Quantenna Communications
QUANTENNA COMMUNICATIONS INC (Form: 10-Q, Received: 11/07/2017 06:07:37)
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from               to
Commission File Number: 001-37927
____________________________________
QUANTENNA COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
_____________________________________
Delaware
 
33-1127317
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
1704 Automation Parkway
San Jose, California 95131
(Address of principal executive offices, including zip code)

(669) 209-5500
(Registrant’s telephone number, including area code)


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  ☐

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes  x  No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨  
Non-accelerated filer
x   (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of November 3, 2017 , 35,220,966 shares of the registrant’s common stock, $0.0001 par value, were outstanding.

 



Table of Contents

TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about our:
ability to design and develop Wi-Fi solutions that achieve market acceptance;
ability to innovate new leading-edge Wi-Fi solutions and bring them to market in a timely manner;
ability to attract and retain customers;
ability to attract and maintain relationships with service providers;
ability to maintain an adequate rate of revenue growth;
ability to expand into new Wi-Fi market segments and additional markets;
ability to achieve design wins and convert design wins into production volume sales;
future financial and results of operations;
expectations regarding our industry and potential markets;
beliefs and objectives for our business plan and anticipated future operations;
beliefs associated with the use of our solutions;
ability to meet customer requirements;
ability to further penetrate our existing customer base;
ability to further develop strategic relationships;
expectations concerning additional purchase orders by existing customers;
ability to maintain our competitive technological advantages against existing competitors and new entrants in our industry;
the effects of increased competition in our market and our ability to compete effectively;
ability to timely and effectively scale and adapt our existing technology;
ability to manage our international operations;
cost of revenue, including changes in costs associated with production, manufacturing and customer support;
operating expenses, including changes in research and development, sales and marketing, and general and administrative expenses;
anticipated income tax rates;
costs associated with defending intellectual property infringement and other claims;
ability to maintain, protect, and enhance our brand and intellectual property;
expectations concerning relationships with third parties, including manufacturing partners;
economic and industry trends or trend analysis;
the attraction and retention of qualified employees and key personnel; and
future acquisitions of or investments in complementary companies, products or technologies.

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We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
 
Quantenna Communications, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
(Unaudited)
 
October 1,
2017
 
January 1,
2017
 
 
 
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
38,844

 
$
117,045

Marketable securities
88,022

 

Accounts receivable
22,820

 
14,480

Inventory
23,700

 
15,820

Prepaid expenses and other current assets
2,444

 
2,470

Total current assets
175,830

 
149,815

Property and equipment, net
11,215

 
4,742

Intangible assets, net
3,259

 

Other long-term assets
1,037

 
232

Total assets
$
191,341

 
$
154,789

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
12,918

 
$
7,776

Accrued liabilities and other current liabilities
27,941

 
11,801

Long-term debt, current portion
2,487

 
2,257

Total current liabilities
43,346

 
21,834

Long-term debt
1,900

 
3,680

Other long-term liabilities
3,413

 
527

Total liabilities
48,659

 
26,041

Commitments and contingencies (see Note 6)

 

Stockholders’ equity

 

Common stock: $0.0001 par value, 1,000,000,000 shares authorized at October 1, 2017 and January 1, 2017, 35,084,934 and 33,076,150 shares issued and outstanding at October 1, 2017 and January 1, 2017, respectively
3

 
3

Additional paid-in capital
302,240

 
290,319

Accumulated other comprehensive loss
(20
)
 

Accumulated deficit
(159,541
)
 
(161,574
)
Total stockholders’ equity
142,682

 
128,748

Total liabilities and stockholders’ equity
$
191,341

 
$
154,789

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Quantenna Communications, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)



 
Three Months Ended
 
Nine Months Ended
 
October 1,
2017
 
September 25,
2016
 
October 1,
2017
 
September 25,
2016
 
 
 
 
 
 
 
 
Revenue
$
50,108

 
$
34,105

 
$
135,084

 
$
91,577

Cost of revenue
25,591

 
17,247

 
68,212

 
46,452

Gross profit
24,517

 
16,858

 
66,872

 
45,125

Operating expenses:
 
 
 
 
 
 
 
Research and development
15,011

 
11,162

 
43,699

 
32,913

Sales and marketing
3,363

 
2,172

 
9,553

 
5,571

General and administrative
3,735

 
3,248

 
11,231

 
7,802

Total operating expenses
22,109

 
16,582

 
64,483

 
46,286

Income (loss) from operations
2,408

 
276

 
2,389

 
(1,161
)
Interest expense
(103
)
 
(189
)
 
(442
)
 
(414
)
Other income (expense), net
223

 
(52
)
 
610

 
(300
)
Income (loss) before income taxes
2,528

 
35

 
2,557

 
(1,875
)
Benefit (provision) for income taxes
274

 
(14
)
 
(470
)
 
(52
)
Net income (loss)
$
2,802

 
$
21

 
$
2,087

 
$
(1,927
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.08

 
$
0.02

 
$
0.06

 
$
(1.84
)
Diluted
$
0.07

 
$
0.00

 
$
0.05

 
$
(1.84
)
Weighted average shares used to compute basic and diluted net income (loss) per share:
 
 
 
 
 
 
 
Basic
34,734

 
1,157

 
33,907

 
1,048

Diluted
38,525

 
29,974

 
38,419

 
1,048

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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Quantenna Communications, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)


 
Three Months Ended
 
Nine Months Ended
 
October 1,
2017
 
September 25,
2016
 
October 1,
2017
 
September 25,
2016
 
 
 
 
 
 
 
 
Net income (loss)
$
2,802

 
$
21

 
$
2,087

 
(1,927
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale marketable securities
12

 

 
(20
)
 

Comprehensive income (loss)
$
2,814

 
$
21

 
$
2,067

 
$
(1,927
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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Quantenna Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)



 
Nine Months Ended
 
October 1,
2017
 
September 25,
2016
Cash flows from operating activities
(in thousands)
Net income (loss)
$
2,087

 
$
(1,927
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 
 
Depreciation and amortization
1,566

 
880

Stock-based compensation expense
7,447

 
2,224

Accretion of discount on investments
93

 

Non-cash interest expense, net
254

 
140

Change in fair value of convertible preferred stock warrants liability

 
109

Changes in assets and liabilities:

 
 
Accounts receivable
(8,340
)
 
(1,589
)
Inventory
(7,880
)
 
(2,861
)
Prepaid expenses and other current assets
(22
)
 
(283
)
Deferred rent and other assets
(790
)
 
16

Accounts payable
5,119

 
(1,136
)
Accrued liabilities and other current liabilities
14,660

 
6,136

Net cash provided by operating activities
14,194

 
1,709

Cash flows from investing activities

 
 
Purchase of property and equipment
(6,961
)
 
(1,621
)
Purchase of marketable securities
(104,044
)
 

Proceeds from sales of marketable securities
3,670

 

Maturities of marketable securities
12,239

 

Restricted cash

 
(1,559
)
Net cash used in investing activities
(95,096
)
 
(3,180
)
Cash flows from financing activities

 
 
Proceeds from issuance of common stock
4,553

 
785

Payments of offering costs
(96
)
 
(881
)
Proceeds from revolving line of credit, net of fees paid

 
2,950

Repayment of revolving line of credit

 
(3,000
)
Proceeds from issuance of long-term debt, net of fees paid

 
3,854

Repayments of long-term debt
(1,756
)
 
(3,265
)
Net cash provided by financing activities
2,701

 
443

Net decrease in cash and cash equivalents
(78,201
)
 
(1,028
)
Cash and cash equivalents

 
 
Beginning of period
117,045

 
18,850

End of period
$
38,844

 
$
17,822

Supplemental disclosure of cash flow information

 
 
Interest paid during the period
$
342

 
$
419

Income taxes paid during the period
$
746

 
$
87

Supplemental disclosure of non-cash investing and financing activities

 
 
Unpaid offering costs
$
254

 
$
1,396

Purchases of property and equipment included in accounts payable and accrued liabilities and other current liabilities
$
280

 
$
18

Issuance of warrants in conjunction with the execution of debt agreement
$

 
$
96

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

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Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


