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As filed with the Securities and Exchange Commission on September 14, 2011

Registration No. 333 -            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

GCT SEMICONDUCTOR, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3674   94-3302894

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

2121 Ringwood Avenue

San Jose, California 95131

(408) 434-6040

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

 

 

Kyeongho Lee, Ph.D.

President and Chief Executive Officer

GCT Semiconductor, Inc.

2121 Ringwood Avenue

San Jose, California 95131

(408) 434-6040

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

 

 

Copies to:

 

Thomas W. Kellerman, Esq.

E. John Park, Esq.

Albert Lung, Esq.

Morgan, Lewis & Bockius LLP

2 Palo Alto Square

3000 El Camino Real, Suite 700

Palo Alto, California 94306

(650) 843-4000

 

Robert P. Latta, Esq.

Mark Baudler, Esq.

Rezwan Pavri, Esq.

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

 

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

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

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

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

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities

to be registered

 

Proposed maximum aggregate

offering price(1)

 

Amount of

registration fee

Common Stock, $0.001 par value per share

  $100,000,000   $11,610.00

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes shares that the underwriters have the option to purchase to cover over-allotments.

 

 

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

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting others to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated                     , 2011

LOGO

            Shares

GCT SEMICONDUCTOR, INC.

Common Stock

 

 

This is the initial public offering of shares of common stock of GCT Semiconductor, Inc.

GCT Semiconductor, Inc. is offering              shares of its common stock.

Prior to this offering, there has been no public market for our common stock. We currently estimate that the initial public offering price per share will be between $         and $        . We intend to list our common stock on The NASDAQ Global Market under the symbol “GCTS.”

See “Risk Factors” on page 12 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities regulators has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount

   $                    $                

Proceeds, before expenses, to GCT Semiconductor, Inc.

   $                    $                

To the extent that the underwriters sell more than             shares of our common stock, the underwriters have the option to purchase up to an additional             shares from us at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                     .

 

Goldman, Sachs & Co.   BofA Merrill Lynch
Cowen and Company   Oppenheimer & Co.

 

 

Prospectus dated                      , 2011.


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LOGO


Table of Contents

TABLE OF CONTENTS

 

Conventions That Apply To This Prospectus

     ii   

Prospectus Summary

     1   

Risk Factors

     12   

Special Note Regarding Forward-Looking Statements

     35   

Use Of Proceeds

     37   

Capitalization

     40   

Dilution

     42   

Selected Consolidated Financial Data

     45   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     48   

Business

     79   

Management

     95   

Executive Compensation

     103   

Certain Relationships and Related Party Transactions

     131   

Principal Stockholders

     135   

Description of Capital Stock

     138   

Shares Eligible for Future Sale

     143   

Material U.S. Federal Tax Considerations for Non-U.S. Holders

     146   

Underwriting

     150   

Legal Matters

     154   

Experts

     154   

Where You Can Find Additional Information

     155   

Index to Consolidated Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We have not, and the underwriters have not, authorized anyone to provide you with additional or different information. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                     , 2011 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in a jurisdiction outside the United States are required to inform themselves about, and to observe any restrictions as to, this offering and the distribution of this prospectus applicable to that jurisdiction.

 

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CONVENTIONS THAT APPLY TO THIS PROSPECTUS

All references in this prospectus to “GCT Semiconductor,” “GCT,” “we,” “us” or “our” are references to GCT Semiconductor, Inc., a Delaware corporation and its subsidiaries. References in this prospectus to:

 

   

“4G” are to the fourth generation of cellular wireless standards.

 

   

“AMPS” are to Advanced Mobile Phone Service, one of the first modern analog cellular phone systems.

 

   

“GPRS” are to General Packet Radio Service, a packet-oriented wireless data service on the 3G and 2G cellular communication systems.

 

   

“kbps” are to kilobits per second, a unit of data transfer rate equal to 1,000 bits per second.

 

   

“KRW” are to Korean won, the currency of the Republic of Korea.

 

   

“LIBOR” are to London InterBank Offered Rate.

 

   

“LTE Advanced” are to Long Term Evolution Advanced, a wireless communication standard for 4G technology and a further evolution from the LTE standard.

 

   

“Mbps” are to megabits per second, a unit of data transfer rate equal to 1,000,000 bits per second.

 

   

“nm” are to nanometers, which is one billionth of a meter.

 

   

“Sdn Bhd” are to Sendirian Berhad, a form of business organization in Malaysia that is equivalent to a corporation in the United States.

 

   

“um” are to micrometer, which is one millionth of a meter.

 

   

“U.S.” are to the United States.

 

   

“WiMAX Forum” are to a not-for-profit organization that certifies and promotes the compatibility and interoperability of broadband wireless products based upon IEEE Standard 802.16.

 

   

“WLAN” are to wireless local area network, which links two or more devices using a certain type of wireless distribution method instead of traditional wired connections or cables. It is also commonly referred to as “WiFi”.

We use various trademarks and trade names in our business, including without limitation “GCT®. This prospectus also contains trademarks and trade names of other businesses that are the property of their respective holders.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this prospectus.

GCT Semiconductor, Inc.

Overview

We are a leading fabless designer and supplier of advanced 4G mobile semiconductor solutions. Our products are system-on-a-chip (SoC) solutions that integrate radio frequency (RF), baseband modem and digital signal processing (DSP) functions onto a single die for the 4G Long-Term Evolution (LTE) and Worldwide Interoperability for Microwave Access (WiMAX) markets. We were the first to commercialize single-chip solutions for LTE and WiMAX and believe we are currently the only company selling fully-commercialized single-chip LTE solutions. We believe our proprietary technology and system-level expertise enable us to provide complete 4G platform solutions, which are differentiated by their small form factors, low power consumption, high performance, high reliability and cost effectiveness. Our solutions have been designed into smartphones, USB dongles, wireless routers, customer premise equipment (CPE), femto access points, public safety devices and embedded modules for notebook and tablet devices.

Our core differentiation results from our distinctive RF complementary metal oxide semiconductor (CMOS) capabilities combined with our ability to integrate multiple functions, including RF, wireless modem and DSP, onto a single die. We believe our RF CMOS integration capability enables us to design products with low costs, small form factors and low power consumption without sacrificing performance. In addition, we have developed multiple orthogonal frequency-division multiple access (OFDMA) modem and multiple-input multiple-output (MIMO) antenna capabilities. These are two technologies that are critical for delivering LTE and WiMAX solutions and for enabling the integration of our solutions with wireless local area network (WLAN) functionality, an important part of our strategic and product roadmap.

We work closely with wireless operators to drive adoption of our solutions, including AT&T, MetroPCS Wireless, Inc., Verizon Wireless (Verizon), Vodafone Limited (Vodafone) and Yota for LTE and Clearwire Corporation (Clearwire), KT Corp., SK Telecom Co. Ltd., Sprint Nextel Corp. (Sprint), UQ Communications, Inc., Yota, YTL Communications Sdn Bhd (YTL) for WiMAX. Our primary customers are device original equipment manufacturers (OEMs) and original design manufacturers (ODMs). Our customers include Infomark Co. Ltd., Inkel Corporation Ltd., Interbro Inc., Kyocera Corporation, LG Electronics, Inc. (LG), Modacom Co. Ltd., Quanta Computer, Inc., Seowon Intech Co. Ltd. and YTL.

As of June 30, 2011, we have shipped over 960,000 LTE semiconductors in support of the initial LTE deployments by AT&T, Verizon and Vodafone and over 4.7 million WiMAX semiconductors supporting many major WiMAX operators globally. Our revenue was $22.4 million, $33.1 million and $68.6 million for the fiscal years ended June 30, 2009, 2010 and 2011, respectively. Our net loss was $14.5 million, $19.9 million and $11.5 million for the fiscal years ended June 30, 2009, 2010 and 2011, respectively.

 

 

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Industry Background

The mobile communications industry is in the early stages of a multi-year upgrade cycle driven by changes in the way customers access the Internet using a wide variety of mobile devices. In contrast to the limited bandwidth provided by legacy technologies, the introduction of 4G technology has dramatically improved the technical performance and usability of the mobile network, allowing for a rich media experience on mobile devices. According to Cisco Systems, Inc., mobile data traffic is expected to grow 26-fold between 2010 and 2015. Furthermore, this improved user experience, along with new device applications that allow for easier access, creation and consumption of content, is driving the next wave of mobile device sales. IDC estimates that shipments of 4G-enabled mobile phones will increase from approximately 13.9 million units in 2011 to approximately 219.0 million units in 2015, representing a compound annual growth rate (CAGR) of 99%.

The two dominant technologies in the 4G standard, LTE and WiMAX, are capable of providing theoretical peak downlink speeds of 100 Mbps and 46 Mbps, respectively. LTE networks are currently being deployed by major 3G cellular operators, who believe that the benefits of increased capacity and throughput offered by 4G technologies justify the related cost of upgrading their existing 3G networks. WiMAX is most often deployed in emerging markets by greenfield operators, which offer fixed wireless broadband internet service, because it takes less time to deploy and is more cost effective than traditional wireline internet service such as DSL.

Robust growth in both the LTE and WiMAX ecosystems is creating significant business opportunities for industry participants. While the initial challenge for 4G semiconductor solution providers will be meeting the core 4G performance requirements, achieving market leadership will be predicated on the ability to deliver silicon solutions that facilitate superior 4G network service and an enhanced user experience in a cost effective manner. We believe that a successful 4G semiconductor solutions provider must be differentiated along several dimensions, including:

 

   

Broad-based technical knowledge and expertise;

 

   

Highly-integrated solutions;

 

   

Accelerated time-to-market and risk mitigation;

 

   

Well-established relationships with industry participants; and

 

   

Multi-mode capabilities and backward compatibility with 3G networks.

Our Competitive Strengths

Our core strengths are the technological differentiation of our solutions, the relationships we have developed in our ecosystem, our track record of execution and our strong Asia presence. We believe that these strengths position us well to address the challenges of delivering 4G semiconductor solutions.

 

   

RF CMOS and integration capabilities. Our foundational strength in RF CMOS design enables us to offer solutions that deliver outstanding RF performance as well as the benefits of CMOS, including integration capability and cost effectiveness. We have developed and patented proprietary technology to implement RF in CMOS and to overcome the traditional drawbacks of RF CMOS integration, including noise, interference and performance degradation.

 

   

OFDMA, MIMO and dual modem implementation expertise. Our core competency in OFDMA, a modulation technique enabling more efficient use of bandwidth than 3G technologies, has helped us to develop and commercialize WiMAX, LTE and high-speed WLAN solutions. OFDMA is also designed to work with MIMO, a leading mobile antenna technology. Together, OFDMA and MIMO

 

 

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facilitate the higher data rates and wider signal range of 4G mobile devices. We have experience in the integration of multiple modems such as combining WiMAX with WLAN, and we are leveraging this experience with LTE. Currently, we are sampling a single-chip WiMAX/WLAN solution, and we are developing a similar single-chip LTE/WLAN solution.

 

   

Software and system-level expertise. Our software and system-level knowledge and expertise enable us to provide our customers with platform solutions, including SoCs, protocol software, high-performance device drivers and full reference designs, that enable our customers to reduce their time-to-market with complete and proven solutions. This effort also assists our customers in identifying suppliers of other components typically required in mobile devices, such as power management, audio or graphics semiconductors.

 

   

Track record of execution and 4G market leadership. We have a history of successfully delivering multiple generations of semiconductor solutions. Our legacy of innovation in WiMAX and CDMA RF demonstrates that we can deliver high quality solutions in high volume. We believe we have achieved a number of industry “firsts,” including:

 

   

World’s first single-chip WiMAX device;

 

   

World’s first single-chip Frequency-Division Duplexing (FDD)-LTE solution; and

 

   

World’s first single-chip, dual-mode WiMAX/WLAN device.

 

   

Key relationships with wireless operators, OEM/ODM customers and base station suppliers. We employ a dual-pronged approach to the market that focuses on both operators and our OEM/ODM customers. Our relationships with wireless operators help cultivate strong endorsement of our products among OEM/ODM customers. In addition, to reduce both time-to-market and the risk of technical incompatibility for our customers, we work with base station suppliers to ensure that our products interoperate seamlessly with their equipment.

 

   

Strong Asia presence. Given Asia’s importance to our market opportunity, we have invested significantly to build a strong presence in the region. We believe having a strong presence in close proximity to local customers helps us win business in Asia.

Our Growth Strategy

Our strategy is to enable the 4G revolution and successive generations of technology by delivering first-to-market, differentiated and cost-effective solutions. Core elements of our growth strategy include:

 

   

Continue to develop and deploy leading integrated LTE solutions. We intend to leverage our technological expertise and track record of execution by continuing to develop and commercialize successive generations of leading single-chip LTE solutions at smaller process nodes, with higher performance levels, higher degrees of integration and lower power consumption.

 

   

Expand our addressable market opportunity within LTE technologies. Our current products address the stand-alone LTE market, which we believe will represent an increasingly significant portion of the 4G market opportunity over time, particularly with the introduction of Voice over Internet Protocol (VoIP) LTE services. We also intend to address additional segments of the LTE opportunity by commercializing products that offer backward-compatibility with 3G technologies. For example, we are currently working with VIA Telecom Co., Ltd. to offer a solution with 3G Evolution-Data Optimized (EVDO) and LTE chips in a single package.

 

   

Grow our market position in WiMAX. We intend to increase our market share in WiMAX by leveraging our existing partnerships and design wins from leading WiMAX operators. We

 

 

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remain committed to WiMAX as reflected in our recent product releases, including a single-chip dual-mode WiMAX/WLAN SoC. We are also currently sampling a single-chip SoC for the emerging 802.16m, or “WiMAX 2,” standard.

 

   

Continue to build and strengthen our network of industry relationships. We believe that developing and marketing the world’s first single-chip FDD-LTE and WiMAX solutions has provided us with a strong reputation for innovation and execution with many operators, OEMs and ODMs. We intend to continue to leverage this reputation to both broaden and deepen our relationships and ultimately drive our market opportunity.

 

   

Seek and invest in opportunities to expand our wireless capabilities into new markets. To continue to grow beyond the traditional 4G market opportunity, we intend to seek and invest in opportunities where our core technological capabilities can drive differentiation and value for our customers. For example, we are currently working with Motorola Solutions, Inc. to enable a portfolio of LTE-based public safety devices using the 700MHz wireless spectrum for government use and with our other customers to enable a 4G-based smart grid.

Risks Affecting Us

Our business is subject to numerous risks, which are highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. These risks represent challenges to the successful implementation of our strategy and to the growth and future profitability of our business. Some of these risks are:

 

   

Our operating results may fluctuate from period to period, making it difficult to predict our quarterly results;

 

   

The LTE market may not develop or develops more slowly than expected;

 

   

We derive a significant portion of our revenues from our solutions for the WiMAX market, which may decline;

 

   

The commercial deployment and upgrades of 4G wireless network may be delayed or unsuccessful;

 

   

We have a history of losses and may not be able to achieve or sustain profitability;

 

   

We may not be able to compete effectively if operators require backward compatibility of 4G products with an integrated 2G/3G/4G chipset solution;

 

   

We may be unsuccessful in developing and selling new products or in penetrating new markets;

 

   

We may not be able to secure adequate manufacturing capacity from our third-party foundries; and

 

   

We rely on a small number of customers for a significant percentage of our revenue.

For further discussion of these and other risks you should consider before making an investment in our common stock, see the section entitled “Risk Factors” immediately following this prospectus summary.

Corporate Information

We were incorporated in California in June 1998 as Global Communication Technology, Inc. and reincorporated in Delaware in February 2001. Our principal executive offices are located at 2121 Ringwood Avenue, San Jose, California 95131, and our telephone number is (408) 434-6040. Our website address is www.gctsemi.com. The information on, or accessible through, our website is not part of this prospectus.

 

 

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THE OFFERING

 

Common stock offered by us

  

             shares of common stock

Common stock outstanding after the offering

  

             shares of common stock

Over-allotment option

   We have granted the underwriters an option for a period of 30 days to purchase up to              additional shares of common stock

Use of proceeds

   We intend to use approximately $12.1 million of the net proceeds from this offering to repay the outstanding balances under our bank loans and to use the remaining net proceeds for other working capital and general corporate purposes. See “Use of Proceeds.”

Risk factors

   You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

Proposed NASDAQ Global Market symbol

   “GCTS”

 

 

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The number of shares of common stock to be outstanding immediately after this offering is based on shares outstanding as of June 30, 2011, and excludes:

 

   

56,500,000 shares of common stock reserved for issuance under our 2011 Incentive Compensation Plan (2011 Plan), which became effective upon adoption by our board of directors on September 12, 2011 and serves as the successor to our 2010 Stock Option/Stock Issuance Plan and 2002 Special Stock Option/Stock Issuance Plan (Predecessor Plans), as well as any automatic increases in the number of shares of our common stock reserved for future issuance under the 2011 Plan, including:

 

   

50,678,762 shares of common stock issuable upon exercise of stock options outstanding under the Predecessor Plans as of June 30, 2011, at a weighted average exercise price of $0.53 per share, which stock options, and the shares underlying them, were transferred to the 2011 Plan; and

 

   

3,430,874 shares of common stock available for issuance under the Predecessor Plans, which shares were added to the shares reserved under our 2011 Plan.

 

   

3,000,000 shares of common stock reserved for issuance under our 2011 Employee Stock Purchase Plan (ESPP), which will become effective immediately upon the execution of the underwriting agreement for this offering, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under the ESPP.

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the automatic conversion of all outstanding shares of our convertible preferred stock (preferred stock) into an aggregate of 157,090,863 shares of common stock upon completion of this offering;

 

   

the issuance of      shares of common stock as payment for all unpaid and accrued dividends to holders of our preferred stock, assuming an initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus and assuming the payment occurs on                     ;

 

   

the exercise of outstanding warrants to purchase 9,303,029 shares of our preferred stock as of June 30, 2011. Such exercise includes the assumed exercise, on a net exercise basis where allowed, of the remaining outstanding warrants to purchase 7,636,363 shares of our preferred stock immediately prior to this offering, and the concomitant conversion of the shares of preferred stock acquired upon exercise into              shares of common stock upon completion of this offering, assuming an initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus;

 

   

the automatic conversion of an aggregate of $8.9 million in principal and accrued interest outstanding under our convertible notes as of June 30, 2011 into              shares of preferred stock at a conversion price equal to $1.20 per share and the concomitant conversion of these shares of preferred stock into              shares of common stock upon completion of this offering, assuming the conversions occur on                     , 2011;

 

   

the automatic conversion of an aggregate of $22.5 million principal and accrued interest outstanding under our convertible notes and our convertible notes to a related party as of June 30, 2011 into              shares of preferred stock immediately prior to a filing of a Registration Statement on Form S-1 with the U.S. Securities and Exchange Commission (SEC) at a conversion price equal to $1.20 per share, and the concomitant conversion of these shares of preferred stock into              shares of common stock upon completion of this offering, assuming the conversions occurs on                     , 2011;

 

   

no exercise by the underwriters of their option to purchase up to an additional              shares of common stock from us; and

 

   

the filing of our amended and restated certificate of incorporation prior to completion of this offering.

 

 

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Because the number of shares of common stock that will be issued upon the exercise of the warrants and as payment of dividends to holders of our preferred stock depend upon the actual initial public offering price per share in this offering and, in the case of the payment of dividends and the convertible notes, the closing date of this offering, the actual number of shares issuable upon such exercise, payment and conversion will likely differ from the respective number of shares set forth above.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the summary consolidated statement of operations data for the years ended June 30, 2009, 2010 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Years Ended June 30,  
               2009                          2010                          2011             
     (In thousands, except share and per share amounts)  

Consolidated Statement of Operations Data:

      

Revenues

   $ 22,428      $ 33,079      $ 68,644   

Cost of revenues(1)

     19,455        24,288        45,398   
  

 

 

   

 

 

   

 

 

 

Gross profit

     2,973        8,791        23,246   

Operating expenses:

      

Research and development (net of NRE and government grants of $5.3 million, $1.1 million and $7.7 million during 2009, 2010 and 2011)(1)

     11,589        17,821        12,675   

Sales and marketing(1)

     4,508        4,780        5,279   

General and administrative(1)

     3,730        3,257        5,853   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,827        25,858        23,807   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (16,854     (17,067     (561

Interest income

     76        49        43   

Interest expense

     (782     (1,540     (2,315

Other income (expense), net

     3,588        (1,171     (8,918
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (13,972     (19,729     (11,751

Provision for (benefit from) income taxes

     569        196        (222
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (14,541   $ (19,925   $ (11,529
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (23,431   $ (28,856   $ (20,741
  

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

   $ (1.17   $ (1.39   $ (0.98
  

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted(2)

     19,989,386        20,769,991        21,066,802   
  

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted(2)

       $     
      

 

 

 

Weighted average shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted(2)

      
      

 

 

 

 

 

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     As of June 30, 2011  
     Actual     Pro Forma(3)      Pro Forma as
Adjusted(4)
 
           (In thousands)         

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 18,227      $                    $                

Working capital (deficit)

     (18,369     

Total assets

     58,748        

Total short-term indebtedness(5)

     42,439        

Total long-term indebtedness(6)

     2,503        

Redeemable convertible preferred stock warrant liability

     4,063             

Foreign currency derivative

     1,165        

Mandatorily redeemable convertible preferred stock

     165,428             

Total stockholders’ deficit

     (191,979     

 

(1) Our stock-based compensation was as follows:

 

     Years Ended June 30,  
     2009      2010      2011  
     (In thousands)  

Cost of revenues

   $ 3       $ 2       $ 32   

Research and development

     46         48         756   

Sales and marketing

     16         21         215   

General and administrative

     7         8         332   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 72       $ 79       $ 1,335   
  

 

 

    

 

 

    

 

 

 

 

(2) See Note 10 to our audited consolidated financial statements for an explanation of the calculations of our basic and diluted net loss per share and pro forma net loss per share attributable to common stockholders.
(3)

The pro forma column in the consolidated balance sheet data table above reflects (i) the automatic conversion of all outstanding share of our preferred stock as of June 30, 2011 into an aggregate of 157,090,863 shares of common stock upon completion of this offering; (ii) the issuance of              shares of common stock to be issued as payment for all unpaid and accrued dividends to holders of our preferred stock, assuming an initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus, and assuming the payment occurs on                     , 2011; (iii) the exercise of outstanding warrants to purchase 9,303,029 shares of our preferred stock as of June 30, 2011, such exercise includes the assumed exercise, on a net exercise basis where allowed, of the outstanding warrants to purchase 7,636,363 shares of our preferred stock, immediately prior to this offering, and the concomitant conversion of the shares of preferred stock acquired upon exercise into              shares of common stock upon completion of this offering, assuming an initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus; (iv) the automatic conversion of an aggregate of $8.9 million in principal and accrued interest outstanding under our convertible notes as of June 30, 2011 into              shares of preferred stock immediately prior to the closing of this offering at a conversion price equal to $1.20 per share, and the concomitant conversion of these shares of preferred stock into              shares of common stock upon completion of this offering, assuming the conversions occur on                     , 2011; (v) the automatic conversion of an aggregate of $22.5 million in principal and accrued interest outstanding under our convertible notes and convertible notes to a related party as of June 30, 2011 into              shares of preferred stock immediately prior to a filing of a Registration Statement on Form S-1 with the SEC at a conversion price equal to $1.20 per share, and the concomitant conversion of these shares of preferred stock into              shares of common stock upon

 

 

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completion of this offering, assuming the conversions occurs on                     , 2011; and (vi) the resulting reclassification of the liabilities related to our convertible notes to additional paid-in capital and the settlement of the liabilities related to our foreign currency derivative instruments.

