Accumulated deficit			(48,776	)			(48,776	)
Total stockholders’ equity (deficit)			(42,268	)			35,396
Total capitalization		$	35,396			$	35,396			$

 

The actual, pro forma and pro forma as adjusted information set forth in the table:

 

•

excludes 12,543,252 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2010, at a weighted average exercise price of $0.75 per share;

 

•

excludes 90,000 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2010, at an exercise price of $0.66 per share;

 

•

excludes 40,107 shares issuable upon the exercise of warrants to purchase convertible preferred stock, at a weighted average exercise price of $3.41 per share, which warrants will convert into warrants to purchase 40,107 shares of common stock upon the completion of this offering;

 

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•

excludes 2,000,000 shares of common stock reserved for future issuance under our 2010 Stock Incentive Plan as well as shares originally reserved for issuance under our 2000 Stock Plan, but which may become available for awards under our 2010 Stock Incentive Plan as described below, which plan will become effective in connection with this offering and contains provisions that will automatically increase its share reserve each year, as more fully described in “Executive Compensation—Employee Benefit Plans”;

 

•

excludes 732,000 shares of our Series E preferred stock issued in connection with the closing of our acquisition of Winyatek Technology, Inc., which shares will convert into 732,000 shares of common stock upon the completion of this offering; and

 

•

assumes no exercise of the option to purchase additional shares granted to the underwriters.

 

As of March 31, 2010, 1,415,651 shares remained available for future issuance under our 2000 Stock Plan. Upon the completion of this offering, no shares of our common stock will remain available for future issuance under our 2000 Stock Plan. Shares originally reserved for issuance under our 2000 Stock Plan but which are not issued or subject to outstanding grants on the effective date of our 2010 Stock Incentive Plan, and shares subject to outstanding options or forfeiture restrictions under our 2000 Stock Plan on the effective date of our 2010 Stock Incentive Plan that are subsequently forfeited or terminated for any reason before being exercised, up to a number of additional shares not to exceed 1,000,000, will become available for awards under our 2010 Stock Incentive Plan upon the completion of this offering.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $             million, or approximately $             million if the underwriters exercise their option to purchase additional shares of common stock in full, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) cash, cash equivalents and available-for-sale securities and each of working capital, total assets and total stockholders’ equity by approximately $             million. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

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DILUTION

 

Our pro forma net tangible book value as of March 31, 2010 was $35.4 million, or $0.91 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number of shares of common stock outstanding, assuming the issuance of 33,790,823 shares of common stock upon the conversion of all of our outstanding shares of Series A preferred stock, Series B preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock, and to give effect to the conversion of warrants to purchase convertible preferred stock into warrants to purchase common stock. Net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after completion of this offering on a pro forma as adjusted basis. After giving effect to the sale of the shares of common stock by us at an assumed initial public offering price of $             per share, which is the mid-point of the price range set forth on the cover of this prospectus, and the application of our estimated net proceeds from the offering, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value as of March 31, 2010 would have been $            , or $             per share of common stock. This represents an immediate increase in net tangible book value of $             per share of common stock to existing common stockholders and an immediate dilution in net tangible book value of $             per share to new investors purchasing shares of common stock in this offering.

 

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share					$
Pro forma net tangible book value per share before this offering		$	0.91
Increase in pro forma net tangible book value per share attributable to new investors
Pro forma net tangible book value per share after this offering
Dilution in pro forma net tangible book value per share to new investors					$

 

If the underwriters exercise their own over-allotment option in full, the pro forma net tangible book value per share of our common stock after giving effect to this offering would be approximately $             per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be approximately $             per share of common stock.

 

The following table summarizes as of March 31, 2010, on the pro forma basis described above, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing and new investors purchasing shares of common stock in this offering, before deducting the estimated underwriting discounts and commissions and estimated offering expenses.

 

		Shares Purchased					Total Consideration						Average Price Per Share
		Number		Percent			Amount			Percent
Existing stockholders		38,805,785			%		$	80,210,506			%		$	2.07
New investors
Total				100.0	%		$			100.0	%

 

The table above assumes no exercise of the option to purchase additional shares granted to the underwriters and no sales of our common stock by the selling stockholders.

 

Sales by selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to              or approximately     % of the total number of shares of common stock

 

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outstanding after this offering and will increase the number of shares of common stock held by new investors by              to approximately     % of the total number of shares of common stock outstanding after this offering. In addition, if the underwriters’ option to purchase additional shares is exercised in full, the number of shares held by existing stockholders will be reduced to     % of the total number of shares of common stock to be outstanding upon completion of this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to             , or     % of the total number of shares of common stock to be outstanding.

 

The table above excludes:

 

•

12,543,252 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $0.75 per share;

 

•

90,000 shares of our common stock issuable upon exercise of outstanding warrants at an exercise price of $0.66 per share;

 

•

40,107 shares issuable upon the exercise of warrants to purchase convertible preferred stock, at a weighted average exercise price of $3.41 per share, which warrants will convert into warrants to purchase 40,107 shares of common stock upon the completion of this offering;

 

•

amounts paid by us in connection with the repurchase, forfeiture or cancellation of shares of common stock; and

 

•

2,000,000 shares of common stock reserved for future issuance under our 2010 Stock Incentive Plan, as well as shares originally reserved for issuance under our 2000 Stock Plan but which may become available for awards under our 2010 Stock Incentive Plan as described below, which plan will become effective in connection with this offering and contains provisions that will automatically increase its share reserve each year, as more fully described in “Executive Compensation—Employee Benefit Plans”; and

 

•

732,000 shares of our Series E preferred stock issued in connection with the closing of our acquisition of Winyatek Technology, Inc., which shares will convert into 732,000 shares of common stock upon the completion of this offering.

 

To the extent that any outstanding options or warrants are exercised, there will be further dilution to new investors.

 

As of March 31, 2010, 1,415,651 shares remained available for future issuance under our 2000 Stock Plan. Upon the completion of this offering, no shares of our common stock will remain available for future issuance under our 2000 Stock Plan. Shares originally reserved for issuance under our 2000 Stock Plan but which are not issued or subject to outstanding grants on the effective date of our 2010 Stock Incentive Plan, and shares subject to outstanding options or forfeiture restrictions under our 2000 Stock Plan on the effective date of our 2010 Stock Incentive Plan that are subsequently forfeited or terminated for any reason before being exercised, up to a number of additional shares not to exceed 1,000,000, will again become available for awards under our 2010 Stock Incentive Plan upon the completion of this offering.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) cash, cash equivalents and available-for-sale securities and each of working capital, total assets and total stockholders’ equity by approximately $             million. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following selected consolidated financial data should be read together 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 prospectus. The selected balance sheet data as of December 31, 2008 and 2009, and the selected statements of operations data for each of the years ended December 31, 2007, 2008 and 2009, have been derived from our audited financial statements included elsewhere in this prospectus. The selected balance sheet data as of December 31, 2005, 2006 and 2007 and the selected statements of operations data for the years ended December 31, 2005 and 2006 have been derived from our audited financial statements not included in this prospectus. The selected consolidated balance sheet data as of March 31, 2010 and the selected consolidated statements of operations data for the three months ended March 31, 2009 and 2010 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results to be expected in the future, and results of interim periods are not necessarily indicative of results for the entire year.

 

		Year Ended December 31,																			Three Months Ended March 31,
		2005				2006				2007				2008				2009			2009				2010
		(in thousands, except share and per share data)
Statement of Operations Data:
Revenue		$	6,618			$	19,741			$	31,681			$	32,727			$	37,617		$	7,337			$	12,662
Revenue from related party(1)			18				1,557				4,556				10,227				21,235			2,999				6,424
Total revenue			6,636				21,298				36,237				42,954				58,852			10,336				19,086
Cost of revenue(2)			2,714				11,244				16,028				19,249				21,269			3,703				7,187
Gross profit			3,922				10,054				20,209				23,705				37,583			6,633				11,899
Operating expense:
Research and development(2)			10,296				11,645				17,332				17,501				17,847			4,707				5,066
Sales and marketing(2)			2,037				3,190				5,157				6,339				7,704			1,662				2,075
General and administrative(2)			1,270				2,446				2,966				3,169				3,947			739				1,903
Total operating expense			13,603				17,281				25,455				27,099				29,498			7,108				9,044
Income (loss) from operations			(9,681	)			(7,227	)			(5,246	)			(3,304	)			8,085			(475	)			2,855
Other income (expense)			198				405				(95	)			(124	)			73			14				27
Income (loss) before income taxes			(9,483	)			(6,822	)			(5,341	)			(3,428	)			8,158			(461	)			2,882
Provision (benefit) for income taxes			—				—				—				—				829			—				(9,117	)
Net income (loss)		$	(9,483	)		$	(6,822	)		$	(5,341	)		$	(3,428	)		$	7,329		$	(461	)		$	11,999
Net income (loss) allocable to common stockholders		$	(9,483	)		$	(6,822	)		$	(5,341	)		$	(3,428	)		$	130		$	(461	)		$	1,302
Net income (loss) per share:
Basic		$	(12.12	)		$	(7.01	)		$	(2.81	)		$	(1.14	)		$	0.03		$	(0.12	)		$	0.28
Diluted		$	(12.12	)		$	(7.01	)		$	(2.81	)		$	(1.14	)		$	0.02		$	(0.12	)		$	0.11
Weighted-average shares used in computing net income (loss) per share:
Basic			782,478				973,597				1,897,745				3,008,751				3,894,132			3,724,253				4,665,332
Diluted			782,478				973,597				1,897,745				3,008,751				6,509,191			3,724,253				12,236,714
Pro forma net income per share (unaudited):
Basic(3)																		$	0.19						$	0.31
Diluted(3)																		$	0.18						$	0.26
Weighted-average shares used in computing pro forma net income per share:
Basic(3)																			37,684,955							38,456,155
Diluted(3)																			40,300,014							46,027,537

 

(1)

Revenue from related party consists of revenue from Samsung, which, together with associated entities, holds over 13% of our outstanding shares of common stock.

 

Footnotes continued on the following page.

 

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		As of December 31,																				As of March 31, 2010
		2005				2006				2007				2008				2009
		(in thousands)
Balance Sheet Data:
Cash and cash equivalents		$	12,586			$	5,587			$	3,268			$	9,052			$	19,061			$	23,010
Working capital			13,259				7,504				3,010				10,721				20,055				23,341
Total assets			19,287				15,785				16,190				20,373				34,472				49,995
Total liabilities			3,573				6,180				10,522				6,558				11,588				14,647
Convertible preferred stock			67,566				67,680				67,680				77,616				77,616				77,616
Total stockholders’ equity (deficit)		$	(51,852	)		$	(58,076	)		$	(62,012	)		$	(63,801	)		$	(54,732	)		$	(42,268	)

 

 

 

 

Footnotes continued from the prior page.

 

(2)

Stock-based compensation expense is included in our results of operations as follows:

 

		As of December 31,															Three Months Ended March 31,
		2005			2006			2007			2008			2009			2009			2010
		(in thousands)
Operating expenses:
Cost of revenue		$	—		$	9		$	19		$	119		$	31		$	6			$11
Research and development			3			76			168			358			475			101			122
Sales and marketing			29			133			66			101			238			48			76
General and administrative			6			280			574			417			421			100			112

 

(3)

Please see note 7 to the notes to our consolidated financial statements for an explanation of the method used to calculate net income allocable to preferred stockholders and net (loss) income allocable to common stockholders, including the method used to calculate the number of shares used in the computation of the per share amounts.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in the forward-looking statements. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this prospectus, particularly in the “Risk Factors” section.

 

Overview

 

We are a fabless provider of high-speed analog semiconductor solutions for the communications and computing markets. Our analog semiconductor solutions provide high signal integrity at leading-edge data speeds while reducing system power consumption. Our semiconductor solutions are designed to address bandwidth bottlenecks in networks, maximize throughput and minimize latency in computing environments and enable the rollout of next generation communications and computing infrastructures. Our solutions provide a vital high-speed interface between analog signals and digital information in high-performance systems such as telecommunications transport systems, enterprise networking equipment, datacenter and enterprise servers, storage platforms, test and measurement equipment and military systems. We believe we are a leader in 40G and 100G high-speed analog semiconductor solutions for the communications market and high-speed memory interface solutions for the computing market. We have a broad product portfolio with 17 product lines and over 170 products as of December 31, 2009. We have ongoing, informal collaborative discussions with industry and technology leaders such as AMD, Alcatel-Lucent, Huawei and Intel to design architectures and products that solve bandwidth bottlenecks in existing and next generation communications and computing systems, although we do not have any formal agreements with these entities. We help define industry conventions and standards within the markets we target by collaborating with technology leaders, OEMs, systems manufacturers and standards bodies.

 

The history of our product development and sales and marketing efforts is as follows:

 

•

From 2000 to 2002, we were primarily engaged in the development of our core high-speed analog products and proprietary system architecture models to address bottlenecks in emerging network architectures. Specifically, during this period, we developed and shipped our 50G MUX and DEMUX products. During this period, we also began development work on our initial 40G products.

 

•

In 2003, we introduced and shipped 13G, 25G and 50G logic products, 20G multiplexers and 40G transimpedance amplifiers, or TIAs, and modulator drivers for the communications, test and measurement and military markets. During this period, we also began the development of our first generation high-speed phase lock loops, or PLLs, and register solution used primarily in conjunction with DDR2 modules for the computing market.

 

•

In 2005, we introduced and shipped our high-speed PLLs and register solution used primarily in conjunction with DDR2 modules for the computing market.

 

•

In 2006, we began development of our second generation single chip high-speed PLLs and register solution to be used primarily in conjunction with DDR3 modules for the computing market and were the first to introduce this product to the market. In addition, we introduced and shipped track-and-hold amplifiers for the communications market.

 

•

In 2007, we began volume shipments of our high-speed PLLs and register solution used primarily in conjunction with DDR2 modules, and continued development of our single chip high-speed PLLs and register solution, used primarily in conjunction with DDR3 modules.

 

•

In 2008, we began volume shipments of our 40G drivers for the communications market and commenced shipments of our high-speed PLLs and register solution used primarily in conjunction with DDR3 modules for the computing market.

 

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•

In 2009, due to the launch of Intel’s Nehalem-based platform servers, we began volume shipments of our single chip high-speed PLLs and register solution to be used primarily in conjunction with DDR3 modules. We also shipped engineering samples of the first generation of our isolation memory buffer, or iMB™, for the computing market. We also began development of our second generation iMB™ product, the architecture for which has been adopted by the Joint Electronic Device Engineering Council, or JEDEC, and development of our low power CMOS SERDES product for next generation 100G Ethernet in enterprise networks.

 

Our products are designed into systems sold by OEMs, including Agilent, Alcatel-Lucent, Cisco, Danaher, Dell, EMC, HP, Huawei, IBM and Oracle. We believe we are one of a limited number of suppliers to these OEMs, and in some cases we may be the sole supplier for certain applications. We sell both directly to these OEMs and to module manufacturers, ODMs and subsystems providers that, in turn, sell to these OEMs. During the year ended December 31, 2009, we sold our products to more than 160 customers. The complex and proprietary nature of our technology often makes it difficult for other suppliers to offer similar products that meet the same performance thresholds as our products do under varying temperature, supply voltage and manufacturing restrictions. In addition, the rigorous testing and qualification requirements required by our customers often make it expensive for them to qualify more than one or two suppliers, thereby enabling us to be the sole supplier, or one of a limited number of suppliers. A significant portion of our revenue has been generated by a limited number of customers. Sales directly to Samsung accounted for 36% and 34% of our total revenue and sales directly and through distributors to Micron accounted for 17% and 17% of our total revenue for the year ended December 31, 2009 and the three months ended March 31, 2010, respectively. Substantially all of our sales to date, including our sales to Samsung and Micron, are made on a purchase order basis. Since the beginning of 2006, we have shipped more than 90 million high-speed analog semiconductors. Our total revenue increased to $58.9 million for the year ended December 31, 2009 from $43.0 million for the year ended December 31, 2008. For the quarter ended March 31, 2010, our total revenue increased to $19.1 million from $10.3 million for the quarter ended March 31, 2009. As of March 31, 2010, our accumulated deficit was $48.8 million.