 
1.      The Company and Summary of Significant Accounting Policies
Quantenna Communications, Inc. (the “Company”) was incorporated in the State of Delaware on November 28, 2005. The Company designs, develops and markets advanced high-speed wireless communication solutions enabling wireless local area networking. The Company’s wireless communication solutions deliver high performance, speed, and reliability for wireless networks and devices.
Reporting Calendar
The Company prepares financial statements on a 52- or 53-week fiscal year that ends on the Sunday closest to December 31. Fiscal 2017 will have 52 weeks and fiscal 2016 had 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. Fiscal 2017 will end on December 31, 2017.
Initial Public Offering
On October 27, 2016, the Company’s registration statement on Form S-1 relating to its initial public offering (“IPO”) of its common stock was declared effective by the U.S. Securities and Exchange Commission (“SEC”) and the shares of its common stock began trading on the NASDAQ Global Select Market on October 28, 2016. The public offering price of the shares sold in the IPO was $16.00 per share. The IPO closed on November 2, 2016 and a second close occurred on November 25, 2016 , pursuant to which the Company sold 6,775,466 shares of common stock, including the sale of 75,466 shares of common stock to the underwriters upon their exercise of their option to purchase additional shares. The Company received net proceeds of approximately $97.4 million , after underwriting discounts, commissions and offering expenses. Immediately prior to the consummation of the IPO, all outstanding shares of convertible preferred stock and preferred stock warrants were converted into common stock and common stock warrants, respectively.
Unaudited Interim Financial Information
The accompanying interim condensed consolidated financial statements and related disclosures are unaudited and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the results of operations for the periods presented. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“US GAAP”). The condensed consolidated results of operations for the three and nine months ended October 1, 2017  are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2017 filed with the SEC on March 1, 2017 (“2016 Annual Report on Form 10-K”).
Use of Estimates
Preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting periods covered by the financial statements and accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Significant Accounting Policies
During the three and nine months ended October 1, 2017 , there have been no changes in our significant accounting policies as described in the Company’s 2016 Annual Report on Form 10-K, except as discussed below:



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Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Stock-based compensation
The Company measures and recognizes compensation expense for all stock-based awards made to employees, directors and non-employees, based on estimated fair values recognized using the straight-line method over the requisite service period.
On January 1, 2017, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . Under this guidance, the Company elected the option to no longer apply a forfeiture rate to the stock-based compensation expense, but to record forfeitures when they occur, and, as a result, under the modified retrospective method of adoption the Company recorded an immaterial cumulative effect adjustment of $54,000 to the opening accumulated deficit on January 2, 2017.
Marketable Securities
Marketable securities consist primarily of highly liquid investments with maturities of greater than 90 days when purchased. We generally classify our marketable securities at the date of acquisition as available-for-sale. These securities are reported at fair value with the related unrealized gains and losses included in " Accumulated other comprehensive loss ", a component of stockholders’ equity, net of tax. Any unrealized losses which are considered to be other-than-temporary impairments are recorded in " Other income (expense), net " in the Condensed Consolidated Statements of Operations. Realized gains (losses) on the sale of marketable securities are determined using the specific-identification method and recorded in " Other income (expense), net " in the Consolidated Statements of Operations.
All of our available-for-sale investments are subject to a periodic impairment review. We record a charge to earnings when a decline in fair value is significantly below cost basis and judged to be other-than-temporary, or have other indicators of impairments. If the fair value of an available-for-sale investment is less than its amortized cost basis, an other-than-temporary impairment is triggered in circumstances where (1) we intend to sell the instrument, (2) it is more likely than not that we will be required to sell the instrument before recovery of its amortized cost basis or (3) a credit loss exists where we do not expect to recover the entire amortized cost basis of the instrument. If we intend to sell or it is more likely than not that we will be required to sell the available-for-sale investment before recovery of its amortized cost basis, we recognize an other-than temporary impairment charge equal to the entire difference between the investment's amortized cost basis and its fair value.
Intangible Assets
On September 29, 2017, the Company entered into a three -year software license contract with Cadence Design Systems, Inc. (“Cadence”), a related party, for the use of various Engineering Design Aid (“EDA”) software tools used for its research and development efforts. The license payments will be made and amortized over 12 quarterly periods amounting to approximately $3.3 million . In addition, the Company also contracted with Cadence for ongoing maintenance support which will be recognized ratably over the contractual term and amount to approximately $1.2 million The Company has classified these licenses as definite long-lived intangible assets in its Condensed Consolidated Balance Sheets as of October 1, 2017 .
Definite long-lived intangible assets consist of software licenses which are recorded based on the total contractual price. Such assets are amortized over its contractual lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that such assets are not recoverable, an impairment charge is recognized for the amount by which the carrying amount of such assets exceeds their fair values. There was no impairment of definite long-lived intangible assets for any periods presented.
2.      Recent Accounting Pronouncements
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU No 2017-09”). The amendments in ASU No. 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU No. 2017-09 is effective for the Company for annual and interim reporting periods beginning January 1, 2018. Early adoption of ASU No. 2017-09 is permitted, including adoption in any interim period, and the standard should be applied prospectively to an award modified on or after the adoption date. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

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Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash , which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flow. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The new standard must be adopted retrospectively. The adoption of this standard is not expected to have a material impact on the Company’s consolidated statements of cash flows.
In October 2016, the FASB issued ASU No. 2016-17, Consolidation - Interests Held through Related Parties That Are under Common Control , to amend the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in the entity held through related parties that are under common control within the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory , which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year. The new standard must be adopted using a modified retrospective transition method which is a cumulative-effective adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments , ASU No. 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this standard is not expected to have a material impact on the Company’s consolidated statements of cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASC 842”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of their classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840 Leases . The standard is effective on January 1, 2019, with early adoption permitted. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities , which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU No. 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) , which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition . This ASU No. 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, FASB issued ASU No. 2015-14,  Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which effectively delayed the adoption date by one year, to an effective date for public entities for annual and interim

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Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

periods beginning after December 15, 2017. In March, April, May and December 2016, the FASB issued additional updates to the new revenue standard relating to reporting revenue on a gross versus net basis, identifying performance obligations and licensing arrangements, and narrow-scope improvements and practical expedients, respectively. The effective date of this additional update is the same as that of ASU No. 2014-09. The guidance permits the use of either a retrospective or cumulative effect transition method. The Company has not yet selected a transition method. The Company is still finalizing the analysis to quantify the adoption impact of the provisions of the new standard, but it does not currently expect it to have a material impact on its consolidated financial position or results of operations. Based on the evaluation of its current contracts and revenue streams, revenue will be recorded consistently under both the current and new standard. The FASB has issued, and may issue in the future, interpretive guidance which may cause the Company’s evaluation to change. The Company believes it is following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption effective the beginning of fiscal year 2018.
3.      Earnings Per Share
The following table summarizes the Company’s computation of basic and diluted net income (loss) per share attributable to common stockholders of the Company:
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2017
 
September 25,
2016
 
October 1,
2017
 
September 25,
2016
 
(in thousands, except per share data)
Net income (loss)
$
2,802

 
$
21

 
$
2,087

 
$
(1,927
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
34,780

 
1,227

 
33,960

 
1,175

Less: weighted average shares subject to repurchase due to early exercise
(46
)
 
(70
)
 
(53
)
 
(127
)
Weighted average shares used to compute basic net income (loss) per share
34,734

 
1,157

 
33,907

 
1,048

Dilutive effect of convertible preferred stock, warrants to purchase preferred stock, stock options, common stock warrants, ESPP and RSUs
3,791

 
28,817

 
4,512

 

Weighted average shares used to compute diluted net income (loss) per share
38,525

 
29,974

 
38,419

 
1,048

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.08

 
$
0.02

 
$
0.06

 
$
(1.84
)
Diluted
$
0.07

$
0.00

 
$
0.05

 
$
(1.84
)

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Table of Contents
Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following potentially dilutive securities outstanding at the end of the periods have been excluded from the computation of diluted shares outstanding as the effect would have been anti-dilutive:
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2017
 
September 25,
2016
 
October 1,
2017
 
September 25,
2016
 
(in thousands)
Convertible preferred stock (as-converted)

 
24,790

 

 
24,790

Warrants to purchase convertible preferred stock

 

 

 
39

Warrants to purchase common stock

 

 

 
439

Restricted Stock Units (“RSUs”)
104

 

 
881

 

Options to purchase common stock
672

 
1,625

 
672

 
6,640

Total
776

 
26,415

 
1,553

 
31,908

4.      Balance Sheets Components
Marketable Securities
Marketable securities at October 1, 2017 consisted of the following:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
(in thousands)
Corporate debt securities
$
81,438

 
$
19

 
$
(36
)
 
$
81,421

Government debt securities
6,604

 

 
(3
)
 
6,601

 
$
88,042

 
$
19

 
$
(39
)
 
$
88,022

The contractual maturities of marketable securities as of October 1, 2017 were as follows:
 
Amortized Cost
 
Fair Value
 
(in thousands)
Due in one year or less
$
40,663

 
$
40,652

Due after one year to five years
47,379

 
47,370

 
$
88,042

 
$
88,022

There were no marketable securities as of January 1, 2017 .







