UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 4, 2011
CAVIUM NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
001-33435 | 77-0558625 | |
(Commission File No.) | (IRS Employer Identification No.) |
805 East Middlefield Road
Mountain View, California 94043
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (650) 623-7000
N/A
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
EXPLANATORY NOTE
On March 9, 2011, Cavium Networks, Inc. (the Company) filed a Current Report on Form 8-K (the Initial 8-K) reporting the closing of the purchase of substantially all of the assets of Celestial Semiconductor, Ltd. (Celestial Semiconductor) on March 4, 2011. This amendment to the Initial 8-K amends Item 9.01 of the Initial 8-K and provides the historical financial information required pursuant to Item 9.01(a) of Form 8-K and the pro forma financial information required pursuant to Item 9.01(b) of Form 8-K.
Item 9.01 | Financial Statements and Exhibits. |
(a) Financial Statements of Business Acquired
The audited consolidated financial statements of Celestial Semiconductor, Ltd. (Celestial Semiconductor) as at March 31, 2009, 2010 and December 31, 2010 and for the years ended March 31, 2009 and 2010 and for the nine-month period ended December 31, 2010 and accompanying notes are included as Exhibit 99.1 hereto and are incorporated herein by reference.
(b) Pro Forma Financial Information
The following Unaudited Pro Forma Combined Condensed Financial Statements required pursuant to Item 9.01(b) of Form 8-K are included as Exhibit 99.2 hereto and are incorporated herein by reference:
(i) Unaudited Pro Forma Combined Condensed Balance Sheet as at December 31, 2010
(ii) Unaudited Pro Forma Combined Condensed Statements of Operations for the year ended December 31, 2010
(iii) Notes to the Unaudited Pro Forma Combined Condensed Financial Statements
(d) | Exhibits |
Exhibit No. | Description | |
2.1 | Asset Purchase Agreement, dated January 31, 2011, between Cavium Networks, Inc., Cavium Networks Singapore Pte. Ltd., and Celestial Semiconductor, Ltd. (1) | |
2.2 | Supplemental Agreement relating to Asset Purchase Agreement, dated January 31, 2011 among Cavium Networks, Inc., Cavium Networks Singapore Pte. Ltd., and Celestial Semiconductor, entered into as of March 4, 2011. (2) | |
2.3 | Shareholders Agreement by and between Cavium Networks, Inc. and Celestial Semiconductor, dated March 4, 2011. (3) | |
23.1 | Consent of Independent Auditors. (4) | |
99.1 | Audited Consolidated Financial Statements of Celestial Semiconductor, Ltd., as at March 31, 2009, 2010 and December 31, 2010 and for the years ended March 31, 2009 and 2010 and for the nine-month period ended December 31, 2010 and accompanying notes thereto. (4) | |
99.2 | Unaudited Pro Forma Combined Condensed Statements of Operations as at and for the year ended December 31, 2010 and accompanying notes thereto. (4) |
(1) | Previously filed as Exhibit 2.2 of the Companys Current Report on Form 8-K/A, filed on February 3, 2011, and incorporated herein by reference. |
(2) | Previously filed as Exhibit 1.1 to the Initial 8-K, and incorporated herein by reference. |
(3) | Previously filed as Exhibit 1.2 to the Initial 8-K, and incorporated herein by reference. |
(4) | Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
CAVIUM NETWORKS, INC. | ||||||
Dated: April 8, 2011 | By: | /s/ ARTHUR D. CHADWICK | ||||
Arthur D. Chadwick | ||||||
Vice President of Finance and Administration | ||||||
and Chief Financial Officer |
EXHIBIT INDEX
Exhibit No. | Description | |
2.1 | Asset Purchase Agreement, dated January 31, 2011, between Cavium Networks, Inc., Cavium Networks Singapore Pte. Ltd., and Celestial Semiconductor, Ltd. (1) | |
2.2 | Supplemental Agreement relating to Asset Purchase Agreement, dated January 31, 2011 among Cavium Networks, Inc., Cavium Networks Singapore Pte. Ltd., and Celestial Semiconductor, entered into as of March 4, 2011. (2) | |
2.3 | Shareholders Agreement by and between Cavium Networks, Inc. and Celestial Semiconductor, dated March 4, 2011. (3) | |
23.1 | Consent of Independent Auditors. (4) | |
99.1 | Audited Consolidated Financial Statements of Celestial Semiconductor, Ltd., as at March 31, 2009, 2010 and December 31, 2010 and for the years ended March 31, 2009 and 2010 and for the nine-month period ended December 31, 2010 and accompanying notes thereto. (4) | |
99.2 | Unaudited Pro Forma Combined Condensed Statements of Operations as at and for the year ended December 31, 2010 and accompanying notes thereto. (4) |
(1) | Previously filed as Exhibit 2.2 of the Companys Current Report on Form 8-K/A, filed on February 3, 2011, and incorporated herein by reference. |
(2) | Previously filed as Exhibit 1.1 to the Initial 8-K, and incorporated herein by reference. |
(3) | Previously filed as Exhibit 1.2 to the Initial 8-K, and incorporated herein by reference. |
(4) | Filed herewith. |
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-166651, Form S-8 No. 333-159031, Form S-8 No. 333-149932, Form S-8 No. 333-143094 and Form S-3 No. 333-164282) of Cavium Networks, Inc. of our report dated February 27, 2011, with respect to the consolidated balance sheets of Celestial Semiconductor Ltd. as of March 31, 2009 and 2010 and December 31, 2010, and the related consolidated statements of operations, deficit and comprehensive income (loss), and cash flows for the years ended March 31, 2009 and 2010, and for the nine-month period ended December 31, 2010, which report appears in this Form 8-K/A of Cavium Networks, Inc. dated April 8, 2011.
Our report dated February 27, 2011 contains an explanatory paragraph that states that Celestial Semiconductor, Ltd. has suffered losses from operations and is in a net deficit position that raises substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Huazhen
Beijing, Peoples Republic of China
April 8, 2011
Exhibit 99.1
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
Consolidated Financial Statements
As at and for the years ended March 31, 2009 and 2010
and as of and for the nine-month period ended December 31, 2010
(With Independent Auditors Report Thereon)
Independent Auditors Report
The Board of Directors and shareholders of
Celestial Semiconductor, Ltd.:
We have audited the accompanying consolidated balance sheets of Celestial Semiconductor, Ltd. and subsidiaries (the Company) as of March 31, 2009 and 2010, and December 31, 2010, and the related consolidated statements of operations, deficit and comprehensive income (loss), and cash flows for the years ended March 31, 2009 and 2010, and for the nine-month period ended December 31, 2010. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Celestial Semiconductor, Ltd. and subsidiaries as of March 31, 2009 and 2010, and December 31, 2010, and the results of their operations and their cash flows for the years ended March 31, 2009 and 2010, and for the nine-month period ended December 31, 2010 in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1(b) to the consolidated financial statements, the Company has suffered losses from operations and is in a net deficit position that raises substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are also described in note 1(b). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Huazhen
Beijing, Peoples Republic of China
February 27, 2011
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||||||
2009 | 2010 | 2010 | ||||||||||
USD | USD | USD | ||||||||||
ASSETS |
||||||||||||
Cash and cash equivalents |
501,704 | 133,302 | 3,412,488 | |||||||||
Accounts receivable |
25,079 | 181,855 | 92,128 | |||||||||
Inventories |
318,308 | 1,291,803 | 2,549,378 | |||||||||
Prepaid expenses and other current assets |
99,870 | 438,841 | 110,854 | |||||||||
Deferred income tax assets |
7,470 | 2,815 | 15,513 | |||||||||
Total current assets |
952,431 | 2,048,616 | 6,180,361 | |||||||||
Property and equipment, net |
107,136 | 73,757 | 212,526 | |||||||||
Intangible assets, net |
404,872 | 539,075 | 417,474 | |||||||||
Other non-current assets |
70,220 | 70,316 | 72,478 | |||||||||
Deferred income tax assets |
126,882 | 16,881 | 16,713 | |||||||||
Total assets |
1,661,541 | 2,748,645 | 6,899,552 | |||||||||
LIABILITIES, SERIES A-1 PREFERRED SHARES AND DEFICIT |
||||||||||||
Notes payable |
1,351,785 | 1,351,785 | 1,351,785 | |||||||||
Convertible notes |
| 1,002,000 | | |||||||||
Amounts due to a shareholder |
87,773 | 2,333 | | |||||||||
Loan from a shareholder |
| 200,000 | | |||||||||
Accounts payable |
447,992 | 1,439,006 | 2,123,405 | |||||||||
Deferred revenue |
610,452 | 440,423 | 962,831 | |||||||||
Accrued expenses and other current liabilities |
214,211 | 357,422 | 540,621 | |||||||||
Total current liabilities |
2,712,213 | 4,792,969 | 4,978,642 | |||||||||
Deferred income tax liabilities |
| 9,939 | 32,083 | |||||||||
Total liabilities |
2,712,213 | 4,802,908 | 5,010,725 | |||||||||
Series A-1 preferred shares USD0.001 par value; 80 million, 200 million and 250 million shares authorized; 75.2 million, 148.3 million and 235.2 million shares issued and outstanding as of March 31, 2009 and 2010, and December 31, 2010, respectively |
1,480,782 | 2,942,097 | 4,658,861 | |||||||||
Deficit |
||||||||||||
Ordinary shares USD0.001 par value; 135 million, 300 million and 400 million shares authorized; 34.6 million, 64.6 million and 102.1 million shares issued and outstanding as of March 31, 2009 and 2010, and December 31, 2010, respectively |
34,593 | 64,593 | 102,093 | |||||||||
Additional paid-in capital |
12,539,069 | 12,699,198 | 12,945,509 | |||||||||
Accumulated other comprehensive income |
774,329 | 781,644 | 953,092 | |||||||||
Accumulated deficit |
(16,887,819 | ) | (19,603,229 | ) | (17,866,800 | ) | ||||||
Total deficit attributable to Celestial Semiconductor, Ltd. |
(3,539,828 | ) | (6,057,794 | ) | (3,866,106 | ) | ||||||
Noncontrolling interests |
1,008,374 | 1,061,434 | 1,096,072 | |||||||||
Total deficit |
(2,531,454 | ) | (4,996,360 | ) | (2,770,034 | ) | ||||||
Commitments and contingencies |
||||||||||||
Total liabilities, series A-1 preferred shares and deficit |
1,661,541 | 2,748,645 | 6,899,552 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31, | Nine-Month Period Ended December 31, |
|||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
USD | USD | USD | USD | |||||||||||||
(Unaudited) | ||||||||||||||||
Revenues |
||||||||||||||||
-Product |
1,242,843 | 6,088,068 | 4,834,744 | 13,716,638 | ||||||||||||
-Service |
428,687 | 313,292 | 313,292 | | ||||||||||||
Cost of revenues |
||||||||||||||||
-Product |
(963,558 | ) | (3,288,732 | ) | (2,467,281 | ) | (6,560,445 | ) | ||||||||
-Service |
(430,558 | ) | (120,699 | ) | (120,699 | ) | | |||||||||
Gross profit |
277,414 | 2,991,929 | 2,560,056 | 7,156,193 | ||||||||||||
Research and development expenses |
(1,350,089 | ) | (3,419,307 | ) | (1,923,598 | ) | (3,267,173 | ) | ||||||||
Selling, general and administrative expenses |
(1,613,962 | ) | (1,895,005 | ) | (1,422,552 | ) | (1,771,616 | ) | ||||||||
Income (loss) from operations |
(2,686,637 | ) | (2,322,383 | ) | (786,094 | ) | 2,117,404 | |||||||||
Interest income |
26,586 | 943 | 913 | 1,331 | ||||||||||||
Interest expense |
(213,279 | ) | (194,090 | ) | (141,127 | ) | (156,681 | ) | ||||||||
Foreign currency exchange losses, net |
(134,227 | ) | (12,238 | ) | (9,037 | ) | (160,262 | ) | ||||||||
Earnings (loss) before income taxes |
(3,007,557 | ) | (2,527,768 | ) | (935,345 | ) | 1,801,792 | |||||||||
Income tax benefit (expense) |
88,495 | (134,582 | ) | (114,463 | ) | (30,725 | ) | |||||||||
Net income (loss) |
(2,919,062 | ) | (2,662,350 | ) | (1,049,808 | ) | 1,771,067 | |||||||||
Less: net loss (income) attributable to noncontrolling interests |
39,240 | (53,060 | ) | (44,094 | ) | (34,638 | ) | |||||||||
Net income (loss) attributable to Celestial Semiconductor, Ltd. |
(2,879,822 | ) | (2,715,410 | ) | (1,093,902 | ) | 1,736,429 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF DEFICIT AND COMPREHENSIVE INCOME (LOSS)
Celestial Semiconductor, Ltd. | ||||||||||||||||||||||||||||||||||||||||
Ordinary Shares | Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||
Number of Shares |