 

Sales to customers in Asia accounted for 54%, 64% and 77% of our total revenue in 2007, 2008 and 2009, respectively. Because many of our customers or their OEM manufacturers are located in Asia, we anticipate that a majority of our future revenue will continue to come from sales to that region. Although a large percentage of our sales are made to customers in Asia, we believe that a significant number of the systems designed by these customers are then sold to end users outside Asia.

 

In April 2010, we received approval from the government of Singapore to set up an international headquarters from which to conduct our international operations. Because of its geographic alignment with suppliers and customers, our operations in Singapore will transition and become a new international headquarters office for receiving and fulfilling orders for product shipped to locations outside the United States. Singapore has a strong university system and an established group of technology-based companies from which to recruit new engineers. We intend to build a team of engineering capability in Singapore both for development as well as testing associated with manufacturing. International operations in Singapore commenced on May 1, 2010 and our business will transition throughout 2010 and 2011.

 

Demand for new features changes rapidly. It is difficult for us to forecast the demand for our products, in part because of the complex supply chain between us and the end-user markets that incorporate our products. Due to our lengthy product development cycle, it is critical for us to anticipate changes in demand for our various product features and the applications they serve to allow sufficient time for product development and design. Our failure to accurately forecast demand can lead to product shortages that can impede production by our customers and harm our customer relationships. Conversely, our failure to forecast declining demand or shifts in product mix can result in excess or obsolete inventory.

 

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Although revenue generated by each design win and the timing of the recognition of that revenue can vary significantly, we consider ongoing design wins to be a key factor in our future success. We consider a design win to occur when an OEM or contract manufacturer notifies us that it has selected our products to be incorporated into a product or system under development. The design win process is typically lengthy, and as a result, our sales cycles will vary based on the market served, whether the design win is with an existing or new customer and whether our product is under consideration for inclusion in a first or subsequent generation product. In addition, our customers’ products that incorporate our semiconductors can be complex and can require a substantial amount of time to define, design and produce in volume. As a result, we can incur significant design and development expenditures in circumstances where we do not ultimately recognize, or experience delays in recognizing revenue. Our customers generally order our products on a purchase order basis. We do not have any long-term purchase commitments (in excess of one year) from any of our customers. Once our product is incorporated into a customer’s design, however, we believe that our product is likely to continue to be purchased for that design throughout that product’s life cycle because of the time and expense associated with redesigning the product or substituting an alternative semiconductor. Our design cycle from initial engagement to volume shipment is typically two to three years. Product life cycles in the markets we serve typically range from two to 10 years or more and vary by application.

 

In May 2010, we entered into an agreement to acquire all of the outstanding shares of Winyatek Technology, Inc., in exchange for $2.5 million in cash, 732,000 shares of our Series E preferred stock and earn-out consideration up to $2,000,000 to be determined based on certain operating metrics. The acquisition was closed on June 30, 2010.

 

Critical Accounting Policies and Significant Management Estimates

 

Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles, or GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

 

Our significant accounting policies are discussed in note 1 of the notes to our consolidated financial statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with our audit committee.

 

Revenue Recognition

 

Our products are fully functional at the time of shipment and do not require production, modification or customization. We recognize revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is reasonably assured. Our fee is considered fixed or determinable at the execution of an agreement, based on specific products and quantities to be delivered at specified prices, which is evidenced by a customer purchase order or other persuasive evidence of an arrangement. Our agreements with non-distributor customers do not include rights of return or acceptance provisions. Product revenue is recognized upon shipment of product to end customers.

 

Approximately 22% of our sales were made through distributors in 2009. Sales to distributors are included in deferred revenue and we include the related costs in inventory until sales and delivery to the end customers

 

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occurs. Two distributor arrangements, which together accounted for 12% of our total revenue in 2009, allow for limited price protection and rights of stock rotation on product unsold by the distributors. The price protection rights allow distributors the right to a credit in the event of declines in the price of our product that they hold prior to the sale to a specific end customer. In the event that we reduce the selling price of products held by distributors, deferred revenue related to distributors with price protection rights is reduced upon notification to the customer of the price change. Stock rotation in the two distributor arrangements is limited to returns for exchange only for a small percentage of product (5%-10%) purchased over a limited period of time (during the immediately prior three to nine months). Other than these two arrangements, no other customer arrangements include any rights of return or acceptance provisions. There were no material product returns or price protection credits in 2007, 2008 and 2009. Revenue recognition on product sales through distributors is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion. Distributors provide us periodic data prior to the release of our consolidated financial statements regarding the product, price, quantity and end customer when products are resold, as well as the quantities of our products they still have in stock.

 

We have not experienced any significant sales returns from end customers due to our stringent quality control standards. We monitor collectability of accounts receivable primarily through review of the accounts receivable aging. Our policy is to record an allowance for doubtful accounts based on specific collection issues we have identified, aging of underlying receivables and historical experience of uncollectible balances. As of December 31, 2009 and March 31, 2010, our allowance for doubtful accounts was $68,000.

 

We have not made any material changes in the accounting methodology we use to record the allowance for doubtful accounts during the past three years. If actual results are not consistent with the assumptions and estimates used, for example, if the financial condition of the customer deteriorated, we may be required to record additional expense that could materially negatively impact our operating results. To date, however, substantially all of our receivables have been collected within the credit term of 30 to 45 days.

 

Inventory Valuation

 

We value our inventory, which includes materials, labor and overhead, at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. We periodically write-down our inventory to the lower of cost or market based on our estimates that consider historical usage and future demand. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction. The calculation of our inventory valuation requires management to make assumptions and to apply judgment regarding forecasted customer demand and technological obsolescence that may turn out to be inaccurate. Inventory valuation reserves were $905,000, $938,000, $916,000 and $916,000 as of December 31, 2007, 2008 and 2009 and as of March 31, 2010, respectively. Inventory valuation reserves, once established, are not reversed until the related inventory has been sold or scrapped.

 

We have not made any material changes in the accounting methodology we use to record inventory reserves during the past three years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that we use to calculate our inventory reserve. However, if estimates regarding customer demand are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses or gains that could be material.

 

Product Warranty

 

Our products are under warranty for full replacement against verifiable defects in material and workmanship for a period of one year from the date of shipment. We expense the estimated cost of product warranties at the time revenue is recognized. Our warranty obligation is affected by product failure rates, cost of replacement and failure analysis cost. We monitor product returns for warranty-related matters and monitor an accrual for the related warranty expense based on historical experience. Our warranty obligation requires management to make

 

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assumptions regarding failure rates and failure analysis costs. If the actual failure rates or failure analysis costs differ from our estimates, revisions to the estimated warranty accrual would be required, which would adversely affect our gross margins and operating results. The warranty obligation as of December 31, 2008 was not material. The warranty obligation was $450,000 as of December 31, 2009 and March 31, 2010.

 

Stock-Based Compensation

 

Effective January 1, 2006, we adopted authoritative guidance for stock-based compensation which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on the grant date fair values of the awards. The fair value is estimated using the Black-Scholes option pricing model. The value of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. We elected to treat share-based payment awards with graded vesting schedules and time-based service conditions as a single award and recognize stock-based compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. Stock-based compensation expenses are classified in the statement of operations based on the department to which the related employee reports.

 

We account for stock options issued to non-employees in accordance with the guidance for equity-based payments to non-employees. Stock option awards to non-employees are accounted for at fair value using the Black-Scholes option pricing model. Our management believes that the fair value of stock options is more reliably measured than the fair value of the services received. The fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

 

The Black-Scholes option pricing model requires management to make assumptions and to apply judgment in determining the fair value of our awards. The most significant assumptions and judgments include estimating the fair value of underlying stock, expected volatility and expected term. In addition, the recognition of stock-based compensation expense is impacted by estimated forfeiture rates.

 

We estimated the expected volatility from the historical volatilities of several unrelated public companies within the semiconductor industry because our common stock has no trading history. When selecting the public companies used in the volatility calculation, we selected companies in the semiconductor industry with comparable characteristics to us, including stage of development, lines of business, market capitalization, revenue and financial leverage. The weighted average expected life of options was calculated using the simplified method of prescribed guidance provided by the SEC. This decision was based on the lack of relevant historical data due to our limited experience and the lack of active market for our common stock. The risk-free interest rate is based on the U.S. Treasury yields in effect at the time of grant for periods corresponding to the expected term of the options. The expected dividend rate is zero based on the fact that we have not historically paid dividends and have no intention to pay cash dividends in the foreseeable future. The forfeiture rate is established based on the historical average period of time that options were outstanding and adjusted for expected changes in future exercise patterns.

 

		Year Ended December 31,									Three Months Ended March 31, 2010
		2007			2008			2009
Risk-free interest rate		4.56	%		4.13	%		2.67	%		3.13	%
Expected life (in years)		6.25			6.25			6.25			6.25
Dividend yield		—			—			—			—
Expected volatility		55.00	%		55.00	%		68.00	%		60.00	%

 

We do not believe there is a reasonable likelihood that there will be material changes in the estimates and assumptions we use to determine stock-based compensation expense. In the future, if we determine that other option valuation models are more reasonable, the stock-based compensation expense that we record in the future may differ significantly from what we have recorded using the Black-Scholes option pricing model.

 

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We have regularly conducted contemporaneous valuations to assist us in the determination of the fair value of our common stock for each stock option grant. Our board of directors was regularly apprised that each valuation was being conducted and considered the relevant objective and subjective factors deemed important by our board of directors in each valuation conducted. Our board of directors also determined that the assumptions and inputs used in connection with such valuations reflected our board of directors’ best estimate of our business condition, prospects and operating performance at each valuation date. The deemed fair value per common share underlying our stock option grants was determined by our board of directors with input from management at each grant date.

 

Below is a summary of our stock option grants for the year ended December 31, 2009 and through July 14, 2010 and the contemporaneous valuations for such grants:

 

Date of Grant		Number of Shares		Exercise Price			Estimated Fair  Value
February 25, 2009		879,000		$	0.63		$	0.63
April 30, 2009		12,000			0.63			0.63
August 27, 2009		492,000			1.12			1.12
October 30, 2009		142,500			1.60			1.60
December 11, 2009		105,000			1.90			1.90
February 24, 2010		440,000			2.30			2.30
April 30, 2010		2,523,000			3.98			3.98
July 14, 2010		1,041,000			5.15			5.15

 

In the absence of a public trading market for our common stock, our board of directors reviewed and discussed a variety of objective and subjective factors when exercising its judgment in determining the deemed fair value of our common stock. These factors generally include the following:

 

•

the nature and history of our business;

 

•

general economic conditions and specific industry outlook;

 

•

our book value and financial condition;

 

•

our operating and financial performance;

 

•

contemporaneous independent valuations performed at periodic intervals;

 

•

the introduction of new products;

 

•

the market price of companies engaged in the same or similar line of business having their equity securities actively traded in a free and open market;

 

•

the likelihood of achieving a liquidity event, such as an initial public offering or sale given prevailing market conditions and the nature and history of our business;

 

•

the differences between our preferred and common stock in respect of liquidation preferences, conversion rights, voting rights and other features; and

 

•

the adjustment necessary to recognize lack of marketability.

 

The valuation of our common stock was performed in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In order to value the common stock, we first determined our enterprise value (associated with both preferred and common equity). We used the income approach in determining the enterprise value. The income approach estimates value based on the expectation of future net cash flows that were then discounted back to the present using a rate of return available from alternative companies of similar type and risk. We also used the market approach as a reasonableness check against the value indication derived from the

 

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income approach. The market approach measures the value of an asset or business through an analysis of recent sales or offerings of comparable investments or assets, and in our case, focused on comparing us to similar publicly traded entities. In applying this method, valuation multiples are: (a) derived from historical operating data of selected comparable entities; (b) evaluated and/or adjusted based on the strengths and weaknesses of our company relative to the comparable entities; and (c) applied to our operating data to arrive at a value indication. The market approach has been considered in each valuation performed. Due to the significance of the differences in the range of products we offer and our size compared to the selected entities, we ultimately do not principally rely on this approach in determining the fair value of our common stock. Instead, we used this method as a reasonableness check. In one instance for the December 11, 2009 valuation, we did use the market approach in determining the fair value of our common stock. Specifically, the valuation was based on the price paid for the acquisition of another private fabless semiconductor company by an unrelated third party that was announced in November 2009. The company acquired was deemed by our board of directors to be comparable to us at that time, based on history, size and revenue, overlapping markets served and certain discussions that had taken place between the two companies.

 

For each valuation, we prepared a financial forecast to be used in the computation of the value of invested capital for both the market approach and income approach. The financial forecast took into account our past experience and future expectations. The risk associated with achieving this forecast was assessed in selecting the appropriate discount rate. There is inherent uncertainty in these estimates as the assumptions used are highly subjective and subject to changes as a result of new operating data and economic and other conditions that impact our business.

 

In order to determine the value of our common stock, the resulting enterprise value was allocated among the holders of preferred stock and common stock using the Black-Scholes option pricing model. The aggregate value of the common stock derived from application of the Black-Scholes option pricing model was then divided by the number of shares of common stock outstanding to arrive at the per share value. The per share value was then adjusted for a lack of marketability discount which was determined based on the analysis performed on the restricted stock of companies whose unrestricted stock is freely traded, as well as a put option model calculation.

 

In 2010, we also began utilizing a probability-weighted expected return method, or PWERM, as a reasonableness check to validate the fair value of our common stock based on the methods discussed above. The recent growth and expansion of our business in the latter half of 2009, combined with a continuing trend of general improvement in the capital markets, had provided us better visibility into the likelihood of a liquidity event in the next two years. This valuation model includes the following steps:

 

•

We estimate the timing of each possible liquidity outcome and its future value. In our analysis, we considered potential liquidity scenarios related to an initial public offering, a sale and bankruptcy.

 

•

We determine the appropriate allocation of value to the common stockholders under each liquidity scenario based on the rights and preferences of each class of stock.

 

•

The resulting value of common stock under each scenario is multiplied by a present value factor, calculated based on our cost of equity and the expected timing of the event.

 

•

The value of common stock is then multiplied by an estimated probability for each of the expected events determined by our management.

 

•

We then calculate the probability-weighted value per share of common stock and apply a lack of marketability discount.

 

The calculated fair values as of February 24, 2010 and April 30, 2010 of grants using the income approach, market approach and probability-weighted expected return method were consistent.

 

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Discussion of Significant Factors Considered in Fair Value Determination

 

The following discusses the significant factors considered by our board of directors in determining the fair value of our common stock at each of the valuation dates specified below. In each of these periods, our board of directors took into account changes in our total revenue and trends in our business, including sales volumes, including sales of our high-speed memory interface devices, design wins and the introduction of new products, as well as the application of a discount rate and lack of marketability discount.

 

February 25, 2009 and April 30, 2009

 

The most significant factors considered by our board of directors in determining the fair value of our common stock at these valuation dates were as follows:

 

•

The most recent independent contemporaneous valuation report as of December 31, 2008.

 

•

The value of our invested capital based on the income approach decreased from $104 million to $84 million since the last valuation date of June 30, 2008. This was due to a wide variety of variables in the valuation model but was primarily driven by a decline in the general economy due to the financial crisis in the fourth quarter of 2008 and a resulting decline in our business outlook.

 

•

Discount rate applied was 19% based on the calculated weighted average cost of capital, a 1% increase from the previous valuation, reflecting greater uncertainty due to the general economic uncertainty as described above.