(4) The pro forma as adjusted column in the consolidated balance sheet data table above reflects the transactions described above and the sale of              shares of common stock in this offering at an assumed initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(5) Total short-term indebtedness includes $12.1 million in bank borrowings, $1.0 million convertible notes payable to a related party and $29.3 million in convertible notes payable.
(6) Total long-term indebtedness includes $1.5 million notes payable to a related party and $1.0 million in convertible notes payable.

Non-GAAP Financial Measures

We believe that the use of Adjusted EBITDA is helpful for an investor in determining whether to invest in our common stock. Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles (GAAP). We have provided a reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to our net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net loss, operating income or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we do. We have included Adjusted EBITDA in this prospectus because it is a basis upon which our management assesses financial performance, and it eliminates the impact of items that we do not consider indicative of our core operating performance. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items.

We include Adjusted EBITDA in this prospectus because (i) we seek to manage our business to a consistent level of Adjusted EBITDA, (ii) it is one of the key bases upon which our management assesses our operating performance and (iii) it is one of the metrics investors may use in evaluating companies’ performance in our industry.

We define Adjusted EBITDA as net income (loss) less interest, provision for income taxes, depreciation and amortization, foreign currency exchange gain (loss), remeasurement charges related to our preferred stock warrants and embedded foreign currency derivatives and stock-based compensation expense.

We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items), the impact of depreciation and amortization expense on our fixed assets, charges related to the fair value remeasurements of our preferred stock warrants and embedded foreign currency derivatives and the impact of stock-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use Adjusted EBITDA for business planning purposes and in evaluating acquisition opportunities.

 

 

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In addition, we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other interested parties in our industry as a measure of financial performance and debt-service capabilities. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;

 

   

Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us;

 

   

Adjusted EBITDA does not reflect foreign currency exchange gains and losses resulting from transactions denominated in currencies other than the U.S. dollar; and

 

   

Other companies, including companies in our industry, may calculate Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.

The following table presents a reconciliation of Adjusted EBITDA to our net income (loss), the most comparable GAAP measure, for each of the periods indicated:

 

     Years Ended June 30,  
     2009     2010     2011  
     (In thousands)  

Net loss

   $ (14,541   $ (19,925   $ (11,529

Non-GAAP adjustments:

      

Interest expense (income), net

     706        1,491        2,272   

Provision for (benefit from) income taxes

     569        196        (222

Depreciation and amortization

     961        574        434   

Remeasurement of liability upon modification of warrants

                   1,066   

Remeasurement of warrant liability and foreign currency derivative instruments (gain) loss

     (4,634     (206     5,326   

Foreign currency exchange (gain) loss

     (105     1,176        2,649   

Stock-based compensation

     72        79        1,335   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (16,972   $ (16,615   $ 1,331   
  

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. The occurrence of any of the following risks, or other risks that are currently unknown or unforeseen by us, could harm our business, financial condition, results of operations or growth prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

Our operating results may fluctuate from period to period and difficulty in predicting our quarterly operating results could cause the market price of our common stock to decline.

Our revenue and operating results have fluctuated significantly from period to period in the past and will do so in the future. Factors that may cause our operating results to fluctuate include:

 

   

changes in the size, growth or growth prospects of the LTE and WiMAX markets;

 

   

timing and success of commercial deployments of and upgrades to 4G wireless networks;

 

   

our ability to develop and sell new products and penetrate into new markets;

 

   

our ability to successfully design and release new products in a timely manner that meet our customers’ needs;

 

   

changes in the competitive dynamics of our market, including new entrants or pricing pressures, and our ability to compete in the LTE and WiMAX markets;

 

   

claims by third parties against us for infringing their intellectual property rights;

 

   

changes in orders and cancellation by our major customers;

 

   

changes in manufacturing costs, including wafer, test and assembly costs;

 

   

availability of adequate manufacturing capacity for our products; and

 

   

general economic conditions globally and in regions where we operate.

Moreover, sales of our semiconductor solutions fluctuate from period to period due to cyclicality in the semiconductor industry and the short product life cycles and wide fluctuations in product supply and demand characteristics of this industry. We expect these cyclical conditions to continue. Due to our limited operating history, we have yet to experience an established pattern of seasonality. However, business activities generally slow down following holiday seasons, including the Lunar New Year in Asia, which may negatively impact our sales and results of operations during the period. If revenue levels are below our expectations, we may experience declines in margins and profitability or incur a loss from our operations. As a result, our quarterly operating results are difficult to predict, and you should not rely on period-to-period comparisons of our operating results as an indication of our future performance. In addition, the difficulty in predicting our future results may cause the market price of our stock to decline.

If the LTE market does not develop or develops more slowly than expected, or if we fail to accurately predict market requirements or market demand for LTE solutions, our business will be harmed.

We have invested substantial time and resources in developing products that support LTE, and we began commercial shipment of LTE products in December 2010. If we fail to accurately predict market requirements or market demand for LTE, or if our solutions are not successfully developed or adopted by our customers, our revenue will decline and our business will suffer. If LTE networks are deployed to a lesser extent or more slowly

 

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than we currently anticipate, or if other competing 4G protocols achieve greater market acceptance or operators do not migrate to LTE, we may not realize any benefits from this investment, which will have an adverse effect on our business, financial condition and results of operations.

We currently derive a significant portion of our revenue from sales of our semiconductor solutions for the WiMAX market. If the WiMAX market declines, our results of operations will be harmed.

We currently derive a significant portion of our revenue from the sale of our semiconductor solutions for the WiMAX market and expect this trend to continue. If the WiMAX market declines, our results of operations would be materially harmed. In addition to the impact of factors unique to the WiMAX market and the impact of global and regional economic factors, the WiMAX market may decline significantly in anticipation of LTE deployments. If customers believe LTE deployments will provide the same or superior coverage as WiMAX networks in the near future, customers may prefer to adopt LTE services and products instead of WiMAX, which in turn is likely to cause the WiMAX market to grow at a slower pace than expected or to decline. If the WiMAX market declines prior to the commercial production and acceptance of our LTE solutions, or if we fail to predict accurately market requirements or market demand for WiMAX, our business, financial condition and operating results will be harmed.

We depend on the commercial deployment and upgrades of 4G wireless communications equipment, products and services to grow our business, and our business may be harmed if wireless network operators delay or are unsuccessful in the commercial deployment or upgrade of 4G technology or if they deploy other technologies.

We depend upon the commercial deployment and upgrades of 4G wireless communications equipment, products and services based on our technology. Although wireless network operators have commercially deployed 3G networks, we cannot predict the timing or success of further commercial deployments, expansions or upgrades of 3G networks. Deployment of new networks by operators requires significant capital expenditures, well in advance of any revenue from these networks. In the past, operators have cancelled or delayed planned deployments of 4G networks. If existing deployments are not commercially successful or do not continue to grow their subscriber base, or if new commercial deployments of 4G networks are delayed or unsuccessful, our business and financial results may be harmed. During network deployment, operators often anticipate a certain rate of subscriber additions and in response, operators typically procure devices and products to satisfy the forecasted subscriber needs. If the 4G networks are not as widely deployed by operators, or if the 4G technology and devices are not widely accepted by consumers, the rate of subscriber additions may be slower than expected, which may cause inventory build up from OEM/ODM customers. This in turn could negatively impact sales and profit margins of our semiconductor solutions. A number of wireless operators have started testing 4G networks utilizing OFDMA and MIMO technology, but the timing and extent of 4G network deployments are uncertain, and we might not be successful in developing and marketing our semiconductor solutions targeting 4G markets.

We have a history of losses, and we may not achieve or sustain profitability in the future, on a quarterly or annual basis.

We began operation in 1998 and have incurred losses on an annual basis since inception. We experienced net losses of $14.5 million, $19.9 million and $11.5 million during the years ended June 30, 2009, 2010 and 2011, respectively. As of June 30, 2011, our accumulated deficit was $192.7 million. In addition, as of June 30, 2011, we had short-term debt in the amount of $42.4 million, which consisted of bank borrowings, convertible notes and convertible notes to a related party. We expect to incur significant expenses related to the research and development of our products and expansion of our business. The audit report accompanying our consolidated financial statements for the year ended June 30, 2011 contains an explanatory paragraph stating that our net loss for the year ended June 30, 2011 and our accumulated deficit and our outstanding debt at June 30, 2011 of $44.9 million, raise substantial doubt about our ability to continue as a going concern. If we are unable to successfully complete this offering, we will need to seek alternative financing or operational plans to continue as

 

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a going concern. Furthermore, the rapidly evolving wireless communications markets in which we sell our products as well as other factors, make it difficult for us to forecast quarterly and annual revenue accurately. As a result, we could experience cash flow management problems, unexpected fluctuations in our results of operations and other difficulties, any of which would make it difficult for us to meet our debt obligations and achieve and maintain profitability. In addition, as a public company, we will also incur significant legal, accounting and other expenses that we did not incur as a private company. As a result of these increased expenditures, we will have to generate and sustain substantially increased revenue to achieve profitability. We may not be able to sustain our revenue growth or achieve or maintain profitability, and we may continue to incur significant losses in the future, which may have an adverse effect on the market price of our common stock.

If certain wireless operators, OEMs or ODMs require 4G solutions to have backwards compatibility with 2G/3G protocols and to have full 2G/3G/4G functionality integrated into one chipset solution, the companies that provide such a solution may compete more effectively than we can.

Our semiconductor solutions currently focus on 4G protocols, notably WiMAX and LTE. While our 4G solutions can be incorporated into a device alongside 2G/3G solutions, it does not integrate 2G/3G protocols and functionalities into a single chip. In addition, until sufficient 4G coverage is established and Voice over Internet Protocol (VoIP) becomes more pervasive in 4G devices, 2G/3G functionality will be required for voice services. Some wireless operators, or OEMs or ODMs serving these operators, that have deployed substantial 3G networks or that prefer to deal with a single company for their 2G/3G and 4G solutions may require 4G semiconductor solutions to have backwards compatibility and integrate 2G/3G functionality with 4G products. As a result, to compete effectively for design wins with these operators, OEMs or ODMs, we may be required to develop or license an integrated or multi-chip solution compatible with 2G/3G protocols or to partner with an entity that offers such a solution. These requirements would take considerable time and investment, and our competitors that provide a solution with integrated 2G/3G/4G functionality may be able to compete more effectively for those design opportunities, which may have an adverse effect on our business, financial condition and results of operations.

If we are unsuccessful in developing and selling new products or in penetrating new markets, our business and operating results would suffer.

The markets in which we and our customers compete or plan to compete are characterized by rapidly changing technologies and industry standards and technological obsolescence. Our ability to compete successfully depends on our ability to design, develop, market and support new products and enhancements on a timely and cost effective basis. A fundamental shift in technologies in any of our target markets could harm our competitive position within these markets. Our failure to anticipate these shifts, develop new technologies or react to changes in existing technologies could delay our development of new products, which could result in product obsolescence, decreased revenue and loss of design wins.

The development of new technologies and products generally requires substantial investment before they become commercially viable, and we have created a roadmap to build and increase our product offerings. Under this roadmap, we intend to continue making substantial investments to develop new technologies and products, and our development efforts may not be successful, and our new technologies and products may not produce meaningful revenue. For example, we currently invest significant resources to develop WiMAX and LTE multi-protocol semiconductor solutions. We are also investing in multi-mode modem technology that will allow us to offer 4G/WLAN solutions. In addition, we may be required, on a case by case basis, to invest additional resources to develop multiple chip solutions in response to changing market demand. If the semiconductor solutions we develop fail to meet market or customer requirements or do not achieve market acceptance, we may not be able to execute our roadmap successfully. In addition, our products have long sales cycles that involve numerous steps, and during this time we may expend substantial financial resources and management time and effort without any assurance that product sales will result. Our sales cycle typically begins when one of our products has been provided to our end customers for evaluation, and thereafter it can take 12 or more months to achieve successful commercialization. The anticipated long sales cycle for our products makes it difficult to predict the quarter in which sales may occur.

 

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The success of our new products will depend on accurate forecasts of long-term market demand, customer and consumer requirements and future technological developments, as well as a variety of specific implementation factors, including:

 

   

accurate prediction of the size and growth of the WiMAX and LTE markets;

 

   

accurate prediction of the market requirements for 2G/3G backward compatibility and our need and ability to offer competitive solutions to meet this requirement;

 

   

accurate prediction of changes in device manufacturer requirements, technology, industry standards or consumer expectations, demands and preferences;

 

   

timely and efficient completion of product design and transfer to manufacturing, assembly and test, and securing sufficient manufacturing capacity to allow us to continue to timely and efficiently deliver products to our customers;

 

   

market acceptance, adequate consumer demand and commercial production of the products in which our mobile and wireless broadband semiconductor solutions are incorporated;

 

   

the quality, performance and reliability of the product as compared to competing products and technologies;

 

   

effective marketing, sales and service; and

 

   

the ability to obtain licenses to use third-party technology to support the development of our products.

If we fail to introduce new products that meet the demands of our customers or our target markets, or if we fail to penetrate new markets, our revenue will likely decrease over time and our financial condition could suffer.

We rely on a small number of customers for a significant percentage of our revenue, and the loss of, or a reduction in, orders from these customers could result in a substantial decline in our revenue.

We sell our products to OEM/ODM customers either directly or indirectly through distributors. We depend on a small number of customers for a large percentage of our annual revenue. During the year ended June 30, 2011, sales to LGE accounted for 48% of our total revenue. All of our sales to LG consisted of LTE products. Sales to our five largest OEM/ODM end customers (including direct sales and indirect sales through distributors) accounted for approximately 83% of our total revenue during the year ended June 30, 2011. Sales through our largest distributor, Daejin Semiconductor Co., Ltd., accounted for approximately 19% of our total revenue during the year ended June 30, 2011. We expect that sales to a limited number of customers will continue to account for a significant percentage of our revenue for the foreseeable future. Additionally, consolidation among OEMs in some of our markets could result in an increased concentration in our sources of revenue. It is possible that any of our major customers could terminate its purchasing arrangements with us or significantly reduce or delay the amount of our products that it orders, purchase products from our competitors or develop its own products internally. The loss of, or a reduction in, orders from any major customer could cause a decline in revenue and adversely affect our business, financial condition and results of operations.

If customers do not design our semiconductor solutions into their product offerings or if our customers’ product offerings are not commercially successful, we would have difficulty selling our semiconductor solutions and our business would suffer.

We sell our semiconductor solutions both directly and indirectly through distributors to OEM/ODM customers. Our OEM/ODM customers incorporate our semiconductor solutions in their products and include our semiconductor solutions in the products they supply to their customers. Our semiconductor solutions are generally incorporated into our customers’ products at the design stage. As a result, we rely on OEM/ODM customers to design our semiconductor solutions into the products they sell. Without these design wins, our business would be materially and adversely affected. We often incur significant expenditures on the development

 

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of a new semiconductor solution without any guarantees that an OEM/ODM customer will select our semiconductor solution for design into its own product. Once an OEM/ODM customer designs a competitor’s semiconductor into its product offering, it becomes significantly more difficult for us to sell our semiconductor solutions to that customer because changing suppliers involves significant cost, time, effort and risk for the customer. Furthermore, even if an OEM/ODM customer designs one of our semiconductor solutions into its product offering, we cannot be assured that its product will be commercially successful and that we will receive any revenue from that customer. If our customers’ products incorporating our semiconductor solutions fail to meet the demands of their customers or otherwise fail to achieve market acceptance, our revenue and business may suffer.

In addition, we employ a dual-pronged approach to the market that focuses on both operators and OEM/ODM customers in order to facilitate design wins of our products. Under this approach, we rely on key relationships with wireless operators to help create strong endorsement of our products to OEM/ODM customers. If we are not able to provide wireless operators with access to leading OEMs/ODMs that can deliver our solutions in volume, or if these operators choose not to work with our OEM/ODM customers, it may make it more difficult for us to achieve design wins and cause a delay in the deployment of our products, which may have an adverse effect on our business, financial condition and results of operations.

If we are unable to compete effectively, we may not increase or maintain our revenue or market share.

Competition in the wireless semiconductor business continues to increase at a rapid pace as consumers, businesses and governments realize the market potential of wireless products and services. To remain competitive, companies must have highly trained engineering talent and make significant capital investments over long development cycles. We may not be able to compete successfully against current or potential competitors. If we do not compete successfully, our revenue and market share may decline. In the LTE market, we compete and expect to compete with semiconductor companies such as Broadcom Corporation, Intel Corporation, Marvell Technology Group Ltd., Qualcomm Inc., Samsung Electronics Co. Ltd., ST-Ericsson N.V. and potentially other companies focused on developing LTE SoCs. In the WiMAX market, we compete and expect to compete with semiconductor companies such as Broadcom Corporation, which acquired Beceem Communications Inc., Intel Corporation, MediaTek Inc., Samsung Electronics, Co. Ltd., Sequans, Inc. and potentially other companies that offer WiMAX SoCs.

Many of our competitors have longer operating histories and customer relationships, significant legacy products and technologies, greater resources and brand recognition, more industry influence and a larger customer base than us. This may allow them to respond more quickly than us to new or emerging technologies or changes in customer requirements and to provide backward compatibility in their products as required by some operators. In addition, these competitors may have greater credibility with our existing and potential customers. Moreover, our competitors may have been doing business with customers for a longer period of time and have established relationships, which may provide them with information regarding future trends and requirements that may not be available to us. In addition, some of our larger competitors may be able to provide greater incentives to customers through rebates, marketing funds and similar programs. Some of our competitors may also adopt aggressive or predatory pricing policies to offset what we believe are the performance and cost advantages of our solutions. Our competitors with multiple product lines may bundle their products to offer a broader product portfolio or integrate wireless functionality into other products that we do not sell, which may make it difficult for us to gain or maintain market share.

Our ability to compete will depend on a number of factors, including:

 

   

our ability to anticipate market and technology trends and successfully develop products that meet market needs;

 

   

our success in identifying and penetrating new markets, applications and customers;

 

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our ability to accurately understand the price points and performance metrics of competing products in the marketplace;

 

   

our products’ performance and cost-effectiveness relative to that of competitors’ products;

 

   

our ability to develop and maintain relationships with wireless operators, base station suppliers and OEM/ODM customers;

 

   

our ability to expand international operations in a timely and cost-efficient manner;

 

   

our ability to secure sufficient manufacturing capacity and deliver products in large volume on a timely basis at competitive prices;

 

   

our ability to participate in or influence the process for setting wireless industry standards;

 

   

our ability to conform to industry standards on a timely basis, while developing new and proprietary technologies to offer products and features previously not available in the 4G marketplace;

 

   

our ability to recruit design and application engineers with expertise in wireless broadband communications technologies and sales and marketing personnel; and

 

   

our ability to obtain third-party licenses for supporting technologies to develop new products.

Our potential competitors may also establish cooperative relationships among themselves or with third parties, acquire companies that provide similar products to ours, or consolidate with other competitors. As a result, new competitors or alliances between our competitors may emerge that could acquire significant market share. In addition, future development efforts by our competitors could render our products obsolete. Any of these factors, alone or in combination with others, could harm our business and result in a loss of market share, an increase in pricing pressure or inability to achieve and sustain profitability.

The average selling prices of semiconductor solutions in our markets have historically decreased over time and will likely do so in the future, which could harm our revenue and gross profits.

Average selling prices of semiconductor products in the markets we serve have historically decreased over time, and we expect such declines to continue to occur for our products over time. Our gross profits and financial results will suffer if we are unable to offset reductions in our average selling prices by reducing our costs, developing new or enhanced semiconductor solutions on a timely basis with higher selling prices or gross profits, or increasing our sales volumes. Additionally, because we do not operate our own manufacturing, assembly or testing facilities and because of our smaller scale relative to these competitors, we may not be able to reduce our costs as rapidly, and our costs may even increase, which could also reduce our margins. Furthermore, from time to time we have and may in the future enter into agreements with selected customers to provide them with favorable pricing arrangement based on volume shipment or other criteria. These agreements may prevent us from offsetting the reduction in our average selling prices of our products. In response to future competitive pricing pressures, we may need to reduce the prices of our semiconductor solutions to remain competitive, which may adversely affect our results of operations, including our product margins.

If we do not sustain our growth rate, or if we are unable to manage any future growth, we may not be able to execute our business plan and our operating results could suffer.