Amount | Additional Paid-in Capital |
Accumulated Other Comprehensive Income |
Accumulated Deficit |
Non-controlling Interests |
Total | Attributable to Celestial Semiconductor, Ltd. |
Attributable to Non- controlling Interests |
Total | |||||||||||||||||||||||||||||||
USD | USD | USD | USD | USD | USD | USD | USD | USD | ||||||||||||||||||||||||||||||||
Balance as of April 1, 2008 |
11,595,000 | 11,595 | 351,822 | 670,342 | (14,007,997 | ) | 1,047,614 | (11,926,624 | ) | |||||||||||||||||||||||||||||||
Net loss |
| | | | (2,879,822 | ) | (39,240 | ) | (2,919,062 | ) | (2,879,822 | ) | (39,240 | ) | (2,919,062 | ) | ||||||||||||||||||||||||
Foreign currency exchange translation adjustment, net of nil income taxes |
| | | 103,987 | | | 103,987 | 103,987 | | 103,987 | ||||||||||||||||||||||||||||||
Comprehensive loss |
(2,775,835 | ) | (39,240 | ) | (2,815,075 | ) | ||||||||||||||||||||||||||||||||||
Share-based compensation |
| | 98,050 | | | | 98,050 | |||||||||||||||||||||||||||||||||
Exercise of stock options |
423,560 | 424 | 20,754 | | | | 21,178 | |||||||||||||||||||||||||||||||||
Issuance of warrants |
| | 13,158 | | | | 13,158 | |||||||||||||||||||||||||||||||||
Conversion of series A preferred shares to ordinary shares |
22,574,375 | 22,574 | 12,055,285 | | | | 12,077,859 | |||||||||||||||||||||||||||||||||
Balance as of March 31, 2009 |
34,592,935 | 34,593 | 12,539,069 | 774,329 | (16,887,819 | ) | 1,008,374 | (2,531,454 | ) | |||||||||||||||||||||||||||||||
Net (loss) income |
| | | | (2,715,410 | ) | 53,060 | (2,662,350 | ) | (2,715,410 | ) | 53,060 | (2,662,350 | ) | ||||||||||||||||||||||||||
Foreign currency exchange translation adjustment, net of nil income taxes |
| | | 7,315 | | | 7,315 | 7,315 | | 7,315 | ||||||||||||||||||||||||||||||
Comprehensive loss |
(2,708,095 | ) | 53,060 | (2,655,035 | ) | |||||||||||||||||||||||||||||||||||
Share-based compensation |
| | 100,129 | | | | 100,129 | |||||||||||||||||||||||||||||||||
Exercise of stock options |
30,000,000 | 30,000 | 60,000 | | | | 90,000 | |||||||||||||||||||||||||||||||||
Balance as of March 31, 2010 |
64,592,935 | 64,593 | 12,699,198 | 781,644 | (19,603,229 | ) | 1,061,434 | (4,996,360 | ) | |||||||||||||||||||||||||||||||
Net income |
| | | | 1,736,429 | 34,638 | 1,771,067 | 1,736,429 | 34,638 | 1,771,067 | ||||||||||||||||||||||||||||||
Foreign currency exchange translation adjustment, net of nil income taxes |
| | | 171,448 | | | 171,448 | 171,448 | | 171,448 | ||||||||||||||||||||||||||||||
Comprehensive income |
1,907,877 | 34,638 | 1,942,515 | |||||||||||||||||||||||||||||||||||||
Share-based compensation |
| | 171,311 | | | | 171,311 | |||||||||||||||||||||||||||||||||
Exercise of stock options |
37,500,000 | 37,500 | 75,000 | | | | 112,500 | |||||||||||||||||||||||||||||||||
Balance as of December 31, 2010 |
102,092,935 | 102,093 | 12,945,509 | 953,092 | (17,866,800 | ) | 1,096,072 | (2,770,034 | ) | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31, | NineMonth Period Ended December 31, |
|||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
USD | USD | USD | USD | |||||||||||||
(Unaudited) | ||||||||||||||||
Operating activities: |
||||||||||||||||
Net income (loss) |
(2,919,062 | ) | (2,662,350 | ) | (1,049,808 | ) | 1,771,067 | |||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||||||||||
Depreciation and amortization |
408,221 | 366,857 | 246,772 | 297,641 | ||||||||||||
Write-down of inventories |
| | | 49,156 | ||||||||||||
Deferred income tax expense (benefit) |
(75,893 | ) | 124,715 | 110,506 | 10,097 | |||||||||||
Share based compensation expense |
98,050 | 100,129 | 75,097 | 171,311 | ||||||||||||
Foreign currency exchange loss |
134,227 | 12,238 | 9,179 | 160,262 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Accounts receivable |
(10,536 | ) | (156,776 | ) | (400,494 | ) | 89,727 | |||||||||
Inventories |
(108,711 | ) | (885,995 | ) | (604,976 | ) | (1,306,731 | ) | ||||||||
Prepaid expenses and other current assets |
94,960 | (338,971 | ) | (382,363 | ) | 327,987 | ||||||||||
Other non-current assets |
17,838 | (96 | ) | 3,705 | (2,162 | ) | ||||||||||
Accounts payable |
2,894 | 903,514 | 563,717 | 684,399 | ||||||||||||
Deferred revenue |
610,452 | (170,029 | ) | (162,135 | ) | 522,408 | ||||||||||
Accrued expenses and other current liabilities |
174,059 | 158,859 | 194,216 | 217,146 | ||||||||||||
Net cash provided by (used in) operating activities |
(1,573,501 | ) | (2,547,905 | ) | (1,396,584 | ) | 2,992,308 | |||||||||
Investing activities: |
||||||||||||||||
Purchase of property and equipment |
(32,576 | ) | (17,946 | ) | (16,210 | ) | (203,177 | ) | ||||||||
Purchase of intangible assets |
| (458,449 | ) | (367,501 | ) | (127,698 | ) | |||||||||
Net cash used in investing activities |
(32,576 | ) | (476,395 | ) | (383,711 | ) | (330,875 | ) | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended March 31, | NineMonth Period Ended December 31, |
|||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
USD | USD | USD | USD | |||||||||||||
(Unaudited) | ||||||||||||||||
Financing activities: |
||||||||||||||||
Proceeds from interest free borrowings provided by a shareholder |
97,773 | 62,046 | 62,046 | | ||||||||||||
Repayment of interest free borrowings provided by a shareholder |
(10,000 | ) | (149,819 | ) | (149,819 | ) | | |||||||||
Proceeds from loans provided by a shareholder |
100,000 | 200,000 | | | ||||||||||||
Repayment of loans provided by a shareholder |
(100,000 | ) | | | (98,125 | ) | ||||||||||
Repayment of notes payable |
(154,625 | ) | | | | |||||||||||
Proceeds from issuance of convertible notes - Series A preferred shares |
237,000 | | | | ||||||||||||
Proceeds from issuance of convertible notes - Series A-1 preferred shares |
500,000 | 2,450,000 | 1,450,000 | 700,000 | ||||||||||||
Proceeds from issuance of Series A-1 preferred shares |
1,000,000 | | | | ||||||||||||
Payment of issuance costs of Series A preferred shares |
(24,204 | ) | | | | |||||||||||
Proceeds from exercise of stock options |
21,178 | 90,000 | 90,000 | | ||||||||||||
Net cash provided by financing activities |
1,667,122 | 2,652,227 | 1,452,227 | 601,875 | ||||||||||||
Effect of foreign currency exchange rate changes on cash and cash equivalents |
6,154 | 3,671 | 5,125 | 15,878 | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
67,199 | (368,402 | ) | (322,943 | ) | 3,279,186 | ||||||||||
Cash and cash equivalents at beginning of period/year |
434,505 | 501,704 | 501,704 | 133,302 | ||||||||||||
Cash and cash equivalents at end of period/year |
501,704 | 133,302 | 178,761 | 3,412,488 | ||||||||||||
Supplemental disclosure of cash flow information: |
||||||||||||||||
Interest paid |
16,115 | | | 790 | ||||||||||||
Income taxes paid |
14,929 | | | 19,112 | ||||||||||||
Non-cash investing and financing activities: |
||||||||||||||||
Conversion of convertible notes to Series A preferred shares |
1,282,210 | | | | ||||||||||||
Conversion of convertible notes to Series A-1 preferred shares, net of issuance costs |
504,986 | 1,461,315 | 1,461,315 | 1,716,764 | ||||||||||||
Settlement of loan provided by a shareholder through an offset of an equivalent amount due from exercise of stock options |
| | | 112,500 | ||||||||||||
Accrual of issuance costs of Series A-1 preferred shares |
| | | 20,000 |
The accompanying notes are an integral part of these consolidated financial statements.
5
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) | Description of Business, Basis of Presentation, Significant Concentrations and Risks |
(a) | Description of Business |
Celestial Semiconductor, Ltd. (Celestial Cayman) is incorporated in Cayman Islands and was established on May 20, 2004. Celestial Cayman and its operating subsidiaries, namely Celestial Semiconductor (Beijing) Co., Ltd. (Celestial Beijing) and Celestial Semiconductor Inc. (Celestial U.S.) (collectively, referred to hereinafter as the Company) is engaged in the design, manufacture and sale of integrated circuits for the broadcast industry markets. The Company primarily sells integrated circuits to set-top-box manufacturers located in the People Republic of China (PRC) and Hong Kong Special Administrative Region. The Company also provides research and development services to semiconductor manufacturers. The Company has two research and development facilities that are located in Beijing, PRC and San Jose, California, the United States (U.S.) and outsources all of the manufacturing process to four third-party foundries.
(b) | Basis of Presentation |
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The Companys fiscal year end is March 31. The December 31, 2009 and 2010 consolidated interim financial statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the Companys results of operations and cash flows for the nine-month periods ended December 31, 2009 and 2010. These adjustments are normal and recurring in nature. The accompanying interim consolidated financial statements for the nine-month period ended December 31, 2009 is unaudited.
The accompanying consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Companys ability to operate profitably, to generate cash flows from operations, and the Companys ability to pursue alternative financing arrangements to support its working capital requirements. As discussed below, the Company has suffered significant losses from operations and breached certain financial undertakings that raise substantial doubt regarding its ability to continue as a going concern. Managements plans in regard to these matters are also described below. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company continues to face difficult market conditions, which have resulted in significant losses from operations and placed considerable pressure on the Companys liquidity. As of December 31, 2010, the Company was in a net deficit position of USD 2.8 million. As discussed in notes 7 and 14, since December 31, 2008, the Company has defaulted in making the monthly installment payment on a loan provided by Venture Lending & Leasing IV, Inc. The Company has negotiated to delay the repayment of the entire loan balance of USD 1.6 million by no later than February 28, 2011.
Based on forecasted operating cash flows and the amount of available cash balance as of December 31, 2010, management believes the Company will be able to meet its commitments and liabilities, including repayment of the defaulted loan, when they fall due for a period extending at least one year beyond the date of the consolidated financial statements. In the event that market conditions and demand for the Companys products deteriorate to cause losses and negative cash flows from operations and, despite its best efforts, the Company is unable to extend the payment term of the loan or secure additional financing sources from lenders and/or other parties to fund its operations and obligations, the Company will be required to dispose of assets, perhaps at a significant discount to the fair value thereof, seek bankruptcy protection or commence liquidation or other administrative proceedings.
Should the Company be unable to continue as a going concern, adjustments would have to be made to reduce the value of assets to their liquidation amounts, which may be lower than the assets carrying amount, and to provide for liabilities which might arise in connection with the liquidation and to reclassify non-current assets and liabilities as current assets and liabilities, respectively. The effects of these adjustments have not been reflected in the accompanying consolidated financial statements.
6
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(c) | Significant Concentration and Risks |
The Companys operating results are significantly dependent on its ability to develop and market products. The Company faces rapid technology advancement, which requires the Company to continually improve the performance, feature and reliability of its products. Inability of the Company to successfully develop and market its products as a result of competition or other factors would have a material adverse effect on the Companys business, financial condition and results of operations.