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Table of Contents
Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Property and Equipment, Net
Property and equipment, net consisted of the following:
 
October 1,
2017
 
January 1,
2017
 
(in thousands)
Computer and lab equipment
$
13,342

 
$
9,748

Computer software
795

 
625

Furniture and fixtures
203

 
136

Leasehold improvements
342

 
218

Sub-total
14,682

 
10,727

Accumulated depreciation and amortization
(7,550
)
 
(5,985
)
Net long-lived assets
$
7,132

 
$
4,742

Construction-in-progress
4,083

 

Total
$
11,215

 
$
4,742

Depreciation and amortization expense related to property and equipment was $0.5 million and $0.3 million , respectively, for the three months ended October 1, 2017 and September 25, 2016 , and $1.6 million and $0.9 million , respectively, for the nine months ended October 1, 2017 and September 25, 2016 .
Inventory
Inventory consisted of the following:
 
October 1,
2017
 
January 1,
2017
 
(in thousands)
Raw materials
$
17,478

 
$
9,067

Work in progress
2,626

 
1,128

Finished goods
3,596

 
5,625

 
$
23,700

 
$
15,820

Accrued Liabilities and Other Current Liabilities
Accrued liabilities and other current liabilities consisted of the following:
 
October 1,
2017
 
January 1,
2017
 
(in thousands)
Accrued payroll and related benefits
$
3,421

 
$
2,842

Accrued customer rebates
12,452

 
3,026

Accrual for inventory purchases
1,913

 
1,353

Accrued expenses
6,763

 
2,952

ESPP employee contributions
1,719

 
665

Other
1,673

 
963

 
$
27,941

 
$
11,801


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Table of Contents
Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

5.      Fair Value Measurements
The Company determines fair value measurements used in its consolidated financial statements based upon the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (ii) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1:
Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2:
Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3:
Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
We obtain the fair value of our Level 1 investments in money market funds, at the expected market price. These investments are expected to maintain a net asset value of $1 per share.

We determine the fair value of our Level 2 financial instruments from third-party asset managers, custodian banks, and the accounting service providers.

We classify financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable, either directly or indirectly. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. There were no assets or liabilities in Level 3 of the fair value hierarchy and there were no transfers between Level 1 and Level 2 categories during any of the periods presented.

We utilize the market approach to measure the fair value of our fixed income securities. The market approach is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The fair value of our fixed income securities is obtained using readily-available market prices from a variety of industry standard data providers, large financial institutions and other third-party sources for the identical underlying securities.

Assets Measured at Fair Value on a Recurring Basis

We measure and report certain assets at fair value at October 1, 2017 on a recurring basis as follows:

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Table of Contents
Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 
Fair Value as of October 1, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
(in thousands)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
4,173

 
$

 
$

 
$
4,173

Corporate debt securities

 
5,989

 

 
5,989

Government debt securities

 
2,299

 

 
2,299

Total cash equivalents
4,173

 
8,288

 

 
12,461

Marketable Securities:
 
 
 
 
 
 

Corporate debt securities

 
81,421

 

 
81,421

Government debt securities

 
6,601

 

 
6,601

Total marketable securities

 
88,022

 

 
88,022

 
 
 
 
 
 
 
 
Total cash equivalents and marketable securities
$
4,173

 
$
96,310

 
$

 
$
100,483


The Level 1 assets consist of money market funds. The Level 2 assets consist of available-for-sale investment portfolio, which are valued utilizing a market approach. At January 1, 2017 , highly liquid money market funds of $100.9 million , respectively, were valued using Level 1 of the fair value hierarchy, quoted prices in active markets for identical assets and were included in cash equivalents.
Common Stock Warrants
As of October 1, 2017 , warrants issued and outstanding were as follows:
 
Date of Issuance
 
Number of Warrants
 
Exercise Price
 
Expiration Date
 
 
 
 
 
 
 
 
Common stock warrants
September 2015
 
83,006

 
$
2.50

 
February 2019
As of January 1, 2017 , warrants issued and outstanding were as follows:
 
Date of Issuance
 
Number of Warrants
 
Exercise Price
 
Expiration Date
 
 
 
 
 
 
 
 
 
 
 
Common stock warrants
October 2013
 
38,748

 
$
7.74

 
October 2023
Common stock warrants
September 2015
 
283,005

 
$
2.50

 
February 2019
Common stock warrants
February 2016
 
20,251

 
$
4.00

 
February 2019
Common stock warrants
February 2016
 
9,000

 
$
0.05

 
January 2018
Common stock warrants
May 2016
 
126,400

 
$
4.00

 
May 2026
During the nine months ended October 1, 2017 , common stock warrants issued in a) October 2013 to a lender of the Company at $7.74 per share was exercised, b) September 2015 to an investor of the Company was partially exercised at $2.50 per share, c) February 2016 at $4.00 per share was exercised, d) February 2016 to a service provider of the Company were exercised at $0.05 per share, and e) May 2016 to a lender of the Company at $4.00 per share were partially exercised and the remainder were canceled.

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Table of Contents
Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

6.      Commitments and Contingencies
Leases
The Company conducts its operations using leased office facilities in various locations. The following is a schedule of future minimum lease payments under operating leases as of October 1, 2017 (in thousands):
2017 (remaining three months)
$
205

2018
2,028

2019
2,261

2020
2,036

2021
1,628

2022 and beyond
3,728

Total minimum lease payments
$
11,886

The Company leases office space under arrangements expiring through 2026. Rent expense for the three months ended October 1, 2017 and September 25, 2016 was $0.4 million and $0.3 million respectively. Rent expense for the nine months ended October 1, 2017 and September 25, 2016 was $1.2 million and $0.9 million , respectively.
In February 2017, the Company entered into a new lease agreement for its corporate headquarters located in San Jose, California consisting of approximately 84,000 square feet. The lease term is 76 months commencing on October 16, 2017 and expiring in 2024.
Purchase Commitments
The Company has purchase obligations of $30.0 million that are based on outstanding purchase orders as of October 1, 2017 , related to the fabrication of certain wafers for which production has started. These purchase orders are cancellable at any time, provided that the Company is required to pay all costs incurred through the cancellation date. Historically, the Company has rarely canceled these agreements once production has started. The Company did not otherwise have any outstanding non-cancellable purchase obligations as of October 1, 2017 .
Indemnification
In connection with the sale of its semiconductor products, the Company executes standard software license agreements allowing customers to use its firmware. Under the indemnification clauses of these license agreements, the Company agrees to defend the licensee against third-party claims asserting infringement by the Company’s products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the licensee, subject to certain restrictions and limitations. The Company has never incurred significant expense defending its licensees against third-party claims. Further, the Company has never incurred significant expense under its standard product or services performance warranties. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements at October 1, 2017 .
Commitments
In April 2012, an agreement was entered into with Joint Stock Company “RUSNANO” (formerly Open Joint Stock Company “RUSNANO”), which required the Company to form a wholly-owned subsidiary in the Russian Federation and to provide funding to the subsidiary in the three years following April 16, 2012. This wholly-owned subsidiary performs research and development activities for the Company. Funding means cash transfers to the subsidiary for equity investments, reimbursements of subsidiary operating expenses and Company expenses related to the subsidiary. RUSNANO also requires participation in subsidiary financial decisions.
In July 2014, the Company entered into an amended and restated letter agreement with RUSNANO pursuant to which the Company agreed, among other matters, to operate and fund its Russian operations in an aggregate amount of $13.0 million over

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Table of Contents
Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