 

•

Lack of marketability discount was determined at 25%.

 

August 27, 2009

 

The most significant factors considered by our board of directors in determining the fair value of our common stock at the valuation date were as follows:

 

•

The most recent independent contemporaneous valuation report as of July 31, 2009.

 

•

The value of our invested capital based on the income approach increased from $84 million to $131 million since the last valuation date. This was due to a wide variety of variables in the valuation model but was primarily driven by an improvement in the world economy since the financial crisis of 2008, an improvement in the confidence of our longer term outlook, as well as the introduction of Intel’s Nehalem-based platform servers using more advanced storage capability, which enabled our technology to achieve greater market share.

 

•

Discount rate applied was 16% based on the calculated weights average cost of capital, a 3% decrease from the previous valuation.

 

•

Lack of marketability discount was determined at 20%, a 5% decrease from the previous valuation.

 

October 30, 2009

 

The most significant factors considered by our board of directors in determining the fair value of our common stock at the valuation date were as follows:

 

•

The most recent independent contemporaneous valuation report as of October 1, 2009.

 

•

The value of our invested capital based on the income approach increased from $131 million to $161 million since the last valuation date. This was due to a wide variety of variables in the valuation model but was primarily driven by an improved business outlook, based on the return of a more robust enterprise server market in the second half of 2009, as well as the continued success of Intel’s Nehalem-based platform servers using more advanced storage capability, which enabled our

 

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technology to achieve broader market adoption and greater market share. The strong growth from the second quarter to the third quarter of 2009 was validated by our actual results, which resulted in further improvements in both our near term and long term business outlook.

 

•

Discount rate applied was 15% based on the calculated weighted average cost of capital, a 1% reduction from the previous valuation.

 

•

Lack of marketability discount was determined at 15%, a 5% decrease from the previous valuation.

 

December 11, 2009

 

To determine the fair value of our common stock for the stock options granted on December 11, 2009, our board of directors adjusted the valuation model as of October 1, 2009 to consider the increased value of invested capital from $161 million to $180 million in accordance with the market approach, based on the price an unrelated company agreed to pay when it announced its acquisition of a private fabless semiconductor company which was deemed by our board of directors be comparable to us at that time, based on history, size and revenue, overlapping markets served and certain discussions that had taken place between the two companies.

 

February 24, 2010

 

The most significant factors considered by our board of directors and its probability assessment applied in determining the fair value of our common stock at the valuation date were as follows:

 

•

The most recent independent contemporaneous valuation report as of January 31, 2010.

 

•

The estimated value of our invested capital based on the income approach increased from $180 million to $203 million since the last valuation based on a marked improvement in the enterprise server market as demonstrated by an unexpected increase in sales of our older generation product due to advantageous system-level economics. The sale of our second generation single chip high-speed PLLs and register solution was also generally expected to expand through the course of 2010, although firm orders for production quantities of the newer technology had not yet been placed. In addition, the improvement in both the overall economy and the semiconductor industry contributed to a stronger business outlook.

 

•

Discount rate applied was 16% based on the calculated weighted average cost of capital, a 1% increase from the previous valuation.

 

•

Lack of marketability discount was determined at 12.5%, a decrease of 2.5% from the previous valuation.

 

•

PWERM scenario probabilities—Based upon early business outlook and an uncertain economy for 2010, our management estimated a 10% probability and 35% probability that we would complete an initial public offering through January 31, 2011 and January 31, 2012, respectively. There was also an approximate 30% and 20% chance assessed that we would be sold or acquired in approximately two years and three years, respectively. A bankruptcy scenario was deemed unlikely and was assigned a probability of approximately 5%.

 

April 30, 2010

 

The most significant factors considered by our board of directors and its probability assessment applied in determining the fair value of our common stock at the valuation date were as follows:

 

•

The most recent independent contemporaneous valuation report as of March 31, 2010.

 

•

The estimated value of our invested capital based on the income approach increased from $203 million to $302 million since the last valuation date. This was due to a wide variety of variables in the

 

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valuation model but was primarily driven by an improved business outlook based upon a more robust enterprise server market in 2010, volume production orders being placed and confirming market acceptance of our next generation low voltage registers and PLLs as well as increased visibility on our opportunities in the 100G Ethernet market in the 2012 to 2019 time frame.

 

•

Discount rate applied was 14% based on the calculated weighted average cost of capital, a 2% decrease from the previous valuation.

 

•

Lack of marketability discount was determined at 12.5%, the same as the previous valuation.

 

•

PWERM scenario probabilities—Our management also estimated a 25% probability and 30% probability that we would complete an initial public offering through September 30, 2010 and June 30, 2011, respectively. There was also an approximate 20% and 20% chance assessed that we could be sold or acquired in approximately one year and two years, respectively. A bankruptcy scenario was deemed unlikely and was assigned a probability of approximately 5%.

 

July 14, 2010

 

The most significant factors considered by our board of directors and its probability assessment applied by determining the fair value of our common stock at the valuation date were as follows:

 

•

The most recent independent contemporaneous valuation report as of June 1, 2010.

 

•

The estimated value of our invested capital based on the income approach increased from $302 million to $339 million since the last valuation date. This was due to a wide variety of variables in the valuation model but was primarily driven by a one percent reduction in the discount rate.

 

•

Lack of marketability discount was reduced from 12.5% to 10% since the last valuation.

 

•

PWERM scenario probabilities – Our management also estimated a 60% and a 10% probability that we would complete an initial public offering through September 30, 2010 and June 30, 2011, respectively. There was also an approximate 17.5% and 10% chance assessed that we could be sold or acquired in approximately one year and two years, respectively. A bankruptcy scenario was deemed unlikely, and was assigned a probability of approximately 2.5%.

 

We believe consideration of the factors described above by our board of directors was a reasonable approach to estimating the fair value of our common stock for those periods. Determining the fair value of our common stock requires complex and subjective judgments, however, and there is inherent uncertainty in our estimates of fair value.

 

Based upon an assumed initial public offering price of $             per share, the mid-point of the range reflected on the cover page of this prospectus, the aggregate intrinsic value of outstanding stock options vested and expected to vest as of March 31, 2010 was $             million, of which $             million related to vested options and $             million related to options expected to vest.

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when and where the differences are expected to reverse. We record a valuation allowance to reduce deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we considered historical levels of income, projections of future income, expectations and risk associated with estimates of future taxable income and ongoing prudent and practical tax planning strategies. To the extent that we believe it is more likely than not that some portion of our deferred tax assets will not be

 

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realized, we would increase the valuation allowance against deferred tax assets. Although, we believe that the judgment we used is reasonable, actual results can differ due to a change in market conditions, changes in tax laws and other factors.

 

From inception through 2008, we incurred annual losses, and accordingly, we determined that a valuation allowance should be recorded against all of our deferred tax assets. We considered future taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance and evaluated the need for a valuation allowance on a regular basis. The determination of recording or releasing a tax valuation allowance is made, in part, pursuant to an assessment performed by management regarding the likelihood that we will generate sufficient future taxable income against which the benefits of our deferred tax assets may or may not be realized. This assessment requires management to exercise significant judgment and make estimates with respect to our ability to generate revenue, gross profits, operating income and taxable income in future periods. Among other factors, management must make assumptions regarding current and projected overall business and semiconductor industry conditions, operating efficiencies, our ability to timely develop, introduce and consistently manufacture new products to meet our customers’ needs and specifications, our ability to adapt to technological changes and the competitive environment, which may impact our ability to generate taxable income and, in turn, realize the value of our deferred tax assets. Significant cumulative operating losses in 2008 and prior years, uncertainty with respect to the acceptance of our products by end customers and significant economic uncertainties in the market made our ability to project future taxable income highly uncertain and volatile at December 31, 2009. Although 2009 was our first profitable year, only the last three quarters of the year were profitable and the vast majority of our pre-tax income was generated in the last two quarters of the year. Based upon management’s assessment of all available evidence, including a relatively short period of recent profitability coupled with significant uncertainties associated with our 2010 business outlook, we have concluded, as of December 31, 2009, that it was not more likely than not that our net deferred tax assets would be realized. See note 6 of the notes to our consolidated financial statements.

 

In March 2010, we received our first substantial quantity of production orders for a new low voltage product. This low voltage product is widely expected in the market to be significant and is expected to begin shipping in high volumes for both us and our competitors with a new Intel platform in the second half of 2010. The arrival of these production orders from one of our largest customers reduced concerns and increased our confidence in the strength of our business outlook for the balance of 2010. In addition, certain other new product introductions began to gain traction with customers, providing additional confidence in our longer term outlook. We also achieved further clarity around certain contingencies related to ongoing litigation and certain other product acceptance concerns that existed at December 31, 2009. Furthermore, during the first quarter of 2010, we unexpectedly received additional orders for an older product that allowed us to exceed the overall plan for the quarter and continue our recent trend of profitability into the first quarter of 2010. At its April 30, 2010 meeting, based on a review of the positive developments that materialized in the first quarter of 2010, our board of directors decided to authorize management to retain investment bankers and proceed with plans to pursue a potential initial public offering. Based on these positive developments and an additional quarter of profitable operation, we reassessed the need for a valuation allowance at March 31, 2010 and concluded that a change in circumstances had occurred. Management determined that, based on our prospects and business outlook, it was now reasonable to conclude that it is more likely than not that our deferred tax assets will be realized. Accordingly, we then released the full valuation allowance recorded against our deferred tax assets based on the weight of positive evidence that existed at March 31, 2010. Significant judgment is required to determine the timing and extent of a valuation allowance release and our ability to utilize deferred tax assets will continue to be dependent on our ability to generate sufficient taxable income in future periods.

 

On January 1, 2007, we adopted the authoritative guidance on accounting for uncertainty in income taxes issued by the Financial Accounting Standards Board, or FASB. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. As a result of the implementation, we determined the tax liability for uncertain tax positions based on a two-step process. The first step is to determine whether it is more likely than

 

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not that each income tax position would be sustained upon audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. There was no net cumulative effect of applying the recognition and measurement provisions upon adoption as the unrecognized tax benefit decreased deferred tax assets, which were fully offset by the valuation allowance. The assessment of each tax position requires significant judgment and estimates. We believe our tax return positions are fully supported, but tax authorities could challenge certain positions, which may not be fully sustained. All tax positions are periodically analyzed and adjusted as a result of events, such as the resolution of tax audits, issuance of new regulations or new case law, negotiations with tax authorities, and expiration of statutes of limitations.

 

Results of Operations and Key Operating Metrics

 

The following describes the line items in the statements of operations, which we consider to be our key operating metrics.

 

Revenue. We generate revenue from sales of our semiconductor products to end customers. A portion of our products is sold indirectly to customers through distributors.

 

We design and develop high-speed analog semiconductor solutions for the communications and computing markets. Our revenue is driven by various trends in these markets. These trends include the deployment and broader market adoption of next generation 40G and 100G technologies in communications and enterprise networks, the timing of next generation network and enterprise server upgrades in different geographic locations worldwide, the introduction and broader market adoption of next generation server platforms such as Intel’s Nehalem-based platform, and the deployment of high-speed memory interfaces in server and computing platforms.

 

Our revenue is also impacted by changes in the number and average selling prices of our semiconductor products. Our products are typically characterized by a life cycle that begins with higher average selling prices and lower volumes, followed by broader market adoption, higher volumes, and average selling prices that are lower than initial levels.

 

We operate in industries characterized by rapidly changing technologies and industry standards as well as technological obsolescence. Our revenue growth is dependent on our ability to continually develop and introduce new products to meet the changing technology and performance requirements of our customers, diversify our revenue base and generate new revenue to replace, or build upon, the success of previously introduced products which may be rapidly maturing. As a result, our revenue is impacted to a more significant extent by product life cycles for a variety of products and to a much lesser extent, if any, by any single product. In 2007 and 2008, there were no products that represented more than 10% of our total revenue. In 2009, we successfully introduced and began to ship a new product in production which integrated a new PLL, along with a new register buffer. Sales of this newly introduced part comprised 43% of our total revenue in 2009. As we continue to grow our business in 2010, this product has now matured. As a result, sales of this product are now declining in volume. We currently expect that by 2011 the new product introduced in 2009 will no longer be material to our total revenue.

 

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The following table is based on the geographic location to which our product is initially shipped. In most cases this will differ from the ultimate location of the end user of a product containing our technology. For sales to our distributors, their geographic location may be different from the geographic locations of the ultimate end customer. Sales by geography for the periods indicated were:

 

		Year Ended December 31,									Three Months Ended March 31,
		2007			2008			2009			2009			2010
		(in thousands)
Korea		$	12,066		$	15,147		$	18,307		$	3,510		$	3,881
United States			14,609			12,265			10,727			1,586			3,298
China			262			2,258			9,924			2,378			5,257
Japan			5,187			5,903			5,688			1,254			1,474
Taiwan			1,079			1,544			5,687			481			2,389
Other			3,034			5,837			8,519			1,127			2,787
		$	36,237		$	42,954		$	58,852		$	10,336		$	19,086

 

Cost of revenue. Cost of revenue includes cost of materials such as wafers processed by third-party foundries, costs associated with packaging and assembly, test and shipping, cost of personnel, including stock-based compensation, as well as equipment associated with manufacturing support, logistics and quality assurance, warranty costs, write down of inventories, amortization of production mask costs, overhead and other indirect costs, such as allocated occupancy and IT costs.

 

As some semiconductor products mature and unit volumes increase, their average selling prices may decline. These declines are often paired with improvements in manufacturing yields and lower wafer, assembly and test costs, which offset some of the margin reduction that results from lower prices. However, our gross profit, period over period, may fluctuate as a result of changes in average selling prices due to new product introductions or existing product transitions into larger scale commercial volumes, manufacturing costs as well as our product mix.

 

Research and development. Research and development expense includes personnel-related expenses, including salaries, stock-based compensation and employee benefits. It also includes pre-production engineering mask costs, software license expenses, prototype wafer, packaging and test costs, design and development costs, testing and evaluation costs, depreciation expense and other indirect costs. All research and development costs are expensed as incurred. We expect research and development expense to increase as a result of the establishment of a design center in the United Kingdom and our acquisition of Winyatek, a Taiwanese company. In addition, we expect research and development expense to increase in absolute dollars as we continue to invest resources to develop more products and enhance our existing product portfolio.

 

Sales and marketing. Sales and marketing expense consists primarily of salaries, stock-based compensation, employee benefits, travel, promotions, trade shows, marketing and customer support, commission payments to employees, depreciation expense and other indirect costs. We expect sales and marketing expense to increase in absolute dollars to support the growth of our business and promote our products to current and potential customers.

 

General and administrative. General and administrative expense consists primarily of salaries, stock-based compensation, employee benefits and expenses for executive management, legal, finance and human resources. In addition, general and administrative expenses include fees for professional services and other indirect costs. After this offering, we expect general and administrative expense to increase in absolute dollars due to the general growth of our business and the costs associated with becoming a public company for, among other things, SEC reporting and compliance, including compliance with the Sarbanes-Oxley Act, director fees, insurance, transfer agent fees and similar expenses.

 

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Provision (benefit) for income taxes. In each period since our inception to December 31, 2009, we have recorded a valuation allowance for the full amount of our deferred tax asset, as the realization of the full amount of our deferred tax asset is uncertain. Therefore, no deferred tax expense or benefit was recognized in the consolidated financial statements. In 2009, a provision for current income tax has been recorded primarily due to our inability to use net operating loss carryforwards for state tax purposes in California and alternative minimum tax for federal tax purposes. For the three months ended March 31, 2010, we recorded a net tax benefit of $9.1 million, which reflects an effective tax rate benefit of 316%. The effective tax rate benefit of 316% differs from the statutory rate of 35% primarily due to a release of our deferred tax valuation allowance and, to a lesser extent, foreign income taxes provided at lower rates, geographic mix in profitability and recognition of California research and development credits.