The Company purchases raw materials from a limited number of suppliers. Management believes that other suppliers could provide similar raw materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results.
Sales to major customers, that individually exceeded 10% of the Companys revenues, are as follows:
Year Ended March 31, | NineMonth Period Ended December 31, |
|||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Percentage | Percentage | Percentage | Percentage | |||||||||||||
(Unaudited) | ||||||||||||||||
Company A |
| | | 42 | % | |||||||||||
Company B |
| | | 30 | % | |||||||||||
Company C |
| 16 | % | 20 | % | | ||||||||||
Company D |
8 | % | 12 | % | 11 | % | | |||||||||
Company E |
21 | % | | | | |||||||||||
Company F |
16 | % | 5 | % | | | ||||||||||
Company G |
12 | % | | | | |||||||||||
Total |
57 | % | 33 | % | 31 | % | 72 | % | ||||||||
Historically and for the periods presented, the Companys sales and revenues were dependent upon a limited number of customers on a non-recurring basis. The loss of or a significant reduction in orders from any of these customers would have a material adverse impact on the Companys business, financial condition and results of operations.
(2) | Summary of Significant Accounting Policies |
(a) | Consolidation |
The accompanying consolidated financial statements include the financial statements of Celestial Cayman and its subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
(b) | Use of Estimates |
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the fair values of financial instruments and share-based compensation, the recoverability of the carrying amounts of property and equipment and intangible assets, the useful lives of property and equipment and intangible assets, the realizability of inventories and deferred income tax assets, the collectibility of accounts receivable, the accruals for income tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
7
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(c) | Foreign Currency Transactions |
The accompanying consolidated financial statements have been expressed in United States dollar (U.S. dollar or USD). The functional currency of Celestial Cayman and Celestial U.S. is the U.S. dollar, whereas the functional currency of Celestial Beijing is Renminbi (RMB).
Transactions denominated in currencies other than the functional currency are remeasured into the functional currency at the exchange rates prevailing at the date of the transactions. Monetary assets and liabilities denominated in a foreign currency are remeasured into the functional currency using the applicable exchange rate at the balance sheet date. The resulting exchange differences are recorded in foreign currency exchange losses, net in the consolidated statements of operations.
Assets and liabilities of Celestial Beijing are translated into USD using the exchange rate at the balance sheet date. Revenues and expenses are translated into USD at average rates prevailing during the reporting period. The differences resulting from such translation are recorded as a separate component of accumulated other comprehensive income within equity.
Since the RMB is not a fully convertible currency, all foreign exchange transactions involving RMB must take place either through the Peoples Bank of China (the PBOC) or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC.
(d) | Cash and Cash Equivalents |
Cash consists of cash on hand and cash in bank. The Company considers highly liquid investments with maturity of three months or less when purchased to be cash equivalents. The Companys cash equivalents consisted of an investment in a money market fund in the amount of USD352,259 as of March 31, 2009. As of March 31, 2009 and 2010, and December 31, 2010, the Company placed RMB denominated bank deposits of USD124,755, USD59,002 and USD403,495 with financial institutions in the PRC. As of March 31, 2009 and 2010, and December 31, 2010, the Company placed bank deposits of USD24,087, USD72,398 and USD3,008,693 with financial institutions in the U.S.
(e) | Accounts Receivable |
Accounts receivable are recorded at the invoiced amount and do not bear interest. In establishing the allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio, management considers historical losses adjusted to take into account current market conditions and customers financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. No allowance for doubtful accounts has been provided for any of the periods presented because management believes all balances are fully collectible. The Company does not have any off-balance-sheet credit exposure related to its customers.
(f) | Inventories |
Inventories are stated at the lower of cost or market. Cost is determined using the first in, first out method. Work-in-progress and finished goods comprise direct materials, direct labor, indirect labor costs and overhead that have been incurred in the manufacturing process to bring the inventories to their present location and condition.
8
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(g) | Property and equipment |
Property and equipment are recorded at cost. Depreciation is calculated on the straight-line method over the following estimated useful lives of the assets:
Furniture and equipment | 3 years | |
Software | 3 years | |
Motor vehicles | 5 years | |
Leasehold improvement | Shorter of the lease term or the estimated useful life of the underlying asset |
Ordinary maintenance and repairs are charged to expenses as incurred, and replacements or betterments are capitalized. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value of the item disposed and proceeds realized thereon.
(h) | Intangible Assets |
Intangible assets consist of purchased licenses for technologies to be used in the Companys research and development activities and that have alternative future uses (in research and development projects or otherwise). Management has determined that for an acquired technology to have an alternative future use, it should be (a) reasonably expected that the Company will use the technology in an alternative manner for an economic benefit and (b) the Companys use of the technology is not contingent on further development subsequent to acquisition (that is, it can be used in an alternative manner at the acquisition date). The purchased technology licenses are amortized on a straight-line basis over the useful life of the asset ranging from 3 to 5 years, which is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company.
(i) | Impairment of long-lived assets |
Long-lived assets, such as property and equipment, and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of a long-lived asset or asset group to be held and used is determined by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the estimated fair value of the asset or asset group. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary. Assets to be disposed are reported at the lower of carrying amount or fair value less costs to sell, and are no longer depreciated.
No impairment of long-lived assets was recognized for any of the periods presented.
(j) | Revenue Recognition |
Revenue is recognized when all of the following conditions are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectibility is reasonably assured. These criteria as they relate to each of the following major revenue generating activities are described below.
9
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Products sales
Revenue from sale of products is recognized when the products are delivered to customers-appointed carriers, which is the point when the customers take ownership and assume risk of loss. The Companys sales agreements do not provide customers the right of return. However, the Company allows for an exchange of products or return if the products are defective. For the periods presented, defective product returns were immaterial.
Service fees
The Company enters into research and development agreements with customers pursuant to which the Company develops integrated circuits technologies according to customers specifications. In exchange, the Company receives progress payments upon the achievement of milestone events. The Company recognizes revenue from service fees upon achievement of substantive milestones in the period in which they are achieved.
(k) | Research and Development |
Research and development costs are expensed as incurred.
(l) | Income Taxes |
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or tax laws is recognized in the consolidated statements of operations in the period the change in tax rates or tax laws is enacted. A valuation allowance is provided to reduce the carrying amount of deferred income tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the consolidated statements of operations.
(m) | Share Based Compensation |
The Company accounts for share-based payments under the provisions of ASC Topic 718, Compensation - Stock Compensation (ASC Topic 718). Under ASC Topic 718, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the cost over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date.
10
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(n) | Employee Benefit Plans |
Pursuant to relevant PRC regulations, the Company is required to make contributions to various defined contribution plans organized by municipal and provincial PRC governments. The contributions are made for each PRC employee at rates ranging from 31% to 44% on a standard salary base as determined by local social security bureau. Contributions to the defined contribution plans are charged to the consolidated statements of operations when the related service is provided. For the years ended March 31, 2009 and 2010, and for the nine-month periods ended December 31, 2009 and 2010, the costs of the Companys obligations to the defined contribution plans amounted to USD294,314, USD383,171, USD284,563 (unaudited) and USD339,894, respectively. The Company has no other obligation for the payment of employee benefits associated with these plans beyond the contributions described above.
(o) | Operating Leases |
Where the Company has the use of the assets under operating leases, payments made under the leases are recognized on a straight-line basis over the term of the lease.
(p) | Commitments and Contingencies |
In the normal course of business, the Company is subject to loss contingencies, including, among others, government investigations, shareholder lawsuits, product liability claims and environmental remediation obligations, and non-income tax disputes. An accrual for a loss contingency is recognized when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.
(q) | Fair Value Measurements |
On April 1, 2008, the Company adopted the provisions of FASB Statement No. 157, Fair Value Measurements, included in ASC Topic 820, Fair Value Measurements and Disclosures, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. ASC Topic 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Topic 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
| Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
| Level 3 inputs are unobservable inputs for the asset or liability. |
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
11
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On April 1, 2009, the Company adopted the provisions of ASC Topic 820 to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
The Company did not have any financial assets and liabilities or nonfinancial assets and liabilities that are measured at fair value on a recurring or nonrecurring basis as of March 31, 2009 and 2010, and December 31, 2010.
(r) | Recently Issued Accounting Standards |
In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements (EITF Issue No. 08-1, Revenue Arrangements with Multiple Deliverables). ASU 2009-13 amends ASC 650-25 to eliminate the requirement that all undelivered elements have vendor specific objective evidence of selling price (VSOE) or third party evidence of selling price (TPE) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. In the absence of VSOE and TPE for one or more delivered or undelivered elements in a multiple element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entitys estimated selling price. Application of the residual method of allocating an overall arrangement fee between delivered and undelivered elements will no longer be permitted upon adoption of ASU 2009-13. Additionally, the new guidance will require entities to disclose more information about their multiple element revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. Management is currently evaluating the potential impact, if any, of adopting ASU2009-13 on the Companys financial position and results of operations.
(3) | Inventories |
Inventories consist of the following:
March 31, | December 31, | |||||||||||
2009 | 2010 | 2010 | ||||||||||
USD | USD | USD | ||||||||||
Raw materials |
65,307 | 937,533 | 496,883 | |||||||||
Work in process |
29,467 | 58,991 | 243,098 | |||||||||
Finished goods |
223,534 | 295,279 | 1,809,397 | |||||||||
Total inventories |
318,308 | 1,291,803 | 2,549,378 | |||||||||
(4) | Prepaid Expenses and Other Current Assets |
Prepaid expenses and other current assets consist of the following:
March 31, | December 31, | |||||||||||
2009 | 2010 | 2010 | ||||||||||
USD | USD | USD | ||||||||||
Prepayment for inventories |
| 291,858 | 19,740 | |||||||||
Staff advances |
30,237 | 75,693 | 1,660 | |||||||||
Others |
69,633 | 71,290 | 89,454 | |||||||||
Total prepaid expenses and other current assets |
99,870 | 438,841 | 110,854 | |||||||||
Others mainly represent prepayment for training, professional service and communication expenses.
12
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) | Property and Equipment, Net |
Property and equipment consist of the following:
March 31, | December 31, | |||||||||||
2009 | 2010 | 2010 | ||||||||||
USD | USD | USD | ||||||||||
Furniture and equipment |
651,974 | 673,398 | 689,505 | |||||||||
Software |
24,077 | 20,161 | 16,208 | |||||||||
Motor vehicles |
87,472 | 87,595 | 90,288 | |||||||||
Leasehold improvement |
226,005 | 226,320 | 233,277 | |||||||||
Total property and equipment |
989,528 | 1,007,474 | 1,029,278 | |||||||||
Less: accumulated depreciation |
(882,392 | ) | (933,717 | ) | (816,752 | ) | ||||||
Property and equipment, net |
107,136 | 73,757 | 212,526 | |||||||||
Depreciation expense was allocated to the following expense items in the statements of operations:
Year Ended March 31, | NineMonth Period Ended December 31, |
|||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
USD | USD | USD | USD | |||||||||||||
(Unaudited) | ||||||||||||||||
Research and development |
71,834 | 25,503 | 19,085 | 9,527 | ||||||||||||
Selling, general and administrative |
93,414 | 17,108 | 11,133 | 38,815 | ||||||||||||
Total |
165,248 | 42,611 | 30,218 | 48,342 | ||||||||||||
(6) | Intangible Assets, Net |
Intangible assets consist of the following:
March 31, | December 31, | |||||||||||
2009 | 2010 | 2010 | ||||||||||
USD | USD | USD | ||||||||||
Developed technology licenses |
1,458,050 | 1,916,499 | 2,044,197 | |||||||||
Less: accumulated amortization |
(1,053,178 | ) | (1,377,424 | ) | (1,626,723 | ) | ||||||
Intangible assets, net |
404,872 | 539,075 | 417,474 | |||||||||
Amortization expenses of USD242,973, USD324,246 USD216,554 (unaudited) and USD249,299 for the years ended March 31, 2009 and 2010, and for the nine-month period ended December 31, 2009 and 2010, respectively, were included in research and development expenses in the consolidated statements of operations.