We have experienced significant growth in a short period of time. Our total revenue increased from $22.4 million during the year ended June 30, 2009 to $33.1 million during the year ended June 30, 2010, and to $68.6 million during the year ended June 30, 2011. We may not achieve similar growth rates in future periods. You should not rely on our revenue growth, gross margins or operating results for any prior quarterly or annual periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our financial results could suffer and our stock price could decline.

 

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Our future operating results depend to a large extent on our ability to successfully manage any expansion and growth. To manage our growth successfully and handle the responsibilities of being a public company, we believe we must effectively, among other things:

 

   

recruit, hire, train and manage additional qualified engineers for our research and development activities, especially in the positions of design engineering, product and test engineering, and applications engineering;

 

   

add additional sales personnel and expand sales offices;

 

   

add additional finance and accounting personnel;

 

   

implement and improve our administrative, financial and operational systems, procedures and controls; and

 

   

enhance our information technology support for enterprise resource planning and design engineering by adapting and expanding our systems and tool capabilities, and properly training new hires as to their use.

We are increasing our investment in research and development, sales and marketing, general and administrative and other functions to grow our business. We are likely to incur the costs associated with these increased investments earlier than some of the anticipated benefits, and the return on these investments, if any, may be lower than we expect, may develop more slowly than we expect, or may not materialize.

If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new products, and we may fail to satisfy customer requirements, maintain product quality, execute our business plan, or respond to competitive pressures.

Our customers may cancel their orders, change production quantities, delay production or require price reductions in our products, and if we fail to forecast demand for our products accurately, we may incur product shortages, delays in product shipments or excess or insufficient product inventory.

All of our sales are made on a purchase order basis which permit our customers to cancel, change or delay product purchase commitments with little or no notice to us and without penalty. Because production lead times often exceed the amount of time required to fulfill orders, we often must manufacture in advance of orders, relying on a demand forecast to project volumes and product mix. Our ability to accurately forecast demand can be adversely affected by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, adverse changes in our product order mix and demand for our customers’ products. Even after an order is received, our customers may cancel or reduce these orders, or require us to reduce the prices of our product. These cancellations, reductions, or price changes may subject us to a number of risks, including the following:

 

   

our projected sales will not materialize on schedule or at all;

 

   

unanticipated reduction in revenue and net profit; and

 

   

increase in excess or obsolete inventory which we may be unable to sell to other customers.

Alternatively, if we are unable to project customer requirements accurately, we may not manufacture sufficient semiconductor solutions, which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. In the past, we have experienced customers significantly increasing their orders with little or no advance notice. If we do not fulfill customer demands in a timely manner, our customers may cancel their orders, or may decide not to order from us in the future. In addition, we may be subject to customer claims for cost of replacement. Either underestimating or overestimating demand could lead to insufficient, excess or obsolete inventory, which could harm our business, financial condition, results of operations, as well as our customer relationships.

 

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We outsource our wafer fabrication, packaging, testing, warehousing and shipping operations to third parties, and if these parties fail to produce and deliver our products according to requested demands in specification, quantity, cost and time, our reputation, customer relationships and operating results could suffer.

We are a fabless company and rely on third parties for all of our manufacturing operations, including wafer fabrication, assembly, testing, warehousing and shipping and logistics. We rely on UMC Group (USA) (UMC) to manufacture substantially all of the wafers for our WiMAX products, and Samsung Semiconductor System LSI Division (Samsung LSI) for substantially all of the wafers for our LTE products. We use third-party vendors to assemble, package and test our products. We primarily use the services of ASE Test Limited (ASE) and STATS ChipPAC Ltd. for assembly, and ASE, Giga Solution Tech Co., Ltd. (Giga Solution), Hana Micron Co., Ltd. and United Test and Assembly Center Ltd. (UTAC) for testing. We depend on these third-party vendors to supply us with services and material of a requested quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. We do not have long-term supply agreements with our third-party vendors other than the minimum capacity agreements with UTAC and Giga Solution. If one or more of these vendors terminates its relationship with us, or if we encounter any problems with our manufacturing supply chain, it could adversely impact our ability to ship our products to our customers on time and in the quantity required, which in turn could cause an unanticipated decline in our sales and possibly damage our customer relationships.

We do not have long-term capacity agreements with our foundries and they may not allocate sufficient capacity to allow us to meet future demands for our products, and there is no guarantee that we will be able to secure capacity agreements in the future.

We currently do not have long-term capacity agreements with our main foundries, UMC and Samsung LSI, primarily because historically we have placed only a limited quantity of orders. Accordingly, our foundries are not obligated to perform services or supply wafers to us for any specific period, in any specific quantities, or at any specific price, except as may be provided in a particular purchase order. Foundry capacity allocated to us has in the past been reduced due to strong demand by other foundry customers. The ability of our foundry vendors to provide us with semiconductor products is limited by available capacity and existing obligations. Because none of our third-party foundries has provided contractual assurances to us that adequate capacity will be available to us to meet future demand for our products, foundry capacity may not be available when we need it or at reasonable prices. The foundries may allocate capacity to the production of other companies’ products while reducing deliveries to us on short or without notice. In particular, our foundries may reallocate capacity to other customers that are larger and better financed than us or that have long-term agreements with our foundry during a period of high demand. For example, we experienced a significant increase in customer demand for our WiMAX products during the fiscal quarters ended September 30 and December 31, 2010, for which we were not able to secure sufficient wafer capacity to meet all of these demands, which resulted in a loss or delay of shipment of our products during the quarters. In addition, we expect that we may need to secure additional capacity from our foundries in the immediate future to support increasing demand for our products, and there is no guarantee that we will be able to secure this increased capacity to meet our needs.

As we continue to grow our business, we intend to negotiate long-term supply agreements with our main foundries in order to secure capacity commitment. There can be no assurance that we will be able to negotiate these agreements successfully or in a timely fashion, or that any agreements we enter into will provide us with favorable pricing or sufficient capacity to meet our customer demand. Our failure to secure suitable long-term capacity agreements with our foundries may limit our ability to expand our market and may have an adverse effect on our business, financial condition and results of operations.

Any increase in the manufacturing cost of our products could reduce our gross margins and operating profit.

The semiconductor business experiences ongoing competitive pricing pressure from customers and competitors. Accordingly, any increase in the cost of our products, whether by adverse changes in purchase price or adverse manufacturing cost, will reduce our gross margins and operating profit. In general, we do not have

 

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long-term supply agreements with our foundry, test, assembly and other vendors other than a framework agreement with UMC and minimum capacity agreements with UTAC and Giga Solution. As a result, we typically negotiate pricing on a purchase order basis. Therefore, we may not be able to obtain price reductions or anticipate or prevent future price increases from our suppliers. There is no assurance that our manufacturing suppliers will be able to deliver raw materials, goods and services to us at reasonable prices and the required volume. These and other related factors could impair our ability to meet our customers’ needs and have an adverse effect on our operating results.

If our foundry vendors do not achieve satisfactory yields or quality, our reputation, customer relationships and financial performance could be harmed.

The fabrication of chipsets is a complex and technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields, and in some cases, cause production to be suspended. Our foundry vendor could, from time to time, experience manufacturing defects and reduced manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundry vendor could result in lower than anticipated manufacturing yields or unacceptable performance. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Poor yields from our foundry vendor, or defects, integration issues or other performance problems in our products could cause us significant customer relations and business reputation problems, harm our financial results and result in financial or other damages to our customers. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.

Our semiconductor solutions are manufactured at a limited number of locations. If we experience manufacturing problems at a particular location, we would be required to transfer manufacturing to a backup location or supplier. Converting or transferring manufacturing from a primary location or supplier to a backup fabrication facility could be expensive and may not be completed for an extended period of time. During such a transition, we would be required to meet customer demand from our then-existing inventory, as well as any partially finished goods that can be modified to the required product specifications. We do not seek to maintain sufficient inventory to address a lengthy transition period because we believe it is not economical to keep more than minimal inventory on hand. As a result, we may not be able to meet customer needs during a transition, which could delay shipments, cause a production delay or stoppage for our customers, result in a decline in our sales and damage our customer relationships. In addition, a significant portion of our sales are to customers that practice just-in-time order management from their suppliers which gives us a very limited amount of time to process and complete these orders. As a result, delays in our production or shipping by the parties to whom we outsource these functions could reduce our sales, damage our customer relationships and our reputation in the marketplace, any of which could harm our business, results of operations and financial condition.

We may experience difficulties in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries or increased costs.

We currently use standard 130-nanometer, 110-nanometer and 65-nanometer standard RF, mixed-signal and digital CMOS production processes. We are also developing our next generation of products using 40-nanometer process technology. To remain competitive, we expect to continue to transition our semiconductor products to progressively smaller geometries and to achieve higher levels of design integration. These ongoing efforts require us from time to time to modify the manufacturing processes for our products and to redesign some products, which in turn may result in delays in product deliveries. We periodically evaluate the benefits of migrating to new process technologies to reduce cost and improve performance. We may face difficulties, delays and increased expenses as we transition our products to new processes and potentially to new foundries. We depend on our relationships with our existing wafer foundries to transition to new processes successfully. There is no assurance that these foundries will be able to effectively manage the transition or that we will be able to

 

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maintain our relationship with them or develop relationships with new foundries. In addition, as new processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as end customer and third-party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis. If we or our wafer foundries experience significant delays in transitioning to smaller geometries or fail to efficiently implement transitions and new processes, we could experience reduced manufacturing yields, delays in product deliveries and increased costs, any or all of which could harm our relationships with our customers, and our business, financial condition and operating results.

The complexity of our semiconductor solutions could result in unforeseen delays or expenses from undetected defects, errors or bugs in hardware or software, which could reduce the market acceptance for our new semiconductor solutions, damage our reputation with current or prospective customers and adversely affect our operating costs.

Highly complex semiconductor solutions such as ours frequently contain defects, errors and bugs when they are first introduced or as new versions are released. We have in the past and may in the future experience these defects, errors and bugs. If any of our semiconductor solutions have reliability, quality, or compatibility problems, we may not be able to successfully correct these problems in a timely manner or at all. In addition, if any of our proprietary features contain defects, errors or bugs when first introduced or as new versions are released, we may be unable to correct these problems. Consequently, our reputation may be damaged and customers may be reluctant to buy our semiconductor solutions, which could harm our ability to retain existing customers and attract new customers and our financial results. In addition, these defects, errors or bugs could interrupt or delay sales to our customers. If any of these problems are not found until after we have commenced commercial production of a new semiconductor solution, we may be required to incur additional development costs and product recalls, repairs or replacement costs. These problems may also result in claims against us by our customers or others.

The loss of any of our key personnel could seriously harm our business, and our failure to attract or retain specialized technical, management or sales and marketing talent could impair our ability to grow our business.

We believe our future success will depend in large part upon our ability to attract, retain and motivate highly skilled management, engineering, sales and marketing personnel. The loss of any key employees or the inability to attract, retain or motivate qualified personnel, including engineers and sales and marketing personnel, could delay the development and introduction of and harm our ability to sell our semiconductor solutions. We believe that our future success is dependent on the contributions of Kyeongho Lee, Ph.D., our President and Chief Executive Officer. The loss of the services of Dr. Lee, other executive officers or certain other key personnel could adversely affect our business, financial condition and results of operations. All of our employees are at-will. For example, if any of these individuals were to leave unexpectedly, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity during the search for any such successor and while any successor is integrated into our business and operations.

Our key technical and engineering personnel represent a significant asset and serve as the source of our technological and product innovations. We plan to recruit design and application engineers with expertise in wireless communications technologies. We may not be successful in attracting, retaining and motivating sufficient numbers of technical and engineering personnel to support our anticipated growth.

In addition, to expand our customer base and increase sales to existing customers, we will need to hire additional qualified sales and marketing personnel. The competition for qualified marketing, sales, technical and engineering personnel in our industry is very intense. If we are unable to hire, train and retain qualified marketing, sales, technical and engineering personnel in a timely manner, our ability to grow our business will be impaired. In addition, if we are unable to retain our existing sales personnel, our ability to maintain or grow our current level of revenue will be adversely affected.

 

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Our failure to protect our intellectual property rights adequately could impair our ability to compete effectively or to defend ourselves from litigation, which could harm our business, financial condition and results of operations.

We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements and other methods, to protect our proprietary technologies and know-how. As of June 30, 2011, we had 41 issued patents and 5 pending patent applications in the United States, 43 issued patents and 8 pending patent applications in Korea, 9 patents issued in China, 9 patents issued in Japan, 8 patents issued in Taiwan, and 4 patents issued in India. Even if the pending patent applications are granted, the rights granted to us may not be meaningful or provide us with any commercial advantage. For example, these patents could be opposed, contested, circumvented or designed around by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer similar products or technologies. Our foreign patent protection is generally not as comprehensive as our U.S. patent protection and may not protect our intellectual property in some countries where our products are sold or may be sold in the future. Many U.S.-based companies have encountered substantial intellectual property infringement in foreign countries, including countries where we sell products. Even if foreign patents are granted, effective enforcement in foreign countries may not be available.

The legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain and evolving. There is no assurance that others will not develop or patent similar or superior technologies, products or services, or that our patents, trademarks and other intellectual property will not be challenged, invalidated or circumvented by others.

Unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for doing so, which could harm our business. Monitoring unauthorized use of our intellectual property is difficult and costly. Although we are not aware of any unauthorized use of our intellectual property in the past, it is possible that unauthorized use of our intellectual property may have occurred or may occur without our knowledge. There is no assurance that the steps we have taken will prevent unauthorized use of our intellectual property. Our failure to effectively protect our intellectual property could reduce the value of our technology in licensing arrangements or in cross-licensing negotiations. We may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination favorable to us. If we are unable to protect our proprietary rights or if third parties independently develop or gain access to our or similar technologies, our business, revenue, reputation and competitive position could be harmed.

Assertions by third parties of infringement by us of their intellectual property rights could result in significant costs and cause our operating results to suffer.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. We have in the past received and, particularly as a public company, we expect that in the future we may receive, communications from various industry participants alleging our infringement of their patents, trade secrets or other intellectual property rights, including suits challenging our products implementing LTE and WiMAX standards. Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

 

   

stop or delay selling products or using technologies that contain the allegedly infringing intellectual property;

 

   

lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others;

 

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incur significant legal expenses;

 

   

pay substantial damages to the party whose intellectual property rights we may be found to be infringing;

 

   

redesign those products that contain the allegedly infringing intellectual property; or

 

   

attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all, or may result in our being required to pay royalties to a third-party on our products.

Our customers could also become the target of litigation relating to the patent and other intellectual property rights of others. This could trigger technical support and indemnification obligations in some of our licenses or customer agreements. These obligations could result in substantial expenses, including the payment by us of costs and damages relating to claims of intellectual property infringement. In addition to the time and expense required for us to provide support or indemnification to our customers, any such litigation could disrupt the businesses of our customers, which in turn could hurt our relationships with our customers and cause the sale of our products to decrease. There is no assurance that claims for indemnification will not be made or that if made, such claims would not have an adverse effect on our business, operating results or financial condition.

The wireless standards that we implement in our products, LTE and WiMAX, are subject to numerous patents held by a number of different third parties. In order to encourage the adoption of these standards, two patent pools are expected to be created to facilitate the licensing of patents that are essential to the LTE and WiMAX standards. These patent pools will license all of the patents contributed to the pool on a reasonable and non-discriminatory basis. However, there can be no assurance that all parties that hold patents to the LTE and WiMAX standards will make their patents available for licensing through these patent pools, or that the terms offered by the patent pools will be acceptable to the industry. Further, if we or our customers are unable to obtain licenses to all of the necessary patents to implement the LTE and WiMAX standards through these patent pools, we or our customers may have to negotiate individual licenses with a number of different entities in addition to obtaining a license from the patent pools. Obtaining these additional licenses could increase the cost of our products or that of our customer’s products and perhaps delay the adoption of our products or those of our customers. Moreover, there is no assurance that the entities that hold patents that are essential to the LTE and WiMAX standards will not seek to sue us or our customers for patent infringement rather than offering to license their patents on reasonable terms individually or through a patent pool.

We may not be able to obtain reimbursements from our customers for costs related to research and development activities.

In connection with government grants and product development agreements with certain customers, we received non-recurring engineering (NRE) fees to reimburse costs incurred in the research, development and design of our products. These arrangements are motivated primarily by the opportunity to engage customers and at the same time, jointly progress our own research and development activities with the associated development compensation. We use these NRE amounts to defray a portion of our research and development expenses, and it has the effect of reducing our operating expenses. During the years ended June 30, 2009, 2010 and 2011, we recognized $5.3 million, $1.1 million and $7.7 million, respectively, related to these NRE contracts and government grants as a reduction to research and development expenses. Generally, these NRE reimbursements are paid upon the completion of specified milestones in our product development contracts. However, there is no guarantee that we will be able to satisfy these milestones, and failure to do so may delay or prevent us from receiving NRE fees. In addition, there is no assurance that we will be able to negotiate or obtain NRE reimbursements in future product development agreements, and failure to receive and recognize NRE reimbursements, and any significant reduction in the amount of NRE reimbursements we receive, could increase our operating expenses and adversely affect our results of operations.

 

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We rely upon third parties for supporting technology that is integrated into some of our products, and if we are unable to continue to use this technology and future technology, our ability to sell technologically advanced products would be limited.

We rely on third parties for supporting technology that is integrated into some of our products. If we are unable to continue to use or license on reasonable terms third-party technologies used in some of our products, we may not be able to secure alternatives on a timely basis and our business could be harmed. Even if we are able to secure an alternative license to replace the loss of an existing technology, our transition to this new technology may require additional time and expenses. Any delay or incurrence of additional costs could have an adverse effect on our business, financial condition and results of operations.

Rapidly changing standards could make our semiconductor solutions obsolete, which would cause our operating results to suffer.

We design our semiconductor solutions to conform to standards set by industry standards bodies, including the Institute of Electrical and Electronics Engineers, Inc., or IEEE, and the 3rd Generation Partnership Project, or 3GPP. We also depend on industry groups , including the WiMAX Forum, to certify and maintain certification of our semiconductor solutions. If our customers adopt new or competing industry standards with which our semiconductor solutions are not compatible, or such industry groups fail to adopt standards with which our semiconductor solutions are compatible, our existing semiconductor solutions would become less desirable to our customers and our sales would suffer. The emergence of markets for our products is affected by a variety of factors beyond our control. In particular, our semiconductor solutions are designed to conform to current specific industry standards. Competing standards may emerge that are preferred by our customers, which could also reduce our sales and require us to make significant expenditures to develop new semiconductor solutions. Governments and foreign regulators may adopt standards with which our semiconductor solutions are not compatible, favor alternative technologies or adopt stringent regulations that would impair or make commercially unviable the deployment of our semiconductor solutions. In addition, products that implement existing standards may be challenged as infringing upon third-party intellectual property rights and may become obsolete.

We have material weaknesses in our internal control over financial reporting. If we fail to establish and maintain an effective system of internal control, we may not be able to accurately or timely report our financial results and detect or prevent fraud, which could adversely affect our stock price and investor confidence.

Prior to completion of this offering, we have been a private company with limited accounting personnel to adequately execute our accounting processes and other supervisory resources with which to address our internal control over financial reporting. This lack of adequate accounting resources contributed to audit adjustments to our financial statements in the past.

In connection with the audit of our consolidated financial statements for the fiscal years ended June 30, 2009, June 30, 2010 and June 30, 2011, our independent registered public accounting firm identified and communicated to us material weaknesses, including a material weakness related to our failure to maintain a sufficient number of personnel with an appropriate level of knowledge, experience and training in the application of generally accepted accounting principles in the U.S. (U.S. GAAP) for complex transactions necessary to satisfy our financial reporting requirements. A material weakness is a control deficiency, or a combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. This material weakness contributed to multiple audit adjustments and also contributed to the following individual material weaknesses:

 

   

We did not maintain effective controls related to the completeness and accuracy of the valuation for the accounting for our preferred stock warrant transactions;

 

   

We did not maintain effective controls related to the completeness and accuracy of the accounting for income taxes in regards to transfer pricing and outside basis differences;

 

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We did not maintain effective controls related to the accuracy and valuation of accounting for deferred margin transactions; and

 

   

We did not maintain effective controls related to the accuracy and valuation of accounting for inventory variances.

Each of the material weaknesses described above could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected.

We are in the process of implementing measures designed to improve our internal control over financial reporting to remediate these material weaknesses. For example, we recently hired a new Chief Financial Officer. We also intend to hire a Corporate Controller with requisite experience in financial reporting for a publicly traded company. We also have plans to add more accounting personnel, including a SEC reporting and Sarbanes-Oxley implementation manager and a financial planning and analysis position. In addition, we have retained consultants to assist with the accounting for income taxes, conduct a transfer pricing study, and review tax strategies. We also expect to retain additional consultants to advise us on making further improvements to our internal controls related to these accounting areas in the future. We believe that these additional resources would enable us to broaden the scope and quality of our internal review of underlying information related to financial reporting and to further enhance our financial review procedures, including the accounting processes for income taxes, deferred margin transactions, inventory variances and complex transactions as they occur.

We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weaknesses in our internal control over financial reporting or to avoid potential future material weaknesses.

In addition, as a U.S.-listed public company, we will be subject to reporting obligations under the United States securities laws, including Section 404 of the Sarbanes-Oxley Act of 2002, as amended (Sarbanes-Oxley Act). For the fiscal year ending June 30, 2013, our management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm will also be required to deliver an attestation report on the effectiveness of our internal control over financial reporting beginning with the year ending June 30, 2013, unless we qualify for an exemption as a non-accelerated filer under the applicable SEC rules and regulations.

Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may decline to issue an opinion as to the effectiveness of our internal control over financial reporting, or may issue a report that is qualified or adverse. During the course of the evaluation of internal control over financial reporting, we or our independent registered public accounting firm may identify control deficiencies that we may not be able to remediate prior to the date of our first assessment of internal control over financial reporting. Our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock.

We will incur additional costs to comply with regulatory requirements as a public company, including Section 404 of the Sarbanes-Oxley Act of 2002, and we may not be able to successfully manage these additional obligations.