 

The following table sets forth a summary of our statement of operations for the periods indicated:

 

		Year Ended December 31,											Three Months Ended March 31,
		2007				2008				2009			2009				2010
		(in thousands)
Total revenue		$	36,237			$	42,954			$	58,852		$	10,336			$	19,086
Cost of revenue			16,028				19,249				21,269			3,703				7,187
Gross profit			20,209				23,705				37,583			6,633				11,899
Operating expense:
Research and development			17,332				17,501				17,847			4,707				5,066
Sales and marketing			5,157				6,339				7,704			1,662				2,075
General and administrative			2,966				3,169				3,947			739				1,903
Total operating expenses			25,455				27,009				29,498			7,108				9,044
Income (loss) from operations			(5,246	)			(3,304	)			8,085			(475	)			2,855
Other income (expense)			(95	)			(124	)			73			14				27
Income (loss) before income taxes			(5,341	)			(3,428	)			8,158			(461	)			2,882
Provision (benefit) for income taxes			—				—				829			—				(9,117	)
Net income (loss)		$	(5,341	)		$	(3,428	)		$	7,329		$	(461	)		$	11,999

 

The following table sets forth a summary of our statement of operations as a percentage of each line item to the revenue:

 

		Year Ended December 31,									Three Months Ended March 31,
		2007			2008			2009			2009			2010
Total revenue		100	%		100	%		100	%		100	%		100	%
Cost of revenue		44			45			36			36			38
Gross profit		56			55			64			64			62
Operating expense:
Research and development		49			41			30			46			26
Sales and marketing		14			15			13			16			11
General and administrative		8			7			7			7			10
Total operating expenses		71			63			50			69			47
Income (loss) from operations		(15	)		(8	)		14			(5	)		15
Other income (expense)		—			—			—			—			—
Income (loss) before income taxes		(15	)		(8	)		14			(5	)		15
Provision (benefit) for income taxes		—			—			2			—			(48	)
Net income (loss)		(15	)%		(8	)%		12	%		(5	)%		63	%

 

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Comparison of Three Months Ended March 31, 2009 and March 31, 2010

 

Revenue

 

		Three Months Ended March 31,						Change
		2009			2010			Amount			%
		(dollars in thousands)
Total revenue		$	10,336		$	19,086		$	8,750		85	%

 

Total revenue for the quarter ended March 31, 2010 increased by $8.8 million due to a near year over year doubling in the number of units sold of our high-speed memory interface products. The increase in unit volumes was a result of a wider acceptance of our products and technology in new server platforms, such as Intel’s Nehalem-based platform servers. This increase was partially offset by a year over year decrease in average selling price of certain products of approximately 15%. Our average selling price decreased primarily as a result of the maturation of certain products that were introduced in the first quarter of 2009 and then transitioned to broader market adoption and higher volumes over the course of the year.

 

Cost of Revenue and Gross Profit

 

		Three Months Ended March 31,								Change
		2009				2010				Amount			%
		(dollars in thousands)
Cost of revenue		$	3,703			$	7,187			$	3,484		94	%
Gross profit		$	6,633			$	11,899			$	5,266		79	%
Gross profit as a percentage of revenue			64	%			62	%			—		(2	)%

 

Cost of revenue for the quarter ended March 31, 2010 increased by $3.5 million primarily due to an increase in the number of units purchased by customers as described above. Gross profit percentage decreased by 2% because of a decline in average selling price due to a change in our product mix, as well as the maturation of certain products that transitioned from initial production to broader market adoption.

 

Research and Development

 

		Three Months Ended March 31,						Change
		2009			2010			Amount			%
		(dollars in thousands)
Research and development		$	4,707		$	5,066		$	359		8	%

 

Research and development expense for the quarter ended March 31, 2010 increased by $0.4 million due to the increase in research and development headcount, which resulted in a $0.2 million increase in personnel costs and stock-based compensation expense, and a $0.2 million increase in pre-production engineering mask costs and packaging development expense. The increase in personnel and development expense was primarily driven by our strategy to expand our product offerings and enhance our existing products. Specifically, we accelerated the development of our products for next generation communications networks and high-speed memory interfaces.

 

Sales and Marketing

 

		Three Months Ended March 31,						Change
		2009			2010			Amount			%
		(dollars in thousands)
Sales and marketing		$	1,662		$	2,075		$	413		25	%

 

Sales and marketing expense for the quarter ended March 31, 2010 increased by $0.4 million primarily due to an increase in personnel costs, including stock-based compensation expense of $0.1 million, and an increase of $0.2 million for expenses incurred on trade shows and communication to introduce our products to potential customers.

 

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General and Administrative

 

		Three Months Ended March 31,						Change
		2009			2010			Amount			%
		(dollars in thousands)
General and administrative		$	739		$	1,903		$	1,164		158	%

 

General and administrative expenses for the quarter ended March 31, 2010 increased by $1.2 million primarily due to third-party professional fees. Outside legal fees increased by $0.5 million related primarily to litigation matters described in note 14 of the notes to our consolidated financial statements. Accounting and consulting fees increased by $0.3 million due to the acceleration of the 2009 audit into the first quarter of 2010 from the second quarter of 2010, and the establishment of our subsidiary in Singapore. In addition, general and administrative headcount increased, resulting in a $0.1 million increase in personnel costs and stock-based compensation expense.

 

Provision (benefit) for Income Tax

 

		Three Months Ended March 31,							Change
		2009			2010				Amount				%
		(dollars in thousands)
Provision (benefit) for income tax		$	—		$	(9,117	)		$	(9,117	)		N/M

 

The income tax benefit of $9.1 million for the three months ended March 31, 2010 reflects an effective tax rate benefit of 316%. The effective tax rate benefit of 316% for the three months ended March 31, 2010 differs from the statutory rate of 35% primarily due to a release of our deferred valuation allowance and, to a lesser extent, foreign income taxes provided at lower rates, geographic mix in profitability and recognition of California research and development credits. During the three months ended March 31, 2009, we realized a loss, however, we did not record any income tax benefit as we provided a full valuation allowance on deferred tax assets.

 

Comparison of the Years Ended December 31, 2007, 2008 and 2009

 

Revenue

 

		Year Ended December 31,									Change
											2008						2009
		2007			2008			2009			Amount			%			Amount			%
		(dollars in thousands)
Total revenue		$	36,237		$	42,954		$	58,852		$	6,717		19	%		$	15,898		37	%

 

Total revenue for the year ended December 31, 2008 increased by $6.7 million due to a 28% increase in the number of units sold, partially offset by a modest decrease in average selling price of 7%. The increase in revenue was driven by the introduction of our next generation high-speed communications products and our high-speed memory interface products in enterprises and the broader adoption of our semiconductor products in next generation servers and computing platforms.

 

Total revenue for the year ended December 31, 2009 increased by $15.9 million due to a combination of a 7% increase in the number of units sold and an increase in average selling price of 29%, primarily due changes in product mix. The increase in revenue was primarily driven by the increased adoption of high-speed memory interfaces by our end customers.

 

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Cost of Revenue and Gross Profit

 

		Year Ended December 31,												Change
														2008						2009
		2007				2008				2009				Amount			%			Amount			%
		(dollars in thousands)
Cost of revenue		$	16,028			$	19,249			$	21,269			$	3,221		20	%		$	2,020		10	%
Gross profit			20,209				23,705				37,583				3,496		17	%			13,878		59	%
Gross profit as a percentage of revenue			56	%			55	%			64	%			—		(1	)%			—		9	%

 

Cost of revenue and gross profit for the year ended December 31, 2008 increased by $3.2 million and $3.5 million, respectively, compared to the prior year primarily due to an increase in the number of units purchased by customers consistent with the overall increase in revenue. Product costs as a percentage of revenue were relatively unchanged compared to the prior period.

 

Cost of revenue in 2009 increased by $2.0 million as a result of an increase in the number of units sold in 2009, compared to 2008 specifically for our high-speed memory interface products. Gross profit and gross profit as a percentage of revenue increased in 2009 relative to 2008 primarily because of a shift in product mix to newer higher margin products shipping in volume.

 

Research and Development

 

		Year Ended December 31,									Change
											2008						2009
		2007			2008			2009			Amount			%			Amount			%
		(dollars in thousands)
Research and development		$	17,332		$	17,501		$	17,847		$	169		1	%		$	346		2	%

 

Research and development expense for the year ended December 31, 2008 increased by $0.2 million due to the increase in new product development and product enhancement projects.

 

Research and development expense for the year ended December 31, 2009 increased by $0.3 million primarily due to continued product enhancements initiatives. Specifically, the increase is related to pre-production engineering mask costs of $0.3 million and additional personnel costs, including stock-based compensation of $0.2 million. These increases were partially offset by a reduction in recruiting expenses by $0.2 million due to payment of fees to an outside recruitment company for new employees hired in 2008.

 

Sales and Marketing

 

											Change
		Year Ended December 31,									2008						2009
		2007			2008			2009			Amount			%			Amount			%
		(dollars in thousands)
Sales and marketing		$	5,157		$	6,339		$	7,704		$	1,182		23	%		$	1,365		22	%

 

Sales and marketing expense for the year ended December 31, 2008 increased by $1.2 million from the prior year primarily due to hiring of sales personnel to support increasing sales activities. Specifically, the change was primarily due to an increase in personnel costs, including stock-based compensation expense of $1.4 million, offset by a decrease in commission expense of $0.3 million, due to a change in sales mix between direct customers and sales through third-party representatives.

 

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Sales and marketing expense for the year ended December 31, 2009 increased by $1.4 million from 2008 primarily due to an increase in sales activities. Personnel costs, including stock-based compensation expense increased by $0.2 million and commission expense increased by $0.5 million. In addition, marketing expenses increased by $0.3 million.

 

General and Administrative

 

		Year Ended December 31,									Change
											2008						2009
		2007			2008			2009			Amount			%			Amount			%
		(dollars in thousands)
General and administrative		$	2,966		$	3,169		$	3,947		$	203		7	%		$	778		25	%

 

General and administrative expense for the year ended December 31, 2008 increased by $0.2 million from the prior period primarily due to the hiring of additional personnel to support increasing business activities. Personnel costs, including stock-based compensation expense in 2008, increased by $0.2 million.

 

General and administrative expense for the year ended December 31, 2009 increased compared to 2008 due to additional personnel costs of $0.6 million which consist of salaries of new employees, stock-based compensation and incentive pay.

 

Provision for Income Taxes

 

		Year Ended December 31,									Change
											2008						2009
		2007			2008			2009			Amount			%			Amount			%
		(dollars in thousands)
Provision for income taxes		$	—		$	—		$	829		$	—		—	%		$	829		N/M

 

During 2007 and 2008, we did not record a provision for income tax primarily due to net losses realized and a full valuation allowance on our deferred tax assets.

 

The provision for income taxes in 2009 consisted of state income taxes recorded due to our inability to use net operating loss carryforwards for state tax purposes in California and Federal income taxes related to alternative minimum tax.

 

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Quarterly Results of Operations

 

The following table presents our unaudited quarterly results of operations for the five quarters in the period ended March 31, 2010. This unaudited quarterly information has been prepared on the same basis as our audited financial statements and includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the information for the quarters presented. You should read this information in conjunction with our consolidated financial statements and the related notes thereto. The results of operations for any quarter are not necessarily indicative of results of operations for any future period.

 

		Three Months Ended
		Mar. 31, 2009				Jun. 30, 2009			Sept. 30, 2009				Dec. 31, 2009			Mar. 31, 2010
		(in thousands)
Total revenue		$	10,336			$	12,986		$	18,370			$	17,160		$	19,086
Cost of revenue			3,703				4,652			6,373				6,541			7,187
Gross profit			6,633				8,334			11,997				10,619			11,899
Operating expense:
Research and development			4,707				4,327			4,714				4,099			5,066
Sales and marketing			1,662				1,742			2,032				2,268			2,075
General and administrative			739				967			945				1,296			1,903
Total operating expense			7,108				7,036			7,691				7,663			9,044
Income (loss) from operations			(475	)			1,298			4,306				2,956			2,855
Other income (expense)			14				11			(23	)			71			27
Income (loss) before income tax			(461	)			1,309			4,283				3,027			2,882
Provision (benefit) for income tax			—				86			437				306			(9,117	)
Net income (loss)		$	(461	)		$	1,223		$	3,846			$	2,721		$	11,999

 

The following table presents the unaudited quarterly results of operations as a percentage of revenue:

 

		Three Months Ended
		Mar. 31, 2009			Jun. 30, 2009			Sept. 30, 2009			Dec. 31, 2009			Mar. 31, 2010
Total revenue		100	%		100	%		100	%		100	%		100	%
Cost of revenue		36			36			35			38			38
Gross profit		64			64			65			62			62
Operating expense:
Research and development		46			33			26			24			26
Sales and marketing		16			14			11			13			11
General and administrative		7			7			5			8			10
Total operating expense		69			54			42			45			47
Income (loss) from operations		(5	)		10			23			17			15
Other income (expense)		—			—			—			—			—
Income (loss) before income tax		(5	)		10			23			17			15
Provision (benefit) for income tax		—			1			2			1			(48	)
Net income (loss)		(5	)%		9	%		21	%		16	%		63	%

 

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Total revenue has generally increased over the five quarters presented due to the success of our high-speed memory interface and next generation high-speed communications products which were introduced in 2007 and 2008, respectively. Total revenue for the fourth quarter of 2009 decreased slightly, primarily related to a delay in delivery of a high-speed communications product to a specific customer who, due to the specifications of their particular platform design, required that our products be screened and pre-selected for certain performance characteristics. The process for screening was established late in the first quarter and our products associated with this order will be shipped in the second and third quarters of 2010. To date, we have not experienced any material impact from seasonal effects on an annual or quarterly basis. Gross profit as a percentage of revenue remained relatively constant from period to period except for the fourth quarter of 2009 and the first quarter of 2010 when gross profit percentage decreased due to a change in product mix.

 

To accommodate our growth, our operating expenses increased in the third quarter of 2009 and the first quarter of 2010. Increases in operating expenses have been largely attributable to growing investment in research and development, increase in sales and marketing efforts and general and administrative expenses for accounting and professional fees, including consulting expenses. Research and development expense increased in the first quarter of 2010 primarily due to an increase in the number of employees, the establishment of a design center in United Kingdom and an increase in pre-production engineering mask costs. General and administrative expense increased in the first quarter of 2010 primarily due to legal fees incurred as a result of the litigation matters as described in legal proceedings below, as well as accounting and consulting fees incurred in connection with the establishment of our subsidiary in Singapore.

 

Liquidity and Capital Resources

 

We have historically financed our operating activities and capital expenditures primarily through proceeds from the issuances of convertible preferred stock. We achieved profitability on an annual basis beginning in 2009 and on a quarterly basis in the second quarter of 2009. We have funded our operating activities and capital expenditures primarily through cash generated from operations since 2009. As of December 31, 2009 and March 31, 2010, we had cash and cash equivalents of $19.1 million and $23 million, respectively.

 

Our primary uses of cash are to fund operating expenses, purchase inventory and acquire property and equipment. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the changes in our outstanding accounts payable and accrued expenses. Our primary sources of cash are cash receipts on accounts receivable from our revenue. Aside from the growth in amounts billed to our customers, net cash collections of accounts receivable are impacted by the efficiency of our cash collections process, which can vary from period to period, depending on the payment cycles of our major customers.