The estimated amortization expense for the next five years is as follows:
USD | ||||
Period from January 2011 to March 2011 |
66,234 | |||
Years ending March 31 |
||||
2012 |
221,422 | |||
2013 |
112,683 | |||
2014 |
13,304 | |||
2015 |
3,831 | |||
2016 |
| |||
Total |
417,474 | |||
13
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) | Notes Payable |
On August 9, 2006, the Company entered into a loan agreement (Original Loan Agreement) with Venture Lending & Leasing IV, Inc. (Lender), pursuant to which the Company borrowed a loan of USD2,500,000 from the Lender at an interest rate of 11.003% per annum. The Company was required to pay equal monthly instalments of USD92,685 from August 31, 2006 to June 1, 2009. In connection with the Original Loan Agreement, the Company also issued a warrant to Venture Lending & Leasing IV, LLC (LLC), the Lenders parent company, to purchase an aggregate of 363,636 Series A preferred shares at an exercise price of USD0.55 per share. The warrant is exercisable until December 31, 2014. The assets of Celestial Cayman and Celestial U.S. were provided as the collateral for the loan.
In May 2008, the Company defaulted in making the monthly instalment payment. On September 30, 2008, the Company and the Lender entered into an amendment to the Original Loan Agreement (Amendment I) pursuant to which the unpaid balance of USD1,342,257, including accumulated interest, was restructured into or exchanged for a long-term loan of USD894,838 (long term loan) and a promissory note of USD447,419. Both the long-term loan and the promissory note bear an interest rate of 12.000% per annum. The long-term loan was payable in equal monthly instalments of USD41,734 from October 1, 2008 to September 1, 2010. The promissory note including principal and accrued interest was due at the earlier of (i) September 30, 2011 (ii) the closing of a Qualified Equity Financing or a Liquidity Event, as defined in the Amendment I. In connection with the Amendment I, the Company also issued a warrant to LLC on October 1, 2008, to purchase an aggregate of 1,096,512 Series A-1 preferred shares at an exercise price of USD0.02, as adjusted for any share splits and share dividends. The fair value of the warrant was USD13,158. In December 2008, the Company defaulted in making the monthly instalment payment on the long term loan.
Management assessed whether the modification or exchange of the loan under the Original Loan Agreement was considered substantial, as defined by ASC Subtopic 470-50, Debt Modifications and Extinguishments, and concluded it was not a substantial modification, because the change in the present value of cash flows under the long term loan and promissory note as compared to the present value of the remaining cash flows of the loan under the terms of the Original Loan Agreement was less than 10%.
Pursuant to the terms of the Original Loan Agreement, as amended, the Company was required to submit audited annual consolidated financial statements to the Lender within 180 days after the fiscal year end. Failure to perform such affirmative covenant will constitute an event of default which will give the Lender the right to demand all outstanding amount to be repaid immediately. As of March 31, 2009 and 2010, and December 31, 2010, the Company was in default of such affirmative covenant. In addition, since December 2008, the Company has defaulted in making the monthly instalment payment related to the long-term loan. Accordingly, both the long-term loan and the promissory note were classified as a current liability for all periods presented. On January 4, 2011, the Company entered into another amendment with the Lender (Amendment II). See note (14).
As of December 31, 2010, USD3,008,693, USD92,128, USD2,549,378, USD114,491 and USD417,474 of the Companys cash and cash equivalents, accounts receivables, inventories, property and equipment, and intangible assets were provided as the collateral for the long term loan and the promissory note.
14
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) | Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities consist of the following:
March 31, | December 31, | |||||||||||
2009 | 2010 | 2010 | ||||||||||
USD | USD | USD | ||||||||||
Accrued payroll and employee benefits |
203,135 | 62,770 | 143,811 | |||||||||
Accrued interest |
6,816 | 187,591 | 308,718 | |||||||||
Others |
4,260 | 107,061 | 88,092 | |||||||||
Total |
214,211 | 357,422 | 540,621 | |||||||||
Others mainly represent accrual for travel expenses and professional service expenses, and income tax payable.
(9) | Income Taxes |
Under the current laws of the Cayman Islands, Celestial Cayman is not subject to tax on its income or capital gains.
Celestial U.S. is subject to U.S. federal income tax at rate of 34% and state income tax at rate of 8%.
Prior to January 1, 2008, Celestial Beijing, a then recognized advanced and new technology enterprise located in the Beijing New Hi-Tech Industry Development and Experimental Zone, was entitled to both a preferential income tax rate of 15% and a tax holiday of 3-year full exemption followed by 3-year 50% exemption reduction in income tax rate (3+3 tax holiday). The 3+3 tax holiday started in 2005 and accordingly, Celestial Beijing was exempt from income tax from 2005 to 2007.
On March 16, 2007, the National Peoples Congress passed the new Enterprise Income Tax law (the new EIT law), which was effective as of January 1, 2008. Under the new EIT law, the statutory tax rate is 25%, however entities that qualify as Advanced and New Technology Enterprise (ANTE) are entitled to a preferential income tax rate of 15%. In addition, based on a tax notice issued by the State Council on December 26, 2007, the 3+3 tax holiday was grandfathered until its expiry provided an entity remained as an ANTE under the new EIT law during the grandfathering period. Celestial Beijing had not been recognized as an ANTE as of March 31, 2009 and therefore Celestial Beijing was subject to PRC statutory income tax at 25% for the calendar year 2008.
In late 2009, Celestial Beijing was granted the ANTE certificate that is valid for a three-year period effective retroactively from January 1, 2009. Accordingly, Celestial Beijing is subject to PRC income tax at 7.5% for the calendar years 2009 and 2010, 15% for calendar year 2011 and 25% for calendar years 2012 onwards, respectively.
The new EIT law and its relevant regulations also impose a withholding income tax at 10%, unless reduced by a tax treaty, for dividends distributed by a PRC-resident enterprise to its immediate holding company outside the PRC for earnings accumulated beginning on January 1, 2008. Undistributed earnings generated prior to January 1, 2008 are exempt from such withholding income tax.
15
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The earnings (loss) before income taxes for the periods presented were generated in the following jurisdictions:
Year Ended March 31, | NineMonth Period Ended December 31, |
|||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
USD | USD | USD | USD | |||||||||||||
(Unaudited) | ||||||||||||||||
Cayman Islands |
(2,661,011 | ) | (3,041,623 | ) | (1,274,622 | ) | 1,573,943 | |||||||||
PRC |
(366,079 | ) | 491,291 | 323,395 | 200,926 | |||||||||||
U.S. |
19,533 | 22,564 | 15,882 | 26,923 | ||||||||||||
Total earnings (loss) before income taxes |
(3,007,557 | ) | (2,527,768 | ) | (935,345 | ) | 1,801,792 | |||||||||
Income tax benefit (expense) recognized in the consolidated statements of operations consists of the following:
Year Ended March 31, | NineMonth Period Ended December 31, |
|||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
USD | USD | USD | USD | |||||||||||||
(Unaudited) | ||||||||||||||||
PRC Income Tax |
||||||||||||||||
Current income tax benefit (expense) |
13,402 | (8,942 | ) | (3,160 | ) | (19,728 | ) | |||||||||
Deferred income tax benefit (expense) |
75,893 | (124,715 | ) | (110,503 | ) | (10,097 | ) | |||||||||
Total |
89,295 | (133,657 | ) | (113,663 | ) | (29,825 | ) | |||||||||
U.S. Income Tax |
||||||||||||||||
Current income tax expense |
(800 | ) | (925 | ) | (800 | ) | (900 | ) | ||||||||
Total |
(800 | ) | (925 | ) | (800 | ) | (900 | ) | ||||||||
Income tax benefit (expense) reported in the consolidated statements of operations for the years ended March 31, 2010 and 2009, and for the ninemonth periods ended December 31, 2009 and 2010, differs from the amounts computed by applying the PRC statutory income tax of 25% to earnings (loss) before income taxes due to the following:
Year Ended March 31, | NineMonth Period Ended December 31, |
|||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
USD | USD | USD | USD | |||||||||||||
(Unaudited) | ||||||||||||||||
Computed expected income tax benefit (expense) |
751,889 | 631,942 | 233,836 | (450,448 | ) | |||||||||||
Non-deductible expenses |
(2,226 | ) | (5,297 | ) | (3,973 | ) | (2,634 | ) | ||||||||
Deferred income tax liability for undistributed earnings |
| (9,939 | ) | (2,386 | ) | (22,144 | ) | |||||||||
Tax rate difference |
4,083 | 177 | (26,445 | ) | 31,288 | |||||||||||
Tax holiday |
| 8,942 | 3,160 | 19,728 | ||||||||||||
Celestial Caymans income (loss) not subject to income tax |
(665,251 | ) | (760,407 | ) | (318,656 | ) | 393,485 | |||||||||
Actual income tax benefit (expense) |
88,495 | (134,582 | ) | (114,463 | ) | (30,725 | ) | |||||||||
16
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The principal components of deferred income tax assets and deferred tax liabilities are as follows.
March 31, | December 31, | |||||||||||
2009 | 2010 | 2010 | ||||||||||
USD | USD | USD | ||||||||||
Deferred income tax assets: |
||||||||||||
Tax loss carryforwards |
79,629 | | | |||||||||
Accrued expenses and other current liabilities |
7,470 | 2,815 | 15,513 | |||||||||
Property and equipment |
47,253 | 16,881 | 16,713 | |||||||||
Total deferred income tax assets |
134,352 | 19,696 | 32,226 | |||||||||
Deferred income tax liabilities: |
||||||||||||
Undistributed earnings |
| (9,939 | ) | (32,083 | ) | |||||||
Total gross deferred income tax liabilities |
| (9,939 | ) | (32,083 | ) | |||||||
Net deferred income tax assets |
134,352 | 9,757 | 143 | |||||||||
Classification on consolidated balance sheets: |
||||||||||||
Deferred income tax assets: |
||||||||||||
- Current |
7,470 | 2,815 | 15,513 | |||||||||
- Non-current |
126,882 | 16,881 | 16,713 | |||||||||
Deferred income tax liabilities: |
||||||||||||
- Non-current |
| (9,939 | ) | (32,083 | ) |
In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of the end of each years and period presented, the deferred income tax assets were all related to Celestial Beijing. Based upon Celestial Beijings level of historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets are deductible, management believes it is more likely than not that Celestial Beijing will realize the benefits of these deductible temporary differences and tax loss carryforwards. The amount of the deferred income tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
As of April 1, 2008 and for the years ended March 31, 2009 and 2010 and for the nine-month periods ended December 31, 2009 and 2010, the Company did not have any material unrecognized tax benefits and thus, no interest and penalties related to unrecognized tax benefits were recorded. In addition, the Company does not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances where the underpayment of taxes is more than RMB100,000. In the case of transfer pricing issues, the statute of limitation is 10 years. There is no statute of limitation in the case of tax evasion. The income tax returns of Celestial Beijing for the period from its date of inception to December 31, 2010 are open to examination by the PRC state and local tax authorities.
17
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) | Deficit |
(a) | Authorized Share Capital |
Celestial Cayman was established with authorized share capital of USD135,000, or 135,000,000 ordinary shares (USD0.001 par value). On September 27, 2009, the shareholders of the Company approved to increase the number of ordinary shares from 135,000,000 shares to 300,000,000 shares. On October 20, 2010, the shareholders of the Company approved a further increase to 400,000,000 shares.
(b) | Series A Preferred Shares |
On November 5, 2004, pursuant to the Series A preferred share subscription agreements (Series A Purchase Agreement), Celestial Cayman issued 10,000,000 Series A convertible preferred shares (Series A Preferred Shares) to ComVentures V, L.P. and its affiliates (collectively ComVentures), and Pacven Walden Ventures V, L.P. and its affiliates (collectively Paven Walden Ventures) for an aggregate purchase price of USD5,500,000 or USD 0.55 per share (Series A Original Issuance Price).
Under the Series A Purchase Agreement, the Series A Preferred Shares investors were also issued options to purchase additional Series A Preferred Shares up to USD5,500,000 at an exercise price equal to the Series A Original Issuance Price. The Series A Preferred Shares investors exercised the options and purchased 10,000,000 Series A Preferred Shares on November 30, 2005.
On February 4, 2008 and May 31, 2008, Celestial Cayman issued convertible promissory notes of USD 1,000,000 and USD237,000, respectively to Series A preferred shareholders. The maturity date of the convertible notes is December 28, 2008. The holder of the convertible notes has the option to convert the notes into Series A Preferred Shares at USD0.55 per share, as adjusted according to the conversion price adjustments as defined in the Companys Memorandum and Articles of Association. On September 4, 2008, the convertible notes of USD1,237,000 and related accrued interest of USD45,210 were converted to 2,574,375 Series A preferred shares, which was a closing condition for issuance of Series A-1 preferred shares pursuant to Series A-1 Preferred Shares Purchase Agreement. See 10 (c).