six annual periods beginning on December 31, 2014. The annual funding requirements in period one to period six are $2.2 million , $1.7 million , $2.0 million , $2.2 million , $2.4 million , and $2.5 million , respectively. In the event that the Company fails to meet its funding obligations for any period, it will be required to pay RUSNANO a penalty fee of 10% on 80% of the difference between the funding obligation and the actual funding for that period, subject to a cure period of one calendar quarter after the applicable period funding deadline.
As of October 1, 2017 , the Company had met the minimum funding requirements and no penalty had been incurred.
Legal Matters
From time to time, the Company is a party to litigation and subject to claims incident to the ordinary course of business, including intellectual property claims, labor and employment claims, breach of contract claims, and other matters. Significant judgment is required when we assess the likelihood of any adverse judgments or outcomes to a potential claim or legal proceeding, as well as potential ranges of probable losses, and when the outcomes of the claims or proceedings are probable and reasonably estimable. Because of uncertainties related to these matters, we base our estimates on the information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation, and may revise our estimates. Any revisions in the estimates of potential liabilities could have a material impact on the Company’s results of operations, financial position, and cash flows.
In October 2016, Innovatio IP Ventures, LLC filed suit in the United States District Court for the Northern District of Illinois alleging infringement by the Company of nine expired U.S. patents. The complaint seeks unspecified damages. The lawsuit is in the early stages and the Company has not accrued for a loss relating to such matter because the Company believes that, although an unfavorable outcome may be possible, it is not considered at this time to be probable and the loss or range of loss is not reasonably estimable.
7.      Long-term Debt
Loan and Security Agreement
The Company’s Amended and Restated Loan and Security Agreement with Silicon Valley Bank (“SVB”) (the “SVB Loan and Security Agreement”) includes (i) term loans, (ii) revolving line of credit, and (iii) Mezzanine Loan. The term loans have interest at a floating rate per annum equal to prime plus 0.75% . The revolving line of credit has interest between 4.25% to 5.00% depending on the Company’s consolidated leverage ratio. The Mezzanine Loan remained unused by the Company and was canceled upon its expiration in May 2017.
The outstanding balance on the term loans was $4.4 million as of October 1, 2017 . The Company has an undrawn balance on the revolving line of credit of $20.0 million which can be drawn subject to 80% of eligible accounts receivable.
The agreement contains usual and customary events of default upon the occurrence of certain events, such as nonpayment of amounts due under the revolving line of credit or the term loans, violation of the restrictive covenants, violation of other contractual provisions, or a material adverse change in its business. The agreement includes customary administrative covenants, including a prohibition on declaring dividends, but does not include any financial maintenance or operating related covenants.
The SVB Loan and Security Agreement is collateralized by certain of the Company’s assets, including pledges of certain of the Company’s equity interests in its subsidiaries, receivables and inventory, subject to customary exceptions and limits. The SVB Loan and Security Agreement contains customary events of default upon the occurrence of certain events, such as nonpayment of amounts due under the revolving line of credit or the term loans, violation of restrictive covenants, violation of other contractual provisions, or a material adverse change in the Company’s business. In addition, the credit facilities prohibit the payment of cash dividends on the Company’s capital stock and also place restrictions on mergers, sales of assets, investments, incurrence of liens, incurrence of indebtedness and transactions with affiliates. The SVB Loan and Security Agreement has certain prepayment premium upon repayment before the maturity date.

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Table of Contents
Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

As of October 1, 2017 , future minimum payments for the long-term debt are as follows (in thousands):
 
Long-term debt
 
 
2017
$
694

2018
2,383

2019
1,618

Total minimum payments
4,695

Less: Amount representing interest
(185
)
Less: Amount representing closing and repayment fees
(210
)
Present value of minimum payments
4,300

Less: Unamortized debt discounts
(66
)
Plus: Accretion of closing and repayment fees
153

Long-term debt, net
4,387

Less: Long-term debt, current portion
(2,487
)
Non-current portion of long-term debt
$
1,900

8.      Stockholders’ Equity
Common Stock
The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 1,000,000,000 shares of $0.0001 par value common stock. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when and if declared by the board of directors, subject to the prior rights of holders of all classes of preferred stock outstanding. The Company has never declared any dividends.
The Company had reserved shares of common stock for issuance, on an as-converted basis, as follows:
 
October 1, 2017
 
 
Options issued and outstanding
5,445,007

RSUs issued and outstanding
888,359

Common stock warrants
83,006

Shares available for ESPP
1,835,341

Shares available for future stock awards
2,973,747

 
11,225,460

During the nine months ended October 1, 2017 , the Company granted 1,041,629 RSUs to employees and 516,750 options. There were no RSUs granted and 233,775 options granted during the nine months ended September 25, 2016 .
Options Subject to Repurchase
The Company has a right of repurchase with respect to unvested shares issued upon early exercise of options at an amount equal to the lower of (i) the exercise price of each restricted share being repurchased and (ii) the fair market value of such restricted share at the time the Company’s right of repurchase is exercised. The Company’s right to repurchase these shares lapses as to 1/36th of the total number of shares originally granted per month for 36 months . At October 1, 2017 , 44,000 shares remained subject to the Company’s right of repurchase.

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Table of Contents
Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The shares purchased by employees pursuant to the early exercise of stock options are not deemed, for accounting purposes, to be issued until those shares vest according to their respective vesting schedules. The cash received in exchange for unvested shares of early exercised stock options is recorded as an early exercise liability on the balance sheets and will be transferred to common stock and additional paid-in capital as such shares vest.
9.      Stock-based Compensation
Total stock-based compensation expense for employees and non-employees recognized in the condensed consolidated statements of operations was as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2017
 
September 25,
2016
 
October 1,
2017
 
September 25,
2016
 
(in thousands)
Cost of revenue
$
38

 
$
9

 
$
123

 
$
15

Research and development
1,367

 
231

 
3,986

 
454

Sales and marketing
416

 
60

 
1,179

 
120

General and administrative
948

 
734

 
2,159

 
1,635

Total stock-based compensation expense
$
2,769

 
$
1,034

 
$
7,447

 
$
2,224

The above stock-based compensation expense related to the following equity-based awards:
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2017
 
September 25,
2016
 
October 1,
2017
 
September 25,
2016
 
(in thousands)
Stock options
$
858

 
$
1,034

 
$
2,539

 
$
2,224

RSU awards
1,603

 

 
3,553

 

ESPP shares
308

 

 
1,355

 

Total stock-based compensation expense
$
2,769

 
$
1,034

 
$
7,447

 
$
2,224

10. Income Taxes
The Company recorded an income tax benefit of $0.3 million and a provision of $0.5 million for the three and nine months ended October 1, 2017 . The provision for income taxes consists primarily of alternative minimum tax and income taxes in the foreign jurisdictions in which we conduct business. We maintain a full valuation allowance for deferred tax assets, including net operating loss carry-forward and Research and Development credits. Income taxes recorded for the three and nine months ended September 25, 2016 were insignificant.
As of October 1, 2017 , based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be realized for federal and state purposes. Accordingly, management has applied a full valuation allowance against its federal and state net deferred tax assets at October 1, 2017 . Due to improvements in the U.S. operating results (over the past three years), management believes a reasonable possibility exists that, within the next year, sufficient positive evidence may become available to reach a conclusion that the valuation allowance against its federal and state net deferred tax assets will no longer be needed. A release of such valuation allowance could cause a material increase to income in the period such determination is made.
Under Internal Revenue Code (“IRC”) Section 382, our ability to utilize NOL carry-forwards or other tax attributes such as research tax credits, in any taxable year may be limited if we experience, or have experienced, an “ownership change”. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders, who own at least 5%

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Table of Contents
Quantenna Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

of our stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws.
We have completed an IRC Section 382 analysis through December 31, 2016 and determined that there was no significant limitation to the utilization of NOL or tax credit carryforwards before they expire. Since no deferred tax assets have been recognized on our balance sheet related to our NOLs and tax credits, as they are fully reserved by a valuation allowance, there was no impact to the tax provision.
11.      Employee Benefit Plans
Defined Contribution Plan
The Company adopted a 401(k) Plan that qualifies as a deferred compensation arrangement under Section 401 of the Internal Revenue Code. Under the 401(k) Plan, participating employees may defer a portion of their pretax earnings not to exceed the maximum amount allowable. The 401(k) Plan permits the Company to make matching contributions and profit sharing contributions to eligible participants. The Company has made matching contributions of $0.4 million for the nine months ended October 1, 2017 .
12.      Related Party Transactions
Purchases from Cadence Design Systems, Inc.
Lip-Bu Tan, a member of the Company’s board of directors since June 2015, is the President and Chief Executive Officer of Cadence, an electronic design automation software and engineering services company. Since 2012, the Company has paid licensing fees for digital and analog layout tools and simulation tools from Cadence in the ordinary course of business. The Company incurred fees of approximately $2.0 million and $0.6 million under the terms of this arrangement during the three months ended October 1, 2017 and September 25, 2016 , respectively, and approximately $3.7 million and $1.2 million during the nine months ended October 1, 2017 and September 25, 2016 , respectively.
On September 29, 2017, the Company entered into a three -year software license contract with Cadence for the use of various EDA software tools used for its research and development efforts. The license payments will be made and amortized over 12 quarterly periods amounting to approximately $3.3 million . In addition, the Company also contracted with Cadence for ongoing maintenance support which will be recognized ratably over the contractual term and amount to approximately $1.2 million . The Company has classified these licenses as definite long-lived intangible assets in its Condensed Consolidated Balance Sheets as of October 1, 2017 .