 

The following table summarizes our cash flows for the periods indicated:

 

		Years Ended December 31,												Three Months Ended March 31,
		2007				2008				2009				2009				2010
		(in thousands)
Net cash provided by (used in) operating activities		$	(4,178	)		$	1,377			$	9,849			$	(1,488	)		$	4,286
Net cash used in investing activities			(1,774	)			(2,478	)			(556	)			(69	)			(456	)
Net cash provided by financing activities			3,633				6,885				716				2				119
Net increase (decrease) in cash and cash equivalents		$	(2,319	)		$	5,784			$	10,009			$	(1,555	)		$	3,949

 

Net Cash Provided by (Used in) Operating Activities

 

Net cash used in operating activities in 2007 primarily reflected the net loss of $5.3 million, growth in inventory of $1.6 million and receivables of $0.6 million, offset by an increase in deferred revenue of $1.4 million, depreciation of $1.3 million and stock-based compensation of $0.8 million, respectively. Inventories and

 

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receivables increased primarily due to an increase in sales in 2007 and increasing forecasted sales for 2008. Increase in deferred revenue resulted from shipments made to distributors close to the end of 2007 to meet the delivery requirement of end customers in early 2008.

 

Net cash provided by operating activities in 2008 primarily reflected the decline in receivables and inventory of $1.8 million and $0.6 million, respectively, increases to accrued expenses by $0.5 million and deferred revenue by $0.4 million, depreciation of $1.4 million and stock-based compensation of $1 million. These were partially offset by a net loss of $3.4 million and a decrease in accounts payable of $1.2 million. Receivables decreased due to improved collection efforts. Inventory decreased due to increased shipment of products to customers. The decrease in accounts payable was due to the timing of payments of vendors as a result of purchasing activities.

 

Net cash provided by operating activities in 2009 primarily reflected net income of $7.3 million, increases to accounts payable of $1.4 million, accrued expense of $1.1 million and deferred revenue of $1.6 million, depreciation of $1.3 million and stock-based compensation of $1.2 million. These were offset by an increase in receivables of $4.6 million. Our accounts payable and accrued expenses increased in 2009 to support our increased production volumes and overall operational growth. Our deferred revenue increased due to payments received from customers for future shipments. Our accounts receivable increased as a result of significantly higher product shipments in the fourth quarter of 2009 to meet customer demand.

 

Net cash provided by operating activities during the three months ended March 31, 2010 primarily reflected net income of $12.0 million, increases to accounts payable and accrued expenses of $1.0 million, deferred revenue of $2.3 million, depreciation and amortization of $0.4 million and stock-based compensation of $0.3 million offset by increases in inventory of $1.1 million, accounts receivable of $0.7 million and deferred income taxes of $9.6 million. Our accounts payable and accrued expenses increased as a result of increased production volumes. Our deferred revenue increased because of shipments made to distributors close to the end of the period to meet delivery requirements of end customers. Our inventory increased as a result of growing production for immediate delivery to customers in the second quarter of 2010, and accounts receivable increased as a result of increased shipments.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities during the years ended December 31, 2007, 2008 and 2009 consisted of purchases of property and equipment of $1.8 million, $2.5 million and $0.6 million, respectively.

 

Net cash used in investing activities during the three months ended March 31, 2010 consisted of purchases of property and equipment of $0.5 million.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities in 2007 consisted of net proceeds of $3.7 million from our line of credit and the exercise of stock options of $0.6 million, offset by the repayment on the line of credit of $0.6 million.

 

Net cash provided by financing activities in 2008 consisted of net proceeds of $9.9 million from our sale of Series E preferred stock and $0.6 million of net proceeds from the exercise of stock options, offset by the repayment on our line of credit of $3.7 million.

 

Net cash provided by financing activities in 2009 consisted primarily of $0.7 million in proceeds from the exercise of stock options.

 

Net cash provided by financing activities during the three months ended March 31, 2010 consisted of $0.1 million proceeds from the exercise of stock options.

 

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Operating and Capital Expenditure Requirements

 

Our principal source of liquidity as of December 31, 2009 consisted of $19.1 million of cash and cash equivalents. Since inception, our operations have been financed primarily by net proceeds of approximately $77.6 million from sales of our convertible preferred stock and, beginning in 2009, by cash generated from operations. Based on our current operating plan, and in the absence of this offering, we believe that our existing cash and cash equivalents from operations will be sufficient to finance our operational cash needs through at least the next 12 to 18 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities and grow our end customer base which will result in higher needs for working capital. Our ability to generate cash from operations is also subject to substantial risks described under the caption “Risk Factors.” If any of these risks occur, we may be unable to generate or sustain positive cash flow from operating activities and the proceeds from this offering. We would then be required to use existing cash and cash equivalents to support our working capital and other cash requirements. If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through debt financing or from other sources. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders, including those acquiring shares in this offering. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility, and would also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us.

 

Contractual Obligations, Commitments and Contingencies

 

The following table summarizes our outstanding contractual obligations as of December 31, 2009:

 

		Payments due by period
		Total			Less Than 1 Year			1-3 Years			3-5 Years			More Than 5 Years
		(in thousands)
Operating lease obligations		$	4,693		$	3,214		$	1,479		$	—		$	—

 

For the three months ended March 31, 2010, we recorded a liability for our uncertain tax position of $0.1 million. We are unable to reasonably estimate the timing of payments in individual years due to uncertainties in the timing of the effective settlement of tax positions.

 

As of March 31, 2010, we have obligations under noncancelable purchase orders of $0.2 million, which are expected to be paid in 2010.

 

Subsequent to March 31, 2010, we entered into new lease agreements for our two offices in California. The lease agreements have terms of 63 and 72 months and required minimum lease payments as specified in the agreements. The increase in our outstanding contractual obligations as of December 31, 2009, as a result of these two leases is as follows:

 

		Payments due by period
		Total			Less Than 1 Year			1-3 Years			3-5 Years			More Than 5 Years
		(in thousands)
Operating lease obligations		$	5,731		$	—		$	1,649		$	2,341		$	1,741

 

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Legal Proceedings

 

We are currently a party to lawsuits involving Netlist. For additional information regarding this litigation, see “Business—Legal Proceedings.” In addition, we may from time to time become involved in litigation relating to claims arising from our ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial and diversion of managerial resources.

 

Off-Balance Sheet Arrangements

 

Since our inception, we have not engaged in any off-balance sheet arrangements, such as the use of structured finance, special purpose entities or variable interest entities.

 

Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Sensitivity

 

We had cash and cash equivalents of $19.1 million and $23.0 million at December 31, 2009 and March 31, 2010, respectively, which was held for working capital purposes. We do not enter into investments for trading or speculative purposes. We do not believe that we have any material exposure to changes in the fair value of these investments as a result of changes in interest rates due to their short-term nature. Declines in interest rates, however, will reduce future investment income.

 

Foreign Currency Risk

 

To date, our international customer and vendor agreements have been denominated almost exclusively in United States dollars. Accordingly, we have limited exposure to foreign currency exchange rates and do not currently enter into foreign currency hedging transactions.

 

Recent Authoritative Accounting Guidance

 

See note 1 of the notes to our consolidated financial statements for information regarding recently issued accounting pronouncements.

 

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BUSINESS

 

Overview

 

We are a fabless provider of high-speed analog semiconductor solutions for the communications and computing markets. Our analog semiconductor solutions provide high signal integrity at leading-edge data speeds while reducing system power consumption. Our semiconductor solutions are designed to address bandwidth bottlenecks in networks, maximize throughput and minimize latency in computing environments and enable the rollout of next generation communications and computing infrastructures. Our solutions provide a vital high-speed interface between analog signals and digital information in high-performance systems such as telecommunications transport systems, enterprise networking equipment, datacenters and enterprise servers, storage platforms, test and measurement equipment and military systems. We believe we are a leader in 40G and 100G high-speed analog semiconductor solutions for the communications market and high-speed memory interface solutions for the computing market. We have a broad product portfolio with 17 product lines and over 170 products as of December 31, 2009.

 

We leverage our proprietary high-speed analog signal processing expertise and our deep understanding of system architectures to address data bottlenecks in current and emerging communications, enterprise network, computing and storage architectures. We develop these solutions as a result of our competitive strengths, including our system-level simulation capabilities, analog design expertise, strong relationships with industry leaders, extensive broad process technology experience and high-speed package modeling and design expertise. We use our core technology and strength in high-speed analog design to enable our customers to deploy next generation communications and computing systems that operate with high performance at high speed. We believe we are at the forefront of developing semiconductor solutions that deliver 100G speeds throughout the network infrastructure, including core, metro and the datacenter. Furthermore, our analog signal processing expertise enables us to improve throughput in computing systems. For example, some of our computing products enable up to four times the memory capacity on server platforms while using the current generation of memory devices.

 

We have ongoing, informal collaborative discussions with industry and technology leaders such as AMD, Alcatel-Lucent, Huawei and Intel to design architectures and products that solve bandwidth bottlenecks in existing and next generation communications and computing systems, although we do not have any formal agreement with these entities. We help define industry conventions and standards within the markets we target by collaborating with technology leaders, OEMs, systems manufacturers and standards bodies. The complex and proprietary nature of our technology often makes it difficult for other suppliers to offer similar products that meet the same performance thresholds as our products do under varying temperature, supply voltage and manufacturing restrictions. In addition, the rigorous testing and qualification requirements required by our customers often make it expensive for them to qualify more than one or two suppliers, thereby enabling us to be the sole supplier, or one of a limited number of suppliers. Our products are designed into systems sold by OEMs, including Agilent, Alcatel-Lucent, Cisco, Danaher, Dell, EMC, HP, Huawei, IBM and Oracle. We believe we are one of a limited number of suppliers to these OEMs, and in some cases we may be the sole supplier for certain applications. We sell both directly to these OEMs and to other intermediary systems or module manufacturers that, in turn, sell to these OEMs. During the year ended December 31, 2009, we sold our products to more than 160 customers. Since 2006, we have shipped more than 90 million high-speed analog semiconductors. Our total revenue increased to $58.9 million for the year ended December 31, 2009 from $43.0 million for the year ended December 31, 2008. For the quarter ended March 31, 2010, our total revenue increased to $19.1 million from $10.3 million for the quarter ended March 31, 2009. As of March 31, 2010, our accumulated deficit was $48.8 million.

 

Industry Background

 

The proliferation of mobile devices and wireless connectivity is driving growth in demand for network bandwidth as users seek faster access to high-definition video and multimedia content and applications.

 

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According to the Cisco Visual Networking Index, global IP traffic is projected to increase more than four-fold from 2009 to 2014, reaching 63.9 exabytes per month in 2014. Global mobile IP traffic is a key driver of this growth, and is projected to grow at a compound annual growth rate of 108% from 2009 to 2014. In addition, the emergence of cloud computing, which allows multiple users to simultaneously execute applications and access data at high speeds is creating additional demand for network bandwidth and computing resources. In order to handle growing network bandwidth and faster computing speeds, communications and computing systems require greater processing resources and higher access speeds.

 

 

Source: Cisco Visual Networking Index.

 

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Emergence of Cloud Computing

 

Cloud computing centralizes computing resources, including hardware, software and data in datacenters and enables users to access these resources on demand via the Internet. The user is agnostic to the type of device used to access or the location of these computing resources, accessing these resources “in the cloud” from anywhere via the Internet. The illustration below graphically depicts the centralized computing resources as well as the enabling infrastructure. The user accesses various applications and services, such as Internet Protocol television, or IPTV, and video conferencing, hosted in cloud-enabled datacenters. The aggregation network and core network enable the user to access cloud-enabled datacenters via broadband or mobile Internet networks. Inside these datacenters, the applications and services are delivered via specific cloud-enabled software layers that run on a hardware layer also designed to accommodate cloud-type resourcing. The cloud-enabled hardware layer includes servers with large amounts of registered dynamic random access memory as well as various types of data storage devices.

 

 

Users benefit from the cloud computing paradigm through increased mobility as well as limited capital and operating expenditures, while maintaining data security and reliability. Providers benefit from increased utilization through economies of scale. According to the IDC eXchange, New IT Cloud Services Forecast: 2009-2013, October 2009, spending on public cloud-based server and storage services is expected to grow from $3.7 billion in 2009 to $12.8 billion in 2013, representing a compound annual growth rate of 37%.

 

The continued successful adoption of cloud computing requires networks that are scalable and efficient. In order to allow multiple users to simultaneously access data at high speeds, service provider, enterprise and datacenter networks require additional bandwidth and storage. For example, in order to provide new and

 

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advanced applications, leading Internet companies operate datacenters that demand additional network bandwidth and storage capacity to scale as their user base grows and applications increase and become more sophisticated. The proliferation of cloud computing is expected to accelerate service provider and enterprise network upgrades and lead to the widespread deployment of the next generation of high-speed network technologies.

 

Trends Across the Network and Computing Infrastructure

 

Service providers have historically driven network upgrade cycles to increase bandwidth and increase the number and quality of services they provide to customers. These upgrade cycles are generally characterized by increased speed requirements for data transmission. For example, transmission speeds in the Internet backbone increased from 622 Mbps (megabits per second) in the early 1990s to 2.5 Gbps by the end of that decade, and to 10 Gbps by the mid 2000s. Beginning in 2006, carriers began upgrading core and metro networks from 10 Gbps to 40 Gbps to meet increasing bandwidth demand. Ovum Research expects the total 40G market to grow from $469 million in 2010 to $1.3 billion in 2015, representing a compound annual growth rate of 23%. Beyond 40G, 100G network upgrades are expected to begin to be deployed in 2012, both in the communication networks as well as in enterprise datacenters. Ovum Research expects the total 100G market to grow by a compound annual growth rate of 88% to $1.2 billion from 2012 to 2015.

 

Enterprises are addressing the increased bandwidth demand by upgrading their corporate networks and expanding computing capacity in datacenters. At the same time, enterprises are trying to minimize power consumption and space requirements. Historically, enterprises have deployed various technologies in their networks, and Ethernet has emerged as a commonly deployed solution to upgrade corporate networks because of its ability to cost-effectively scale bandwidth capacity while minimizing power consumption, space and operational support requirements. Due to favorable performance attributes of 100G technology, enterprise networking equipment is also expected to transition to 100G technology. For example, a single 100G Ethernet link can provide the same bandwidth, better latency and reduced system complexity while utilizing a fraction of the power and space as compared to ten 10G Ethernet links. As a result, 100G Ethernet technology is expected to improve energy efficiency and lower capital expenditures as compared to 10G Ethernet technology.

 

Increasing data volumes, coupled with software technologies such as virtualization, which allows multiple users to run different operating systems and applications on a single server, require increased server processing capacity in the datacenter. As server virtualization and efficiency become more important to enterprise information technology, or IT, management, we believe that servers with multi-core central processing units, or CPUs, and high-speed technology will become more prevalent in the datacenter. These high-end servers must support the transfer of large volumes of data between the CPU, the system memory and other input-output, or I/O, devices at extremely high speeds and with low latency. This requirement is particularly challenging because increases in memory density have failed to keep pace with advances in processing power, resulting in bottlenecks within the server. As enterprises continue to migrate to cloud computing models, these high-end servers and other datacenter solutions require technology solutions that allow them to process greater data volume from multiple sources, maximize server floor space, cost-effectively upgrade new and existing networks and reduce power consumption.

 

The Need for High-Speed Analog Semiconductors to Address Critical Signal Integrity Challenges

 

Communications and computing systems must manage data reliably at increasing speeds using a wide range of physical media or interfaces, including wireless, twisted pair copper wires, coaxial cables and fiber optic cables. At higher speeds, signal integrity and data transmission and recovery become increasingly difficult to achieve. Moreover, in many networks and computing systems, bandwidth bottlenecks arise where the physical media and traditional semiconductor solutions are incapable of supporting the increased data transfer rates and cause signal deterioration. These signal deterioration issues are addressed with high-speed analog semiconductors that maintain or improve signal integrity at every point of the physical interface. These high-speed analog semiconductors employ sophisticated analog signal processing techniques to accurately generate, amplify, reshape, retime and receive the transmitted data.