We have not operated as a public company in the past and will incur significant legal, accounting, and other expenses that we did not incur as a private company. The individuals who constitute our management team have limited experience managing a publicly traded company, and limited experience complying with the increasingly

 

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complex and changing laws pertaining to public companies, including rules and regulations promulgated by the U.S. Securities and Exchange Commission (SEC) and The NASDAQ Stock Market. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives, and we may not successfully or efficiently manage our transition into a public company. We expect rules and regulations, such as the Sarbanes-Oxley Act and the Consumer Protection Act enacted in July 2010, to increase our legal, accounting and finance compliance costs and to make some activities more time consuming and costly. Furthermore, in anticipation of becoming a public company, we have created board committees and will adopt additional internal controls and disclosure controls and procedures. We also intend to hire additional accounting and finance personnel with technical accounting and financial reporting experiences, including compliance with the internal control requirements under Section 404 of the Sarbanes-Oxley Act. Any inability to recruit and retain the accounting personnel we require may have an adverse impact on our ability to accurately and timely prepare our financial statements, and we expect to incur additional costs associated with preparing, filing and distributing period public reports. These rules and regulations could increase our administrative costs and divert our management’s attention, which may adversely affect our business, financial condition and results of operations.

We cannot predict our future capital needs and we may not be able to obtain additional financing to fund our operations.

We may need to raise additional funds in the future. Our ability to continue to meet our obligations and to achieve our intended business objectives is dependent upon, among other things, refinancing the debt obligations or raising additional capital in order to satisfy those obligations which are due during the twelve months ending June 30, 2012. There can be no assurance that sufficient debt or equity financing will be available at all or, if available, that such financing will be at terms and conditions acceptable to us. Should we fail to refinance the debt or raise additional capital, we may not be able to achieve our longer term business objectives and may face other serious adverse consequences. If we raise additional funds by issuing equity securities or convertible debt, investors may experience significant dilution of their ownership interest, and the newly-issued securities may have rights senior to those of the holders of our common stock. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility. Furthermore, if our cash flows and capital resources are insufficient to fund our interest payments under these loans, we may be forced to take alternative measures to meet our cash requirements, including sales and disposition of our assets used as collateral for the loans, which may have an adverse effect on our business and results of operations. If additional financing is not available when required or is not available on acceptable terms, we may have to scale back our operations or limit our production activities, and we may not be able to expand our business, develop or enhance our products, take advantage of business opportunities or respond to competitive pressures, which could result in lower revenue and reduce the competitiveness of our products.

Our business depends on international customers, suppliers and operations in Asia, which subjects us to additional risks, including increased complexity and costs of managing international operations and geopolitical instability.

We rely on, and expect to continue to rely on, customers and suppliers located primarily in the Asia-Pacific region. We also have, and will continue to have, research and development facilities in Korea and sales offices in China, Japan, Korea and Taiwan. As a result of our international focus, we are subject to a number of risks, including:

 

   

increased complexity and costs of managing international operations;

 

   

longer and more difficult collection of receivables;

 

   

difficulties in enforcing contracts generally;

 

   

geopolitical and economic instability, terrorist attacks and armed conflicts;

 

   

limited protection of our intellectual property and other assets;

 

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restrictions on our ability to export our technology from the U.S. and other countries;

 

   

compliance with local laws and regulations and unanticipated changes in local laws and regulations, including tax laws and regulations;

 

   

complexities in the accounting and financial management of our operations;

 

   

trade and foreign exchange restrictions and higher tariffs;

 

   

travel restrictions;

 

   

timing and availability of import and export licenses and other governmental approvals, permits and licenses, including export classification requirements;

 

   

foreign currency exchange fluctuations relating to our international operating activities;

 

   

transportation delays and limited local infrastructure and disruptions, such as large scale outages or interruptions of service from utilities or telecommunications providers;

 

   

difficulties in staffing international operations;

 

   

heightened risk of terrorism;

 

   

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

 

   

differing employment practices and labor issues; and

 

   

regional health issues and natural disasters.

In addition, although we do not conduct any business in North Korea, any future increase in political or military tensions between South Korea and North Korea, or between the U.S. and North Korea, may adversely affect our business, financial condition and results of operations.

Our business operations could be significantly harmed by natural disasters or global epidemics.

We have research and development facilities located in San Jose, California which could suffer significant business disruption due to earthquakes. A significant portion of our products are manufactured by third-party contractors located in the Pacific Rim region, including Taiwan. The risk of an earthquake or tsunami in Taiwan and elsewhere in the Pacific Rim region is significant due to the proximity of major earthquake fault lines to the facilities of our foundry vendors and assembly and test subcontractors. In addition, a number of our customers and suppliers have maintained facilities in Japan that were affected by the March 2011 Sendai earthquake. Even if these customers and suppliers are not located near the epicenter of the March 2011 Sendai earthquake, they may be affected by the consequences of the natural disaster that has affected Japan, which have included rolling blackouts, decreased access to raw materials and limited ability to ship inventory. If these conditions persist, we may experience delay or cancellation of orders from our customers if they are unable to obtain adequate supplies of components needed for the manufacture of their products that incorporate our components. We may also experience shortages of key materials required for the assembly of our own products, which could limit our ability to manufacture and ship these products. In either event, our net sales and results of operations could be adversely affected. We are not currently covered by insurance against business disruption caused by earthquakes.

Our business could be adversely affected by epidemics or outbreaks such as avian flu or H1N1 flu, also known as swine flu. An outbreak of avian flu or H1N1 flu in the human population, or another similar health crisis, could adversely affect the economies and financial markets of many countries, particularly in Asia. Moreover, any related disruptions to transportation or the free movement of persons could hamper our operations and force us to close our offices temporarily.

The occurrence of any of the foregoing or other natural or man-made disasters could cause damage or disruption to us, our employees, operations, distribution channels, markets and customers, which could result in

 

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significant delays in deliveries or substantial shortages of our products and adversely affect our business results of operations, financial condition, or prospects.

Our failure to comply with obligations under open source licenses could require us to release our source code to the public or cease distribution of our products, which could harm our business, financial condition and results of operations.

Some of the software used with our products, as well as that of some of our customers, may be derived from so-called “open source” software that is generally made available to the public by its authors and/or other third parties. This open source software is often made available to us under licenses, such as the GNU General Public License, which impose certain obligations on us in the event we were to make available derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, and/or license such derivative works under a particular type of license, rather than the forms of license customarily used to protect our intellectual property. In addition, there is little or no legal precedent for interpreting the terms of certain of these open source licenses, including the determination of which works are subject to the terms of such licenses. While we believe we have complied with our obligations under the various applicable licenses for open source software, in the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work, which may adversely affect our business, financial condition and results of operations.

Failure to comply with governmental laws and regulations could harm our business.

Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these regulatory requirements are more stringent than in the United States. It is expected that new environmental laws and regulations will impact our products and operations, and although we cannot predict the ultimate impact of any such changes, they may increase our operating and manufacturing costs or result in increased penalties, which could harm our business. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, fines, damages, civil and criminal penalties or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results and financial condition could be adversely affected. In addition, we may incur significant costs to respond to or defend against adverse government proceedings, and these actions may divert our management’s attention and resources. Enforcement actions and sanctions could harm our business, operating results and financial condition.

The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations.

The U.S. government has made public statements indicating that it has made international tax reform a priority, and key members of the U.S. Congress have conducted hearings and proposed new legislation. Recent changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to the large and expanding scale of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and harm our financial condition, and results of operations.

 

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Risks Related to Our Industry

The semiconductor and communications industries have historically experienced significant fluctuations with prolonged downturns, which could impact our operating results, financial condition and cash flows.

The semiconductor industry has historically exhibited a pattern of cyclicality, which at various times has included significant downturns in customer demand. Because a significant portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in revenue. If this situation were to occur, it could adversely affect our operating results, cash flow and financial condition. Furthermore, the semiconductor industry has periodically experienced increased demand and production constraints. If this happens in the future, we may not be able to produce sufficient quantities of our products to meet the increased demand. We may also have difficulty in obtaining sufficient wafer, assembly and test resources from our subcontract manufacturers. Any factor adversely affecting the semiconductor industry in general, or the particular segments of the industry that our products target, may adversely affect our ability to generate revenue and could negatively impact our operating results.

The communications industry has, in the past, experienced pronounced downturns, and these cycles may continue in the future. A future decline in global economic conditions could have adverse, wide-ranging effects on demand for our products and for the products of our customers, particularly wireless communications equipment manufacturers or other members of the wireless industry, such as wireless network operators. Inflation, deflation and economic recessions that adversely affect the global economy and capital markets also adversely affect our customers and our end consumers. For example, our customers’ ability to purchase or pay for our products and services, obtain financing and upgrade wireless networks could be adversely affected, which may lead to many networking equipment providers slowing their research and development activities, canceling or delaying new product development, reducing their inventories and taking a cautious approach to acquiring our products, which would have a significant negative impact on our business. If this situation were to occur, it could adversely affect our operating results, cash flow and financial condition. In the future, any of these trends may also cause our operating results to fluctuate significantly from year to year, which may increase the volatility of the price of our stock.

The mobile phone industry is characterized by short product cycles, significant fluctuations in supply and demand, and rapidly changing technologies, and we may not be able to meet these challenges successfully.

A substantial portion of our products is incorporated into mobile phones. The mobile phone markets into which we sell our products are characterized by high growth, short product cycles, significant fluctuations in supply and demand, and rapidly changing technologies. In order to remain competitive, mobile phone manufacturers must continuously develop new technologies, deliver new products and otherwise adjust their business strategies to meet these challenges. We may not be able to implement the necessary measures timely, or if at all, to mitigate these industry-wide forces. For example, we may not be able to reduce our expenses timely to offset the impact of lower revenue in a cyclical downturn due to a reduction in demand, or it may be difficult for us to shift quickly the direction of our research and development efforts in response to new market requirements. Our failure to do so could have an adverse effect on our financial condition and results of operations.

Changes in current laws or the imposition of new laws regulating the wireless network and radio frequency emission could impede the sale of our products or otherwise harm our business.

Wireless networks can only operate in the frequency bands, or spectrum, allowed by regulators and in accordance with rules governing how the spectrum can be used. The Federal Communications Commission, or the FCC, in the United States, as well as regulators in foreign countries, have broad jurisdiction over the allocation of frequency bands for wireless networks. We therefore rely on the FCC and international regulators to provide sufficient spectrum and usage rules. For example, countries such as China, Taiwan, Japan, or Korea heavily regulate all aspects of their wireless communication industries, and may restrict spectrum allocation or

 

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usage. If further restrictions were to be imposed over the frequency range where our semiconductor solutions are designed to operate, we may have difficulty in selling our products in those regions. In addition, our semiconductor solutions operate in the 2 and 3 gigahertz, or GHz, band, which in some countries is also used by government and commercial services such as military and commercial aviation. The FCC and European regulators have traditionally protected government uses of the 2 and 3 GHz bands by setting power limits and indoor and outdoor designation and requiring that wireless local area networking devices not interfere with other users of the band such as government and civilian satellite services. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding the allocation and usage of the 2 and 3 GHz band on us, our customers or the industries in which we operate may materially and adversely impact the sale of our products and our business, financial condition and results of operations.

In addition, concern over the effects of radio frequency emissions, even if unfounded, may have the effect of discouraging the use of wireless devices, which may decrease demand for our products and those of our licensees and customers. In recent years, the FCC and foreign regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions from radio equipment, including wireless phones and other wireless devices. In addition, interest groups have requested that the FCC investigate claims that wireless communications technologies pose health concerns and cause interference with airbags, hearing aids and medical devices. Concerns have also been expressed over the possibility of safety risks due to a lack of attention associated with the use of wireless devices while driving. In May 2011, the World Health Organization announced the result of a scientific study on cell phone safety, which indicates that radio frequency electromagnetic fields is a possible carcinogen to humans. The study also found some evidence of increase in certain type of brain cancer for prolonged use of mobile phones. Any legislation that may be adopted, or any negative public sentiment that may have developed in response to these concerns could reduce demand for our products and those of our customers, which may adversely affect our business, financial condition and results of operations.

The large amount of capital required to obtain radio frequency licenses, deploy and expand wireless networks and obtain new subscribers could slow the growth of the wireless communications industry and adversely affect our business.

Our growth is dependent upon the increased use of wireless communications services that utilize our technology. In order to provide wireless communications services, wireless operators must obtain rights to use specific radio frequencies. The allocation of frequencies is regulated in the United States and other countries throughout the world, and limited spectrum space is allocated to wireless communications services. Industry growth may be affected by the amount of capital required to obtain licenses to use new frequencies, deploy wireless networks to offer voice and data services, expand wireless networks to grow voice and data services and obtain new subscribers. The significant cost of licenses, wireless networks and subscriber additions may slow the growth of the industry if wireless operators are unable to obtain or service the additional capital necessary to implement or expand 4G wireless networks. Our growth could be adversely affected if this occurs.

We may experience a decrease in market demand due to uncertain economic conditions in the United States and in international markets, which has been further exacerbated by the concerns of terrorism, war and social and political instability.

Economic growth in the United States and international markets has slowed significantly and the United States economy has recently been in a recession, and the timing of a full economic recovery is uncertain. The uncertainty in the economic environment may contribute to the volatility in the United States stock markets, which has experienced significant fluctuations recently. In addition, terrorist attacks in the United States and turmoil in the Middle East have increased the uncertainty in the United States economy and may contribute to a decline in economic conditions, both domestically and internationally. Terrorist acts and similar events, or war in general, could contribute further to a slowdown of the market demand for goods and services, including demand for our products. If the economy declines as a result of the recent economic, political and social turmoil,

 

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including any potential default or downgrade in the rating of United States debt obligations, or if there are further terrorist attacks in the United States or elsewhere, we may experience decreases in the demand for our products and services, which may harm our operating results.

Risks Related to this Offering and Ownership of our Common Stock

There has been no prior trading market for our common stock, and an active trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for our common stock, and there is no assurance that an active trading market will develop or be sustained after this offering. The initial public offering price will be negotiated between us and representatives of the underwriters and may not be indicative of the market price of our common stock after this offering.

The market price of our common stock may be volatile, which could cause the value of your investment to decline.

Prior to this offering, our common stock has not been traded in a public market. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price may not be indicative of prices that will prevail in the trading market. The trading price of our common stock following this offering is therefore likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:

 

   

changes in financial estimates, including our ability to meet our future revenue and operating profit or loss projections;

 

   

changes in earnings estimates or recommendations by securities analysts;

 

   

fluctuations in our operating results or those of our customers, operators or other semiconductor companies;

 

   

commercial deployment and upgrade of 4G wireless networks;

 

   

economic developments in the semiconductor or mobile and wireless industries as a whole;

 

   

general economic conditions and slow or negative growth of related markets;

 

   

announcements by us or our customers or competitors of acquisitions, new products, significant contracts or orders, commercial relationships or capital commitments;

 

   

announcements regarding intellectual property litigation involving us or our competitors;

 

   

changes in the financial estimates of our competitors;

 

   

our ability to develop and market new and enhanced products on a timely basis;

 

   

changes in the pricing and costs of manufacturing;

 

   

commencement of or our involvement in litigation;

 

   

any major change in our board of directors or management;

 

   

political or social conditions in the markets where we sell our products; and

 

   

changes in governmental regulations.

In addition, the stock market in general, and the market for semiconductor and other technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations may be even more

 

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pronounced in the trading market shortly following this offering. These broad market and industry factors may cause the market price of our common stock to decrease, regardless of our actual operating performance. These trading price fluctuations may also make it more difficult for us to use our common stock as a means to make acquisitions or to use options to purchase our common stock to attract and retain employees. If the market price of shares of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources for our business operations.

Purchasers in this offering will immediately experience substantial dilution in net tangible book value.

The initial public offering price of our common stock is substantially higher than the prices paid for our common stock in the past and higher than the book value of the shares we are offering. In other words, you are paying a price per share that substantially exceeds the value of our assets after subtracting our liabilities. Accordingly, if you purchase common stock in the offering, you will incur immediate dilution of approximately $         per share in the net tangible book value per share from the price you pay for our common stock based on the assumed initial public offering price of $         per share. If the holders of outstanding stock options exercise those securities, you will incur additional dilution. In addition, we may raise additional capital through public or private equity or debt offerings, subject to market conditions. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance could result in further dilution to our stockholders. For a further description of the dilution that you will experience immediately after this offering, see the section of this prospectus entitled “Dilution.”

The price of our stock could decrease as a result of shares being sold in the market after this offering.

Additional sales of our common stock in the public market after this offering, or the perception that these sales may occur, could cause the market price of our shares to decline. Upon the completion of this offering, we will have approximately             shares of common stock outstanding, assuming no exercise of the underwriters’ option to purchase additional shares in this offering. All of the shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended (Securities Act). Our directors, officers and other existing security holders will be subject to lock-up agreements described under the caption “Shares Eligible for Future Sale” in this prospectus. Subject to the restrictions under Rule 144 under the Securities Act, these securities will be available for sale following the expiration of these lock-up agreements. These lock-up agreements expire 180 days after the date of this prospectus, which may be extended under certain circumstances. Approximately             shares of our common stock will be eligible for resale under Rule 144 immediately upon the expiration of the applicable lock-up period. In addition, the representatives of the underwriters in the offering may also release shares subject to the lock-up prior to the expiration of the lock-up period at their discretion.

In addition, after this offering, the holders of approximately             shares of common stock, including shares of common stock issuable upon conversion of our preferred stock upon the completion of this offering, will be entitled to rights to cause us to register the sale of those shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration.

We intend to file a registration statement under the Securities Act covering 59,500,000 shares of common stock reserved for issuance under our stock plans. This registration statement is expected to be filed after the date of this prospectus and will automatically become effective upon filing. Accordingly, shares registered under this registration statement will be available for sale in the open market unless those shares are subject to vesting restrictions with us or the contractual restrictions described above.

 

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If securities analysts or industry analysts downgrade our stock, publish negative research or reports, or do not publish reports about our business, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us, our business and our market. If one or more analysts adversely change their recommendation regarding our stock or our competitors’ stock, our stock price could decline. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

A limited number of stockholders will have the ability to influence the outcome of director elections and other matters requiring stockholder approval.

After this offering, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately 37% of our outstanding common stock, assuming no exercise of the underwriters’ option to purchase additional shares in this offering. These stockholders, if they acted together, could exert substantial influence over matters requiring approval by our stockholders, including electing directors, adopting new compensation plans and approving mergers, acquisitions or other business combination transactions. This concentration of ownership may discourage, delay or prevent a change of control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by our other stockholders, including those who purchase shares in this offering.

Our management will have broad discretion over the use of proceeds from this offering.

The net proceeds from this offering may be used to repay the outstanding balances under our bank loans and for working capital and other general corporate purposes. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. However, we do not have any agreements or commitments for any specific acquisitions at this time. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our operating results or market value. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

Delaware law and our amended and restated certificate of incorporation and bylaws contain provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our amended and restated certificate of incorporation and bylaws, as they will be in effect upon the completion of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

 

   

the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or due to the resignation or departure of an existing board member;

 

   

the prohibition of cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

 

   

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

 

   

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

 

   

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

 

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the elimination of the rights of stockholders to call a special meeting of stockholders and to take action by written consent in lieu of a meeting; and

 

   

the required approval of at least a majority of the shares entitled to vote at an election of directors to remove directors without cause.

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

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

We do not intend to declare and pay dividends on our capital stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our credit facility restrict our ability to pay dividends. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, particularly the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” contains forward-looking statements. All statements other than present and historical facts and conditions contained in this prospectus, including statements regarding our future results of operations and financial positions, business strategy, plans and our objectives for future operations, are forward looking statements. When used in this prospectus the words “anticipate,” “objective,” “may,” “might,” “should,” “could,” “can,” “intend,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” “is designed to” or the negative of these and similar expressions identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:

 

   

the markets in which we compete and in which our products are sold, including statements and growth rates regarding the LTE and WiMAX markets;

 

   

commercial deployment and upgrade of 4G wireless communications networks;

 

   

our expectations regarding our expenses, sales and operations;

 

   

our sales and marketing strategies and customer and operator relationships;

 

   

our ability to anticipate the future market demands and future needs of our customers;

 

   

our ability to achieve new design wins;

 

   

our intent to develop products that are compatible with current wireless networks;

 

   

anticipated features and benefits of our current and future products;

 

   

our growth strategy elements and our growth rate;

 

   

our ability to acquire third-party licenses to use supporting technologies;

 

   

our intellectual property, third-party intellectual property and claims related to infringement thereof;

 

   

our ability to secure manufacturing capacity for our products;

 

   

general economic conditions in our domestic and international markets;

 

   

our anticipated trends and challenges in the markets in which we operate, including average selling price reductions, cyclicality in the networking industry and transitions to new process technologies; and

 

   

expectations regarding the use of net proceeds from this offering.

All forward-looking statements involve risks, assumptions and uncertainties. The occurrence of the events described, and the achievement of the expected results, depend on many factors, some or all of which are not predictable or within our control. Actual results may differ materially from expected results. See the section titled “Risk Factors” and elsewhere in this prospectus for a more complete discussion of these risks, assumptions and uncertainties and for other risks and uncertainties. These risks, assumptions and uncertainties are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this prospectus. Other than as required by applicable securities laws, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation, and specifically decline any obligation, to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by U.S. federal securities laws.

 

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MARKET, INDUSTRY AND OTHER DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our services. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information and cannot assure you of its accuracy or completeness, but we believe such third-party information is accurate. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the common stock that we are offering will be $         million, assuming an initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares from us is exercised in full, we estimate that our net proceeds would be approximately $         million after deducting estimated underwriting discounts and commission and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our uses of the net proceeds from this offering, although it may impact when we may need to seek additional capital.