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Table of Contents

Item 2. 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 our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 1, 2017 (“2016 Annual Report on Form 10-K”) and the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, those discussed in the section titled “Risk Factors” and those included elsewhere in this Quarterly Report on Form 10-Q.
Our Management’s discussion and analysis is organized as follows:
Overview. Discussion of our business and overall analysis of financial and other highlights affecting our Company.
Results of Operations. Analysis of our financial results comparing the third quarter and first nine months of 2017 to the corresponding periods in 2016.
Liquidity and Capital Resources. Analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and sources of liquidity.
Contractual Commitments. Contractual obligations and off-balance sheet arrangements as of October 1, 2017 .
Overview
We are a leader in the design, development, and marketing of advanced, high-speed wireless communication solutions enabling wireless local area networking. Our solutions are designed to deliver leading-edge Wi-Fi performance to support an increasing number of connected devices accessing a rapidly growing pool of digital content. We combine our wireless systems and software expertise with high-performance radio frequency, mixed-signal and digital semiconductor design skills to provide highly-integrated solutions to our customers.
Our solutions portfolio is currently comprised of Institute of Electrical and Electronics Engineers (“IEEE”) Wi-Fi standard radio frequency and digital baseband semiconductor solutions. These semiconductors are typically sold together as a chipset combined with software and system-level reference designs that constitute a highly integrated Wi-Fi solution.
We sell our Wi-Fi solutions directly to global original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”) and contract manufacturers (“CMs”) that serve the end markets we address. In addition, we sell our Wi-Fi solutions to third-party distributors who, in turn, resell to OEMs, ODMs and CMs. OEMs incorporate our solutions into their products, which are then sold to their own customers, such as service providers, retailers, enterprises, small and medium businesses, and retail consumers. To date, we have primarily addressed the service provider market for home networking applications, including home gateways, repeaters, and set-top boxes. We are also addressing additional end markets, with solutions for (i) retail OEMs for home networking as well as small and medium business applications (e.g., routers and repeaters), (ii) enterprise OEMs for enterprise networking applications (e.g., access points), and (iii) potential future opportunities from consumer electronics OEMs for consumer applications, including wireless streaming of audio and video, wireless TVs, and wireless speakers. We believe the life cycles of our customers’ products can range from approximately one year to five years or more depending on the end market.
Some OEMs purchase our Wi-Fi solutions directly from us and use them in the design and manufacture (directly or through their third-party contract manufacturers) of their own products. Other OEMs utilize ODMs to design and build subsystem products incorporating our Wi-Fi solutions, which the OEMs then purchase from the ODM and incorporate into the OEM products. Accordingly, we ship our Wi-Fi solutions either directly to the OEM, its contract manufacturer, or its ODM, based on the requirements of each OEM. However, we maintain close relationships with the target OEM to monitor OEM end-market demand as the initial Wi-Fi solution design win is generally awarded by the OEM.
We derive the substantial majority of our revenue from the sale of our Wi-Fi solutions. In addition, historically we also derived a portion of our revenue from a limited number of licensing and non-recurring arrangements. While licensing and non-recurring arrangements are not part of primary focus, we may enter into such arrangements on an opportunistic basis from time to time.

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Table of Contents

The following table shows OEM, ODM and third-party distributor customers from which we derived 10% or more of our revenue:
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2017
 
September 25,
2016
 
October 1,
2017
 
September 25,
2016
 
(Percentage of revenue)
Customer:
 
 
 
 
 
 
 
A
*
 
18%
 
*
 
17%
B
18%
 
*
 
15%
 
12%
C
*
 
*
 
*
 
12%
I
10%
 
*
 
*
 
*
________________________
*
Customer percentage of revenue was less than 10%.
Almost all of our revenue is generated outside the United States for the three and nine months ended October 1, 2017 and September 25, 2016 , based on ship-to destinations, and we anticipate that the vast majority of our shipments will continue to be delivered outside the United States. Although almost all shipments are delivered outside the United States, we believe that a significant number of the Wi-Fi products that include our semiconductors, such as access points, gateways, set-top boxes and repeaters, are ultimately directed and sold by OEM customers to service providers in North America and Western Europe. To date, all of our revenue has been denominated in U.S. dollars.
We use a fabless semiconductor business model and rely on third-party contractors to fabricate, assemble, and test our chipset designs. We purchase silicon wafers from Taiwan Semiconductor Manufacturing Company Limited (“TSMC”), our foundry partner, which are then shipped to third-party contractors who assemble and test our chipsets. Our inventory is distributed from the third-party contractors and a contracted warehouse in Taiwan. We believe this outsourced manufacturing approach gives us access to the best available process technology, reduces our capital requirements, and allows us to focus our resources on the design, development, marketing, sales, and customer integration of our Wi-Fi solutions. We typically receive purchase orders 12 to 14 weeks ahead of our customers’ desired delivery date, and we build our inventory primarily on the basis of purchase orders from our customers.
Third Quarter 2017 and Recent Highlights
Revenue increased $16.0 million , or 47% , to $50.1 million for the three months ended October 1, 2017 and net income increased by $2.8 million for the same period when compared to the three months ended September 25, 2016 . Revenue increased $43.5 million , or 48% , to $135.1 million for the nine months ended October 1, 2017 and net income increased $4.0 million , or 208% , to $2.1 million from a net loss of $1.9 million compared to the nine months ended September 25, 2016 .
Gross profit increased $7.7 million , or 45% , to $24.5 million in the three months ended October 1, 2017 and increased $21.7 million , or 48% to $66.9 million in the nine months ended October 1, 2017 when compared to the corresponding periods in 2016 .
The overall increase in revenue for the above periods was primarily due to increase in sales of our Wi-Fi solutions driven by higher unit volumes on substantially flat ASPs. The overall increase in gross profit for the above periods was primarily due to lower unit costs as well as a mix shift towards higher margin 802.11ac Wi-Fi solutions.
We generated cash from operations of $14.2 million for the nine months ended October 1, 2017 and ended the third quarter of 2017 with cash and cash equivalents and marketable securities of $126.9 million , up 8% from January 1, 2017 . At October 1, 2017 , we had approximately $4.4 million of debt, down 26% from January 1, 2017 as a result of our repayment of the debt. See "Liquidity and Capital Resources" below for further details.
As of October 1, 2017 , we had 372 employees, up 7% from 348 employees at the end of the second quarter of 2017 , and up 14% from 325 employees at the end of the fourth quarter of 2016. We expect our headcount to continue to grow as we scale our business.

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In the first nine months of fiscal 2017 , we announced the QSR5G-AX solution which supports eight total streams of 802.11ax: four streams in the 5GHz band and four streams in the 2.4GHz band; announced a smart Wi-Fi self-optimized managed network solution comprised of SONiQ, an open software framework that unites various network devices regardless of Wi-Fi chipset, coupled with a hardware reference design for third-party compatibility to operate seamlessly; announced the industry's first carrier-grade full-duplex Wi-Fi range extender mesh network solution with Greenwave Systems, Inc.; announced a high-end Gigabit Passive Optical Networks gateway product with ZTE Corporation featuring Quantenna’s award-winning 4x4 802.11ac Wave 2 QSR1000 chipset; shipped our 100 millionth chip, a major milestone that culminates over a decade of intense development effort led by our world-class engineering, sales and operations teams; announced a partnership with AirTies Wireless Networks to offer Internet Service Providers a complete turnkey managed Wi-Fi mesh solution with new classes of differentiated, premium Wi-Fi services; announced the Spartan AP Booster which offers service providers a cost-effective Wi-Fi performance upgrade for their existing subscriber legacy home gateways without replacing or upgrading the entire gateway; entered the over-the-top (“OTT”) set-top box (“STB”) market with the Zero Memory family of client products for STB and OTT applications; announced that Technicolor has adopted the QV860 chipset in its OWA0130 dual-band multi-function extender, augmenting the coverage of Wi-Fi gateways with a mesh network offering seamless connectivity; demonstrated with Cortina Access a Dual 4x4 802.11ax 10G fiber/Passive Optical Networks gateway reference platform at the 2017 International Broadcasting Convention in Amsterdam; and announced a partnership with SoftAtHome to offer its Smart Wi-Fi software availability on the QV860 chipset.
We plan to continue to introduce leading edge premium Wi-Fi solutions and related technologies that increase our addressable market and expand our selling opportunities into the strategic customers which we serve.
Factors Affecting Our Performance
Design Wins with Existing and Prospective Service Providers
Existing and prospective service providers that we serve through our OEM and ODM customers tend to be global enterprises that are continuously working with their partners to deploy new products. We believe our Wi-Fi solutions enable service providers to differentiate their products and services and drive the next upgrade cycles in their end market to ultimately gain market share. We work closely with service providers to assist in the development of their product specifications and designs. We compete to secure service provider design wins through an extended sales cycle, which can often last six to 18 months. After a design win is achieved, we continue to work closely with the service providers to assist them and their OEMs and ODMs throughout their product development and early deployment, which can often last six to 18 months. We believe our design win performance is dependent on the investments we make in research and development and sales and marketing to bring innovative Wi-Fi solutions to our existing and new markets and develop close relationships with our customers and service providers. As a result, we expect our research and development and sales and marketing expenses to increase in absolute dollars as we continue to grow our business.
Because of this extended sales cycle, our revenue is highly dependent upon the ongoing achievement of service provider design wins. We expect future revenue to depend upon sales to service providers with whom we have existing relationships as well as our ability to garner design wins with new service providers with whom we currently do not have relationships or sales. Further, because we expect revenue relating to our earlier generation solutions to decline in the future, we consider these design wins critical to our future success.
Product Life Cycle of our Customers and Service Providers; Expanding into Other End Markets
In the service provider home networking market, once service providers select our Wi-Fi solutions for integration into their products, we work with our OEM and ODM customers to monitor all phases of the product life cycle, including the initial design phase, prototype production and volume production. Our service providers’ product life cycles typically range from three to five years or more, based on product features, size of subscriber base, and roll-out plans. In contrast, wireless products sold in the retail or consumer electronics end markets have shorter life cycles than those sold into the service provider home networking market. In the retail or consumer electronics markets, a wireless product typically has a product life cycle of one to two years.
Currently, the majority of our revenue is derived from sales to OEMs and ODMs serving the service provider home networking market, with relatively longer sales cycles, longer customer product development cycles and longer time to shipment, but also with longer product life cycles. However, as we expand into additional end markets, such as retail, small and medium business, enterprise or consumer electronics, we expect revenue from such markets to increase as a proportion of our revenue