The significant terms of the Series A Preferred Shares are as follows:
Conversion
The holders of Series A Preferred Shares have the right to convert all or any portion of their holdings into ordinary shares of Celestial Cayman at a conversion price equal to the Series A Original Issuance Price, subject to a contingent conversion price adjustment if there are additional common shares issued or deemed to be issued, as defined in the Companys Memorandum and Articles of Association, at a price lower than the Series A Original Issuance Price (Conversion Price Adjustment). The contingent conversion price adjustment, if any, is determined with reference to the difference between the Series A Original Issuance Price and the issue price of the additional ordinary shares issued or deemed to be issued. The contingent conversion price adjustment may provide the holders of the Series A Preferred Shares with a beneficial conversion feature; however, any such beneficial conversion feature relating to the conversion price adjustment, if any, will only be recognized when the contingency is resolved. In addition, each Series A Preferred Share will automatically be converted into ordinary shares upon vote or written consent of the holders of more than two-thirds of the then outstanding Series A Preferred Shares or the consummation of a Qualified Public Offering, as defined in the Series A Purchase Agreement.
18
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Voting Rights
The holders of the Series A Preferred Shares have voting rights equivalent to the ordinary shareholders on an if-converted basis.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of Celestial Cayman, either voluntary or involuntary, the holders of the preferred shares shall be entitled to receive, prior and in preference to any distribution of any of the assets of Celestial Cayman to the holders of the ordinary shares by reason of their ownership of such shares, an amount per share for each share of preferred shares held by them equal to the sum of: (i) three times the original issue price of Series A Preferred Shares and (ii) all declared but unpaid dividends (if any) on such Series A Preferred Shares.
The remaining assets of the Company, if any, shall be distributed pro rata to the holders of ordinary shares and preferred shares then outstanding, based on the number of ordinary shares then held by each shareholder on an if-converted basis.
Drag-along rights
Prior to the closing of a Qualified Public Offering, Series A preferred share holders have a drag-along right whereby provided the Companys board of directors and holders of two thirds of the Companys Series A Preferred Shares vote in favor of a third-party offer to directly or indirectly purchase all, or substantially all, of the equity interests or assets of the Company, all other equity holders are required to vote in favor, or consent to such transaction. Triggering of this drag-along right results in a deemed liquidation of the Company with a required distribution of the transaction proceeds in accordance with the Companys Memorandum and Articles of Association. Consequently, the Series A preferred shares are classified outside of permanent equity. Accretion to the liquidation value is recognized when the exercise of the drag-along rights is considered probable.
The Company has determined that there was no embedded beneficial conversion feature attributable to the Series A Preferred Shares at the commitment date since the initial conversion price of the Series A Preferred Shares was greater than the estimated fair value of the Companys ordinary shares as of the respective commitment date. The estimated fair value of the underlying ordinary shares was determined by management based on a retrospective valuation performed by American Appraisal China Limited (American Appraisal), an independent third-party valuation firm, using the income approach, which requires the estimation of future cash flows, and the application of an appropriate discount rate with reference to comparable listed companies engaged in a similar industry to convert such future cash flows to a single present value.
The Shareholders of the Company approved to cancel all of the authorized 25,000,000 Series A preferred shares on September 4, 2008, on which date all outstanding Series A preferred shares were converted to ordinary shares at a conversion ratio of 1:1, which was a closing condition for issuance of Series A-1 preferred shares pursuant to Series A-1 Preferred Shares Purchase Agreement. See 10 (c). The Series A preferred shareholders waived their Conversion Price Adjustment rights to allow the Company to issue Series A-1 Preferred Shares.
(c) | Series A-1 Preferred Shares |
On September 4, 2008, the shareholders of Celestial Cayman approved the authorization of the issuance of up to 80,000,000 Series A-1 preferred shares. The authorized number of Series A-1 preferred shares was increased from 80,000,000 to 200,000,000 pursuant to a resolution passed by the shareholders of Celestial Cayman on September 27, 2009. The authorized number of Series A-1 preferred shares was further increased to 250,000,000 pursuant to a Shareholders resolution on October 20, 2010.
19
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On July 14, 2008, Celestial Cayman issued convertible promissory notes of USD500,000 to ComVentures, the founder and chief executive officer (CEO) of the Company, and NingBo Technology Asset Management (NingBo Technology). The original maturity date of the convertible notes is August 14, 2008. The holder of the convertible notes has the option to convert the notes into Series A-1 convertible preferred shares (Series A-1 Preferred Shares) at the price of USD 0.02 per share. On September 4, 2008, pursuant to the Series A-1 Preferred Share Subscription Agreements (Series A-1 Purchase Agreement), Celestial Cayman issued 25,249,313 Series A-1 convertible preferred shares to the holders of convertible promissory notes for the conversion of their promissory notes of USD 500,000 and related accrued interest of USD 4,986, at the price of USD 0.02 per share (Series A-1 Original Issuance Price).
Under the Series A-1 Purchase Agreement, the Series A-1 Preferred Shares investors were also issued options to purchase additional Series A-1 Preferred Shares up to USD 560,000 prior to September 30, 2008 at an exercise price equal to the Series A-1 Original Issuance Price. On September 30, 2008, the investors exercised their options and purchased 24,999,999 Series A-1 Preferred Shares.
Furthermore, ComVentures was also granted an option to purchase additional Series A-1 Preferred Shares up to USD500,000 prior to November 30, 2008 at an exercise price equal to the Series A-1 Original Issuance Price. Other Series A-1 preferred shareholders waived their rights to purchase additional Series A-1 preferred shares in proportion to their existing ownership in the Company. On November 25, 2008, ComVentures exercised the options and purchased 25,000,000 Series A-1 Preferred Shares.
For the year ended March 31, 2009, 75,249,312 Series A-1 Preferred Shares were issued, among which 25,249,313 Series A-1 Preferred Shares were issued to convert convertible notes of USD 500,000 and related accrued interest of USD 4,986, and 49,999,999 Series A-1 Preferred Shares were issued in consideration of USD 1,000,000 cash.
Total direct and incremental costs of issuing Series A-1 Preferred Shares of USD 24,204 were charged against the proceeds from Series A-1 Preferred Shares issued during the year ended March 31, 2009.
For the year ended March 31, 2010 and for the nine-month periods ended December 31, 2009 and 2010, the Company issued convertible promissory notes of USD2,450,000, USD1,450,000 (unaudited) and USD700,000, respectively, to Series A-1 preferred shareholders. The maturity dates of the convertible notes are May 1, 2010, May 1, 2010 and May 31, 2010, respectively. The holder of the convertible notes has the option to convert the notes into Series A-1 Preferred Shares. For the year ended March 31, 2010, the convertible notes of USD1,450,000 and related accrued interest of USD 11,315 were converted to 73,065,749 Series A-1 Preferred Shares. For the nine-month period ended December 31, 2010, the convertible notes of USD1,700,000 and related accrued interest of USD36,764 were converted to 86,838,218 Series A-1 Preferred Shares at USD0.02 per share. For the nine-month period ended December 31, 2009, the convertible notes of USD1,450,000 (unaudited) and related accrued interest of USD 11,315 (unaudited) were converted to 73,065,749 (unaudited) Series A-1 Preferred Shares.
Total direct and incremental costs of issuing Series A-1 Preferred Shares of USD nil (unaudited) and USD20,000 were charged against the proceeds from Series A-1 Preferred Shares issued during the nine-month periods ended December 31, 2009 and 2010.
The significant terms of the Series A-1 Preferred Shares are as follows:
20
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Conversion
The holders of Series A-1 Preferred Shares have the right to convert all or any portion of their holdings into ordinary shares of the Company at a conversion price equal to the Series A-1 Original Issuance Price at any time, subject to a contingent conversion price adjustment if there are additional common shares issued or deemed to be issued, as defined Companys Memorandum and Articles of Association at a price lower than the Series A-1 Original Issuance Price. The contingent conversion price adjustment, if any, is determined with reference to the difference between the Series A-1 Original Issuance Price and the issue price of the additional ordinary shares issued or deemed to be issued. The contingent conversion price adjustment may provide the holders of the Series A-1 Preferred Shares with a beneficial conversion feature; however, any such beneficial conversion feature relating to the conversion price adjustment, if any, will only be recognized when the contingency is resolved. As of December 31, 2010, there were no additional ordinary shares issued or deemed to be issued at a price lower than the Series A-1 Original Issuance Price, which would trigger the contingent conversion price adjustment. In addition, each Series A-1 Preferred Share will automatically be converted into ordinary shares upon vote or written consent of the holders of more than two-thirds of the then outstanding Series A-1 Preferred Shares or the consummation of a Qualified Public Offering, as defined in the Series A-1 Purchase Agreement.
Voting Rights
The holders of the Series A-1 Preferred Shares have voting rights equivalent to the ordinary shareholders on an if-converted basis.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of the preferred shares shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the ordinary shares by reason of their ownership of such shares, an amount per share for each share of preferred shares held by them equal to the sum of : (i) three times the original issue price of Series A-1 Preferred Shares and (ii) all declared but unpaid dividends (if any) on such Series A-1 Preferred Shares.
The remaining assets of the Company, if any, shall be distributed pro rata to the holders of ordinary shares and preferred shares then outstanding, based on the number of ordinary shares then held by each shareholder on an if-converted basis.
Drag-along rights
Prior to the closing of a Qualified Public Offering, Series A-1 preferred share holders have a drag-along right whereby provided the Companys board of directors and holders of two thirds of the Companys Series A-1 Preferred Shares vote in favor of a third-party offer to directly or indirectly purchase all, or substantially all, of the equity interests or assets of the Company, all other equity holders are required to vote in favor, or consent to such transaction. Triggering of this drag-along right results in a deemed liquidation of the Company with a required distribution of the transaction proceeds in accordance with the Companys Memorandum and Articles of Association. Consequently, the Series A-1 preferred shares are classified outside of permanent equity. Accretion to the liquidation value is recognized when the exercise of the drag-along rights is considered probable.
21
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has determined that there was no embedded beneficial conversion feature attributable to the Series A-1 Preferred Shares at the commitment date since the initial conversion price of the Series A-1 Preferred Shares was greater than the estimated fair value of the Companys ordinary shares as of the respective commitment date. The estimated fair value of the underlying ordinary shares was determined by management based on a retrospective valuation performed by American Appraisal, using income approach, which requires the estimation of future cash flows, and the application of an appropriate discount rate with reference to comparable listed companies engaged in a similar industry to convert such future cash flows to a single present value.
(d) | Non-controlling interest |
On October 15, 2006, Celestial Cayman and Infotech Ventures Co., Ltd. (Infotech) entered into an agreement pursuant to which Infotech contributed USD 1,870,604 in cash to Celestial Beijing in exchange for 14.5% of the equity interest of Celestial Beijing. In addition, Infotech was granted a conversion right to convert its 14.5% equity interest in Celestial Beijing to 3,401,100 Series A Preferred Shares of Celestial Cayman (Infotech Shares), at a price of USD 0.55. The conversion right is conditional upon Infotechs ability to obtain all requisite PRC governmental approvals. The conversion right shall end upon the earlier of the consummation of i) an initial public offering (IPO); or ii) a change in control of Celestial Cayman. The non-controlling interest is not redeemable at the option of Infotech or upon the occurrence of an event that is not solely within the control of the Company.
Pursuant to the agreement, Celestial Cayman has an option to make Infotech convert all its equity interest in Celestial Beijing to Infotech Shares beginning on the earlier of the date that Celestial Caymans Board of Directors intends to prepare for i) an IPO or ii) a change in control, and ending on the third anniversary of the earlier of the consummation of such IPO or change in control. If Infotech cannot obtain the requisite PRC governmental approvals in order to consummate the transaction, Celestial Cayman shall purchase from Infotech all its equity interest in Celestial Beijing for an amount determined as follows:
1) | If the call option is exercised in connection with a change in control, the consideration shall be equal to an amount that Infotech would have received if, immediately prior to and in connection with such change in control, Infotech held the Infotech Shares; |
2) | If the call option is exercised on or prior to an IPO and not in connection with a change in control, the consideration shall be the Purchase Price, plus accrued interest from the date of Infotechs investment in Celestial Beijing at 8% per annum; |
3) | If the call option is exercised after an IPO, the consideration shall be at fair value at such date times the number of Infotech Shares. |
On September 4, 2008, Infotech agreed to amend its conversion right of converting 3,401,100 Series A Preferred Shares of Celestial Cayman to 3,401,100 ordinary shares of Celestial Cayman.