We intend to use approximately $12.1 million of our net proceeds from this offering to pay the principal amount outstanding under the following bank loans:

 

   

A loan and security agreement with Comerica Bank, which provides a revolving line of credit based on our outstanding accounts receivables. The line of credit carries an interest rate of 1.0% per annum over the lender’s prime rate; provided that such prime rate shall not be less than the daily adjusted LIBOR rate plus 2.5% per annum. Interest rate in effect as of June 30, 2011 was 4.3%. The revolving loans may be borrowed, repaid and reborrowed until July 3, 2012, at which time all amounts borrowed under the loan agreement must be repaid. The loan agreement is subject to an annual nonrefundable fee of $15,000 due in July of each year until the facility is terminated. The principal amount outstanding under this loan and security agreement was $2.9 million as of June 30, 2011.

 

   

A term loan agreement with Kookmin Bank, which carries a fixed interest of 9.9% per annum (as of June 30, 2011) and has a maturity date of October 16, 2011. The principal amount outstanding under this loan agreement was $4.2 million as of June 30, 2011.

 

   

A term loan agreement with Korea Development Bank, which carries a fixed interest of 6.4% per annum and has a maturity date of April 30, 2012. The principal amount outstanding under this loan agreement was $3.7 million as of June 30, 2011.

 

   

A term loan agreement with Industrial Bank of Korea, which carries a fixed interest of 16.8% per annum and has a maturity date of November 4, 2011. The principal amount outstanding under this loan agreement was $0.8 million as of June 30, 2011.

 

   

A loan facility with Industrial Bank of Korea, which carries a monthly variable interest rate based on Public Capital Management Fund lending rate in Korea less 0.5%, which was 2.75% as of June 30, 2011. The maturity date of this loan is March 15, 2012. The principal amount outstanding under this loan facility was $0.5 million as of June 30, 2011.

We intend to use the remaining net proceeds from this offering for working capital and other general corporate purposes, including:

 

   

providing additional capital to fund our operations;

 

   

improving our competitive position; and

 

   

facilitating our future access to the public equity markets.

 

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Pending the uses described above, we intend to invest the net proceeds in a variety of capital preservation instruments, including short-term, interest-bearing, investment grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

The expected use of the net proceeds of this offering represents our current intentions based upon our present plans and business conditions, and our management will have broad discretion in using the net proceeds from this offering.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividend on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends on our common stock in the foreseeable future.

The holders of our Series C, D, E and F redeemable convertible preferred stock are entitled to receive, prior to and in preference of the holders of Series A and B redeemable convertible preferred stock and common stock, cumulative dividends at the rate of $0.05, $0.08, $0.09 and $0.10 per share respectively, when and if declared by the board of directors. In May 2011, we amended our certificate of incorporation to specify that we will pay the cumulative dividends for the Series C, D, E and F redeemable convertible preferred stock in shares of common stock upon the automatic conversion of these shares in connection with a qualified underwritten initial public offering. The number of shares of common stock to be issued as a result of these payments will be determined by dividing the calculated U.S. dollar amount of the cumulative dividends by the per share initial public offering price.

Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on a number of factors, including our earnings, capital requirements and overall financial conditions. In addition, we are currently restricted from paying dividends on our capital stock until our outstanding obligations under our bank borrowings are repaid in full.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2011 as follows:

 

   

our actual cash and cash equivalents and capitalization as of June 30, 2011;

 

   

our pro forma cash and cash equivalents and capitalization as of June 30, 2011 after giving effect to:

 

   

the automatic conversion of all outstanding shares of our preferred stock as of June 30, 2011 into an aggregate of 157,090,863 shares of common stock upon completion of this offering;

 

   

the issuance of              shares of common stock as payment for all unpaid and accrued dividends to holders of our preferred stock, assuming an initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus and assuming the payment occurs on                     ;

 

   

the exercise of outstanding warrants to purchase 9,303,029 shares of our preferred stock as of June 30, 2011, such exercise includes the assumed exercise, on a net exercise basis where allowed, of the outstanding warrants to purchase 7,636,363 shares of our preferred stock, immediately prior to this offering, and the concomitant conversion of the shares of preferred stock acquired upon exercise into             shares of common stock upon completion of this offering, assuming an initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus;

 

   

the automatic conversion of an aggregate of $8.9 million in principal and accrued interest outstanding under our convertible notes as of June 30, 2011 into              shares of preferred stock which will occur immediately prior to the closing of this offering at a conversion price equal to $1.20 per share, and the concomitant conversion of these shares of preferred stock into              shares of common stock upon completion of this offering, assuming the conversions occur on                     , 2011;

 

   

the automatic conversion of an aggregate of $22.5 million in principal and accrued interest outstanding under our convertible notes and convertible notes to a related party as of June 30, 2011 into              shares of preferred stock immediately prior to a filing of a Registration Statement on Form S-1 with the SEC at a conversion price equal to $1.20 per share, and the concomitant conversion of these shares of preferred stock into              shares of common stock upon completion of this offering, assuming the conversions occurs on                      , 2011; and

 

   

the resulting reclassification of the liabilities related to the convertible notes to additional paid-in capital and the settlement of the liabilities related to the foreign currency derivative instruments; and

 

   

our pro forma as adjusted cash and cash equivalents and capitalization as of June 30, 2011 after giving effect to the transactions described above and the sale of              shares of common stock in this offering at an assumed initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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

 

    As of June 30, 2011  
          Actual           Pro
Forma
    Pro Forma as
    Adjusted    
 
    (In thousands, except share and per share data)  

Cash and cash equivalents

  $ 18,227      $        $     
 

 

 

   

 

 

   

 

 

 

Bank borrowings

    12,072       

Notes payable—related party

    1,475       

Convertible notes payable

    30,357            

Convertible notes payable—related party

    1,038            

Foreign currency derivatives

    1,165            

Preferred stock warrant liability

    4,063            

Mandatorily redeemable convertible preferred stock, par value $0.001 per share: 193,180,806 shares authorized, 157,090,863 shares issued and outstanding, actual; no shares authorized, issued and outstanding pro forma and pro forma as adjusted (unaudited)

    165,428            

Stockholders’ equity (deficit):

     

Common stock, par value $0.001 per share: 305,374,718 shares authorized, 23,689,499 shares issued and outstanding, actual ; 400,000,000 shares authorized,             shares issued and outstanding pro forma (unaudited);             shares issued and outstanding pro forma as adjusted (unaudited)

    24       
 

 

 

   

 

 

   

 

 

 

Additional paid-in capital

          

Accumulated other comprehensive income

    709       

Accumulated deficit

    (192,712    
 

 

 

   

 

 

   

 

 

 

Total stockholders’ deficit

    (191,979    
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 23,619      $        $     
 

 

 

   

 

 

   

 

 

 

If the underwriters’ overallotment option were exercised in full, pro forma as adjusted cash and cash equivalents, common stock and additional paid-in capital, stockholders’ equity (deficit) and shares issued and outstanding as of June 30, 2011 would be $         million, $         million, $         million and              shares, respectively.

The number of shares of common stock issued and outstanding actual, pro forma and pro forma as adjusted in the table above excludes the following shares:

 

   

56,500,000 shares of common stock reserved for issuance under our 2011 Plan, which became effective upon adoption by our board of directors on September 12, 2011 and serves as the successor to our 2010 Stock Option/Stock Issuance Plan and 2002 Special Stock Option/Stock Issuance Plan (Predecessor Plans), as well as any automatic increases in the number of shares of our common stock reserved for future issuance under the 2011 Plan, including:

 

   

50,678,762 shares of common stock issuable upon exercise of stock options outstanding under the Predecessor Plans as of June 30, 2011, at a weighted average exercise price of $0.53 per share, which stock options, and the shares underlying them, were transferred to the 2011 Plan, and

 

   

3,430,874 shares of common stock available for issuance under the Predecessor Plans, which shares were added to the shares reserved under our 2011 Plan.

 

   

3,000,000 shares of common stock reserved for issuance under our ESPP, which will become effective immediately upon the execution of the underwriting agreement for this offering, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under the ESPP.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. The dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our historical net tangible book value (deficit) as of June 30, 2011 was a deficit of $(26.6) million, or $(1.12) per share. Our pro forma net tangible book value (deficit) as of June 30, 2011 was a deficit of $         million, or $         per share, based on the total number of shares of our common stock outstanding as of June 30, 2011, after giving effect to (i) the automatic conversion of all outstanding shares of our preferred stock as of June 30, 2011 into an aggregate of 157,090,863 shares of common stock upon completion of this offering; (ii) the issuance of              shares of common stock to be issued as payment for all unpaid and accrued dividends to holders of our preferred stock, assuming an initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus and assuming the payment occurs on                     , 2011; (iii) the exercise of outstanding warrants to purchase 9,303,029 shares of our preferred stock as of June 30, 2011, including the assumed exercise, on a net exercise basis where allowed, of the remaining outstanding warrants to purchase 7,636,363 shares of Series F redeemable convertible preferred stock, immediately prior to this offering, and the concomitant conversion of the shares of preferred stock acquired upon exercise into              shares of common stock upon completion of this offering, assuming an initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus; (iv) the automatic conversion of an aggregate of $8.9 million in principal and accrued interest outstanding under our convertible notes as of June 30, 2011 into              shares of preferred stock immediately prior to the closing of this offering at a conversion price equal to $1.20 per share, and the concomitant conversion of these shares of preferred stock into              shares of common stock upon completion of this offering, assuming the conversions occur on                     , 2011; (v) the automatic conversion of an aggregate of $22.5 million in principal and accrued interest outstanding under our convertible notes and convertible notes to a related party as of June 30, 2011 into              shares of preferred stock immediately prior to a filing of a Registration Statement on Form S-1 with the SEC at a conversion price equal to $1.20 per share, and the concomitant conversion of these shares of preferred stock into              shares of common stock upon completion of this offering, assuming the conversions occurs on                     , 2011; and (vi) the resulting reclassification of the liabilities related to our convertible notes to additional paid-in capital and the settlement of the liabilities related to our foreign currency derivative instruments.

After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2011 would have been $        , or $         per share. This represents an immediate increase in net tangible book value of $         per share to existing stockholders and an immediate dilution in net tangible book value of $         per share to purchasers of common stock in this offering, as illustrated in the following table:

 

Initial public offering price per share

      $     

Pro forma net tangible book value (deficit) per share as of June 30, 2011

   $               

Increase in pro forma net tangible book value (deficit) per share attributable to new investors

     

Pro forma as adjusted net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to investors in this offering

      $     
     

 

 

 

 

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Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by $         million, or $         per share, and the pro forma dilution per share to investors in this offering by $         per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1.0 million shares in the number of shares offered by us would result in a pro forma as adjusted net tangible book value of $         million, or $         per share, and the pro forma dilution per share to investors in this offering would be $         per share. Similarly, a decrease of 1.0 million shares in the number of shares offered by us would result in a pro forma as adjusted net tangible book value of $         million, or $         per share, and the pro forma dilution per share to investors in this offering would be $         per share. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

If the underwriters’ over-allotment option to purchase additional shares from us is exercised in full, the pro forma as adjusted net tangible book value per share after this offering would be $         per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $         per share and the dilution to new investors purchasing shares in this offering would be $         per share.

The table below summarizes as of June 30, 2011, on the pro forma as adjusted basis described above, the number of shares of our common stock we issued and sold, the total consideration we received and the average price per share (1) paid to us by existing stockholders; (2) to be paid by new investors purchasing our common stock in this offering at the assumed initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; and (3) the average price per share paid by existing stockholders and by new investors who purchase shares of common stock in this offering:

 

     Shares Purchased     Total Consideration(1)     Average Price
per Share
 
      Number    Percent     Amount    Percent    

Existing stockholders

                                           $                

New investors

            
  

 

  

 

 

   

 

  

 

 

   

 

 

 

Totals

        100        100  
  

 

  

 

 

   

 

  

 

 

   

 

 

 

 

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $         million assuming a price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The foregoing calculations exclude the following shares:

 

   

56,500,000 shares of common stock reserved for issuance under our 2011 Plan, which became effective upon adoption by our board of directors on September 12, 2011 and serves as the successor to the Predecessor Plans, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under the 2011 Plan, including:

 

   

50,678,762 shares of common stock issuable upon exercise of stock options outstanding under the Predecessor Plans as of June 30, 2011, at a weighted average exercise price of $0.53 per share, which stock options, and the shares underlying them, were transferred to the 2011 Plan, and

 

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3,430,874 shares of common stock available for issuance under the Predecessor Plans, which shares were added to the shares reserved under our 2011 Plan; and

 

   

3,000,000 shares of common stock reserved for issuance under our ESPP, which will become effective immediately upon the execution of the underwriting agreement for this offering, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under the ESPP.

If the underwriters exercise their option to purchase additional shares of our common stock in full, our existing stockholders would own    % and our new investors would own    % of the total number of shares of our common stock outstanding upon completion of this offering. The total consideration paid by our existing stockholders would be approximately $         million, or     %, and the total consideration paid by our new investors would be $         million, or     %.

Effective upon the closing of this offering, an aggregate of up to 59,500,000 shares of our common stock will be reserved for future issuance under our equity benefit plans, and the number of reserved shares will also be subject to automatic annual increases in accordance with the terms of the plans. To the extent that new options are issued under our equity benefit plans or we issue additional shares of common stock in the future, there will be further dilution to investors purchasing common stock in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statement of operations data for the years ended June 30, 2009, 2010 and 2011 and the consolidated balance sheet data as of June 30, 2010 and 2011 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the years ended June 30, 2007 and 2008 and the consolidated balance sheet data as of June 30, 2007, 2008 and 2009 are derived from our audited consolidated financial statements which are not included in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the following selected consolidated historical financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Years Ended June 30,  
     2007     2008     2009     2010     2011  
     (In thousands, except share and per share data)  

Consolidated Statement of Operations Data:

          

Revenues

   $ 29,232      $ 41,381      $ 22,428      $ 33,079      $ 68,644   

Cost of revenues(1)

     17,494        29,130        19,455        24,288        45,398   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     11,738        12,251        2,973        8,791        23,246   

Operating expenses:

          

Research and development (net of NRE and government grants of $0.5 million, $4.9 million, $5.3 million, $1.1 million and $7.7 million during 2007, 2008, 2009, 2010 and 2011)(1)

     22,466        17,072        11,589        17,821        12,675   

Sales and marketing(1)

     5,529        7,853        4,508        4,780        5,279   

General and administrative(1)

     4,468        4,823        3,730        3,257        5,853   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     32,463        29,748        19,827        25,858        23,807   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (20,725     (17,497     (16,854     (17,067     (561

Interest income

     458        250        76        49        43   

Interest expense

     (733     (1,019     (782     (1,540     (2,315

Other income (expense), net

     170        2,109        3,588        (1,171     (8,918
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (20,830     (16,157     (13,972     (19,729     (11,751

Provision for (benefit from) income taxes

     321        2,450        569        196        (222
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (21,151   $ (18,607   $ (14,541   $ (19,925   $ (11,529
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders(2)

   $ (28,191   $ (26,312   $ (23,431   $ (28,856   $ (20,741
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

   $ (1.50   $ (1.36   $ (1.17   $ (1.39   $ (0.98
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted(2)

     18,793,531        19,363,678        19,989,386        20,769,991        21,066,802   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted(2)

           $                        
          

 

 

 

Weighted average shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted(2)

          
          

 

 

 

 

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     As of June 30,  
     2007     2008     2009     2010     2011  
     (In thousands)  

Consolidated Balance Sheet Data:

          

Cash and cash equivalents

   $ 4,420      $ 6,178      $ 8,171      $ 3,928      $ 18,227   

Working capital (deficit)

     (8,880     (2,446     6,682        (12,275     (18,369

Total assets

     22,628        25,839        26,522        16,456        58,748   

Total short-term indebtedness

     8,075        7,135        3,459        6,095        42,439   

Total long-term indebtedness

     4,527        3,007        18,358        17,697        2,503   

Redeemable convertible preferred stock warrant liability

     390        5,549        987        800        4,063   

Foreign currency derivative

                   101        82        1,165   

Mandatorily redeemable convertible preferred stock

     103,731        129,733        139,113        142,627        165,428   

Total stockholders’ deficit

     (116,619     (138,457     (154,950     (178,048     (191,979

 

(1) Our stock-based compensation was as follows:

 

     Years Ended June 30,  
     2007      2008      2009      2010      2011  
     (In thousands)  

Cost of revenues

   $ 4       $ 5       $ 3       $ 2       $ 32   

Research and development

     42         48         46         48         756   

Sales and marketing

     7         23         16         21         215   

General and administrative

             9         7         8         332   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 53       $ 85       $ 72       $ 79       $ 1,335   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 10 to our audited consolidated financial statements for an explanation of the calculations of our basic and diluted net loss per share and pro forma net loss per share attributable to common stockholders.

Non-GAAP Financial Measures

We believe that the use of Adjusted EBITDA is helpful for an investor in determining whether to invest in our common stock. Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles (GAAP). We have provided a reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to our net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net loss, operating income or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we do. We have included Adjusted EBITDA in this prospectus because it is a basis upon which our management assesses financial performance, and it eliminates the impact of items that we do not consider indicative of our core operating performance. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items.

We include Adjusted EBITDA in this prospectus because (i) we seek to manage our business to a consistent level of Adjusted EBITDA, (ii) it is one of the key bases upon which our management assesses our operating performance and (iii) it is one of the metrics investors may use in evaluating companies’ performance in our industry. We define Adjusted EBITDA as net income (loss) less interest income (expense), provision for (benefit from) income taxes, depreciation and amortization, foreign currency exchange gain (loss), remeasurement charges related to our preferred stock warrants and embedded foreign currency derivatives and stock-based compensation expense.

We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies for changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items), the impact of depreciation

 

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and amortization expense on our fixed assets, charges related to the fair value remeasurements of our preferred stock warrants and embedded foreign currency derivatives and the impact of stock-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use Adjusted EBITDA for business planning purposes and in evaluating acquisition opportunities.

In addition, we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other interested parties in our industry as a measure of financial performance and debt-service capabilities. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;

 

   

Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us;

 

   

Adjusted EBITDA does not reflect foreign currency exchange gains and losses resulting from transactions denominated in currencies other than the U.S. dollar; and

 

   

Other companies, including companies in our industry, may calculate Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.

The following table presents a reconciliation of Adjusted EBITDA to our net income (loss), the most comparable GAAP measure, for each of the periods indicated:

 

     Years Ended June 30,  
     2007     2008     2009     2010     2011  
     (In thousands)  

Net loss

   $ (21,151   $ (18,607   $ (14,541   $ (19,925   $ (11,529

Non-GAAP adjustments:

          

Interest (income) expense, net

     275        769        706        1,491        2,272   

Provision for (benefit from) income taxes

     321        2,450        569        196        (222

Depreciation and amortization

     1,137        1,275        961        574        434   

Remeasurement of liability upon modification of warrants

                                 1,066   

Remeasurement of warrant liability and foreign currency derivative instruments (gain) loss

     (167     (1,140     (4,634     (206     5,326   

Foreign currency exchange (gain) loss

     73        (970     (105     1,176        2,649   

Stock-based compensation

     53        85        72        79        1,335   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (19,459   $ (16,138   $ (16,972   $ (16,615   $ 1,331   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

Overview

We are a leading fabless designer and supplier of advanced 4G mobile semiconductor solutions. Our products are system-on-a-chip (SoC) solutions that integrate radio frequency (RF), baseband modem, and digital signal processing (DSP) functions onto a single die for the 4G Long-Term Evolution (LTE) and Worldwide Interoperability for Microwave Access (WiMAX) markets. We were the first to develop single-chip solutions for LTE and WiMAX and believe we are currently the only company selling fully-commercialized single-chip LTE solutions. We believe our proprietary technology and system-level expertise enable us to provide complete 4G platform solutions, which are differentiated by their small form factors, low power consumption, high performance, high reliability, and cost effectiveness. Our solutions have been designed into smartphones, USB dongles, wireless routers, customer premise equipment (CPE), femto access points, public safety devices, and embedded modules for notebook and tablet devices.

The following summarizes some of our significant corporate, product and financial milestones:

 

   

we were incorporated in 1998;

 

   

since inception, we received cash proceeds of an aggregate of $90.0 million from the issuance of our preferred shares and related warrants;

 

   

during the year ended June 30, 2005, we shipped our first fully integrated Personal Handy-Phone system (PHS) CMOS transceivers, with approximately 17 million units shipped to date;

 

   

during the year ended June 30, 2005, we shipped our first mobile digital TV product, with approximately 4 million units shipped to date;

 

   

during the year ended June 30, 2006, we shipped our first Code Division Multiple Access (CDMA) fully integrated CMOS transceivers, with over 30 million units shipped to date;

 

   

during the year ended June 30, 2006, we shipped our single-chip WiMAX device;

 

   

during the year ended June 30, 2008, we shipped the world’s first dual-mode WiMAX/WLAN device;

 

   

during the year ended June 30, 2009, we entered into a product development agreement with LG for our LTE solutions;

 

   

during the year ended June 30, 2010, we began shipment of our single-chip FDD-LTE solution for mobile handsets in support of 4G network deployment by major U.S. operators, including Verizon;

 

   

our revenue during the year ended June 30, 2011 increased to $68.6 million, a 108% increase from the year ended June 30, 2010;

 

   

in June 2011, we announced the use of our LTE single-chip solution in LG’s smartphone, “Revolution by LG”, launched by Verizon in May 2011; and

 

   

in July 2011, we announced a new WiMAX 2 single-chip solution that offers 4x4 MIMO system and 150 Mbps throughput.

 

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Prior to fiscal year 2008, we focused our core technology on RF CMOS to develop single-chip mobile digital TV and handset RF products, which generated the majority of our revenues. Since fiscal year 2008, our revenue has been driven primarily by increased sales volume of our products due to various trends in the 4G wireless communications markets. These trends included initial deployment and broader adoption of the commonly accepted 4G protocols, first WiMAX and followed by LTE, and a significant increase in the number and type of devices consumers use to access the wireless network. Accordingly, we have recently experienced a major shift in the primary source of our revenue from the traditional mobile digital TV and handset RF products to newer single-chip WiMAX, and increasingly LTE, semiconductor solutions. As the growth of the 4G market continues, we expect our revenue opportunities will depend substantially on our ability to design and develop WiMAX and LTE products.