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over time. The shorter product life cycles associated with such additional end markets typically require greater frequency of design wins, and they may also result in faster time to shipment of our Wi-Fi solutions.
Sales Volume and Customer Concentration
A typical design win can generate a wide range of sales volumes for our Wi-Fi solutions, depending on the end market demand for our customers’ products. Such demand depends on several factors, including end market size, size of the service providers, product price and features, and the ability of customers and service providers to sell their products into their end markets. As such, some design wins result in orders and significant revenue shortly after the design win is awarded and other design wins do not result in significant orders and revenue for several months or longer after the initial design win, if at all. As a result, an increase or decrease in the number of design wins we achieve on a quarterly or annual basis does not necessarily correlate to a likely increase or decrease in revenue in the same or immediately succeeding quarter or year. Nonetheless, design wins are critical to our continued sales, and we believe that the collective impact of design wins correlates to our overall revenue growth over time.
Our customers and service providers often share their product development schedules with us, including the projected launch dates of their wireless product offerings. Once customers and service providers are in production, they generally will provide nine to 12-month forecasts of expected demand. However, they may change their purchase orders and demand forecasts at any time with limited or no prior notice.
We derive a significant portion of our revenue from a small number of OEMs and ODMs, and substantially all of our revenue to date has been generated by sales of our solutions to OEMs and ODMs serving the service provider market for home networking. While we strive to expand and diversify our customer base and we expect our customer concentration to decline over time, we anticipate that sales to a limited number of customers will continue to account for a significant percentage of our revenue in the foreseeable future. In light of this customer and service provider concentration, our revenue is likely to continue to be materially impacted by the purchasing decisions of our largest customers and the service providers they serve.
Wi-Fi Solutions Pricing, Cost and Gross Margin
Our average selling price (“ASP”) can vary by product mix, customer mix and end market, due to end market-specific characteristics such as supply and demand, competitive landscape, the maturation of Wi-Fi solutions launched in prior years and the launch of new Wi-Fi solutions. Our gross margin depends on a variety of factors, including the sales volume, features, price, and manufacturing costs of our Wi-Fi solutions. We make continuous investments in our solutions to enhance existing and add new features, maintain our competitiveness, minimize ASP erosion, and reduce the cost of our solutions.
As we rely on third-party contractors for the fabrication, assembly and testing of our chipsets, we work closely with these third-parties to improve the manufacturability of our chipsets, lower wafer cost, enhance yields, lower assembly and test costs, and improve quality.
In general, our latest generation solutions have higher prices compared to our prior generation solutions. As is typical in the semiconductor industry and consistent with our historical trends, we expect the ASPs of our solutions to decline as those solutions mature and unit volumes increase. These ASP declines often coincide with improvements in manufacturing yields and lower wafer, assembly and testing costs, which may offset some or all of the margin reduction that results from lower ASPs.
Components of Results of Operations
Revenue
Our revenue is generated primarily from sales of our Wi-Fi solutions to our OEM and ODM customers, net of accruals for estimated sales rebates. In addition, we sell our Wi-Fi solutions to third-party distributors who in turn resell to OEMs and ODMs. Our Wi-Fi solutions are integrated into OEM products, such as gateways, set-top boxes, repeaters or routers, which are then sold primarily to service providers. Our sales have historically been made on the basis of purchase orders against our standard terms and conditions, rather than long-term agreements and revenue is recognized on a sell-in basis. We account for sales rebates by recording reductions to revenue in the same period that the related revenue is recorded. The amount of these reductions is based upon the terms agreed to with the customers. Sales of our Wi-Fi solutions fluctuate primarily based on competition, sales volume, customer inventory and price. We expect our revenue to fluctuate from quarter to quarter due to a variety of factors,

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such as customer product development and deployment cycles and the purchasing patterns of our customers and third-party distributors.
During the nine months ended October 1, 2017 and September 25, 2016 , we derived revenue from a limited number of licensing and non-recurring arrangements. These arrangements are no longer active. While licensing and non-recurring arrangements are not part of primary focus, we may enter into such arrangements on an opportunistic basis from time to time.

Cost of Revenue
We utilize third-party contractors for the production of the chipsets included in our Wi-Fi solutions. Cost of revenue primarily relates to the purchase of silicon wafers from our third-party foundry, and costs associated with assembly, testing and inbound and outbound shipping of our wafers and chipsets. After we purchase wafers from our third-party foundry, we bear the manufacturing yield risk related to assembling and testing these wafers into chipsets, which can result in benefit or expense recorded in cost of revenue. Cost of revenue also includes lower of cost or market adjustments to the carrying value of inventory, scrap and inventory obsolescence, royalty costs, and any accruals for warranty obligations, which we record when revenue is recognized. Additionally, cost of revenue includes manufacturing overhead expense, such as personnel cost which primarily consist of compensation costs related to employees, consultants and contractors, including salaries, sales commissions, bonuses, stock-based compensation and other employee benefits, depreciation expense, and allocated administrative costs associated with supply chain management and quality assurance activities as well as property insurance premiums.
We seek to negotiate price reductions, which historically has included rebates, from our third-party foundry on the purchase of silicon wafers upon achieving certain volume targets. Such rebates are recorded as a reduction of inventory cost and are recognized as a reduction of cost of revenue. Because we do not have long-term, fixed supply agreements, our wafer costs are subject to changes based on the cyclical demand for semiconductors.
Operating Expenses
Our operating expenses consisted of research and development (“R&D”), sales and marketing (“S&M”) and general and administrative (“G&A”) expenses. Personnel costs are the largest component of operating expenses and primarily consist of compensation costs related to employees, consultants and contractors, including salaries, sales commissions, bonuses, stock-based compensation and other employee benefits. As we continue to grow our business, we expect operating expenses to increase in absolute dollars.
Research and Development. Our R&D expenses consisted primarily of personnel costs to support our R&D activities, including silicon design, software development and testing, and customers’ product development support and qualification. R&D expenses also included tape-out costs, which include layout services, mask sets, prototype wafers, mask set revisions, intellectual property license fees, and system qualification and testing incurred before releasing new semiconductor designs into production. In addition, R&D expenses included design software and simulation tools licenses, depreciation expense, and allocated administrative costs. All R&D costs are expensed as incurred.
Sales and Marketing. Our S&M expenses consisted primarily of personnel costs for our S&M activities, including pre-sales support. S&M expenses also included sales-based commissions we pay to independent sales representatives, public relations costs, trade show expenses, product marketing and communication, promotional activities, travel and entertainment costs and allocated administrative costs.
General and Administrative. Our G&A expenses consisted primarily of personnel costs for our administrative personnel in support of our infrastructure functions such as general management, finance, human resources, legal, facilities and information technology. G&A expenses also included professional services fees, insurance premiums, office equipment and supplies, depreciation expense and allocated administrative costs.
Interest Expense
Interest expense consists primarily of interest related to outstanding debt and amortization of debt discount.