 

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High-speed analog semiconductor solutions address critical engineering needs of the different markets within the communications and computing infrastructures. These needs include: high signal integrity at high speeds, reduced power consumption, system-wide cost efficiency, small form factor and rapid time to market. Signal integrity, especially at high speeds, has been a technical challenge that has not been met by many existing analog semiconductor solutions. Further, those analog solutions that have met the required signal integrity benchmarks at high speeds are often constrained by power, cost, footprint and other performance considerations. These constraints differ by end market, and are outlined below:

 

•

Communications Networks. Network operators are upgrading their networks from 10G to 40G and 100G, requiring error-free or low-error transmission of data up to several thousands of kilometers in distance. In these networks, high-speed analog semiconductors are required to ensure high signal integrity as well as increased data transfer from transmission through receipt. Current solutions that achieve high signal integrity typically do so at the expense of power consumption, footprint and size.

 

•

Enterprise and Datacenter Networks. In the datacenter, Ethernet switches and routers have traditionally connected downstream servers with 1G Ethernet ports to upstream switches and routers with 10G Ethernet ports. The advent of more powerful downstream servers results in data bottlenecks in these switches and routers as they provide upstream connections with existing 10G ports. High-speed analog semiconductors are required to address these data bottlenecks that arise as server interconnect port speeds increase.

 

•

Computing and Storage. The proliferation of advanced multi-core processing and higher CPU speeds has made it more challenging to incorporate additional I/O and memory devices. At high speeds, signal deterioration within communication channels restricts the maximum number of I/O interface or memory devices that can connect to a single controller or CPU. As speeds within each channel and the number of channels increases, the impact of these limitations is magnified, resulting in reduced I/O, memory and CPU communication channel capacity and throughput. This results in decreased server utilization, which creates the need for additional server racks and increases system power consumption. To increase throughput, high-speed analog semiconductors are required to manage signals along the communication channels between the CPU, system memory and other interface devices.

 

High-speed analog semiconductors also serve critical functions within high-performance systems deployed in other markets such as test and measurement equipment and military systems. For example, to support the measurement and validation of communications systems, research and development teams within systems providers need to use signal test and measurement tools with even more advanced, next generation capabilities. These test and measurement systems, require high-speed analog semiconductors to enable high frequency signal acquisition. In addition, military systems, such as next generation radar detection systems, incorporate high-speed analog semiconductors to improve signal integrity and data throughput at higher speeds while limiting system power consumption, size and cost. As the speed requirements for next generation test and measurement systems and military equipment continue to increase, we believe that many current solutions will fall short of addressing market needs.

 

Our Competitive Strengths

 

Our semiconductor solutions leverage our deep understanding of high-speed analog signal processing and our system architecture knowledge to address data bottlenecks in current and emerging network architectures. We design and develop our products for the communications and computing markets, which typically have two to three year design cycles, and product life cycles of 10 or more years. We believe our leadership position in developing high-speed analog semiconductors is a result of the following core strengths:

 

•

System-Level Simulation Capabilities. We design our high-speed analog semiconductor solutions to be critical components in complex systems. In order to understand and solve system problems, we work closely with systems vendors to develop proprietary component, channel and system simulation models. We use these proprietary simulation and validation tools to accurately predict system performance prior to fabricating the semiconductor or alternately, to identify and optimize critical

 

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semiconductor parameters to satisfy customer system requirements. We use these simulation and validation capabilities to reduce our customers’ time to market and engineering investments, thus enabling us to establish differentiated design relationships with our customers.

 

•

Analog Design Expertise. We believe that we are a leader in developing broadband analog semiconductors operating at high frequencies of up to 100 GHz. High-speed analog circuit design is extremely challenging because, as frequencies increase, semiconductors are increasingly sensitive to temperature, power supply noise, process variation and interaction with neighboring circuit elements. Development of components that work robustly at high frequencies requires an understanding of analog circuit design, including electromagnetic theory and practical experience in implementation and testing. Our analog design expertise has enabled us to design and commercially ship the first 18 GHz track-and-hold amplifier, 28 GHz linear transimpedance amplifier, 40 GHz transimpedance amplifier and 50 GHz MUX and DEMUX components.

 

•

Strong Relationships with Industry Leaders. We develop many of our high-speed analog semiconductor solutions for applications and systems that are driven by industry leaders in the communications and computing markets. Through our established relationships with industry leaders, we have repeatedly demonstrated the ability to address their technological challenges. As a result, we are designed into several of their current systems and believe we are well-positioned to develop high-speed analog semiconductor solutions for their emerging architectures. For instance, our high-speed memory interface designs have been validated for Intel’s Xeon® Core i7® and next generation platforms. We have ongoing, informal collaborative discussions with communication companies such as Alcatel-Lucent and Huawei to address their next generation 100G efforts, although we have not entered into formal agreements with these entities. As a result of our development efforts with industry leaders, we help define industry conventions and standards within the markets we target by collaborating with technology leaders, OEMs and systems manufacturers, as well as standards bodies such as the Joint Electronic Device Engineering Councils, or JEDEC, and the Institute of Electrical and Electronic Engineers, or IEEE, and the Optical Internetworking Forum, or OIF, to establish industry standards.

 

•

Broad Process Technology. We employ process technology experts, device technologists and circuit designers who have extensive experience in many process technologies including CMOS, SiGe and III-V technologies such as GaAs or InP. We have developed specific internal models and design kits for each process to support a uniform design methodology across all of our semiconductor solutions. For example, our products using 40nm CMOS technology require development of accurate models for sub-circuits such as phase locked loops, varactors and inductors. As another example, for III-V materials-based processes, in-house model development is a necessity and we believe also provides a substantial competitive advantage because these processes have complex material and device interactions. Combined with our fabless manufacturing strategy, our design expertise, proprietary model libraries and uniform design methodology allow us to use the best possible materials and substrates to design and develop our semiconductor solutions. We believe that our ability to design high-speed analog semiconductors in a wide range of materials and process technologies allows us to provide superior performance, power, cost and reliability for a specific set of market requirements.

 

•

High-Speed Package Modeling and Design. We have developed deep expertise in high-speed package modeling and design, since introducing the first high-speed 50 GHz MUX and DEMUX product in 2001. At high frequencies, the interaction between an analog device, its package and the external environment can significantly affect product performance. Accurately modeling and developing advanced packaging allows semiconductor solutions to address this challenge. Due to the advanced nature of this work, there is a limited supply of engineers with experience in high-speed package modeling and design, and therefore this required expertise can be difficult to acquire for companies that have not invested in developing such a skill set. We have developed an infrastructure to simulate electrical, mechanical and thermal properties of devices and packages that we integrate within our semiconductor design process and implement at our third-party packaging providers. Modeling is an inherently iterative process, and since our model libraries are used extensively by our circuit designers,

 

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the accuracy and value of these models increases over time. Our current packaging and modeling techniques enable us to deliver semiconductors that are energy efficient, offer high-speed processing and enable advanced signal integrity, all in a small footprint.

 

We believe that our system-level simulation capabilities, our analog design and broad process technology design capabilities as well as our strengths in packaging enable us to differentiate ourselves by delivering advanced high-speed analog signal processing solutions. For example, we believe we have successfully demonstrated the feasibility of our next generation 100G Ethernet architecture well ahead of our competitors. Within the server market, we have applied our analog signal processing expertise to develop our iMB^TM technology, which is designed to expand the memory capacity in existing server and computing platforms. Adoption of the iMB^TM allows up to four times the memory capacity to be installed in a server platform, while using the current generation of memory devices.

 

Benefits We Provide to Our Customers

 

We believe the key benefits that our solutions provide to our customers are as follows:

 

•

High Performance. Our high-speed analog semiconductor solutions are designed to meet the specific technical requirements of our customers in their respective end-markets. In many cases, our close design relationships and deep engineering expertise put us in a position where we are one of a limited group of semiconductor vendors that can provide the necessary solution. For instance, in the broadband communications market, we believe our products achieve the highest signal integrity and attain superior signal transmission distance at required error-free or low error rates. In the computing market, we believe our products achieve industry leading data transfer rates at the smallest die size.

 

•

Low Power and Small Footprint. In each of the end markets that we serve, the power budget of the overall system is a key consideration for systems designers. Power consumption greatly impacts system operation cost, footprint and cooling requirements, and is increasingly becoming a point of focus for our customers. We believe that our high speed analog signal processing solutions enable our customers to implement system architectures that reduce overall system power consumption. We also believe that, at high frequencies, our high-speed analog semiconductor devices typically consume less power than competitors’ standard designs, which often incorporate power-consuming digital signal processing to perform data transfer functions, thereby further reducing overall system power consumption. In addition, in many of our applications, we are able to design and deliver semiconductors that have a smaller footprint and therefore reduce the overall system size.

 

•

Faster Time to Market. Our customers compete in markets that require high-speed, reliable semiconductors that can be integrated into their systems as soon as new market opportunities develop. To meet our customers’ time-to-market requirements, we work closely with them early in their design cycles and are actively involved in their development processes. Over the past nine years, we have developed methodologies and simulation environments that accurately predict the behavior of complex integrated circuits within various communications systems. In addition, we have developed an extensive internal library of proven building block circuits such as amplifiers, phase frequency detectors and transmitters that are reused to shorten design cycles and reduce risk.

 

Our Strategy

 

Our mission is to enable faster communications and computing infrastructure with high-speed analog semiconductor solutions that reliably capture critical analog signals, convert them to useful data, and transport the data at high speeds. Key elements of our strategy include:

 

•

Focus on Markets that Require High Signal Integrity at High Speeds. We believe our target markets are driven by expected growth trends in video applications, mobile Internet and cloud computing, causing a greater demand for network bandwidth and computing speeds. Due to higher bandwidth and faster computing needs, these applications require our specialized semiconductor solutions that provide high-speed data traffic, preserve signal integrity and increase power efficiency. For example, we

 

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provide high-speed analog semiconductor solutions for high growth markets such as 40G and 100G communications. We intend to continue to focus our efforts in markets where high signal integrity at high speeds is imperative.

 

•

Extend Technology Leadership in High-Speed Analog Semiconductors. We believe we employ best-in-class technology and design capabilities in our high-speed analog semiconductor solutions. Our innovative approaches have allowed us to be first to market in a number of key product lines. For example, we designed and commercially shipped the first 18 GHz track-and-hold amplifier, 28 GHz linear transimpedance amplifier, 40 GHz transimpedance amplifier and 50 GHz MUX and DEMUX components. We intend to continue to invest in research and development to extend our leadership in existing markets and enable the widespread deployment of our next generation technology into newer markets.

 

•

Expand Global Presence. Given the continued globalization of the semiconductor supply chain, we believe that a global presence is critical to securing design wins from both new and existing customers. We currently have offices in North America, Asia and Europe coupled with 16 sales channel partners worldwide. We plan to continue the expansion of our sales, design and technical support organization to broaden our customer reach in new markets, primarily in Asia and Europe. For example, we recently opened new design centers in the United Kingdom and Singapore to capitalize on local design talent. Additionally, we continue to increase the number of global sales professionals directly and through channel partners.

 

•

Continue to Build Deep Relationships with Customers. We intend to continue to develop long-term, collaborative relationships with customers who are regarded as leaders in their respective markets. We work closely with customers throughout design cycles that often last two to three years, and often in situations where we are their sole supplier for a given product. As a result, we are able to develop long-term relationships with our customers as our technology becomes embedded in their products. We plan to continue to work with customers to enable them to develop innovative solutions that address both existing and new performance challenges.

 

•

Attract and Retain Top Talent. We believe one of our key differentiators resides in the design of solutions that address complex, real world problems for our customers. In this respect, our team of analog engineers and systems designers is critical to our success. Our technical team typically has, on average, more than 20 years of industry experience with more than 75% having advanced degrees and more than 25% having Ph.Ds. We intend to continue to aggressively recruit and seek to retain talented engineering and design personnel. For example, on June 30, 2010, we acquired Winyatek Technology Inc., in part to further strengthen our technology and engineering resources.

 

Risks Associated with Our Business Model

 

Our business model is subject to various risks and uncertainties, including:

 

•

fluctuations in our operating results due to the cancellation of customer orders, fluctuations in level of component inventories held by our customers, the gain or loss of significant customers, our ability to develop and market new products and technologies on a timely basis and timing and extent of product development costs;

 

•

our dependence on a limited number of customers;

 

•

the lack of long-term purchase commitments with any of our customers and that substantially all our sales are made on a purchase order basis;

 

•

our lengthy sales cycle, which may cause us to incur significant expenditures without generating any revenue;

 

•

lengthy and expensive qualification processes required by our customers for our products and our third-party contractors;

 

•

our need to continually develop and introduce new products; and

 

•

development of the market and demand for 100G solutions.

 

For additional discussion of the risks applicable to our business model, please see the discussion under the heading “Risk Factors.”

 

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Products

 

Our products address bandwidth bottlenecks throughout the cloud computing and network communications infrastructure, as depicted in the illustration below. For instance, our high-speed memory interface products can be found in servers where they allow central processing units, or CPUs, to better utilize available memory resources. In addition, our products find application in devices such as dense wavelength division multiplexers, or DWDMs, that enable core and aggregation networks.

 

 

As of December 31, 2009, we had more than 170 products across 17 product lines, including products that have commercially shipped, products for which we have shipped engineering samples and products under development, that perform a wide range of functions such as amplifying, encoding, multiplexing, demultiplexing, retiming and buffering data and clock signals at speeds up to 100 Gbps. These products are key enablers for servers, routers, switches, storage and other equipment that process, store and transport data traffic. Our products are also used in test and measurement equipment and military radar systems that capture and process high-speed and ultra broadband signals. We introduced 11 new products in 2009. We design and develop our products for the communications and computing markets, which typically have two to three year design cycles, and product life cycles as long as 10 years or more.

 

The complex and proprietary nature of our technology often makes it difficult for other suppliers to offer similar products that meet the same performance thresholds as our products do under varying temperature, supply voltage and manufacturing restrictions. In addition, the rigorous testing and qualification requirements required by our customers often make it expensive for them to qualify more than one or two suppliers, thereby enabling us to be the sole supplier, or one of a limited number of suppliers.

 

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The table below lists our products, their application speed in gigabits per second and functional description.

 

Product Line		Speed		Description		Application
Clock and Data Recovery (CDR)		100G		Recovers the clock from high-speed signals; used to retime the signal prior to re-transmitting to ensure the highest signal integrity		Enables the next generation of small form factor 100G Ethernet modules, line cards and backplane applications
Clock fanout		10G to 50G		Provides replication and buffering of high-speed clock signals		Typically used to distribute a high-speed clock to multiple chips in a system
Demultiplexer (DEMUX)		10G to 50G		De-serializes a high-speed data stream to multiple lower speed data streams for further signal processing		Typically used in high-speed data acquisition applications
D Flip Flops		10G to 50G		Retimes the input signal to deliver optimal signal integrity		Typically used in high-speed pattern generation applications
Differential Amplifiers		10G		Amplifies differential signals and drives high-speed analog-to-digital converters		Typically used to amplify linear broadband signals or drive high-speed analog-to-digital converters for data acquisition applications
Differential Encoders		10G		Provides differential encoding function for Differential Phase Shift Keying (DPSK) transmission		Typically used in 10 Gbps ultra long haul optical transceivers
Isolation Memory Buffer (iMBTM)		1.6G		Provides critical high-speed interface between CPU and memory		Architecture adopted by JEDEC as an industry standard
Latched Comparator		10G to 50G		Used as a high-speed 1-bit analog-to-digital converter		Typically used in high-speed data acquisition applications
Logic Gates		10G to 50G		Standard AND, OR, XOR logic gates used as general-purpose building blocks for high-speed data processing		Typically used in test and measurement applications
Modulator Driver		40G to 100G		Amplifies a small signal to 8V (or higher) output voltage in order to drive optical modulators for very long distance data transmission		Typically used in optical transmission systems and test and measurement equipment
Multiplexer (MUX)		10G to 50G		Serializes multiple data streams to a high-speed data stream prior to transmission		Typically used in high-speed pattern generation applications
Phase-Lock Loop (PLL)		1.86G		Provides critical high-speed interface between CPU and memory		Typically used for all but the lowest capacity modules in order to install sufficient memory in computing and storage platforms
Prescalers		10G to 50G		Divides the high frequency clock to a lower frequency clock		Typically used in test and measurement, military and ultra long haul optical transmission equipment
Register Buffers		1.86G		Regenerates a CPU’s command and address signals		Typically used for all but the lowest capacity modules in order to install sufficient memory in computing and storage platforms
RZ Converter		10G		Converts a Non-Return-to-Zero (NRZ) digital bit stream to Return-to-Zero (RZ) format		Typically used in 10 Gbps ultra long haul optical transceivers
Serializer-Deserializer (SERDES)		100G		Combines a serializer, deserializer, equalizer and CDR functions on one chip		Enables the next generation of high density 100G Ethernet linecards
Transimpedance Amplifier (TIA)		10G to 100G		Amplifies small currents generated by a photodetector for further signal processing		Typically used in optical transceivers for Ethernet, synchronous optical networking, dense wavelength division multiplexing, as well as other optical receiver applications

 

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Each of the products listed in the table above are currently in commercial production except for our iMB^™ product, for which we are currently shipping engineering samples and expect to commence commercial production in 2011, and our CDR and SERDES products, which are under development. We currently expect to commence shipments of engineering samples of our CDR and SERDES products in 2011, and commercial production of these products in 2012.