To drive early adoption of our solutions, we employ a dual-pronged approach to the market that focuses on both wireless operators and our OEM/ODM customers. Our relationships with wireless operators help cultivate strong endorsement of our products among OEM/ODM customers. In addition, to reduce both time-to-market and the risk of technical incompatibility for our customers, we work with base station suppliers to ensure that our products interoperate seamlessly with their equipment. We are a fabless semiconductor design company and rely on third-party foundries, assembly contractors, and test contractors for manufacturing our products. This outsourcing approach allows us to focus our resources on the design, development, sales and marketing of our products. Our foundry vendors are UMC Group (USA) (UMC) and Samsung Semiconductor System LSI Division. The use of these commercially available standard processes enables us to produce cost effective products. We use third-party vendors to assemble, package and test our products. In general, we do not have supply agreements with our foundry, test, assembly, and other vendors other than minimum capacity agreements with two testing suppliers.

As of June 30, 2011, we have shipped over 960,000 LTE semiconductors in support of the initial LTE deployments by AT&T, Verizon and Vodafone and over 4.7 million WiMAX semiconductors supporting many major WiMAX operators around the world. Our revenue was $22.4 million, $33.1 million and $68.6 million during the years ended June 30, 2009, 2010 and 2011, respectively. Our net loss was $14.5 million, $19.9 million and $11.5 million during the years ended June 30, 2009, 2010 and 2011, respectively.

Factors Affecting our Financial Performance

Industry growth and demand for products and applications using our solutions.

The overall adoption of 4G solutions will influence the growth and demand for our solutions and impact our financial performance. The pace of commercial deployment and upgrade of 4G wireless communications networks, products and services is expected to drive the sales of our products. During network deployment, operators often anticipate a certain rate of subscriber additions, and in response, operators typically procure devices and products to satisfy the forecasted subscriber needs. If 4G networks are not as widely or quickly deployed by operators as expected or if 4G technology and devices are not as widely accepted by consumers, the rate of subscriber additions may be slower than expected, which in turn could negatively impact the sales and profit margin of our semiconductor solutions.

Successful execution on the 4G market opportunities.

We currently derive a significant portion of our revenue from the sale of our semiconductor solutions for the WiMAX market and expect this trend to continue. Given the growth in the LTE market, we expect our LTE products to constitute an increasingly larger percentage of our revenue going forward. Our ability to take advantage of the growth in 4G market opportunities depends heavily on the timely introduction of new LTE and WiMAX solutions that meet our customers’ specification and to achieve design wins for these products. Our sales cycle typically begins when one of our products, has been provided to our end customers for evaluation,

 

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and thereafter it can take 12 or more months to achieve successful commercialization. We expect to incur significant expenditures on the development of new 4G solutions. There is no assurance that a design win can be secured and failure to do so may adversely affect our financial performance.

Revenue driven by significant customers and the commercial success of their products.

We depend on a small number of customers and customer products for a large percentage of our revenues. During the year ended June 30, 2011, sales to LG accounted for 48% of our total revenue, although these sales were made in support of launches of 4G networks from major wireless operators. All of our sales to LG consist of LTE products. Sales to our five largest OEM/ODM end customers (including direct sales and indirect sales through distributors) accounted for approximately 83% of our total revenue during the year ended June 30, 2011. While we strive to expand and diversify our customer base and we expect 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 for the foreseeable future. The concentration of major customers may cause our financial performance to fluctuate significantly from period to period based on the sales patterns of these customers and the success of their products, and the loss of any significant customer may have an adverse effect on our results of operations.

Pricing and margins of our products.

Our gross profit and margin has been and will continue to be affected by a variety of factors, including the timing and pace of new product introductions and upgrades to existing products, changes in customer and product mixes, shipment volumes, changes in our purchase price of fabricated wafers and assembly and test service costs, changes in pricing and inventory write downs. In general, products with more complex components and higher performance tend to be priced higher and have higher gross margins. We also expect our gross profit and margin will fluctuate over time depending upon competitive pricing pressures. In addition, erosion of average selling prices as products mature is typical in our industry. Consistent with this historical trend, we expect that average selling prices of our products will decline as they mature. As a normal course of business, we seek to offset the effect of declining average selling prices by reducing manufacturing costs of existing products and introducing new and higher value-added products.

General economic conditions and geographic concentration.

A global economic slowdown or financial crisis, similar to the one that occurred beginning in late calendar year 2008, would likely have a significant impact on the wireless semiconductor industry and our financial results. As the economy slows, consumer confidence may decline, and because our products serve consumer electronic applications, any decline may adversely affect our sales and revenues. Moreover, because our sales have been concentrated in a few selected markets, including Korea and China, amongst others, our financial results will be impacted by general economic and political conditions in such markets.

Revenue

We derive our revenue from sales of 4G mobile semiconductor solutions, consisting of our product and platform solutions, to vendors in the wireless semiconductor industry. Our products are system-on-a-chip solutions for the 4G mobile LTE and WiMAX markets. Our proprietary technology and system-level expertise enable us to provide complete 4G platform solutions. As discussed further in “Critical Accounting Policies and Estimates—Revenue Recognition”, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable.

 

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During the years ended June 30, 2009, 2010 and 2011, we recognized revenue attributable to our LTE, WiMAX and RF and other products as follows:

 

     Years Ended June 30,  
     2009      2010      2011  
     (In thousands)  

LTE

   $       $ 929       $ 35,183   

WiMAX

     16,719         25,468         30,210   

RF and other products(1)

     5,709         6,682         3,251   
  

 

 

    

 

 

    

 

 

 

Total

   $ 22,428       $ 33,079       $ 68,644   
  

 

 

    

 

 

    

 

 

 

 

(1) Other products include our WLAN, CDMA and other products related to prior generation technologies.

We sell our products to our customers directly or through distributors, with substantially all of our revenue coming from outside the United States because many of our customers or their contract manufacturers are located in Asia. The percentage of our total revenues for each geographic region, based on the billing address of our customers, is as follows:

 

     Years Ended June 30,  
     2009     2010     2011  

United States

     1     1     1

Korea

     57        70        87   

China

     25        20        4   

Japan

     6        1        1   

Taiwan

     10        7        7   

Other

     1        1          
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

During the periods presented, we generated a majority of our total revenue from a small number of key customers. During the year ended June 30, 2011, 87% of our revenues were derived from customers with billing addresses in Korea, including certain significant customers. However, most of the products purchased by these customers were incorporated into their devices that were sold and shipped to their customers throughout the United States and other countries. Our revenues attributable to our largest customers during the years ended June 30, 2009, 2010 and 2011 were as follows (as a percentage of total revenues):

 

     Years Ended June 30,  
     2009     2010     2011  

China Electronic Appliance Shenzhen Co., Ltd (CEAC).

     14     19     *   

Daejin Semiconductor Co., Ltd

     11     42     19

LG Electronics, Inc.

     *        *        48

SK Telecom Co. Ltd.

     29     *        *   

 

* less than 10%

Cost of Revenues and Gross Profit

Cost of revenues consists of direct and indirect costs related to the manufacture of our products. Direct costs include costs of wafers manufactured by third-party foundries and costs relating to assembly and testing performed by third-party manufacturing suppliers. Indirect costs consist of allocated overhead for employee benefits and facility costs and the amortization of our mask sets, royalties, personnel costs, including share-based compensation expense and valuation provisions for excess and obsolete inventory and warranty costs. Our

 

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historical experience has been that over the life cycle of a particular product, the cost of revenues as a percentage of total revenue has typically declined as a result of decreases in our product costs. The decrease in cost generally results from an increase in the volume purchased from manufacturing suppliers, as well as yield improvements and assembly and test enhancements.

Our gross profit fluctuates due to several factors, including new product introductions and upgrades to existing products, changes in customer and product mixes, the mix of product demand, shipment volumes, our product costs, pricing and inventory write downs. We expect cost of revenues to increase in absolute dollars as our sales continue to increase.

Operating Expenses

Operating expenses consist primarily of research and development, sales and marketing, and general and administrative expenses. Personnel costs, which consist of salaries, bonuses, benefits and stock-based compensation, are the most significant component of each of these expense categories. Professional services costs primarily consist of fees for outside legal, accounting and tax services. We expect our operating expenses to continue to grow in absolute dollars in the near term, although they are likely to fluctuate as a percentage of revenue.

Research and Development

Research and development expenses are expensed as incurred. Our primary research and development function is performed in South Korea. Research and development costs include personnel costs, consultant costs, prototype expenses, mask set costs that are not expected to be used in production manufacturing, allocated facilities costs and depreciation of equipment used in our research and development activities. In addition, amounts received in connection with government grants and work performed under development contracts (nonrecurring engineering or “NRE”) prior to completion of related milestones are deferred and recognized as an offset to the research and development expense upon achievement and acceptance of the specified milestones. During the years ended June 30, 2009, 2010 and 2011, we recognized the following amounts related to these NRE contracts and government grants as offsets to research and development expenses:

 

     Years Ended June 30,  
     2009     2010     2011  
     (In thousands)  

Gross research and development

   $ 16,931      $ 18,924      $ 20,366   

NRE and government grants

     (5,342     (1,103     (7,691
  

 

 

   

 

 

   

 

 

 

Research and development expense

   $ 11,589      $ 17,821      $ 12,675   
  

 

 

   

 

 

   

 

 

 

We expect our research and development expenses to increase for the foreseeable future as we continue to invest substantial internal resources to develop and improve our systems and expand into other or adjacent vertical markets. However, our research and development expenses have historically been significantly impacted by the timing and recognition of NRE reimbursements and government grants. Our NRE reimbursements and government grants will fluctuate depending upon our selection of NRE bearing opportunities that align with our strategic goals and product roadmap. We expect our NRE reimbursements and government grants to decline as we are able to be more selective in our criteria for pursuing these NRE arrangements. As a result, we currently cannot estimate the extent of our future NRE arrangements as they are generally event and negotiation driven and may not coincide with the future plans of our business.

Sales and Marketing

Our sales and marketing expenses consist primarily of personnel costs, sales commissions, travel costs, costs for marketing programs and industry conferences and allocated facilities costs. We plan to continue to invest in sales and marketing and increase the number of our sales personnel worldwide.

 

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General and Administrative

Our general and administrative expenses consist primarily of personnel costs, allocated facilities costs and other expenses for outside professional services, including legal, audit, tax and accounting services. We expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on the NASDAQ Stock Market, including Sarbanes-Oxley compliance and SEC reporting and compliance, as well as increased expenses related to additional insurance, investor relations and other increases related to needs for additional human resources and professional services.

Interest Income

Interest income consists primarily of interest received on our cash and cash equivalent balances.

Interest Expense

Interest expense consists primarily of interest on our outstanding bank borrowings, convertible notes payable, convertible notes to a related party and related party notes payable.

Other Income (Expense)

Other income (expense) primarily includes gains and losses from the remeasurement of our liabilities related to our preferred stock warrants and foreign currency derivative instruments to fair value at each period end and the impact of gains or losses related to the remeasurement of monetary accounts denominated in non-U.S. currencies, such as intercompany accounts receivables and payables, third-party accounts payables, notes payable to a related party, convertible notes or bank borrowings, to the U.S. dollar. We will continue to record adjustments to the fair value of our preferred stock warrants reflecting changes in the underlying value of the shares until the earlier of the exercise or expiration of the warrants, the conversion of the underlying shares of our preferred stock, or the completion of a liquidation event, including the completion of an initial public offering, at which time all unexercised warrants will expire. We will also continue to record adjustments to the fair value of our foreign currency derivative instruments until the related convertible notes are converted to preferred stock, the conversion of the underlying shares of preferred stock, or the completion of a liquidity event, including the completion of an initial public offering, at which time the embedded derivatives will be settled.

Provision for (Benefit from) Income Taxes

We are subject to income taxes in both the United States and foreign jurisdictions and use estimates in determining our provision for income taxes. This process involves estimating actual current tax assets and liabilities together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the consolidated balance sheets. Net deferred tax assets are recorded to the extent we believe that these assets will more likely than not be realized. In making such determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. We maintained a full valuation allowance against our net deferred tax assets as of June 30, 2010 and 2011 because we believe that it is not more likely than not that the gross deferred tax assets will be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax assets would increase net income in the period such a determination was made.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted

 

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tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. The following two tables present our historical operating results first in dollars and then as a percentage of total revenues for the periods presented:

 

     Years Ended June 30,  
     2009     2010     2011  
     $     % of
revenue
    $     % of
revenue
    $     % of
revenue
 
     (In thousands)  

Revenues

   $ 22,428        100   $ 33,079        100   $ 68,644        100

Cost of revenues(1)

     19,455        87        24,288        73        45,398        66   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,973        13        8,791        27        23,246        34   

Operating expenses:

            

Research and development(1)

     11,589        52        17,821        54        12,675        18   

Sales and marketing(1)

     4,508        20        4,780        14        5,279        8   

General and administrative(1)

     3,730        16        3,257        10        5,853        9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,827        88        25,858        78        23,807        35   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (16,854     (75     (17,067     (51     (561     (1

Interest income

     76               49               43          

Interest expense

     (782     (3     (1,540     (5     (2,315     (3

Other income (expense), net

     3,588        16        (1,171     (3     (8,918     (13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (13,972     (62     (19,729     (59     (11,751     (17

Provision for (benefit from) income taxes

     569        3        196        1        (222       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (14,541     (65 )%    $ (19,925     (60 )%    $ (11,529     (17 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Our stock-based compensation was as follows:

 

     Years Ended June 30,  
     2009      2010      2011  
     (In thousands)  

Cost of revenues

   $ 3       $ 2       $ 32   

Research and development

     46         48         756   

Sales and marketing

     16         21         215   

General and administrative

     7         8         332   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 72       $ 79       $ 1,335   
  

 

 

    

 

 

    

 

 

 

 

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Comparison of the Years Ended June 30, 2010 and 2011

The following table presents our historical operating results and the changes in these results in dollars and as a percentage for the periods presented:

 

     Years Ended June 30,     Increase /
(Decrease)
    % Increase /
(Decrease)
 
     2010     2011      
     (Dollars in thousands)        

Revenues

   $ 33,079      $ 68,644      $ 35,565        108

Cost of revenues

     24,288        45,398        21,110        87   
  

 

 

   

 

 

   

 

 

   

Gross profit

     8,791        23,246        14,455        164   

Operating expenses:

        

Research and development

     17,821        12,675        (5,146     (29

Sales and marketing

     4,780        5,279        499        10   

General and administrative

     3,257        5,853        2,596        80   
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     25,858        23,807        (2,051     (8
  

 

 

   

 

 

   

 

 

   

Income (loss) from operations

     (17,067     (561     (16,506     (97

Interest income

     49        43        (6     (12

Interest expense

     (1,540     (2,315     775        50   

Other income (expense), net

     (1,171     (8,918     7,747        662   
  

 

 

   

 

 

   

 

 

   

Loss before income taxes

     (19,729     (11,751     (7,978     (40

Provision for (benefit from) income taxes

     196        (222     (418     (213
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (19,925   $ (11,529   $ (8,396     (42
  

 

 

   

 

 

   

 

 

   

Revenues

Revenues for the year ended June 30, 2011 were $68.6 million, an increase of $35.6 million, or 108%, compared to revenues of $33.1 million for the year ended June 30, 2010. The overall increase was primarily due to the introduction of our LTE single-chip solution for 4G mobile terminals in the year ended June 30, 2010 and the subsequent $34.2 million increase in sales of these products during the year ended June 30, 2011 to $35.2 million from $1.0 million in the year ended June 30, 2010. Our increased revenues also reflected a $4.7 million increase in sales of our WiMAX solutions for 4G mobile terminals during the year ended June 30, 2011 to $30.2 million from $25.5 million in the year ended June 30, 2010. These increases, however, were partially offset by a $3.4 million decrease in sales of our RF and other products during the year ended June 30, 2011 to $3.3 million from $6.7 million in the year ended June 30, 2010.

Cost of Revenues and Gross Profit

Cost of revenues for the year ended June 30, 2011 was $45.4 million, an increase of $21.1 million, or 87%, compared to cost of revenues of $24.3 million for the year ended June 30, 2010. Similarly, gross profit for the year ended June 30, 2011 was $23.2 million, an increase of $14.5 million, or 164%, compared to gross profit of $8.8 million for the year ended June 30, 2010. The increases in cost of revenues and gross profit were primarily the result of the volume increases in sales of our LTE and WiMAX solutions during the year ended June 30, 2011. Our gross margins increased from 27% for the year ended June 30, 2010 to 34% for the year ended June 30, 2011. This increase in gross margins was due primarily to changes in product mix and yield, and the magnitude of this increase was partially offset by reduced sales of our WiMAX platforms, which generally produce higher average gross margins, during the year ended June 30, 2011 compared to the same period in 2010. In addition, inventory write-downs through cost of revenues were $3.1 million during the year ended June 30, 2010, compared to a write-down of $1.4 million during the year ended June 30, 2011. Inventory write-downs in the year ended June 30, 2010 were primarily a result of excess inventory due to a general slowdown in

 

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the economy related to the financial crisis that occurred during the year ended June 30, 2009, which continued into the year ended June 30, 2010, combined with product transitions during this period.

Research and Development

Gross research and development expenses were $20.4 million for the year ended June 30, 2011, an increase of $1.5 million or 8%, compared to gross research and development expenses for the year ended June 30, 2010. Research and development expenses, net of NRE and government grants, were $12.7 million for the year ended June 30, 2011, a decrease of $5.1 million, or 29%, compared to research and development expenses of $17.8 million for the year ended June 30, 2010. This decrease was driven primarily by the achievement of NRE development contract milestones, which were recognized as an offset to research and development expenses, in the amount of $1.1 million during the year ended June 30, 2010 compared to $7.7 million during the year ended June 30, 2011.

Sales and Marketing

Sales and marketing expenses were $5.3 million for the year ended June 30, 2011, an increase of $0.5 million, or 10%, compared to sales and marketing expenses of $4.8 million during the year ended June 30, 2010. This slight increase was primarily the result of increased personnel cost.

General and Administrative

General and administrative expenses were $5.9 million for the year ended June 30, 2011, an increase of $2.6 million, or 80%, compared to general and administrative expenses of $3.3 million for the year ended June 30, 2010. This increase was comprised primarily of increased personnel cost but also increased professional services such as legal, audit and other accounting expenses as we grew our business and began contemplating our initial public offering (IPO).

Interest Income

Interest income was $43,000 for the year ended June 30, 2011, a decrease of $6,000, or 12%, compared to interest income of $49,000 for the year ended June 30, 2010. This decrease was due primarily to us carrying lower average cash and cash equivalent balances combined with lower average interest rates during the year ended June 30, 2011.

Interest Expense

Interest expense was $2.3 million for the year ended June 30, 2011, an increase of $0.8 million, or 50%, compared to interest expense of $1.5 million for the year ended June 30, 2010. This increase was primarily due to the incremental interest expense associated with the issuance of $21.6 million in convertible notes payable during the year ended June 30, 2011. Total indebtedness, consisting of bank borrowings, notes payable to a related party, convertible notes payable and convertible notes payable to a related party, increased from $23.8 million as of June 30, 2010 to $44.9 million as of June 30, 2011.

Other Income (Expense), net

Other expense was $8.9 million for the year ended June 30, 2011, an increase of $7.7 million, or 662%, compared to other expense of $1.2 million for the year ended June 30, 2010. This increase was primarily due to charges reflecting the increase in the fair value of the liabilities related to our preferred stock warrants issued to our lenders in the amount of $5.3 million and foreign currency derivative instruments embedded in our Korean won based notes payable in the amount of $1.1 million.

 

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Provision for (Benefit from) Income Taxes

Our benefit from income taxes was $0.2 million for the year ended June 30, 2011 compared to the provision for income taxes of $0.2 million for the year ended June 30, 2010. The change to the income taxes was primarily a result of the reversal of uncertain tax positions due to the statutes of limitation expiring for our Korean subsidiaries during the year ended June 30, 2011.

Comparison of the Years Ended June 30, 2009 and 2010

 

     Years Ended June 30,    

Increase /
(Decrease)

    % Increase /
  (Decrease)  
 
     2009     2010      
     (Dollars in thousands)        

Revenues

   $ 22,428      $ 33,079      $ 10,651        47

Cost of revenues

     19,455        24,288        4,833        25   
  

 

 

   

 

 

   

 

 

   

Gross profit

     2,973        8,791        5,818        196   

Operating expenses:

        

Research and development

     11,589        17,821        6,232        54   

Sales and marketing

     4,508        4,780        272        6   

General and administrative

     3,730        3,257        (473     (13
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     19,827        25,858        6,031        30   
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (16,854     (17,067     213        1   

Interest income

     76        49        (27     (36

Interest expense

     (782     (1,540     758        97   

Other income (expense), net

     3,588        (1,171     (4,759     (133
  

 

 

   

 

 

   

 

 

   

Loss before income taxes

     (13,972     (19,729     5,757        41   

Provision for income taxes

     569        196        (373     (66
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (14,541   $ (19,925   $ 5,384        37   
  

 

 

   

 

 

   

 

 

   

Revenues

Revenues for the year ended June 30, 2010 were $33.1 million, an increase of $10.7 million, or 47%, compared to revenues of $22.4 million for the year ended June 30, 2009. This increase was primarily due to a $8.7 million increase in sales of our WiMAX products for the year ended June 30, 2010. In addition, we also recognized a $0.9 million increase in sales of our LTE products and a $1.0 million increase in sales of our RF and other products during the year ended June 30, 2010. These increases in sales of our products were primarily the result of the recovery of the economy after the global recession, which began in the early part of our fiscal year ended June 30, 2009, and the related increase in customer demand and average selling prices of our WiMAX products.