(11) | Share Based Compensation |
On July 1, 2004, Celestial Cayman adopted a stock compensation plan, as amended in March 2005, (the 2004 Plan) pursuant to which Celestial Caymans board of directors may grant stock options to officers and employees. The 2004 Plan authorizes and reserves for the issuance of up to 9,500,000 ordinary shares. The number of ordinary shares reserved under the 2004 Plan was increased to 49,500,000 shares on November 11, 2009, and further to 94,500,000 shares on October 10, 2010 pursuant to the resolutions of the board of directors. All options grants require approval by the Board of Directors, which have been received for all the following stock option grants.
22
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On September 30, 2004, 400,000 stock options were granted to a director at an exercise price of USD0.07 per share. The options vest ratably each month over the following 4-year period starting from September 30, 2004. The contractual term of these stock options is 10 years.
On March 24, 2005, 2,400,000 stock options were granted to a director at an exercise price of USD0.05 per share. 25% of the options shall vest on the first anniversary of six months after January 23, 2005, and the remaining 75% of the options shall vest each month thereafter over the next 3-year period. The contractual term of these stock options is 10 years.
On July 27, 2005, October 3, 2005, February 2, 2006, May 3, 2006 and November 6, 2006, 2,475,000, 225,000, 470,000, 800,000 and 300,000 stock options were granted, respectively, to employees and officers at an exercise price of USD0.05 per share. 10% of the options shall vest on the first anniversary of six months after the grant date, and the remaining 90% of the options shall vest each month thereafter over the next 54-month period. The contractual term of these stock options is 10 years.
On February 8, 2007 and October 27, 2008, 491,500 and 2,357,429 stock options were granted, respectively, to employees at an exercise price of USD0.05 per share. 10% of the options shall vest on the first anniversary of the grant date, 20% shall vest on the second, third and fourth anniversary each, and the remaining 30% of the options shall vest on the fifth anniversary. The contractual term of these stock options is 10 years.
On June 28, 2007 and January 18, 2008, 120,000 and 300,000 stock options were granted, respectively, to employees at an exercise price of USD0.05 per share. 10% of the options shall vest on the first anniversary of six months after the grant date, and the remaining 90% of the options shall vest each month thereafter over the next 54-month period. The contractual term of these stock options is 10 years.
On November 11, 2009 and October 22, 2010, 30,000,000 and 35,000,000 stock options were granted to the founder and CEO of the Company at an exercise price of USD0.003 per share. The options, which were fully vested on the grant date, were granted for the purpose of management retention as well as to compensate his past service. The contractual term of these stock options is 10 years.
On October 22, 2010, 4,400,000 stock options were granted to employees and one director at an exercise price of USD0.003 per share. The options were fully vested on the grant date. The contractual term of these stock options is 10 years.
On September 16, 2010, pursuant to a resolution by Celestial Caymans board of directors, in consideration of the decline in the fair value of the ordinary shares, the exercise price for all outstanding stock options with an exercise price of USD0.05 per share were adjusted to USD0.003 per share. As a result of the modification:
1) | For those stock options that had been vested as of September 16, 2010, incremental compensation cost, which represents the difference between the fair value of modified stock options on September 16, 2010 and the fair value of original stock options immediately before the modification, in the amount of USD6,090 was recognized in the consolidated statement of operations. |
2) | For those stock options that had not vested as of September 16, 2010, incremental compensation cost, which represents the difference between the fair value of modified stock options on September 16, 2010 and the fair value of original stock options immediately before the modification, in the amount of USD1,704 will be recognized ratable over the remaining requisite service period. |
On October 22, 2010, 7,400,000 stock options were granted to employees at an exercise price of USD0.003 per share. 10% of the options shall vest on the first anniversary of six months after the grant date, and the remaining 90% of the options shall vest each month thereafter over the next 54-month period. The contractual term of these stock options is 10 years.
23
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 22, 2010, 6,198,000 stock options were granted to employees at an exercise price of USD0.003 per share. 10% of the options shall vest on the first anniversary of grant date, 20% shall vest on the second, third and fourth anniversary each, and the remaining 30% of the options shall vest on the fifth anniversary. The contractual term of these stock options is 10 years.
A summary of all the stock option activities for the years ended March 31, 2009 and 2010, and for the nine-month period ended December 31, 2010 is presented below:
Number of Shares | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Remaining Life |
||||||||||
USD | (Years) | |||||||||||
Outstanding as at April 1, 2008 |
1,567,500 | 0.05 | ||||||||||
Granted |
2,357,429 | 0.05 | ||||||||||
Exercised |
(423,560 | ) | 0.05 | |||||||||
Forfeited |
(831,162 | ) | 0.05 | |||||||||
Expired |
(293,134 | ) | 0.05 | |||||||||
Outstanding as at March 31, 2009 |
2,377,073 | 0.05 | ||||||||||
Granted |
30,000,000 | 0.003 | ||||||||||
Exercised |
(30,000,000 | ) | 0.003 | |||||||||
Forfeited |
(7,047 | ) | 0.05 | |||||||||
Expired |
(932 | ) | 0.05 | |||||||||
Outstanding as at March 31, 2010 |
2,369,094 | 0.05 | ||||||||||
Granted |
52,998,000 | 0.003 | ||||||||||
Exercised |
(37,500,000 | ) | 0.003 | |||||||||
Forfeited |
(174,724 | ) | 0.003 | |||||||||
Expired |
(41,453 | ) | 0.003 | |||||||||
Outstanding as at December 31, 2010 |
17,650,917 | 0.003 | 9.50 | |||||||||
Exercisable as of December 31, 2010 |
3,488,327 | 0.003 | 9.09 | |||||||||
The Company calculated fair values of stock options on the date of grant using the Binomial option-pricing valuation model. The assumptions used in the valuation model are summarized as follows:
Year Ended March 31, | NineMonth Period Ended December 31, |
|||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
(Unaudited) | ||||||||||||||||
Expected volatility |
69 | % | 67 | % | 67 | % | 63 | % | ||||||||
Expected dividend |
| | | | ||||||||||||
Suboptimal exercise factor |
2.0x | 2.0x | 2.0x | 2.0x | ||||||||||||
Risk-free interest rate (per annum) |
5.80 | % | 4.37 | % | 4.37 | % | 3.37 | % | ||||||||
Estimated fair value of underlying ordinary shares at grant date |
USD0.003 | USD0.004 | USD0.004 | USD0.006 |
For options granted, the expected volatility was based on historical volatilities of comparable publicly traded semiconductor companies operating in the United States because Celestial Cayman did not have a trading history at the time the options were granted.
The estimated fair value of ordinary shares of Celestial Cayman was determined by management based on valuations of Celestial Caymans ordinary shares that were conducted by American Appraisal, supplemented by managements estimate of forecasted profitability and cash flows of the Company.
24
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted-average grant-date fair value of stock options granted during the years ended March 31, 2009 and 2010, and for the nine-month periods ended December 31, 2009 and 2010 was less than USD0.01 per share. Share-based compensation expense related to stock options amounted to USD98,050, USD100,129, USD75,097 (unaudited) and USD171,311, respectively, for the years ended March 31, 2009 and 2010, and for the nine-month periods ended December 31, 2009 and 2010, which were allocated to selling, general and administrative expenses.
As of December 31, 2010, USD79,795 of total unrecognized compensation expense related to non-vested share options is expected to be recognized over the next 4.9 years.
(12) | Related Party Transactions |
During the periods presented, the Company entered into related party transactions with a shareholder of the Company, who is also the CEO and founder of the Company. The significant related party transactions are summarized as follows:
Year Ended March 31, | NineMonth Period Ended December 31, |
|||||||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||||||
USD | USD | USD | USD | |||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Loan from a shareholder: |
(a | ) | ||||||||||||||||||
Loan from a shareholder |
100,000 | 200,000 | | | ||||||||||||||||
Interest expense resulting from the loan |
3,720 | 2,333 | | 9,082 | ||||||||||||||||
Repayment of loan and interest to a shareholder |
103,720 | | | 98,915 | ||||||||||||||||
Settlement of loan provided by a shareholder through an offset of equivalent amount due from exercise of stock options |
| | | 112,500 | ||||||||||||||||
Interest-free borrowings from a shareholder: |
(b | ) | ||||||||||||||||||
Interest free borrowings from a shareholder |
97,773 | 62,046 | 62,046 | | ||||||||||||||||
Repayment of interest free borrowings to a shareholder |
10,000 | 149,819 | 149,819 | |
The balances with the related party are summarized as follows:
March 31, | December 31, | |||||||||||
2009 | 2010 | 2010 | ||||||||||
USD | USD | USD | ||||||||||
Loan from a shareholder |
| 200,000 | | |||||||||
Amounts due to a shareholder |
87,773 | 2,333 | |
(a) | In May 2008, the Company borrowed USD100,000 from the shareholder. The loan was unsecured and had no specific terms of repayment. The interest rate is 7% annum. The interest expense accrued for the year ended March 31, 2009 was USD3,720. The Company repaid USD103,720 (including USD3,720 interest) on December 11, 2008. |
25
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On February 1, 2010, the Company borrowed USD200,000 from the shareholder. The loan was unsecured and had no specific terms of repayment. The interest rate is 7.136% annum. The interest expense accrued for the year ended March 31, 2010 and for the nine-month periods ended December 31, 2009 and 2010 were USD2,333, nil (unaudited) and USD9,082, respectively. The outstanding balance of USD112,500 was set off against an equivalent amount due from the shareholder for the exercise of his 35,000,000 stock options and exercise of 2,500,000 stock options on behalf of one employee on October 25, 2010. The Company repaid the remaining USD98,915 (including USD11,415 interest) on December 17, 2010.
(b) | The Company borrowed interest free loans from the shareholder to support its operating activities. The loans were unsecured and have no specific terms of repayment. During the years ended March 31, 2009 and 2010 and nine-month period ended December 31, 2009, the Company borrowed USD97,773, USD62,046 and USD62,046 (unaudited), and repaid USD10,000, USD149,819 and USD149,819 (unaudited) respectively. |
(13) | Commitments |
The Company has entered into non-cancelable operating leases for office premises with initial or remaining lease terms in excess of one year as of December 31, 2010 as follows:
USD | ||||
Period from January 2011 to March 2011 |
80,991 | |||
Year ending |
||||
March 2012 |
291,368 | |||
March 2013 |
291,368 | |||
March 2014 |
218,527 | |||
882,254 | ||||
Rental expense incurred under operating leases for office premises for the years ended March 31, 2009 and 2010, and for the nine-month period ended December 31, 2009 and 2010 were USD294,113, USD358,428, USD 268,821 (unaudited) and USD262,299, respectively.
(14) | Subsequent events |
(a) | Notes payable amendment |
On January 4, 2011, the Company entered into a further amendment with the Lender (Amendment II), pursuant to which the Lender agreed to continue to forebear from exercising any remedies it has against the Company, including exercising the collateral claims of certain Companys assets as a result of the defaults of the long term loan and promissory note as of December 31, 2010 (the Existing Defaults) (see note 7) until the earlier of:
i) | Any default as defined in the Original Loan Agreement, other than the Existing Defaults; |
ii) | February 28, 2011; and |
iii) | The closing of a liquidity event as defined in Amendment II. |
The Company is obligated to repay to the Lender in the amount of USD1,644,107 no later than February 28, 2011.
In connection with the Amendment II, the Company also issued a warrant to LLC on January 4, 2011, to purchase an aggregate of 6,583,388 Series A-1 preferred shares at an exercise price equal to USD 0.02 per share, as adjusted for any share splits and share dividends. The options expire on December 31, 2016.
26
CELESTIAL SEMICONDUCTOR, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(b) | Definitive asset purchase agreement |
On January 31, 2011, the Company entered into an asset purchase agreement (the Purchase Agreement) with Cavium Networks, Inc. and Cavium Networks Singapore Pte. Ltd. (Cavium), pursuant to which Cavium will acquire certain assets and assume certain liabilities of the Company as specified in the Purchase Agreement in exchange for approximately USD55 million, consisting of approximately USD20 million in cash and USD35 million in Cavium Networks, Incs common stock. In addition, Cavium may pay additional cash consideration of up to USD10 million that is contingent upon the Company meeting certain sales thresholds following consummation of the transaction.
The transaction is subject to certain closing conditions and has not been consummated as of February 27, 2011.
Management has considered subsequent events through February 27, 2011, which was the date the consolidated financial statements are available to be issued.