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Other Income (Expense), Net
Other income (expense), net consists primarily of interest income from our cash equivalents portfolio and marketable securities, the effect of exchange rates on our foreign currency-denominated asset and liability balances and prior to our IPO, changes in the fair value of our convertible preferred stock warrants.
Provision for Income Taxes
Provision for income taxes consists primarily of alternative minimum tax and income taxes in the foreign jurisdictions in which we conduct business. We maintain a full valuation allowance for deferred tax assets, including net operating loss carry-forward and R&D credits. As of October 1, 2017 , based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be realized for federal and state purposes. Accordingly, management has applied a full valuation allowance against our federal and state net deferred tax assets at October 1, 2017 .
Results of Operations
The following tables set forth our results of operations for the periods presented, in dollars and as a percentage of our revenue:
 
Three Months Ended
 
October 1,
2017
 
September 25,
2016
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
 
 
 
 
(In thousands, except per share data)
Revenue
$
50,108

 
100.0
 %
 
$
34,105

 
100.0
 %
Cost of revenue (1)
25,591

 
51.1

 
17,247

 
50.6

Gross profit
24,517

 
48.9

 
16,858

 
49.4

Operating expenses (1)
 
 
 
 
 
 
 
Research and development
15,011

 
30.0

 
11,162

 
32.7

Sales and marketing
3,363

 
6.7

 
2,172

 
6.4

General and administrative
3,735

 
7.4

 
3,248

 
9.5

Total operating expenses
22,109

 
44.1


16,582

 
48.6

Income from operations
2,408

 
4.8

 
276

 
0.8

Interest expense
(103
)
 
(0.2
)
 
(189
)
 
(0.6
)
Other income (expense), net
223

 
0.4

 
(52
)
 
(0.1
)
Income before income taxes
2,528

 
5.0

 
35

 
0.1

Benefit (provision) for income taxes
274

 
0.5

 
(14
)
 

Net income
$
2,802

 
5.5
 %
 
$
21

 
0.1
 %
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.08

 
 
 
$
0.02

 
 
Diluted
$
0.07

 
 
 
$
0.00

 
 
Weighted average shares used to compute basic and diluted net income per share:
 
 
 
 
 
 
 
Basic
34,734

 
 
 
1,157

 
 
Diluted
38,525

 
 
 
29,974

 
 


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Nine Months Ended
 
October 1,
2017
 
September 25,
2016
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
 
 
 
 
(In thousands, except per share data)
Revenue
$
135,084

 
100.0
 %
 
$
91,577

 
100.0
 %
Cost of revenue
68,212

 
50.5

 
46,452

 
50.7

Gross profit
66,872

 
49.5

 
45,125

 
49.3

Operating expenses:
 
 
 
 
 
 
 
Research and development
43,699

 
32.3

 
32,913

 
35.9

Sales and marketing
9,553

 
7.1

 
5,571

 
6.1

General and administrative
11,231

 
8.3

 
7,802

 
8.5

Total operating expenses
64,483

 
47.7

 
46,286

 
50.5

Income (loss) from operations
2,389

 
1.8

 
(1,161
)
 
(1.2
)
Interest expense
(442
)
 
(0.3
)
 
(414
)
 
(0.5
)
Other income (expense), net
610

 
0.4

 
(300
)
 
(0.3
)
Income (loss) before income taxes
2,557

 
1.9

 
(1,875
)
 
(2.0
)
Provision for income taxes
(470
)
 
(0.3
)
 
(52
)
 
(0.1
)
Net income (loss)
$
2,087

 
1.6
 %
 
$
(1,927
)
 
(2.1
)%
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.06

 
 
 
$
(1.84
)
 
 
Diluted
$
0.05

 
 
 
$
(1.84
)
 
 
Weighted average shares used to compute basic and diluted net income (loss) per share:
 
 
 
 
 
 
 
Basic
33,907

 
 
 
1,048

 
 
Diluted
38,419

 
 
 
1,048

 
 

________________________
(1)
Cost of revenue and operating expenses include stock-based compensation expense as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2017
 
September 25,
2016
 
October 1,
2017
 
September 25,
2016
 
(In thousands)
Cost of revenue
$
38

 
$
9

 
$
123

 
$
15

Research and development
1,367

 
231

 
3,986

 
454

Sales and marketing
416

 
60

 
1,179

 
120

General and administrative
948

 
734

 
2,159

 
1,635

Total stock-based compensation expense
$
2,769

 
$
1,034

 
$
7,447

 
$
2,224



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Comparison of the three and nine months ended October 1, 2017 and September 25, 2016
Revenue, Cost of Revenue, Gross Profit and Gross Margin
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2017
 
September 25,
2016
 
Change
 
% Change
 
October 1,
2017
 
September 25,
2016
 
Change
 
% Change
 
(Dollars in thousands)
Revenue
$
50,108

 
$
34,105

 
$
16,003

 
47
%
 
$
135,084

 
$
91,577

 
$
43,507

 
48
%
Cost of revenue
25,591

 
17,247

 
8,344

 
48
%
 
68,212

 
46,452

 
21,760

 
47
%
Gross profit
$
24,517

 
$
16,858

 
$
7,659

 
45
%
 
$
66,872

 
$
45,125

 
$
21,747

 
48
%
Gross margin
48.9
%
 
49.4
%
 
(50
)bps
 
 
 
49.5
%
 
49.3
%
 
20
bps
 
 
Revenue . Revenue increased $16.0 million , or 47% , to $50.1 million in the three months ended October 1, 2017 and increased $43.5 million , or 48% , to $135.1 million in the nine months ended October 1, 2017 compared to the corresponding periods in 2016 , primarily due to an increase in sales of our 11ac Wave 2 products driven by higher unit volumes on substantially flat average selling prices (“ASPs”) and 11ac Wave 3 (10G) products driven by higher unit volumes. The above increase was partially offset by declining sales of our legacy 11n products for the same comparative periods. The increase in revenue for the nine months ended October 1, 2017 was partially offset by a $0.5 million decrease in revenue from licensing arrangements that ended in January 2016 . We expect that revenue will decrease in absolute dollars in the fourth quarter due to lower unit shipments of our Wi-Fi solutions.
Cost of Revenue, Gross Profit and Gross Margin . Cost of revenue increased $8.3 million , or 48% , to $25.6 million in the three months ended October 1, 2017 and increased $21.8 million , or 47% to $68.2 million in the nine months ended October 1, 2017 compared to the corresponding periods in 2016 , as a result of higher unit volumes partially offset by lower unit costs for our Wi-Fi solutions.
Gross profit increased $7.7 million , or 45% , to $24.5 million in the three months ended October 1, 2017 and increased $21.7 million , or 48% to $66.9 million in the nine months ended October 1, 2017 compared to the corresponding periods in 2016 due to the higher unit volumes and lower unit costs.
Gross margin decreased by 50 basis points, to 48.9% , in the three months ended October 1, 2017 compared to the corresponding period in 2016 due to less favorable product mix offset by cost of sales improvement due to scale. Gross margin increased by 20 basis points to 49.5% in the nine months ended October 1, 2017 compared to the corresponding period in 2016 , primarily from a mix shift towards higher margin 802.11ac Wi-Fi solutions and cost of sales improvement due to scale. We expect gross margin to increase in the fourth quarter due to favorable product mix.
Operating Expenses
 
Three Months Ended
 
 
 
 
 
October 1,
2017
 
September 25,
2016
 
 
 
 
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Change
 
% Change
 
(Dollars in thousands)
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
$
15,011

 
30
%
 
$
11,162

 
33
%
 
$
3,849

 
34
%
Sales and marketing
3,363

 
7

 
2,172

 
6

 
1,191

 
55

General and administrative
3,735

 
7

 
3,248

 
10

 
487

 
15

Total operating expenses
$
22,109

 
44
%
 
$
16,582

 
49
%
 
$
5,527

 
33
%


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Nine Months Ended
 
 
 
 
 
October 1,
2017
 
September 25,
2016
 
 
 
 
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Change
 
% Change
 
(Dollars in thousands)
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
$
43,699