Cost of Revenues and Gross Profit

Cost of revenues for the year ended June 30, 2010 was $24.3 million, an increase of $4.8 million, or 25%, compared to cost of revenues of $19.5 million for the year ended June 30, 2009. Similarly, gross profit for the year ended June 30, 2010 was $8.8 million, an increase of $5.8 million, or 196%, compared to gross profit of $3.0 million for the year ended June 30, 2009. These increases in cost of revenues and gross profit were primarily the result of the volume increases in sales of our WiMAX solutions during the year ended June 30, 2010, as a result of increased customer demand following the financial crisis in the early part of our fiscal year ended June 30, 2009. Inventory write-downs for excess and obsolete inventories were $5.1 million during the year ended June 30, 2009 compared to inventory write-downs of $3.1 million during the year ended June 30, 2010. Inventory write-downs in the year ended June 30, 2010 were primarily a result of excess inventory due to a

 

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general slowdown in the economy related to the financial crisis that occurred during the year ended June 30, 2009, which continued into the year ended June 30, 2010, combined with product transitions during this period. In addition, gross margins increased significantly to 27% for the year ended June 30, 2010 from 13% for the year ended June 30, 2009. This increase was primarily the result of higher average selling prices and increased volume shipment during the year ended June 30, 2010 due to increased customer demand, but also, to a lesser extent, product mix within our WiMAX products, including increases in sales of our WiMAX platforms during the year which generally produce higher average gross margins.

Research and Development

Gross research and development expenses were $18.9 million for the year ended June 30, 2010, a decrease of $2.0 million or 12%, compared to gross research and development expenses for the year ended June 30, 2009. Research and development expenses, net of NRE and government grants, were $17.8 million for the year ended June 30, 2010, an increase of $6.2 million, or 54%, compared to research and development expenses of $11.6 million for the year ended June 30, 2009. This increase was driven primarily by the achievement of NRE development contract milestones, which are deferred and recognized as an offset to research and development expenses, in the amount of $5.3 million during the year ended June 30, 2009 compared to $1.1 million during the year ended June 30, 2010. This decrease was primarily due to the application of a more selective criteria for entering into these NRE arrangements during the year ended June 30, 2010. In addition, we made additional investments aimed to enhance our product offerings, which caused a general increase in our research and development activities. Research and development expenses included a $3.2 million increase in pre-production expenses, including costs related to pre-production masks and wafers, third-party design automation support, test development and product reliability activities, during the year ended June 30, 2010. These increases were partially offset by a reduction in personnel cost in the amount of $1.3 million necessitated by the general economic downturn and lower average headcount in our research and development function and certain salary decreases during the year ended June 30, 2010 compared to the year ended June 30, 2009. We also recognized an out-of-period adjustment during the year ended June 30, 2009 to correct an expense in the year ended June 30, 2008 related to our preferred stock warrants which reduced research and development expense by $1.1 million.

Sales and Marketing

Sales and marketing expenses were $4.8 million for the year ended June 30, 2010, an increase of $0.3 million, or 6%, compared to sales and marketing expenses of $4.5 million for the year ended June 30, 2009, primarily due to increases in travel related expenses for our sales team, which were partially offset by a decrease in personnel cost in the amount of $0.4 million and in advertising and promotional samples in the amount of $0.4 million during the year ended June 30, 2010.

General and Administrative

General and administrative expenses were $3.3 million for the year ended June 30, 2010, a decrease of $0.5 million, or 13%, compared to general and administrative expenses of $3.7 million for the year ended June 30, 2009, primarily due to a reduction in personnel cost in the amount of $0.7 million resulting from the timing of the hiring and termination of our general and administrative staff during the respective periods and certain salary decreases during the year ended June 30, 2010.

Interest Income

Interest income was $49,000 for the year ended June 30, 2010, a decrease of $27,000, or 36%, compared to interest income of $76,000 for the year ended June 30, 2009. This decrease was due primarily to us carrying lower average cash and cash equivalent balances during the year ended June 30, 2010.

 

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Interest Expense

Interest expense was $1.5 million for the year ended June 30, 2010, an increase of $0.8 million, or 97%, compared to interest expense of $0.8 million for the year ended June 30, 2009. This increase was primarily due to the timing of when we entered into or paid off our indebtedness during the respective periods as well as the incremental interest expense associated with the increases in our outstanding indebtedness during the year ended June 30, 2010. Total indebtedness, consisting of bank borrowings, notes payable to a related party, convertible notes payable and convertible notes payable to a related party, increased from $21.8 million as of June 30, 2009 to $23.8 million as of June 30, 2010.

Other Income (Expense), net

Other expense was $1.2 million for the year ended June 30, 2010 compared to other income of $3.6 million for the year ended June 30, 2009. This change primarily relates to gains on the remeasurement of the fair value of our preferred stock warrant liability in the amount of $4.6 million during the year ended June 30, 2009 compared to a gain of $0.2 million during the year ended June 30, 2010. The remeasurement of the warrants during the year ended June 30, 2009 resulted in a gain due to the declining fair value of the underlying preferred stock while, in the year ended June 30, 2010, the remeasurement resulted in a charge as a result of the increasing fair value of the preferred stock. This decrease in gains was partially offset by gains from the remeasurement of monetary balances denominated in non-U.S. currencies. We also recognized an out of period adjustment to correct an expense related to our preferred stock warrants which reduced other income (expense) by $0.4 million during the year ended June 30, 2009.

Provision for (Benefit from) Income Taxes

Our provision for income taxes for the year ended June 30, 2010 was $0.2 million, a decrease of $0.4 million, or 66%, compared to our provision of $0.6 million for the year ended June 30, 2009. This decrease was primarily due to a $0.5 million decrease in taxes payable by our Korean subsidiaries.

 

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Quarterly Results of Operations

The following unaudited quarterly consolidated statements of operations for the six quarters in the period ended June 30, 2011 have been prepared on a basis consistent with our audited annual consolidated financial statements and include, in the opinion of management, all normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. The following consolidated quarterly financial data should be read in conjunction with our annual consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    Three Months Ended  
    March 31,
2010
    June 30,
2010
    September 30,
2010
    December 31,
2010
    March 31,
2011
    June 30,
2011
 
    (In thousands)  

Consolidated Statement of Operations Data:

           

Revenues(1)

  $ 7,068      $ 10,830      $ 6,718      $ 19,672      $         20,932      $         21,322   

Cost of revenues

    4,939        7,736        4,078        12,533        13,929        14,858   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    2,129        3,094        2,640        7,139        7,003        6,464   

Operating expenses:

           

Research and development(2)

    5,014        5,595        3,773        3,368        2,719        2,815   

Sales and marketing

    1,301        1,285        1,007        1,209        1,448        1,615   

General and administrative

    871        1,061        931        969        1,146        2,807   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    7,186        7,941        5,711        5,546        5,313        7,237   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (5,057     (4,847     (3,071     1,593        1,690        (773

Interest income

    8        18        7        8        9        19   

Interest expense

    (406     (443     (465     (582     (632     (636

Other income (expense), net

    (889     1,718        (2,908     (1,840     (2,478     (1,692
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (6,344     (3,554     (6,437     (821     (1,411     (3,082

Provision for (benefit from) income taxes

    268        12        (229     (261     (100     368   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (6,612   $ (3,566   $ (6,208   $ (560   $ (1,311   $ (3,450
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (8,845   $ (5,799   $ (8,441   $ (2,792   $ (3,544   $ (5,964
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

  $ (0.42   $ (0.27   $ (0.40   $ (0.13   $ (0.16   $ (0.27
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted

    20,812,917        21,204,335        21,320,928        21,356,231        21,528,865        22,173,484   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)       We recognized revenue attributable to our LTE, WiMAX and RF and other products as follows:

 

          

    Three Months Ended  
    March 31,
2010
    June 30,
2010
    September 30,
2010
    December 31,
2010
    March 31,
2011
    June 30,
2011
 
    (In thousands)  

LTE

  $ 6      $ 923      $ 2,133      $ 11,965      $ 9,786      $ 11,299   

WiMAX

    4,661        8,166        3,836        6,972        10,514        8,888   

RF and other products

    2,401        1,741        749        735        632        1,135   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 7,068      $ 10,830      $ 6,718      $ 19,672      $ 20,932      $ 21,322   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(2)       We recognized the following amounts from NRE contracts and government grants as an offset to research and development expenses as follows:

 

           

    Three Months Ended  
    March 31,
2010
    June 30,
2010
    September 30,
2010
    December 31,
2010
    March 31,
2011
    June 30,
2011
 
    (In thousands)  

Gross research and development

  $ 5,114      $ 5,595      $ 3,773      $ 4,451      $ 5,006      $ 7,136   

NRE and government grants

    (100                   (1,083     (2,287     (4,321
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Research and development

  $ 5,014      $ 5,595      $ 3,773      $ 3,368      $ 2,719      $ 2,815   

 

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Quarterly Trends

Revenues

Our total revenue increased sequentially in each of the quarters presented, with the exception of the quarter ended September 30, 2010, primarily due to the fluctuation of WiMAX sales as described below. Total revenue thereafter increased each quarter primarily as a result of the introduction of our LTE single-chip solution for 4G mobile terminals and subsequent increases in the volume of our WiMAX and LTE products sold. Within the different product lines, we experienced multiple fluctuations between LTE, WiMAX and RF and other products during the quarters presented primarily as a result of changes in product mix and average selling prices during the respective periods. In particular, our LTE revenue increased each quarter until March 31, 2011 when a decrease occurred primarily related to lower average selling prices (ASP) for our LTE product sold to our lead LTE customer. This occurred as part of the anticipated transition to the next generation of lower ASP LTE products. As planned, this reduction was mostly offset by increased sales volume to our lead LTE customer for these products which continued through the quarter ended June 30, 2011. Our WiMAX sales fluctuated during the quarters presented as a result of several factors, including customer purchase patterns, supply availability, wireless operators’ ramp and ASP. As our focus shifted more towards our LTE and WiMAX products, we experienced a general decline in our sales of our RF and other products during the quarters presented; however, an increase occurred during the quarter ended June 30, 2011 as a result of a large sell-through order for a new product with higher ASPs.

Cost of Revenues

Similar to our total revenue, our total cost of revenues increased sequentially in each of the quarters presented, with the exception of the quarter ended September 30, 2010. Total cost of revenues thereafter increased primarily as a result of the introduction of our LTE single-chip solution for 4G mobile terminals and subsequent increases in the volume of our WiMAX and LTE products sold during the year ended June 30, 2011. We also recognized inventory write-downs through cost of revenues in the amount of $0.5 million, $1.0 million, $1.2 million, $0.1 million and $0.2 million during the quarters ended March 31, June 30 and December 31, 2010, March 31 and June 30, 2011, respectively, but did not recognize any inventory write-downs during the quarter ended September 30, 2010. The inventory write-downs during our fiscal year ended June 30, 2010 were primarily a result of excess inventory due to a general slowdown in the economy related to the financial crisis that occurred during the year ended June 30, 2009, which continued into the year ended June 30, 2010. We also recognized an inventory write-down during the quarters ended December 31, 2010 and June 30, 2011 as a result of a buildup of early generation LTE products during the year ended June 30, 2011 as our customers moved to newer products. During the quarters presented we also experienced some fluctuations between the cost of revenues related to our LTE, WiMAX and RF and other products as a result of changes in customer and product mixes and yield.

Gross Profit

Our gross profit has fluctuated over the periods presented based on customer and product mixes, changes in inventory reserves and manufacturing variances. Except for a small decrease during the quarter ended September 30, 2010, gross profit increased quarter over quarter through December 31, 2010 due to an overall increase in sales volume. Gross profit was slightly lower in the quarter ended March 31, 2011 as a result of reduction of LTE platform sales after initial purchases of LTE platforms used for the ramped introduction of LG’s smartphone, “Revolution by LG,’’ launched by Verizon, and these platforms generally carry higher margins.

Similar to the gross profit, our gross margins experienced fluctuations over the period presented ranging from a low of 29% during the quarter ended June 30, 2010 to a high of 39% during the quarter ended September 30, 2010. Gross margins increased during the quarter ended September 30, 2010 to 39% as a result of

 

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changes in product mix and yield as well as an increase in sales volume of our LTE and WiMAX chips. The lower gross margin of 29% during the quarter ended June 30, 2010 was due primarily to inventory adjustments in the amount of $1.0 million for slow-moving and obsolete inventory. Our gross margins of 33% and 30% during the quarters ended March 31 and June 30, 2011, respectively, were influenced by lower margins for the ramp-up of LTE products to our lead LTE customer, partially offset by favorable manufacturing variances as cost reduction programs were put into place. The gross margin of 30% for the quarter ended June 30, 2011 was also negatively impacted by the warrants and concessions issued to our lead LTE customer as these warrant charges and concessions in the amount of $0.7 million were recognized as a reduction to our LTE revenue during the quarter.

Research and Development

Our gross research and development expenses, excluding NRE offsets, increased sequentially since the quarter ended September 30, 2010 due primarily to the development and introduction of our LTE single-chip solution for 4G mobile terminals. Our net research and development expenses decreased after the quarter ended June 30, 2010 until a slight increase during the quarter ended June 30, 2011. The general decrease in our net research and development expenses was primarily a result of quarterly changes in the recognition of NRE development contract milestones, which are recognized as an offset to research and development expenses.

Sales and Marketing

Except for slight decreases during the quarters ended June 30 and September 30, 2010, our sales and marketing expense has since increased during the periods presented primarily due to increased personnel cost as we have expanded our sales team.

General and Administrative

Except for a slight decrease during the quarter ended September 30, 2010, our general and administrative expense generally increased during the periods presented primarily due to the addition of staff and professional services to support our expanding operations. A more significant increase occurred during the quarter ended June 30, 2011 as we began to prepare for the proposed IPO.

We base our planned operating expenses on our expectations of future net revenue. If net revenue for a particular quarter is lower than expected, we may be unable to proportionately reduce our operating expenses. As a result, we believe that period-to-period comparisons of our past operating results should not be relied upon as an indication of our future performance.

Interest Expense, net

Interest expense trended higher over the periods presented primarily as a result of incremental interest expense associated with increases in outstanding indebtedness.

Other Income (Expense), net

Other income (expense) fluctuations are mainly due to gains and losses from the remeasurement of our liabilities related to our preferred stock warrants and foreign currency derivative instruments to fair value at each period end and the impact of gains or losses related to the remeasurement of monetary accounts denominated in non-U.S. currencies, such as intercompany accounts receivables and payables, third-party accounts payables, notes payable to a related party, convertible notes and bank borrowings, to the U.S. dollar. If the fair value of the shares of stock underlying our convertible preferred stock warrants increases, we expect the fair value and the related remeasurement charges to increase and subsequent remeasurement charges could be significant. We will continue to record adjustments to the fair value of our preferred stock warrants reflecting changes in the

 

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underlying value of the shares until the earlier of the exercise or expiration of the warrants, the conversion of the underlying shares of preferred stock, or the completion of a liquidity event, including the completion of an IPO, at which time all unexercised warrants will expire. We will also continue to record adjustments to the fair value of our foreign currency derivative instruments until the related convertible notes are converted to preferred stock, the conversion of the underlying shares of preferred stock, or the completion of a liquidity event, including the completion of an IPO, at which time the embedded derivatives will be settled.

Non-GAAP Financial Measures

We believe that the use of Adjusted EBITDA is helpful for an investor in determining whether to invest in our common stock. Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles (GAAP). We have provided a reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to our net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net loss, operating income or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we do. We have included Adjusted EBITDA in this prospectus because it is a basis upon which our management assesses financial performance and it eliminates the impact of items that we do not consider indicative of our core operating performance. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items.

We include Adjusted EBITDA in this prospectus because (i) we seek to manage our business to a consistent level of Adjusted EBITDA, (ii) it is one of the key bases upon which our management assesses our operating performance and (iii) it is one of the metrics investors may use in evaluating companies performance in our industry. We define Adjusted EBITDA as net income (loss) less interest income (expense), provision for income taxes, depreciation and amortization, foreign currency exchange gain (loss), remeasurement charges related to our preferred stock warrants and embedded foreign currency derivatives and stock-based compensation expense.

We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items), the impact of depreciation and amortization expense on our fixed assets, charges related to the fair value remeasurements of our preferred stock warrants and embedded foreign currency derivatives and the impact of stock-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use Adjusted EBITDA for business planning purposes and in evaluating acquisition opportunities.

In addition, we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other interested parties in our industry as a measure of financial performance and debt-service capabilities. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements;

 

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Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;

 

   

Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us;

 

   

Adjusted EBITDA does not reflect foreign currency exchange gains and losses resulting from transactions denominated in currencies other than the U.S. dollar; and

 

   

Other companies, including companies in our industry, may calculate Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.

The following table presents a reconciliation of Adjusted EBITDA to our net income (loss), the most comparable GAAP measure, for each of the periods indicated:

 

    Three Months Ended  
    March 31,
2010
    June 30,
2010
    September 30,
2010
    December 31,
2010
    March 31,
2011
    June 30,
2011
 
    (In thousands)  

Net loss

  $ (6,612   $ (3,566   $ (6,208   $ (560   $ (1,311   $ (3,450

Non-GAAP adjustments:

           

Interest expense (income), net

    398        425        458        574        623        617   

Provision for (benefit from) income taxes

    268        12        (229     (261     (100     368   

Depreciation and amortization

    104        104        103        114        95        122   

Remeasurement of liability upon modification of warrants

                  680               386          

Remeasurement of warrant liability and foreign currency derivative instruments (gain) loss

    (22     (280     883        1,668        1,648        1,127   

Foreign currency exchange (gain) loss

    694        (1,428     1,347        190        535        577   

Stock-based compensation

    20        19        15        40        82        1,198   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (5,150   $ (4,714   $ (2,951   $ 1,765      $ 1,958      $ 559   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

Liquidity and Capital Expenditures

Since inception, our operations have been financed primarily by net proceeds of $90.0 million from the issuance of shares of our preferred stock and related warrants and $71.1 million in proceeds from the issuance of indebtedness, consisting of bank borrowings, notes payable to a related party, convertible notes payable and convertible notes payable to a related party. As of June 30, 2011, we carried $18.2 million of cash and cash equivalents. In addition, we have access to an unused line of credit in the amount of $4.5 million as of June 30, 2011.

Our primary uses of cash are to fund operating expenses, purchase inventory and acquire property and equipment. Cash used to fund operating expenses is impacted by our collection of accounts receivable and the timing of when we pay these operating expenses as reflected in the change in our outstanding accounts payable and accrued expenses. We acquired property and equipment of $0.1 million, $0.2 million and $1.1 million during the years ended June 30, 2009, 2010 and 2011, respectively.

 

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We also use cash to repay our outstanding indebtedness. During the years ended June 30, 2009, 2010 and 2011, we used cash of $2.0 million, $0.6 million and $4.1 million, respectively, to repay outstanding bank borrowings and notes payable to a related party. As of June 30, 2011, we had $44.9 million in outstanding indebtedness consisting of bank borrowings, notes payable to a related party, convertible notes payable and convertible notes payable to a related party, of which $42.4 million is considered short-term as it is due for repayment before June 30, 2012. Of these amounts, $22.5 million of the total indebtedness (including accrued interest) is related to our convertible notes payable and convertible notes payable to a related party that will be converted into our preferred stock immediately prior to a filing of a Registration Statement on Form S-1 with the SEC, and $8.9 million of this indebtedness (including accrued interest) is related to our convertible notes payable that will be converted into our preferred stock immediately prior to the completion of our IPO.

We have incurred substantial losses from our operations and therefore have historically relied upon external sources of capital to fund our operations. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities and the timing and extent of our spending to support our research and development efforts and expand into other markets. Our ability to continue to meet our obligations and to achieve our intended business objectives is dependent upon, among other things, refinancing our debt obligations or raising additional capital in order to satisfy those obligations which are due during the 12 months ending June 30, 2012. There can be no assurance that sufficient debt or equity financing will be available at all or, if available, that such financing will be at terms and conditions acceptable to us. The sale of additional equity securities could result in additional dilution to our stockholders and those securities may have rights senior to those of our common stock. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. Should we fail to refinance the debt or raise additional capital, we may not be able to achieve our longer term business objectives and may face other serious adverse consequences.

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

 

     Year Ended June 30,  
     2009     2010     2011  
     (In thousands)  

Cash used in operating activities

   $ (15,143   $ (4,646   $ (19,155

Cash used in investing activities

     (11     (146     (1,043

Cash provided by financing activities

     17,277        524        34,492   

Cash Flows from Operating Activities

Cash used in operating activities for the year ended June 30, 2011 included the effects of our net loss of $11.5 million offset by non-cash charges of $0.4 million for depreciation and amortization, $1.4 million for additional reserves on our inventory due to obsolescence of certain inventory items during the period and $6.4 million for the change in fair value of our liabilities related to our convertible preferred stock warrants and foreign currency derivative instruments. Our short-term working capital accounts, excluding cash and cash equivalents, increased from a deficit of $16.2 million as of June 30, 2010 to a deficit of $36.6 million as of June 30, 2011. The increase in accounts receivable of $12.8 million was due to the overall growth of our business with days sales outstanding remaining flat and an increase in inventory of $14.6 million primarily to support new product as we ramped volume production of our LTE single-chip solutions earlier in the year combined with the overall growth of our business. Similarly, the aggregate increase in accounts payable and accrued liabilities of $5.4 million was primarily the result of the growth of our business. Also, the increase in customer deposits of $7.1 million was due to the acquisition of a significant new customer for our LTE products during the period.

Cash used in operating activities for the year ended June 30, 2010 included the effects of our net loss of $19.9 million partially offset by non-cash items of $0.6 million for depreciation and amortization and $3.1 million for additional reserves on our inventory due to obsolescence of certain inventory items during the

 

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period. Our short-term working capital accounts, excluding cash and cash equivalents, increased from a deficit of $1.5 million as of June 30, 2009 to a deficit of $16.2 million as of June 30, 2010. The decrease in accounts receivable of $3.6 million was due primarily to the timing of payment receipts. The aggregate increase in accounts payable and accrued and other liabilities of $8.3 million was due primarily to the timing of the related payment of payables and extension of payment terms of a significant supplier.