27
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On January 25, 2011, Cavium Networks, Inc. (the Company) completed the acquisition of substantially all of the assets of Wavesat Inc. (Wavesat), including, but not limited to, certain intellectual property, all of Wavesats rights to, in and under customer contracts and other material agreements, inventory, equipment, work in progress, fixed assets, goodwill and assume certain liabilities. On January 31, 2011, the Company entered into an asset purchase agreement with Celestial Semiconductor Ltd (Celestial Semiconductor) where the Company would purchase certain assets and assumed certain liabilities of Celestial Semiconductor. The acquisition of Celestial Semiconductor was completed on March 4, 2011. See notes to the unaudited pro forma condensed combined financial statements for detailed discussions on both acquisitions.
The following unaudited pro forma condensed combined financial statements as at and for the year ended December 31, 2010 are based on the historical financial statements of the Company, Wavesat and Celestial Semiconductor as adjusted for the pro forma impact of applying the acquisition method of accounting in accordance with Generally Accepted Accounting Principles in the United States of America (US GAAP) and the translation of the historical financial statements of Wavesat from Canadian dollars to US dollars. The pro forma adjustments are based upon available information and assumptions that the Company believes are reasonable. The allocation of the purchase price of the Wavesat and Celestial Semiconductor acquisitions reflected in these unaudited pro forma condensed combined financial statements has been based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. The pro forma adjustments are therefore preliminary and have been prepared to illustrate the estimated effect of the acquisitions. A final determination of the fair values of Wavesat and Celestial Semiconductor assets and liabilities will be based on the actual valuation of the tangible and intangible assets and liabilities that exist as at the date of completion of the transactions. Consequently, amounts preliminarily allocated to identifiable tangible and intangible assets and liabilities could change significantly from those used in the pro forma condensed combined financial statements presented below and could result in a material change in amortization of tangible and intangible assets. We anticipate finalizing the purchase price allocations by the third calendar quarter of 2011. The unaudited pro forma condensed combined financial statements do not include any pro forma adjustments relating to costs of integration that the combined companies may incur as such adjustments would be forward-looking.
The unaudited pro forma condensed combined balance sheet as at December 31, 2010 is presented as if the acquisitions of Wavesat and Celestial Semiconductor had occurred on December 31, 2010. The unaudited pro forma condensed combined statement of operation for the year ended December 31, 2010 illustrate the effect of the acquisitions of Wavesat and Celestial Semiconductor, as if the transactions had occurred on January 1, 2010. The historical financial information has been adjusted to give effect to pro forma events that are (i) directly attributable to the acquisition, (ii) factually supportable, and (iii) with respect to the statement of operations, expected to have a continuing impact on the combined results of the companies. The detailed assumptions used to prepare the pro forma financial information are contained in the notes to the unaudited pro forma condensed combined financial statements, and such assumptions should be reviewed in their entirety.
The unaudited pro forma condensed combined financial statements have been derived from and should be read in conjunction with (i) the audited financial statements and notes thereto of the Company in its Annual Report on Form 10-K as at December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008, (ii) the audited financial statements and notes thereto of Wavesat as at December 31, 2010 and 2009 and for the years ended December 31, 2010 and 2009 included in Exhibit 99.4 on Form 8-K of Wavesat acquisition filed on April 8, 2011, and (iii) the audited financial statements and notes thereto of Celestial Semiconductor as at March 31, 2009, 2010 and December 31, 2010 and for the years ended March 31, 2009 and 2010 and nine-month period ended December 31, 2010 included in Exhibit 99.1 to this current report on Form 8-K/A.
The unaudited pro forma condensed combined financial statements are prepared by management for informational purposes only in accordance with Article 11 of Regulation S-X and are not necessarily indicative of future results or of actual results that would have been achieved had the acquisitions been consummated as of the dates presented, and should not be taken as representative of future consolidated operating results of the Company. The unaudited pro forma condensed combined financial statements do not reflect any operating efficiencies and/or cost savings that the Company may achieve, or any additional expenses that maybe incurred, with respect to the combined companies.
CAVIUM NETWORKS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As at December 31, 2010
(in thousands)
Pro Forma Combined - Cavium and Wavesat |
Historical | Pro Forma Combined - Cavium, Wavesat and Celestial |
||||||||||||||||||||||||||||||
Histocial As of December 31, 2010 |
Pro Forma Adjustments |
As of December 31, 2010 |
Pro Forma Adjustments |
|||||||||||||||||||||||||||||
Cavium | Wavesat(1) | Celestial(1) | ||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 90,673 | $ | 73 | $ | (10,073 | ) | (a) | $ | 80,673 | $ | 3,412 | $ | (24,018 | ) | (z) | $ | 60,067 | ||||||||||||||
Accounts receivable, net |
29,912 | 46 | (46 | ) | (b) | 29,912 | 92 | (92 | ) | (y) | 29,912 | |||||||||||||||||||||
Inventories |
31,556 | 21 | (11 | ) | (c) | 31,566 | 2,549 | 1,478 | (x) | 35,594 | ||||||||||||||||||||||
Prepaid expenses and other current assets |
2,423 | 2,407 | (2,407 | ) | (b) | 2,423 | 111 | (111 | ) | (y) | 2,423 | |||||||||||||||||||||
Deferred income taxes |
9,053 | | 9,053 | 16 | (16 | ) | (y) | 9,053 | ||||||||||||||||||||||||
Total current assets |
163,617 | 2,547 | (12,537 | ) | 153,627 | 6,180 | (22,759 | ) | 137,049 | |||||||||||||||||||||||
Property and equipment, net |
14,162 | 1,368 | (789 | ) | (d) | 14,741 | 213 | (21 | ) | (w) | 14,933 | |||||||||||||||||||||
Intangible assets, net |
29,226 | 717 | 3,783 | (d),(e) | 33,726 | 417 | 20,448 | (v) | 54,591 | |||||||||||||||||||||||
Goodwill |
57,230 | | 7,397 | (e) | 64,627 | | 37,819 | (v) | 102,446 | |||||||||||||||||||||||
Deferred income taxes |
26,020 | | 26,020 | 17 | (17 | ) | (y) | 26,020 | ||||||||||||||||||||||||
Other assets |
1,365 | | 1,365 | 73 | (73 | ) | (y) | 1,365 | ||||||||||||||||||||||||
Total assets |
$ | 291,620 | $ | 4,632 | $ | (2,146 | ) | $ | 294,106 | $ | 6,900 | $ | 35,397 | $ | 336,403 | |||||||||||||||||
Liabilities, Redeemable Preferred Stock and Stockholders Equity (Deficit) |
||||||||||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||||||||||
Accounts payable |
$ | 14,160 | $ | 5,049 | $ | (5,049 | ) | (b) | $ | 14,160 | $ | 2,123 | $ | 1,625 | (u) | $ | 17,908 | |||||||||||||||
Accrued expenses and other current liabilities |
8,136 | 1,386 | 2,900 | (f) | 12,422 | 541 | 6,038 | (s) | 19,271 | |||||||||||||||||||||||
Deferred revenue |
15,361 | 199 | (199 | ) | (b) | 15,361 | 963 | (963 | ) | (y) | 15,361 | |||||||||||||||||||||
Notes and loans payable |
| 1,572 | (1,572 | ) | (b) | | 1,352 | (1,352 | ) | (y) | | |||||||||||||||||||||
Convertible loans |
| 38,904 | (38,904 | ) | (b) | | | | ||||||||||||||||||||||||
Capital lease and technology license obligations, current |
8,088 | | 8,088 | | 8,088 | |||||||||||||||||||||||||||
Total current liabilities |
45,745 | 47,111 | (42,825 | ) | 50,031 | 4,979 | 5,618 | 60,628 | ||||||||||||||||||||||||
Capital lease and technology license obligations, net of current |
2,956 | | 2,956 | | 2,956 | |||||||||||||||||||||||||||
Deferred tax liability |
5,917 | | 5,917 | 32 | (32 | ) | (y) | 5,917 | ||||||||||||||||||||||||
Other non-current liabilities |
2,392 | | 2,392 | | 2,392 | |||||||||||||||||||||||||||
Total liabilities |
57,010 | 47,111 | (42,825 | ) | 61,296 | 5,011 | 5,586 | 71,893 | ||||||||||||||||||||||||
Redeemable preferred stock |
| 25,536 | (25,536 | ) | (g) | | | | ||||||||||||||||||||||||
Redeemable convertible preferred stock |
| | | 4,659 | (4,659 | ) | (r) | | ||||||||||||||||||||||||
Stockholders equity (deficit) |
||||||||||||||||||||||||||||||||
Common shareholders equity |
276,103 | 35,206 | (35,206 | ) | (g) | 276,103 | 13,048 | 21,952 | (r),(q) | 311,103 | ||||||||||||||||||||||
Accumulated comprehensive loss |
| | | 953 | (953 | ) | (r) | | ||||||||||||||||||||||||
Accumulated deficit |
(41,493 | ) | (103,221 | ) | 101,421 | (g) | (43,293 | ) | (17,867 | ) | 14,567 | (r) | (46,593 | ) | ||||||||||||||||||
Non-controlling interest |
| | | 1,096 | (1,096 | ) | (r) | | ||||||||||||||||||||||||
Total stockholders equity (deficit) |
234,610 | (68,015 | ) | 66,215 | 232,810 | (2,770 | ) | 34,470 | 264,510 | |||||||||||||||||||||||
Total liabilities, redeemable preferred stock and stockholders equity (deficit) |
$ | 291,620 | $ | 4,632 | $ | (2,146 | ) | $ | 294,106 | $ | 6,900 | $ | 35,397 | $ | 336,403 | |||||||||||||||||
(1) | See Note 3 to the unaudited pro forma combined condensed financial statements. |
CAVIUM NETWORKS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2010
(in thousands, except per share data)
Historical For the Year Ended December 31, 2010 |
Pro Forma Adjustments |
Pro Forma Combined - Cavium and Wavesat |
Historical For the Year Ended December 31, 2010 |
Pro forma Adjustments |
Pro Forma Combined - Cavium, Wavesat and Celestial |
|||||||||||||||||||||||||||
Cavium | Wavesat(1) | Celestial (1) | ||||||||||||||||||||||||||||||
Net revenue |
$ | 206,500 | $ | 856 | $ | 207,356 | $ | 14,970 | $ | 222,326 | ||||||||||||||||||||||
Cost of revenue |
79,487 | 314 | 617 | (h) | 80,418 | 7,382 | 3,991 | (p) | 91,791 | |||||||||||||||||||||||
Gross profit |
127,013 | 542 | (617 | ) | 126,938 | 7,588 | (3,991 | ) | 130,535 | |||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||||||
Research and development |
60,602 | 11,223 | 71,825 | 4,763 | 76,588 | |||||||||||||||||||||||||||
Sales, general and administrative |
55,303 | 6,447 | (134 | ) | (i) | 61,616 | 2,245 | 404 | (p),(n) | 64,265 | ||||||||||||||||||||||
Total operating expenses |
115,905 | 17,670 | (134 | ) | 133,441 | 7,008 | 404 | 140,853 | ||||||||||||||||||||||||
Income (loss) from operations |
11,108 | (17,129 | ) | (483 | ) | (6,503 | ) | 580 | (4,395 | ) | (10,319 | ) | ||||||||||||||||||||
Other income (expense), net: |
||||||||||||||||||||||||||||||||
Interest expense |
(405 | ) | (4,576 | ) | 4,576 | (j) | (405 | ) | (209 | ) | | (614 | ) | |||||||||||||||||||
Other |
(1,004 | ) | 207 | (797 | ) | (163 | ) | | (960 | ) | ||||||||||||||||||||||
Total other income (expense), net |
(1,409 | ) | (4,369 | ) | 4,576 | (1,202 | ) | (372 | ) | | (1,574 | ) | ||||||||||||||||||||
Income (loss) before income tax expense |
9,699 | (21,497 | ) | 4,093 | (7,705 | ) | 208 | (4,395 | ) | (11,893 | ) | |||||||||||||||||||||
Income tax expense (benefit) |
(27,425 | ) | | (169 | ) | (k) | (27,594 | ) | 50 | (1,538 | ) | (m) |
(29,082 | ) | ||||||||||||||||||
Net income (loss) before non-controlling interest |
$ | 37,124 | $ | (21,497 | ) | $ | 4,262 | $ | 19,888 | $ | 158 | $ | (2,587 | ) | $ | 17,189 | ||||||||||||||||
Non-controlling interest |
| | | 44 | (44 | ) | (l) | | ||||||||||||||||||||||||
Net income (loss) |
$ | 37,124 | $ | (21,497 | ) | $ | 4,262 | $ | 19,888 | $ | 114 | $ | (2,813 | ) | $ | 17,189 | ||||||||||||||||
Accretion on redeemable preferred stock |
| 8,670 | (8,670 | ) | (l) | | | | ||||||||||||||||||||||||
Net income (loss) attributable to common stockholders |
$ | 37,124 | $ | (30,167 | ) | $ | 12,931 | $ | 19,888 | $ | 114 | $ | (2,813 | ) | $ | 17,189 | ||||||||||||||||
Net income (loss) per common share, basic |
$ | 0.83 | $ | 0.44 | $ | 0.38 | ||||||||||||||||||||||||||
Weighted average shares used in computing basic net income (loss) per common share |
44,740 | 44,740 | 806 | (k) | 45,546 | |||||||||||||||||||||||||||
Net income (loss) per common share, diluted |
$ | 0.77 | $ | 0.41 | $ | 0.35 | ||||||||||||||||||||||||||
Weighted average shares used in computing diluted net income (loss) per common share |
48,235 | 48,235 | 806 | (k) | 49,041 |
(1) | See Note 3 to the unaudited pro forma combined condensed financial statements. |
CAVIUM NETWORKS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. BACKRGROUND AND BASIS OF PRO FORMA PRESENTATION
On January 25, 2011, the Company completed the acquisition of substantially all of the assets of Wavesat including, but not limited to, certain intellectual property, all of Wavesats rights to, in and under customer contracts and other material agreements, inventory, equipment, work in progress, fixed assets, goodwill and assumed certain liabilities. The Company paid $10.0 million in cash, plus the aggregate amount of certain liabilities, which were specified in the related purchase agreement. Of the $10.0 million purchase price, $1.0 million was deposited in escrow for a limited period after closing in order to secure Wavesats indemnification obligations under the purchase agreement, including for breaches of representations and warranties and covenants made by Wavesat as defined in the related purchase agreement. Following the closing, the Company has also paid a total of $1.96 million to Wavesat in connection with a transition services arrangement, pursuant to which Wavesat continued to employ certain employees prior to their becoming employees of the Company. The transition services are billed based on agreed upon methods that include actual expenses incurred by Wavesat (e.g. payroll costs, consulting services, other miscellaneous operating expenses) during the transition period from the closing date of the acquisition to March 15, 2011 in accordance with the terms of the agreement. No pro forma adjustment has been made to include these costs in the unaudited pro forma condensed combined statements of operations as these services are not expected to have a continuing impact on operations.