 
32
%
 
$
32,913

 
36
%
 
$
10,786

 
33
%
Sales and marketing
9,553

 
7

 
5,571

 
6

 
3,982

 
71

General and administrative
11,231

 
8

 
7,802

 
9

 
3,429

 
44

Total operating expenses
$
64,483

 
47
%
 
$
46,286

 
51
%
 
$
18,197

 
39
%
Research and Development Expenses .  R&D expenses increased $3.8 million , or 34% , to $15.0 million in the three months ended October 1, 2017 , compared to the corresponding period in 2016. The increase was due to a $3.3 million increase in personnel costs, including $1.0 million in stock-based compensation expense, resulting from a 20% increase in headcount to further develop and expand our solutions portfolio and to support increased customer product development activities, $0.3 million from equipment related expenses to support and qualify new product platforms, $0.1 million for increase in tape-out and lay-out expenses and $0.1 million higher travel related expenses. We expect that R&D expenses will be higher in the fourth quarter.
R&D expenses increased $10.8 million , or 33% to $43.7 million in the nine months ended October 1, 2017 , compared to the corresponding period in 2016. The increase was due to a $10.0 million increase in personnel costs, including $3.7 million in stock based compensation expense, resulting from an 22% increase in headcount to further develop and expand our solutions portfolio, and to support increased customer product development activities, $0.8 million due to increase from allocated administrative costs and $0.7 million from equipment related expenses to support and qualify new product platforms. The increase in R&D expenses was partially offset by reduction in tape-out of $0.6 million and lower professional services of $0.1 million.
Sales and Marketing Expenses . S&M expenses increased $1.2 million , or 55% , to $3.4 million in the three months ended October 1, 2017 compared to the corresponding period in 2016 due to an increase of $1.0 million in personnel related costs, including $0.4 million in stock based compensation expense to support our expanding business, $0.1 million in higher consulting expenses and $0.1 million higher travel related expenses. We expect that S&M expenses will be higher in the fourth quarter.
S&M expenses increased $4.0 million , or 71% , to $9.6 million in the nine months ended October 1, 2017 compared to the corresponding period in 2016 primarily due to an increase of $3.2 million in personnel related costs, including $1.1 million in stock based compensation to support our expanding business, $0.3 million in higher consulting expenses, $0.2 million in travel related expenses and $0.2 million from allocated administrative costs.
General and Administrative Expenses .  G&A expenses increased $0.5 million , or 15% , to $3.7 million in the three months ended October 1, 2017 compared to the corresponding period in 2016, primarily due to a $0.3 million in personnel costs, as we increased our administrative headcount by 28% to support the growth of our business and $0.1 million in office equipment and supplies. We expect that G&A expenses will be higher in the fourth quarter.
G&A expenses increased $3.4 million , or 44% , to $11.2 million in the nine months ended October 1, 2017 compared to the corresponding period in 2016, primarily due to an increase of $1.6 million in legal and consulting expenses as we became a public company, $1.1 million in personnel costs (including $0.5 million of stock based compensation expense) as we increased our administrative headcount by 25% to support the growth of our business, $0.9 million in general administrative costs, $0.5 million in facility costs and $0.3 million in office equipment and supplies partially offset by $1.1 million allocated administrative costs.

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Liquidity and Capital Resources
Since our inception in 2005, we have funded our operations primarily through sales of our common stock in conjunction with our initial public offering (“IPO”), private equity financing, gross profits generated from sales, technology licensing and debt financing arrangements. As of October 1, 2017 and January 1, 2017 , we had cash and cash equivalents and marketable securities of $126.9 million and $117.0 million , respectively. As of October 1, 2017 , we had an accumulated deficit of $159.5 million .
On November 2, 2016, we consummated our IPO and sold 6,775,466 shares of common stock, including the sale of 75,466 shares of common stock to the underwriters upon their exercise of their option to purchase additional shares. We received net proceeds of approximately $97.4 million , after underwriting discounts, commissions and other offering expenses. Immediately prior to the consummation of our IPO, all outstanding shares of convertible preferred stock and preferred stock warrants were converted into common stock and common stock warrants, respectively.
Credit Facilities
Our Amended and Restated Loan and Security Agreement with Silicon Valley Bank (“SVB” or the “Lender”) (the “SVB Loan and Security Agreement”) includes (i) term loans, (ii) revolving line of credit and (iii) Mezzanine Loan. The Mezzanine Loan facility remained unused by the Company and was canceled upon its expiration in May 2017. The term loans have interest at a floating rate per annum equal to prime plus 0.75% and the revolving line of credit has interest between 4.25% to 5.00% depending on our consolidated leverage ratio.
The outstanding balance on the term loan was $4.4 million as of October 1, 2017 . The Company has an undrawn balance on the revolving line of credit of $20.0 million .
The SVB Loan and Security Agreement is collateralized by certain of our assets, including pledging of certain of our equity interest in our subsidiaries, receivables and inventory, subject to customary exceptions and limits. The SVB Loan and Security Agreement and the Mezzanine Loan contain customary events of default upon the occurrence of certain events, such as nonpayment of amounts due under the revolving line of credit or the term loans, violation of restrictive covenants, violation of other contractual provisions, or a material adverse change in our business. In addition, the credit facilities prohibit the payment of cash dividends on our capital stock and also places restrictions on mergers, sales of assets, investments, incurrence of liens, incurrence of indebtedness and transactions with affiliates. As of October 1, 2017 , we were in compliance with all applicable covenants.
Based on our current operating plan, we expect that our cash and cash equivalents and marketable securities will be sufficient to fund our operations through at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect.
In the event that additional capital is needed, we may not be able to raise such capital on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be adversely affected. We may also seek to raise capital opportunistically to support the anticipated growth of our business.

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Cash Flows
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:
 
Nine Months Ended
 
October 1,
2017
 
September 25,
2016
 
(In thousands)
Net cash provided by (used in):
 
 
 
Operating activities
$
14,194

 
$
1,709

Investing activities
(95,096
)
 
(3,180
)
Financing activities
2,701

 
443

Net decrease in cash and cash equivalents
$
(78,201
)
 
$
(1,028
)
Cash flows from Operating Activities.
Net cash provided by operating activities for the nine months ended October 1, 2017 was $14.2 million , compared to net cash provided by operating activities for the nine months ended September 25, 2016 of $1.7 million .
Net cash provided by operating activities for the nine months ended October 1, 2017 of $14.2 million resulted from a net income of $2.1 million , net cash inflow from changes in operating assets and liabilities of $2.7 million and non-cash expenses of $7.4 million of stock based compensation, $1.6 million of depreciation and amortization, $0.3 million of non-cash interest expense and $0.1 million of accretion of discount on our marketable securities. The $2.7 million cash inflow from changes in operating assets and liabilities primarily consisted of an increase of $14.7 million in accrued liabilities and other current liabilities as a result of an increase in expenses consistent with the growth of our business and a $5.1 million increase in accounts payable due to timing of payments to our suppliers offset by a $8.3 million increase in accounts receivable due to increased sales and timing of collections, a $7.9 million increase in inventory due to timing of purchases of raw materials and an increase of $0.9 million of other assets.
Net cash provided by operating activities for the nine months ended September 25, 2016 of $1.7 million resulted from a net loss of  $1.9 million , offset by net cash inflow from changes in operating assets and liabilities of $0.3 million and non-cash expenses of  $2.2 million  and $0.9 million relating to stock based compensation and depreciation and amortization, respectively, $0.1 million of non-cash interest expense and $0.1 million of changes in fair value of convertible preferred stock warrants. The $0.3 million cash inflow from changes in operating assets and liabilities consisted of an increase of  $6.1 million  in accrued liabilities and other current liabilities as a result of an increase in expenses consistent with the growth of our business offset by a $2.9 million increase in inventory due to timing of purchases of raw materials, a $1.6 million  increase in accounts receivable due to increased sales and timing of collections, a decrease of $1.1 million in accounts payable due to timing of payments to our suppliers and a $0.2 million increase in prepaid expenses and other current assets.
Cash flows from Investing Activities.
Net cash used in investing activities was $95.1 million for the nine months ended October 1, 2017 compared to net cash used in investing activities for the nine months ended September 25, 2016 of $3.2 million . Cash used in investing activities for the nine months ended October 1, 2017 related to $104.0 million of marketable securities purchases and $7.0 million of property and equipment purchases including $4.1 million related to our new corporate headquarters, partially offset by maturities and sales of $15.9 million in marketable securities. Net cash used in investing activities for the nine months ended September 25, 2016 related to $1.6 million of property and equipment purchases and the use of $1.6 million for restricted cash deposits required by our foundry partner in connection with the purchase of silicon wafers.
Cash flows from Financing Activities.
Net cash provided by financing activities was $2.7 million for the nine months ended October 1, 2017 , compared to net cash provided by financing activities for the nine months ended September 25, 2016 of $0.4 million . Net cash flow provided by

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Table of Contents

financing activities during the  nine months ended October 1, 2017  reflected $4.6 million in proceeds from issuance of common stock partially offset by repayments of outstanding long-term debt of $1.8 million and payment of offering costs of $0.1 million . Net cash provided by financing activities for the nine months ended September 25, 2016 primarily reflected $3.9 million in long-term debt borrowing, net of debt issuance costs, and $3.0 million from borrowing under our revolving line of credit, partially offset by repayments of outstanding long-term debt of $3.3 million and repayment of outstanding amounts under the revolving line of credit of $3.0 million .
Contractual Obligations and Commitments
The following table summarizes our contractual commitments and obligations as of October 1, 2017 :
 
Total
 
Less Than
1 Year
 
1-3 Years
 
3-5 Years
 
More Than
5 Years
 
(In thousands)
Debt obligations and related interest payments and fees (1)
$
4,695

 
$
2,481

 
$
2,214

 
$

 
$

Operating lease obligations
11,886

 
1,726

 
6,024

 
3,382

 
754

Commitments (2)
5,600

 
700

 
4,900

 

 

Software license commitments
4,464

 
1,488

 
2,976

 
$

 
$

 
$
26,645

 
$
6,395

 
$
16,114

 
$
3,382

 
$
754

________________________
(1)
Future in