Cash used in operating activities for the year ended June 30, 2009 included the effects of our net loss of $14.5 million and non-cash items such as $1.0 million from the recovery of bad debts and $4.6 million for the change in fair value of our liabilities related to our convertible preferred stock warrants and foreign currency derivative instruments which were partially offset by non-cash items of $1.0 million for depreciation and amortization and $5.1 million for additional reserves on our inventory as a result of the excess inventory due to a general slowdown in the economy. Our short-term working capital accounts, excluding cash and cash equivalents, decreased from a deficit of $8.6 million as of June 30, 2008 to a deficit of $1.5 million as of June 30, 2009. The increase in accounts receivable of $0.3 million was due to a slowing of payments from our customers during the financial crisis that was taking place during the year. The aggregate decrease in accounts payable and accrued and other liabilities of $1.1 million was primarily related to the slowdown in the economy and the related slowdown in spending. The increase in deferred margin of $5.2 million was attributable to the deferral of revenue for several distributors.

Cash Flows from Investing Activities

Cash used in investing activities was primarily related to our acquisition of property and equipment which amounted to $0.1 million, $0.2 million and $1.1 million for the years ended June 30, 2009, 2010 and 2011.

Cash Flows from Financing Activities

Cash provided by financing activities for the year ended June 30, 2011 of $34.5 million was comprised of proceeds of $21.6 million from the issuance of convertible notes and convertible notes to a related party and $16.7 million from the exercise of warrants. These increases were partially offset by $4.1 million of notes payable to a related party and bank borrowing repayments.

Cash provided by financing activities for the year ended June 30, 2010 of $0.5 million was comprised of $1.0 million from the additional issuance of notes to a related party, which was partially offset by $0.6 million of note and bank borrowing repayments.

Cash provided by financing activities for the year ended June 30, 2009 of $17.3 million was due primarily to the receipt of proceeds from issuances of $6.5 million in convertible notes payable, $7.7 million in bank borrowings and notes to a related party and $4.9 million in proceeds raised through sales of our Series F preferred stock. These increases were partially offset by repayments on our bank borrowings and notes to a related party of $2.0 million.

 

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Contractual Obligations and Other Commitments

The following table summarizes our contractual obligations as of June 30, 2011:

 

    Payments Due by Period
(In thousands)
 

Contractual Obligations:

  Less Than
1 Year
    1 to 3
Years
    3 to 5
Years
    More Than
5 Years(3)
    Total  

Purchase obligations(1)

  $ 541      $      $      $      $ 541   

Bank borrowings and notes payable to related party

    12,146                      1,475        13,621   

Convertible notes payable and convertible notes payable to a related party

    30,367        1,028                      31,395   

Capital lease

    6        7        6               19   

Interest on bank borrowings, notes payable to related party, convertible notes payable, convertible notes payable to a related party and capital lease(4)

    3,250        92                      3,342   

Operating leases(2)

    677        141        41               859   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

  $ 46,987      $ 1,268      $ 47      $ 1,475      $ 49,777   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amounts included within purchase obligations are based on outstanding purchase orders as of June 30, 2011 related to the manufacture of certain wafers that we utilize in which production has started. These production agreements are cancellable at any time with the company required to pay all costs incurred through the cancellation date. However, we rarely cancel these agreements once production has started. We do not otherwise have any outstanding non-cancellable purchase commitments as of June 30, 2011.
(2) Operating leases include total future minimum rent payments under non-cancellable operating lease agreements.
(3) Note payable to related party amounting to $1.5 million does not have a fixed maturity date.
(4) Consisted solely of future interests.

We made regular rental payments under our non-cancellable operating leases and outstanding indebtedness subsequent to the year ended June 30, 2011 but did not enter into any new lease or debt agreements during this period.

As of June 30, 2011, we had an agreement with one of our suppliers and our obligations under this agreement are collateralized by all of our assets, excluding intellectual property, and this security interest is set to expire on May 6, 2014.

Off-Balance Sheet Arrangements

Through June 30, 2011, we had not entered into any off-balance sheet arrangements and did not have any holdings in variable interest entities.

Segment Information

We have one business activity, which is designing, developing and marketing integrated circuits for the wireless communications industry, and operate in one operating segment. Our chief operating decision-maker is considered to be our chief executive officer. The chief operating decision-maker allocates resources and assesses financial performance of the business on a consolidated level as one operating segment.

 

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Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate and foreign exchange rate sensitivities as follows:

Interest Rate Risk

We had cash and cash equivalents of $18.2 million as of June 30, 2011 which consists of bank deposits and money market funds. Such interest-earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant. We had total outstanding debt of $44.9 million as of June 30, 2011, of which 94%, or $42.4 million is due within 12 months. Our outstanding indebtedness consists of bank borrowings of $12.1 million, notes payable to a related party of $1.5 million and convertible notes payable and convertible notes payable to a related party of $31.4 million. All of our debt obligations carry fixed interest rates with the exception of our revolving line of credit with Comerica and a loan facility with Industrial Bank of Korea, which may vary.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. In addition, we expect our outstanding convertible notes and convertible notes to a related party in the amount of $22.5 million (including accrued interest) to convert into our preferred stock upon the filing of our initial Registration Statement on Form S-1 with the SEC, and outstanding convertible notes in the amount of $8.9 million (including accrued interest) to convert into our preferred stock upon the completion of this offering, which will reduce our exposure to these interest rate risks. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

Foreign Currency Exchange Risk

Our sales contracts are predominately denominated in U.S. dollars and therefore substantially all of our revenue is not subject to foreign currency translation risk. However, a substantial portion of our operating expenses incurred outside the U.S. are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Korean won. We also have various intercompany accounts receivables and payables and bank borrowings. To date, we have not entered into any hedging contracts, however, the Korean won denominated notes contain fixed exchange rate features that are considered embedded derivatives. These embedded derivatives are separated from the debt host contract and accounted for at fair value with the changes in fair value recognized as other income (expense), net. As of June 30, 2011, the carrying value of these embedded derivatives was $1.2 million. A hypothetical 10% appreciation or depreciation in the value of the U.S. dollar relative to the Korean won or other currencies in which our loan obligations and expenses are denominated during the year ended June 30, 2011 would have impacted our results of operations by $3.8 million or $4.6 million, respectively. For the year ended June 30, 2011, we recognized a charge of $1.1 million in relation to the embedded derivatives in the consolidated statement of operations.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Accordingly, actual results could differ significantly from the

 

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estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collection is reasonably assured. Products are considered delivered to the customer once they have been shipped and title and risk of loss have been transferred.

We generate revenue through the sales of our products directly to end customers and indirectly through a network of independent distributors. Sales to direct customers are recognized upon shipment of the product. For sales to distributors, which generally have a history of returns or credits, or where collectability is not reasonably assured, we defer recognition of revenue and the related costs until the distributor has resold the products to their end customer. Evaluating these estimated return and collectability assumptions require management judgment and if our assumptions are not correct, our revenue, cost of products sold, deferred margin and net income (loss) could be impacted.

Warranty

We generally provide warranties on our products for 12 months. We provide for the estimated cost of product warranties at the time revenue is recognized. We regularly monitor product returns for warranty purposes and maintain a reserve for warranty expenses based upon our historical experience and any specifically identified failures. We utilize judgment in estimating these product warranties. As of June 30, 2010 and 2011, our warranty accruals were $0.2 million and $0.3 million, respectively.

Allowances for Doubtful Accounts

We record a provision for doubtful accounts based on our historical experience and a detailed assessment of the collectability of our accounts receivable. To assist with the estimate, our management considers, among other factors, the aging of the accounts receivable, including trends within the age of the accounts receivable, our historical write-offs, the credit-worthiness of each purchaser, the economic conditions of the purchaser’s industry and general economic conditions. In cases where we are aware of circumstances that may impair a specific purchaser’s ability to meet their financial obligations to us, we record a specific allowance against amounts due from the customer, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. There is significant judgment involved in estimating the allowance for doubtful accounts.

Share-Based Compensation

We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

 

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The fair value of the awards granted during the years ended June 30, 2009, 2010 and 2011 was calculated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

     Years Ended June 30,
     2009   2010   2011

Expected term (in years)

   5.7   5.9   5.7-5.9

Expected volatility

   65%   65%   60%

Risk-free interest rate

   2.3-3.3%   2.5%   1.6-2.5%

Expected dividend yield

   0%   0%   0%

The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the expected term and the price volatility of the underlying stock. These assumptions include:

 

   

Expected term—The expected term represents the period that the stock-based awards are expected to be outstanding. We used the simplified method to determine the expected term as provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting period and the contractual life of the options;

 

   

Expected volatility—The expected volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the expected term of the award. We use this approach because we have limited information on the volatility of our common stock due to the lack of trading history. When making the selections of our industry peer companies to be used in the volatility calculation, we considered the size, operational and economic similarities to our principle business operations;

 

   

Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term of the awards; and

 

   

Expected dividend yield—The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.

In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. We will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis.

We are also required to determine the fair market value of the common stock underlying our stock-based awards when performing the fair value calculations with the Black-Scholes option-pricing model. The fair market value of the common stock underlying our stock-based awards was determined on each grant date by our board of directors, based on input from management and a concurrent or recent valuation of the common stock prepared by an independent appraiser. Our board of directors is comprised of a majority of non-employee directors with significant experience in operating companies in the semiconductor industry. Therefore, we believe that our board of directors has the relevant experience and expertise to determine the fair market value of our common stock on each respective grant date after taking into account the independent valuations of our common stock conducted on a periodic basis. Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors, including the independent third-party valuations, to determine the fair market value of our common stock.

Although independent valuations performed by unrelated third-party specialists were utilized by our board of directors to assist with determining the valuation of the common stock, management and our board have assumed full responsibility for the determination of such value.

 

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For the June and December 2010 and the March and June 2011 valuations, the independent appraiser utilized only the market approach, specifically the market multiple method, to estimate the fair value of the common stock. The enterprise value determined by the market approach was then allocated to the common stock using either the option pricing method (OPM) or the probability weighted expected return method (PWERM). Over time, as certainty developed regarding possible discrete events, including an IPO, the allocation methodology utilized to allocate our enterprise value to the common stock transitioned from the OPM, which was last utilized in the June 30, 2010 valuation, to the PWERM, which was utilized for all subsequent valuations.

We have granted the following stock options to our employees since July 1, 2010:

 

Grant Date

   Number of Option
Shares Granted
     Exercise
Price
     Fair
Value
 

October 28, 2010

     454,352         0.25         0.25   

March 4, 2011

     7,183,328         0.53         0.53   

June 24, 2011

     17,616,000         0.93         0.93   

No single event caused the valuation of our common stock to increase or decrease from July 2010 through June 2011. Instead, a combination of factors described in greater detail in the individual valuation discussions below led to the changes in the fair market value of the underlying common stock. Primarily, the increase was attributable to business developments during this intervening period. Specifically, our revenues, shipments and bookings were increasing during each of the four quarters in the year ended June 30, 2011. In addition, we began to notice a significant increase in traction for our 4G LTE products during the quarter ended December 2010 as evidenced by increased shipments of our 4G LTE products during that quarter, particularly increased shipments based on a significant agreement with LG. In addition to the increase as a result of business developments, the increase in valuation was also due to our progress towards an IPO, including initial, informal discussions in March 2011 with investment bankers and others in the IPO process soon followed by expanded and more formal discussions with these parties and an organizational meeting that was held in April 2011. Also during this period, the US and world economies as well as the stock markets, including the market for IPOs, rebounded from the downturn during 2008 and 2009. Specifically, the Dow Jones Industrial Average increased 14% and the NASDAQ increased 15% during this period.

To assist our board of directors in setting the exercise price of our stock options at the fair market value of our common stock on the applicable grant date, we obtained third-party valuations of our common stock as of June 30 and December 31, 2010 and March 31 and June 30, 2011. An analysis of our valuations and determinations of the exercise price and the fair market value of the underlying common stock for our stock-based awards granted on or between the respective valuation dates are discussed further below.

As of June 30, 2010, the board determined the fair market value of the common stock to be $0.04 per share. In reaching this determination, a contemporaneous independent valuation of the common stock was prepared as of June 30, 2010 on a minority, non-marketable basis assuming our business was in the bridge stage of development. This valuation was developed using the market approach, specifically the market multiple method, by analyzing the financial performance of seven publicly traded peer companies in the semiconductor industry. The independent appraiser chose to utilize multiples determined by dividing the guideline companies’ enterprise values by their revenues for the projected calendar year which was the median of the multiples evaluated.

The aggregate enterprise value was then allocated to the common stock using two scenarios. The first scenario assumed an IPO in which the preferred stock would lose its liquidation preference and participation rights, and the second scenario assumed the preferred stock retains its rights and privileges. The probability of the two scenarios reflected the expectation of an IPO, in addition to outside factors such as our open IPO window, and the potential for receiving an attractive acquisition offer in lieu of an IPO. The estimated probability of a liquidity event through an IPO was 10% and through another event, such as an acquisition, was 90%. The enterprise value was then allocated to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of 1.5 years, risk-free rate of 0.5%, dividend yield of 0% and volatility of 60% over the

 

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time to a liquidity event. The combined fair market value of our common stock from the acquisition and IPO scenarios, as determined by an OPM and after applying a marketability discount of 20%, was determined to be $0.04 per share.

Subsequent to the date of this valuation, our board granted 454,352 options on October 28, 2010 with an exercise price of $0.25 per share. This exercise price was based on its estimate of the fair market value of the underlying common stock on the grant date. In making its determination, the board reviewed business developments during the intervening period between the grant date and the earlier valuation date which caused the fair market value of our common stock to change during the intervening period. The fair value of $0.25 per share was also used for financial accounting purposes. No other stock-based awards were granted through the date of the December 31, 2010 valuation.

As of December 31, 2010, the board determined the fair market value of the common stock to be $0.53 per share. In reaching this determination, a contemporaneous independent valuation of the common stock was prepared as of December 31, 2010 on a minority, non-marketable basis assuming our business was in the bridge stage of development. Like the June 30, 2010 valuation, this valuation also utilized the market approach, specifically the market multiple method, by analyzing the financial performance of six publicly traded companies in the semiconductor industry. The independent appraiser chose to utilize multiples for the guideline companies’ enterprise values compared to projected 2012 EBITDA for the respective periods. The OPM is preferred when future outcomes are difficult to predict. PWERM becomes useful when discrete future outcomes become more predictable. During the period between June and December 31, 2010, the range of discrete events, specifically IPO scenarios, became fairly well established in the board’s view; therefore, the PWERM was utilized by the independent appraiser to estimate the fair market value of the common stock during this period with the following scenario probabilities and assumptions:

 

Scenario

   Pre-emptive M&A   IPO - Low   IPO - High   M&A   Low M&A

Timing

   Q3 2011   Q3 2011   Q3 2011   Q4 2012   Q4 2012

Probability estimate

   30%   15%   5%   10%   40%

Based on the processes described above and after applying a marketability discount of 15%, the fair market value of the common stock was determined to be $0.53 per share.

The marketability discount was reduced from 20% to 15% from the June 30, 2010 valuation to the December 31, 2010 valuation. The reduction in the discount rate was due primarily to a decrease in the average estimated time for a liquidity event to approximately 0.5 years. Based on the analysis of the empirical studies quantifying discounts for lack of marketability, the quantitative analysis from the put option models, and certain other company-specific factors such as the size of our business, management team, leverage, financial performance, prospects and estimated time for a liquidity event (approximately 0.5 years), volatility (55% - 65%), an expected range between 6% and 22% was noted within the respective models so the board estimated a discount for lack of marketability to be 15%.

The board granted 7,183,328 options on March 4, 2011 with an exercise price of $0.53 per share. This exercise price was based upon the fair market value of the underlying common stock as determined in the December 2010 valuation. For financial reporting purposes and the related stock-based compensation, we also utilized a fair value of $0.53 per share for the underlying common stock. Our management and board determined that the fair market value of $0.53 per share was appropriate as of the March 4, 2011 grant date because there were no significant business developments during this period and, as a result, the board believed that the fair market value did not change during this intervening period.

As of March 31, 2011, the board determined the fair market value of the common stock to be $0.76 per share. In reaching this determination, a contemporaneous valuation of the common stock was prepared as of March 31, 2011 on a minority, non-marketable basis assuming our business was in the IPO stage of development

 

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because we had started informal planning for our IPO. Like our June 30, 2010 and December 31, 2010 valuations, this valuation also utilized the market approach, specifically the market multiple method, by analyzing the financial performance of six publicly traded companies in the semiconductor industry. The valuation utilized multiples determined by dividing the guideline companies’ fair values by the projected 2011, 2012 and 2013 EBITDA for the respective periods. For this valuation, the independent appraiser selected the same guideline companies utilized in the December 2010 valuation, which were based on size, business model, industry and business descriptions.

The PWERM was utilized to estimate the fair market value of the common stock as of March 31, 2011 with the following scenario probabilities and assumptions:

 

Scenario

   Pre-emptive M&A   IPO - Low   IPO - High   M&A   Low M&A

Timing

   Q3 2011   Q3 2011   Q3 2011   Q4 2012   Q4 2012

Probability estimate

   30%   20%   5%   10%   35%

Based on the processes described above and after applying a marketability discount of 15%, the fair market value of the common stock was determined to be $0.76 per share.

The board determined the probability estimates above based on its view of the future prospects of our business as determined through discussions of such estimates with the independent third-party valuation firm, as well as informal discussions with bankers and others familiar with estimating such probabilities. As a result of these discussions and based on its own experiences, the board did not feel that it could reasonably place a probability higher than 25% toward the IPO occurring at the time of this valuation as we had not yet had any formal discussions with bankers for a company-specific IPO, nor had we formally started the process at the time of this valuation. As a result, the board allocated the remaining 75% amongst the different M&A scenarios, including a probability of 35% for a distressed sale since the board did not feel confident in the prospects of a high-end merger or acquisition based on current experiences of the board and management team as of March 31, 2011.

The increase in the fair value as of March 31, 2011 to $0.76 per share was primarily attributed to our progress in moving toward an IPO later in March 2011 including initial, informal discussions with investment bankers and others involved with the IPO process.

As of June 30, 2011, the board determined the fair market value of the common stock to be $0.91 per share. In reaching this determination, a contemporaneous valuation of the common stock as of June 30, 2011 was prepared on a minority, non-marketable basis assuming our business was in the IPO stage of development. Like prior valuations, this valuation also utilized the market approach, specifically the market multiple method, by analyzing the financial performance of six publicly traded companies in the semiconductor industry. The independent appraiser chose to utilize multiples determined by dividing the guideline companies’ fair values by the projected 2011, 2012 and 2013 EBITDA for the respective periods.

The PWERM was utilized to estimate the fair market value of the common stock as of June 30, 2011 with the following scenario probabilities and assumptions:

 

Scenario

   Pre-emptive M&A   IPO -
Low
  IPO - High   M&A   Low M&A

Timing

   Q4 2011   Q4 2011   Q4 2011   Q4 2012   Q4 2012

Probability estimate

   30%   30%   15%   10%   15%

Based on the processes described above and after applying a marketability discount of 10%, the fair market value of the common stock value was determined to be $0.91 per share.

 

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This reduction in the marketability discount was due primarily to a decrease in the average estimated time for a liquidity event to approximately 0.33 years.

The board updated the above probabilities based on its current view of the future prospects of our business and, specifically, an IPO occurring in the near term. During the period between the March 31, 2011 and June 30, 2011 valuations, we held formal discussions with investment bankers and officially kicked off the IPO process with an Organization Meeting in April 2011. In addition, the stock market remained strong during this quarter. As a result, the board adjusted the probabilities to have a heavier weighting toward an IPO by increasing the combined high and low IPO probabilities to 45% from a combined probability of 25% for the March 31, 2011 valuation. The Board determined that this range was appropriate at the time of the June 30, 2011 valuation because the IPO was in progress but a substantial amount of work still remained to complete the initial filing of a registration statement for an IPO, and, therefore, the probability should not be any higher at this point.

The 20% increase in the IPO probabilities was offset by a 20% decrease in the low M&A scenario. The board determined that the probability of this scenario is the proper offset for this change because the prospects of a low M&A should be decreasing as a result of the increasing prospects of our business combined with the improved operating results. The pre-emptive and typical M&A scenarios remained unchanged from the March 31, 2011 valuation.

Also, the marketability discount for the June 30, 2011 valuation was reduced to 10% from the 15% discount rate used in the March 31, 2011 valuation.

Prior to the date of June 30, 2011 valuation, the board granted 17,616,000 options on June 24, 2011 with an exercise price of $0.93 per share. This exercise price was based on a preliminary valuation of the common stock performed by the independent appraiser prior to the June 30, 2011 valuation. For financial statement reporting purposes and the related stock-based compensation, we utilized a fair value of $0.91 per share for the underlying common stock based on the fair market value determined in the June 30, 2011 valuation. No other stock-based awards were granted from April 1, 2011 through the date of the June 30, 2011 valuation.

Stock-based compensation expense included in operating results during the years ended June 30, 2009, 2010 and 2011 was included in cost of revenues and in operating expenses as follows (in thousands):

 

     Years Ended June 30,  
     2009      2010      2011  

Cost of revenues

   $ 3       $ 2       $ 32   

Research and development

     46         48         756   

Sales and marketing

     16         21         215   

General and administrative

     7         8         332   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 72       $ 79       $ 1,335   
  

 

 

    

 

 

    

 

 

 

The intrinsic value of all outstanding options as of June 30, 2011 was $         million based on the estimated fair value for our common stock of $         per share, the mid-point of the price range set forth of the cover page of this prospectus. As of June 30, 2011, we had $8.4 million of unrecognized stock-based compensation expense, net of estimated forfeitures, that is expected to be recognized over a weighted average period of 3.5 years. In future periods, our stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation to be recognized as these awards vest and as we issue additional stock-based awards to attract and retain employees.

 

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Inventory

We value our inventory at the lower of cost or market value with cost being determined by actual cost on a first-in, first-out basis. Our inventory is concentrated in high technology parts and components that may be specialized in nature or subject to rapid technological obsolescence. These factors, including age of inventory on hand and that the inventory may be returned from distributors, historical sales levels, estimated future demand within the next six months, inventory commitments or potential product revision