 

Customers

 

We sell our products directly to OEMs and indirectly to OEMs through module manufacturers, ODMs and sub-systems providers. We work closely with technology leaders, including microprocessor and communications equipment companies, to design architectures and products that help solve bandwidth bottlenecks in and between systems. These technology leaders often design our products into reference designs, which they provide to their customers and suppliers. For example, in the server market we work closely with major CPU manufacturers to address the bottleneck between their CPU and the increasing amount of memory attached to it. These CPU manufacturers then provide their server CPU customers and memory module partners with a validation report, including validation of our memory interface products. These server OEMs and memory module companies then design our memory interface products into their production systems. Ultimately, our sales into these servers are to memory module companies, including Hynix, Micron, Samsung and others. In the networking market, we work closely with OEMs to deliver high performance communication links. These OEMs design our product into their systems and then require their ODM and electronics manufacturing services, or EMS, suppliers to purchase and use that specific product from us. We also work directly with module manufacturers to design our products into their modules, which they sell to OEMs.

 

We work closely with our customers throughout design cycles that often last two to three years and we are able to develop long-term relationships with them as our technology becomes embedded in their products. As a result, we believe we are well-positioned to not only be designed into their current systems, but also to continually develop next generation high-speed analog semiconductor solutions for their future products. During the year ended December 31, 2009, we sold our products to more than 160 customers.

 

Sales to customers in Asia accounted for 54%, 64% and 77% of our total revenue in 2007, 2008 and 2009, respectively. Because many of our customers or their OEM manufacturers are located in Asia, we anticipate that a majority of our future revenue will continue to come from sales to that region. Although a large percentage of our sales are made to customers in Asia, we believe that a significant number of the systems designed by these customers and incorporating our semiconductor products are then sold to end users outside Asia.

 

We currently rely, and expect to continue to rely, on a limited number of customers for a significant portion of our revenue. In the quarter ended March 31, 2010, Samsung accounted for 34% of our total revenue, and our 10 largest customers collectively accounted for 79% of our total revenue. In addition, sales directly and through distributors to Micron accounted for 17% of our total revenue in the quarter ended March 31, 2010. Samsung directly accounted for 36% of our total revenue and sales directly and through distributors to Micron accounted for 17% of our total revenue for the year ended December 31, 2009. No other single customer directly or indirectly accounted for more than 10% of our total revenue in 2009 or the three months ended March 31, 2010.

 

Sales and Marketing

 

Our design cycle from initial engagement to volume shipment is typically two to three years, with product life cycles in the markets we serve ranging from two to 10 years or more. For many of our products, early engagement with our customers’ technical staff is necessary for success. To ensure an adequate level of early engagement, our application and development engineers work closely with our customers to identify and propose solutions to their systems challenges.

 

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In addition to our direct customers, we work closely with technology leaders such as Intel and AMD for the computing and storage markets and Alcatel-Lucent, Cisco, Huawei for the networking and communications market to anticipate and solve next generation challenges facing our customers. As part of the sales and product development process, we often design our products in close collaboration with these industry leaders and help define their architecture. We also participate actively in setting industry standards with organizations such as IEEE, JEDEC and OIF to have a voice in the definition of future market trends.

 

We sell our products worldwide through multiple channels, including our direct sales force and a network of sales representatives and distributors. For the year ended December 31, 2009, 78% of our revenue was generated by our direct sales team and third-party sales representatives. We operate direct sales offices in Japan, Korea, Singapore, Taiwan and the United States and employ sales personnel that cover our direct customers and manage our channel partners. We utilize two sales representatives and two distributors in Asia, a distributor in Europe, a distributor in Israel, nine sales representatives in North America and a distributor in Japan. Our channel network includes more than 100 sales professionals to support our products and customers. We believe these distributors and sales representatives have the requisite technical experience in our target markets and are able to leverage existing relationships and understanding of our customers’ products to effectively sell our products. Given the breadth of our target markets, customers and products, we provide our direct and indirect sales teams with regular training and share product information with our customers and sales team using web-based tools.

 

Manufacturing

 

We operate a fabless business model and use third-party foundries and assembly and test manufacturing contractors to manufacture, assemble and test our semiconductor products. We also inspect and test parts in our Westlake Village, California, facility. This outsourced manufacturing approach allows us to focus our resources on the design, sale and marketing of our products. In addition, we believe outsourcing many of our manufacturing and assembly activities provides us the flexibility needed to respond to new market opportunities, simplifies our operations and significantly reduces our capital requirements.

 

We subject our third-party manufacturing contractors to rigorous qualification requirements in order to meet the extremely high quality and reliability standards required of our products. We carefully qualify each of our partners and processes before applying the technology to our products. Our engineers work closely with our foundries and other contractors to increase yield, lower manufacturing costs and improve product quality.

 

•

Wafer Fabrication. We currently utilize a wide range of semiconductor processes to develop and manufacture our products. Each of our foundries tends to specialize in a particular semiconductor wafer process technology. We choose the semiconductor process and foundry that we believe provides the best combination of performance attributes for any particular product. For most of our products, we utilize a single foundry for semiconductor wafer production. Our principal foundries are TSMC in Taiwan, Sumitomo in Japan, GCS in California and UMS in France.

 

•

Package and Assembly. Upon the completion of processing at the foundry, the finished wafers are shipped to our third-party assemblers for packaging and assembly. Currently, our principal packaging and assembly contractors are OSE in Taiwan, STATS ChipPAC in Korea, Signetics in Korea, Kyocera in America and Japan, and Natel in California.

 

•

Test. At the last stage of integrated circuit production, our third-party test service providers test the packaged and assembled integrated circuits. Currently, OSE in Taiwan, STATS ChipPAC in Korea and Signetics in Korea are our test partners. We also perform testing in our Westlake Village, California, facility.

 

We are committed to maintaining the highest level of quality in our products. Our objective is that our products meet all of our customer requirements, are delivered on-time and function reliably throughout their useful lives. As part of our total quality assurance program, our quality management system has been certified to ISO 9001:2008 standards. Our manufacturing partners are also ISO 9001 certified.

 

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Research and Development

 

We focus our research and development efforts on developing products that address bandwidth bottlenecks in networks and minimize latency in computing environments. We believe that our continued success depends on our ability to both introduce improved versions of our existing products and to develop new products for the markets that we serve. We devote a portion of our resources to expanding our core technology including efforts in system-level simulation, high-speed analog design, supporting a broad range of process technologies and high-speed package modeling and design.

 

We develop models that are used as an input to a combination of proprietary and commercially available simulation tools. We use these tools to predict overall system performance based on the performance of our product. After our product is manufactured, we perform system measurements and refine our model set to improve the model’s accuracy and predictive ability. As a result, our models and simulation tools have improved over time and we have been able to very accurately predict overall system performance prior to fabricating a part.

 

We have assembled a core team of experienced engineers and systems designers in three design centers located in the United States, the United Kingdom and Taiwan. Our technical team typically has, on average, more than 20 years of industry experience with more than 75% having advanced degrees and more than 25% having Ph.Ds. These engineers and designers are involved in advancing our core technologies, as well as applying these core technologies to our product development activities across a number of areas including telecommunications transport systems, enterprise networking equipment, datacenters and enterprise servers, storage platforms, test and measurement and military systems. In 2007, 2008, 2009 and the three months ended March 31, 2010, our research and development expenses were $17.3 million, $17.5 million, $17.8 million and $5.1 million, respectively.

 

Competition

 

The global semiconductor market in general, and the communications and computing markets in particular, are highly competitive. We expect competition to increase and intensify as more and larger semiconductor companies enter our markets. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could materially and adversely affect our business, revenue and operating results.

 

Currently, our competitors range from large, international companies offering a wide range of semiconductor products to smaller companies specializing in narrow markets. Our primary competitors include Broadcom, Hittite, IDT and Texas Instruments, as well as other smaller analog signal processing companies. We expect competition in our target markets to increase in the future as existing competitors improve or expand their product offerings. In addition, as we continue to develop our 100G semiconductor solutions for enterprise networks, we may face competition from companies such as Broadcom and NetLogic.

 

Our ability to compete successfully depends on elements both within and outside of our control, including industry and general economic trends. During past periods of downturns in our industry, competition in the markets in which we operate intensified as our customers reduced their purchase orders. Many of our competitors are significantly larger, have greater financial, technical, marketing, distribution, customer support and other resources, are more established than we are, and have significantly better brand recognition and broader product offerings with which to withstand similar adverse economic or market conditions in the future. These developments may materially and adversely affect our current and future target markets and our ability to compete successfully in those markets.

 

We compete or plan to compete in different target markets to various degrees on the basis of a number of principal competitive factors, including:

 

•

product performance;

 

•

power budget;

 

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•

features and functionality;

 

•

customer relationships;

 

•

size;

 

•

ease of system design;

 

•

product roadmap;

 

•

reputation and reliability;

 

•

customer support; and

 

•

price.

 

We believe we compete favorably with respect to each of these factors. We maintain our competitive position through our ability to successfully design, develop and market complex high-speed analog solutions for the customers that we serve.

 

Intellectual Property

 

We rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, and contractual protections, to protect our core technology and intellectual property. As of March 31, 2010, we had 28 issued and allowed patents in the United States and other patent applications pending in the United States. The 28 issued and allowed patents in the United States expire in the years beginning in 2021 through 2027. Many of our issued patents and pending patent applications relate to high-speed circuit and package designs.

 

We may not receive competitive advantages from any rights granted under our patents, and our patent applications may not result in the issuance of any patents. In addition, any future patent may be opposed, contested, circumvented, designed around by a third party or found to be unenforceable or invalidated. Others may develop technologies that are similar or superior to our proprietary technologies, duplicate our proprietary technologies or design around patents owned or licensed by us.

 

In addition to our own intellectual property, we also use third-party licensors for certain technologies embedded in our semiconductor solutions. These are typically non-exclusive contracts provided under paid-up licenses. These licenses are generally perpetual or automatically renewed for so long as we continue to pay any maintenance fees that may be due. To date, maintenance fees have not constituted a significant portion of our capital expenditures. We have entered into a number of licensing arrangements pursuant to which we license third-party technologies. We do not believe our business is dependent to any significant degree on any individual third-party license.

 

We generally control access to and use of our confidential information through the use of internal and external controls, including contractual protections with employees, contractors and customers. We rely in part on United States and international copyright laws to protect our mask work. All employees and consultants are required to execute confidentiality agreements in connection with their employment and consulting relationships with us. We also require them to agree to disclose and assign to us all inventions conceived or made in connection with the employment or consulting relationship.

 

Despite our efforts to protect our intellectual property, unauthorized parties may still copy or otherwise obtain and use our software, technology or other information that we regard as proprietary intellectual property. In addition, we intend to expand our international operations, and effective patent, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries.

 

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The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. We have in the past received and, particularly as a public company, we expect that in the future we may receive, communications from various industry participants alleging our infringement of their patents, trade secrets or other intellectual property rights. Any lawsuits could subject us to significant liability for damages, invalidate our proprietary rights and harm our business and our ability to compete. Any litigation, regardless of success or merit, could cause us to incur substantial expenses, reduce our sales and divert the efforts of our technical and management personnel. In the event we receive an adverse result in any litigation, we could be required to pay substantial damages, seek licenses from third parties, which may not be available on reasonable terms or at all, cease sale of products, expend significant resources to develop alternative technology or discontinue the use of processes requiring the relevant technology.

 

Employees

 

At March 31, 2010, we employed 110 full-time equivalent employees, including 65 in research, product development and engineering, 20 in sales and marketing and 14 in general and administrative management and 11 in manufacturing logistics. We consider relations with our employees to be good and have never experienced a work stoppage. None of our employees are either represented by a labor union or subject to a collective bargaining agreement.

 

Facilities

 

We currently lease our principal executive offices in Sunnyvale, California, under a sublease for 8,000 square feet of office space that expires on December 31, 2010. We also lease 18,701 square feet of office space in Westlake Village, California under a lease that expires on December 31, 2010. In April and June 2010, we entered into new lease agreements for office space in Santa Clara, California and Thousand Oaks, California, respectively. The lease for 14,578 square feet of office space in Santa Clara, California has a term of 63 months and the total minimum lease payments are $2.1 million. The lease for 29,090 square feet of office space in Thousand Oaks has a term of 72 months and the total minimum lease payments are $3.6 million. Our Singapore subsidiary currently leases 2,368 square feet of office space in Singapore under a lease that expires on March 14, 2012. Our United Kingdom subsidiary currently leases office space in Northamptonshire, England under a lease that expires on September 24, 2011. We believe that current facilities are sufficient to meet our needs for the foreseeable future.

 

Legal Proceedings

 

We are currently a party to the following legal proceedings:

 

Netlist, Inc. v. Inphi Corporation, Case No. 09-cv-6900 (C.D. Cal.)

 

On September 22, 2009, Netlist filed suit in the United States District Court, Central District of California, or the Court, asserting that we infringe U.S. Patent No. 7,532,537. Netlist filed an amended complaint on December 22, 2009, further asserting that we infringe U.S. Patent Nos. 7,619,912 and 7,636,274, collectively with U.S. Patent No. 7,532,537, the patents-in-suit, and seeking both monetary damages to be determined and an injunction to prevent further infringement. These infringement claims allege that our iMB™ and certain other memory module components infringe the patents-in-suit. We answered the amended complaint on February 11, 2010 and asserted that we do not infringe the patents-in-suit and that the patents-in-suit are invalid. We have since filed inter partes requests for reexamination with the USPTO asserting that the patents-in-suit are invalid. The USPTO is required to grant or deny the reexamination requests within three months of their effective filing dates, which, due to re-filing of certain papers due to procedural requests of the USPTO, was June 4, 2010 for U.S. Patent No. 7,636,274, June 8, 2010 for U.S. Patent No. 7,619,912 and June 9, 2010 for U.S. Patent No. 7,532,537. The USPTO has accepted the filings of the reexamination requests for U.S. Patent Nos. 7,619,912

 

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and 7,636,274, and we re-filed our reexamination request for U.S. Patent No. 7,532,537 on June 9, 2010. If the reexamination requests are granted, the USPTO will then evaluate the validity of the patents-in-suit in reexamination proceedings. The reexamination proceedings could result in a determination that the patents-in-suit, in whole or in part, are valid or invalid, as well as modifications of the scope of the patents-in-suit.

 

A third party, Sanmina-SCI Corporation, or SSC, has also requested interference proceedings with the USPTO with respect to each of the patents-in-suit. In its April 21, 2010 Request for Continued Examination of U.S. Application No. 11/142,989 (“SSC ’989 patent application”), SSC asserted that it has priority to the inventions claimed by the patents-in-suit and should be granted rights to those inventions. We have entered into an agreement with SSC for a non-exclusive license to those rights, if any, that SSC may obtain to the inventions claimed by the patents-in-suit if the USPTO agrees to commence interference proceedings and if SSC prevails in those proceedings.

 

The USPTO, in a communication dated July 7, 2010, acknowledged that claims were submitted in a filing made in the SSC ‘989 patent application to invoke an Interference with each of the patents-in-suit, but has declined to declare an Interference at this time. The July 7, 2010 USPTO communication rejected the claims submitted to invoke the Interference based upon 35 USC 112, with the rejection asserting that these claims contain “subject matter which was not described in the specification in such a way as to reasonably convey to one skilled in the relevant art that the inventor(s), at the time the application was filed, had possession of the claimed invention.” SSC has until January 7, 2011 to respond to the current USPTO communication.

 

In connection with the reexamination requests and the interference proceedings, we also filed a motion to stay proceedings with the Court, which was granted on May 18, 2010, whereby the Court stayed the proceedings until at least February 14, 2011, requested that Netlist notify the Court within one week of any action taken by the USPTO in connection with the reexamination or interference proceedings, and requested that the parties file papers by January 31, 2011 stating their position on whether the stay should be extended. While the Court granted a stay until February 14, 2011, the Court could lift the stay before then. For example, the USPTO is required to evaluate the reexamination requests well before February 14, 2011, as noted above, and if the USPTO denies the reexamination requests, the Court may decide to lift the stay.

 

Inphi Corporation v. Netlist, Inc, Case No. 09-cv-8749 (C.D. Cal.).

 

On November 30, 2009, we filed suit in the United States District Court, Central District of California asserting that Netlist infringes U.S. Patent Nos. 7,307,863 and 7,479,799, collectively the patents-in-suit, and are seeking both monetary damages and an injunction to prevent further infringement. Netlist answered the complaint on January 15, 2010 and filed an amended answer on April 22, 2010, asserting that it does not infringe the patents-in-suit, that the patents-in-suit are invalid and that U.S. Patent No. 7,479,799 is unenforceable due to inequitable conduct before the USPTO. Discovery is currently proceeding, and the Court has set a trial date of October 11, 2011.

 

While we intend to defend the lawsuit vigorously, litigation, whether or not determined in our favor or settled, could be costly and time-consuming and could divert our attention and resources, which could adversely affect our business. We are unable to assess the possible outcome of these matters. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, our business, financial condition, results of operations or cash flows could be materially and adversely affected.

 

We are not currently a party to any other material litigation. The semiconductor industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. We may from time to time become involved in litigation relating to claims arising from our ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

 

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MANAGEMENT

 

Executive Officers and Directors

 

The following table shows information about our executive officers and directors as of May 31, 2010:

 

Name		Age		Position(s)
Young K. Sohn		54		President, Chief Executive Officer and Director
John Edmunds		53		Chief Financial Officer and Chief Accounting Officer
Gopal Raghavan, Ph.D.		49		Chief Technology Officer
Ron Torten		43		Vice President of Worldwide Sales
Diosdado P. Banatao		64		Chairman of the Board
David J. Ladd(1)(2)(3)		63		Director
Timothy D. Semones		50		Director
Peter J. Simone(1)(2)(3)		62		Director
Sam S. Srinivasan(1)(2)(3)		65		Director
Lip-Bu Tan		50		Director

 

(1)

Member of our audit committee

(2)

Member of our compensation committee

(3)

Member of our nominating and corporate governance committee

 

Young K. Sohn has served as our President and Chief Executive Officer since August 2007 and as a director since July 2007. Prior to joining us, Mr. Sohn served as an Advisor at Panorama Capital, a venture capital firm, from June 2006 to June 2007. From August 2003 until his retirement in March 2005, Mr. Sohn served as President of Agilent Technologies, Inc.’s Semiconductor Group, now known as Avago Technologies, and as Chairman and Chief Executive Officer of Oak Technology, Inc., a semiconductor company, from 1999 until it was acquired by Zoran Corporation in August 2003. In addition, Mr. Sohn was an advisor to the Massachusetts Institute of Technology Media Lab’s OLPC (One Laptop Per Child) program from 2005 to 2007 and was the past President and Chairman of the Asia America MultiTechnology Association (AAMA) from 2001 to 2003. He currently serves on the board of directors for ARM Holdings PLC and Cymer, Inc. Mr. Sohn holds a B.S. degree in electrical engineering from the University of Pennsylvania and an M.S. degree from the MIT Sloan School of Management.

 

John Edmunds has served as our Chief Financial Officer and Chief Accounting Officer since January 2008. He previously served as Chief Financial Officer of Trident Microsystems, a semiconductor company, from June 2004 to January 2008. Mr. Edmunds also served as Senior Vice President and Chief Financial Officer for Oak Technology, Inc. from January 2000 until it was acquired by Zoran Corporation in August 2003. He continued to serve as Vice President of Finance for Zoran until June 2004. Mr. Edmunds started his career as a C.P.A. with Coopers & Lybrand in San Francisco and San Jose. He holds a B.S. degree in finance and accounting from the University of California, Berkeley.

 

Dr. Gopal Raghavan is one of our founders and has served as our Chief Technology Officer since January 2001. Dr. Raghavan previously served as a principal engineer for Conexant Systems, Inc., a semiconductor company, designing integrated circuits for 10 Gbps SONET applications from June 2000 to November 2000. He served as a senior scientist for Hughes Electronics from September 1994 to May 2000 and as a senior engineer with Intel Corporation from 1984 to 1994. Dr. Raghavan holds 15 patents and has published more than 30 technical publications. He holds a B. Tech degree in electrical engineering from the Indian Institute of Technology and an M.S. degree and a Ph.D. in electrical engineering from Stanford University.

 

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Ron Torten has served as our Vice President of Worldwide Sales since December 2007. Mr. Torten previously served as Chief Executive Officer of NemeriX, a semiconductor company, from January 2006 to December 2007. From January 2004 to December 2005, he served as Vice President, Worldwide Materials, at Agilent Technologies, Inc., a semiconductor company. Mr. Torten served as Vice President and General Manager for the Networking Entertainment Division at Agere Systems, Inc., a semiconductor company, from April 2000 to January 2004. He holds a B.S. degree in chemical engineering from the Technion—Israel Institute of Technology and an M.B.A. from the University of California, Davis.

 

Diosdado P. Banatao has served on our board of directors and as chairman of our board of directors since December 2000 and served as our Interim President and Chief Executive Officer from October 2006 to August 2007. Mr. Banatao has been a Managing Partner of Tallwood Venture Capital, a venture capital firm, since July 2000 and has served as Interim President and Chief Executive Officer at Ikanos Communications, Inc. since April 2010. From April 2008 to June 2009, he also served as Interim Chief Executive Officer of SiRF Technology Holdings, Inc., which was acquired by CSR plc in June 2009. Prior to forming Tallwood, Mr. Banatao was a venture partner at Mayfield Fund from January 1998 to May 2000. Mr. Banatao co-founded three technology startups: S3 Incorporated, Chips & Technologies and Mostron. He also held positions in engineering and general management at National Semiconductor Corporation, Seeq Technologies and Intersil Corporation. Mr. Banatao currently serves on the board of directors of CSR plc, a public company traded on the London Stock Exchange, and Ikanos Communications, Inc. He previously served as Chairman and led investments in SiRF Technology, acquired by CSR (CSR); Marvell Technology Group (MRVL); Acclaim Communications, acquired by Level One (INTC); Newport Communications, acquired by Broadcom (BRCM); Cyras Systems, acquired by Ciena (CIEN); and Stream Machine, acquired by Cirrus Logic (CRUS). He has also served on the board of directors of various privately held companies in the semiconductor industry. Mr. Banatao holds a B.S. degree in electrical engineering, cum laude, from the Mapua Institute of Technology in the Philippines and an M.S. degree in electrical engineering from Stanford University.

 

Mr. Banatao’s background as a technologist, as well as a senior manager of, board member of, and investor in numerous semiconductor companies provides a diversity of experience for his service on our board of directors. The companies with which he has been involved range from start-up companies to very large public corporations.

 

David J. Ladd has served on our board of directors since June 2007. In 1997, Mr. Ladd joined Mayfield Fund, a forty-one year old venture capital firm, where he has served in various capacities as a member of Mayfield Fund’s investment team. Currently, Mr. Ladd manages three Mayfield Fund related portfolio company investments, including us. Prior to joining Mayfield Fund, he served as Chief Technology Officer of Octel Communications Corporation from 1994 until it was acquired by Lucent Technologies in 1997. In 1981 he co-founded Opcom/VMX, a voice messaging company, which was acquired by Octel in 1994. Mr. Ladd holds a B.S. degree in electrical engineering from the University of California, Berkeley and an M.S. degree in Computer Science from Stevens Institute of Technology.

 

Mr. Ladd’s experience as a technologist and as a technology-focused investor, which gives him in-depth knowledge of, and exposure to, current technology and industry trends and developments, provides us with valuable insight into our industry and target markets.

 

Timothy D. Semones is one of our founders and has served as a director since 2001. Mr. Semones also served as our Chief Financial Officer from November 2000 to January 2008 and as our Chief Operating Officer from October 2006 to June 2007. Mr. Semones previously served as the Director of Marketing at MindSpring Enterprises, an Internet service provider, and the Director of Broadband Technology at Earthlink Network, an Internet service provider. He has also held general management and engineering positions with Measurement Systems, Inc. and Hewlett-Packard Company. Mr. Semones also sits on the board of directors of Semi Dice, Inc. He holds a B.S. degree in electrical engineering from Georgia Institute of Technology and an M.B.A. from the Anderson School of Management at the University of California, Los Angeles.

 

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As one of our founders and a technologist, Mr. Semones has comprehensive expertise and knowledge regarding our semiconductor solutions and technology, as well as insight into our anticipated future technological needs and industry needs.

 

Peter J. Simone has served on our board of directors since April 2010. Mr. Simone has served as an investment consultant and as a consultant to numerous private companies since February 2001. He also served as Executive Chairman of SpeedFam-IPEC, Inc., a semiconductor equipment manufacturing company, which was acquired by Novellus Systems, Inc., from June 2001 to December 2002. From February 2000 to February 2001, Mr. Simone served as a director and President of Active Controls Experts, Inc., a manufacturer and distributor of solid-state actuators, and served as President, Chief Executive Officer and director of Xionics Document Technologies, Inc., a software company, from April 1997 until Xionics’ acquisition by Oak Technology, Inc. in January 2000. Mr. Simone currently serves on the board of directors of Monotype Imaging Holdings Inc., Newport Corporation, Veeco Instruments, Inc. and Cymer, Inc. He previously served on the board of directors of Sanmina-SCI Corporation from 2003 to 2008. Mr. Simone is also a member of the board of directors of the Massachusetts High Technology Council and is vice president of the board of Walker Home and School for Children. Mr. Simone holds a B.S. degree in accounting from Bentley University and an M.B.A. from Babson College.

 

Mr. Simone possesses particular knowledge and operational experience across several industries as well as broad experience in financial markets, which provides a diversity of experience.

 

Sam S. Srinivasan has served on our board of directors since June 2007. Mr. Srinivasan served as Chief Executive Officer and Chairman of Health Language, Inc., a software company, from May 2000 to March 2002 and currently serves as Chairman Emeritus. He also served as Senior Vice President, Finance Chief Financial Officer of Cirrus Logic, Inc., a semiconductor company, from November 1988 to March 1996, and as Director, Internal Audits and subsequently as Corporate Controller of Intel Corporation, a semiconductor company, from May 1984 to November 1988. Currently, Mr. Srinivasan serves on the board of directors of TranSwitch Corporation, as well as its nominating and corporate governance committee and is the chairman of its audit committee. Mr. Srinivasan previously served on the board of directors of SiRF Technology Holdings, Inc. from 2004 to 2009, Centillium Communications, Inc. from 2006 to 2008, and Leadis Technology, Inc. from 2008 to 2009. He holds a B.A. in commerce from Madras University, India and an M.B.A. from Case Western Reserve University. Mr. Srinivasan is a member of the American Institute of Certified Public Accountants.

 

Mr. Srinivasan has considerable financial experience with publicly-traded companies and is a certified public accountant. He has also served as a director for a number of technology companies and as member of various board of director committees.

 

Lip-Bu Tan has served on our board of directors since May 2002. Mr. Tan has served as Chairman of Walden International, an international venture capital firm, since he founded the firm in 1987. He has also served as President and Chief Executive Officer of Cadence Design Systems, Inc., an electronic design automation software and engineering services company, since January 2009 and as a director since 2004. Mr. Tan currently serves on the board of directors of Flextronics International Ltd., Semiconductor Manufacturing International Corporation and SINA Corporation. He previously served on the board of directors of Centillium Communications, Inc. from 1997 to 2007, Creative Technology, Ltd. from 1990 to 2009, Integrated Silicon Solution, Inc. from 1990 to 2007, Leadis Technology, Inc. from 2002 to 2006 and MindTree Ltd. from 2006 to 2009. He holds a B.S. degree in physics from Nanyang University in Singapore, an M.S. degree in nuclear engineering from Massachusetts Institute of Technology and an M.B.A. from the University of San Francisco.

 

As Chief Executive Officer of Cadence and a Chairman of an international venture capital firm, as well as a director of a number of technology companies, Mr. Tan has extensive experience in the electronic design and semiconductor industries, as well as international operations and corporate governance expertise.

 

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Board of Directors

 

We currently have seven directors on our board of directors. Upon the completion of this offering, our bylaws will provide for a board of directors consisting of not fewer than 3 nor more than 11 members. The authorized number of directors may be changed by resolution of our board of directors. Vacancies on the board can be filled by resolution of our board of directors. Upon the completion of this offering, our board of directors will be divided into three classes, each serving staggered, three-year terms:

 

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Our Class I directors will be Messrs. Ladd, Semones and Tan and their terms will expire at the first annual meeting of stockholders following the date of this prospectus;

 

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Our Class II directors will be Messrs. Banatao and Sohn and their terms will expire at the second annual meeting of stockholders following the date of this prospectus; and

 

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Our Class III directors will be Messrs. Simone and Srinivasan and their terms will expire at the third annual meeting of stockholders following the date of this prospectus.

 

As a result, only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their respective terms. This classification of our board of directors may delay or prevent a change in control of Inphi.

 

Corporate Governance

 

We believe our corporate governance initiatives comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC adopted thereunder. In addition, we believe our corporate governance initiatives comply with the rules of the NYSE. After this offering, our board of directors will continue to evaluate our corporate governance principles and policies.

 

Our board of directors also adopted a code of business conduct that applies to each of our directors, officers and employees. The code addresses various topics, including:

 

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compliance with laws, rules and regulations, including the Foreign Corrupt Practices Act;

 

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conflicts of interest;

 

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insider trading;

 

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corporate opportunities;

 

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competition and fair dealing;

 

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equal employment and working conditions;

 

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record keeping;

 

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confidentiality;

 

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giving and accepting gifts;

 

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compensation or reimbursement to customers;

 

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protection and proper use of company assets; and

 

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payments to government personnel and political contributions.

 

Our board of directors also adopted a code of ethics for senior financial officers applicable to our Chief Executive Officer, President, Chief Financial Officer, controller and other key management employees addressing ethical issues. Upon completion of this offering, the code of business conduct and the code of ethics will each be posted on our website. The code of business conduct and the code of