On January 31, 2011, the Company entered into an asset purchase agreement with Celestial Semiconductor, a Cayman Islands company. On the terms and subject to the conditions set forth in the asset purchase agreement, the Company will purchase certain assets and assume certain liabilities of Celestial Semiconductor. Under the terms of the asset purchase agreement, the Company will pay approximately $55.0 million in total consideration, consisting of a mix of cash and shares of the Companys common stock. A portion of the cash consideration will be deposited in escrow for a one year period after closing in order to secure Celestial Semiconductors indemnification obligations under the asset purchase agreement, including breaches of representations and warranties and covenants made by Celestial Semiconductor in the asset purchase agreement. In addition, the Company may pay additional cash consideration of up to $10.0 million after the closing per an earn-out provision based upon the sales of Celestial Semiconductors products following consummation of the transaction. On March 4, 2011, the Company and Celestial Semiconductor entered into a Supplemental Agreement modifying certain terms and provisions of that certain asset purchase agreement. Among other things, the supplemental agreement increased the aggregate purchase price from $55.0 million to $56.04 million, with such $1.04 million increase will be funded entirely in cash. The acquisition was completed on March 4, 2011.
The unaudited pro forma condensed combined balance sheet as at December 31, 2010 and the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2010 are derived from the historical financial information of the Company, Wavesat and Celestial Semiconductor after giving effect to the pro forma adjustments relating to the acquisitions and the translation of the historical financial statements of Wavesat from Canadian dollars to US dollars.
The acquisition of Wavesat and Celestial Semiconductor, have been accounted for using acquisition method of accounting in accordance with the business acquisition standards. Under the acquisition method of accounting, the total estimated purchase consideration of the acquisitions was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the tangible and identifiable intangible assets acquired and liabilities assumed was recorded as goodwill. The fair value guidance clarifies that the fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between the market participants. The fair value guidance also requires that the fair value measurements reflect the assumptions market participants use in pricing an asset or liability based on the best information available. Under the acquisition method of accounting, acquisition related transaction costs (e.g., success-based banking fees, professional fees for legal, accounting, tax, due diligence and other related services costs) are not included as a component of consideration transferred, but are accounted for as expenses in the periods in which the costs are incurred.
2. PRELIMINARY ESTIMATED PURCHASE PRICE ALLOCATION
Wavesat Inc.
The following table summarizes the consideration paid and preliminary estimated fair values of the assets acquired and the liabilities assumed as if the acquisition of Wavesat occurred on December 31, 2010:
Amount | ||||
(in thousands) | ||||
Tangible assets (liabilities) acquired: |
||||
Inventories |
$ | 10 | ||
Property and equipment |
579 | |||
Assumed liabilities |
(2,486 | ) | ||
Net tangible liabilities acquired |
(1,897 | ) | ||
In-process research and development |
800 | |||
Other identifiable intangible assets |
3,700 | |||
Goodwill |
7,397 | |||
Total purchase price |
$ | 10,000 | ||
The following represents details of the purchased intangible assets as part of the acquisition:
Intangible Assets | Estimated useful life (in years) |
Amount | ||||||
(in thousands) | ||||||||
Existing technology |
6.0 | $ | 2,500 | |||||
Core technology |
6.0 | 900 | ||||||
Trademarks |
6.0 | 300 | ||||||
Total |
$ | 3,700 | ||||||
Of the $4.5 million acquired intangible assets, $800,000 was assigned to in-process research and development or IPR&D. Acquired IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition date, this asset will not be amortized as charges to earnings; instead this asset will be subject to periodic impairment testing. Upon successful completion of the development process for the acquired IPR&D project, the asset would then be considered a finite-lived intangible asset and amortization of the asset will commence. The fair value of the IPR&D was determined based on an income approach using the discounted cash flow method. A discount rate of 17% was used to value the project based on the implied rate of return of the transaction, adjusted to reflect additional risks inherent in the acquired project. The preliminary remaining useful life is currently estimated to be 7 years from the completion date, but is subject to change based on a reassessment as at the completion date.
The fair value of the existing technology was determined based on an income approach using the discounted cash flow method. A discount rate of 13% was used to value the existing technology and was estimated using a discount rate based on implied rate of return of the transaction, adjusted for specific risk profile of the asset. The remaining useful life for the existing technology was based on historical product development cycles, the projected rate of technology attrition, and the pattern of projected economic benefit of the asset.
The fair value of core technology and trademark were determined using a variation of income approach known as profit allocation method. The estimated savings for profit were determined using 4% and 1% profit allocation rates and 14% and 15% discount rates for core technology and trademark, respectively. The estimated useful life was determined based on the future economic benefit expected to be received from the asset.
This acquisition will add multicore wireless digital system processing to the Companys embedded processor product line. This factor contributed to a purchase price resulting in the recognition of goodwill. The acquired goodwill, which is not deductible for tax purposes, has been allocated to the semiconductor products reportable segment.
Celestial Semiconductor, Ltd.
Following summarizes the total purchase price consideration paid by the Company in relation to the asset purchase agreement with Celestial Semiconductor:
Amount | ||||
(in thousands) | ||||
Cash consideration |
$ | 20,606 | ||
Common stock (806,265 shares at $43.41 per share) |
35,000 | |||
Fair value of the contingent earn-out consideration to other selling shareholders |
3,432 | |||
Total |
$ | 59,038 | ||
The 806,265 common stock issued to Celestial Semiconductor was determined by dividing the purchase price consideration of $35 million as per the asset purchase agreement with the Companys average stock price of $43.41. The average stock price was determined based on the average closing price reported on NASDAQ for the fifteen (15) trading days ending five trading days prior to March 1, 2011. The accounting purchase consideration is determined based on the closing stock price at the date of acquisition and amounts to $35.4 million.
The contingent earn-out provision of up to $10 million which is based on the achievement of the sales milestone measured within one year from the acquisition date is payable to certain employees of Celestial Semiconductor who became employees of the Company (affected employees) and to other selling shareholders who did not become employees of the Company (other selling shareholders). The contingent earn-out which will be distributed to the affected employees was not considered to be a component of the purchase price, rather a compensation expense considering the factors involving the terms of continuing employment. The contingent earn-out which will be distributed to the other selling shareholders however was considered as part of the total purchase price consideration. In accordance with the business acquisition standards, a liability will be recognized for the estimated acquisition date fair value of the contingent earn-out consideration based on the probability of the achievement of the related milestone. Any change in the fair value of the contingent earn-out consideration subsequent to the acquisition date, including changes from events after the acquisition date, will be recognized in earnings in the period the estimated fair value changes. The estimated fair value of the total earn-out amounted to $6.8 million of which, $3.39 million and $3.43 million is expected to be distributed to the affected employees and other shareholders, respectively. The contingent earn-out payable to affected employees will be recognized as compensation expense ratably over one year from acquisition date. No pro forma adjustment has been made to include this compensation expense in the unaudited pro forma condensed combined statements of operations as it is expected to have no continuing impact on operations.
The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and the liabilities assumed as if the acquisition of Celestial Semiconductor occurred on December 31, 2010:
Amount | ||||
(in thousands) | ||||
Tangible assets (liabilities) acquired: |
||||
Inventories |
$ | 4,027 | ||
Property and equipment |
192 | |||
Assumed liabilities |
(3,865 | ) | ||
Net tangible assets acquired |
354 | |||
In-process research and development |
600 | |||
Other identifiable intangible assets |
20,265 | |||
Goodwill |
37,819 | |||
Total purchase price |
$ | 59,038 | ||
The following represents details of the purchased intangible assets as part of the acquisition:
Intangible Assets | Estimated useful life (in years) |
Amount | ||||||
(in thousands) | ||||||||
Existing technology |
4.0 | $ | 11,565 | |||||
Core technology |
4.0 | 3,000 | ||||||
Customer contracts and relationships |
7.0 | 4,600 | ||||||
Trademarks |
4.0 | 1,000 | ||||||
Order backlog |
1.0 | 100 | ||||||
Total |
$ | 20,265 | ||||||
Of the $20.9 million acquired intangible assets, $600,000 was assigned to in-process research and development or IPR&D. Acquired IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition date, this asset will not be amortized as charges to earnings; instead this asset will be subject to periodic impairment testing. Upon successful completion of the development process for the acquired IPR&D project, the asset would then be considered a finite-lived intangible asset and amortization of the asset will commence. The fair value of the IPR&D was determined based on an income approach using the discounted cash flow method. A discount rate of 17% was used to value the project based on the implied rate of return of the transaction, adjusted to reflect additional risks inherent in the acquired project. The preliminary remaining useful life is currently estimated to be 5 years from the completion date, but is subject to change based on a reassessment as at the completion date.
The fair value of the existing technology and customer contracts and relationships were determined based on an income approach using the discounted cash flow method. Discount rates of 14% and 17% were used to value the existing technology and customer relationships, respectively. The estimated discount rates were based on implied rate of return of the transaction, adjusted for
specific risk profile of the asset. The remaining useful life for the existing technology was based on historical product development cycles, the projected rate of technology attrition, and the pattern of projected economic benefit of the asset. The remaining useful life of customer contracts and relationships was estimated based on customer attrition, new customer acquisition and future economic benefit of the asset.
The fair value of core technology and trademark were determined using a variation of income approach known as profit allocation method. The estimated savings for profit were determined using 4% and 1% profit allocation rates and 15% and 16% discount rates for core technology and trademark, respectively. The estimated useful life was determined based on the future economic benefit expected to be received from the asset.
The fair values of the order backlog was determined using a cost approach where the fair value was based on estimated sales and marketing expenses expected that would have to be incurred to regenerate the order backlog. The estimated useful lives for both assets were determined based on the future economic benefit expected to be received from the asset.
With the acquisition of Celestial Semiconductor, the Company will have a proven processor family targeted for the large and growing market of digital media players. This factor contributed to a purchase price resulting in the recognition of goodwill. The acquired goodwill, which is not deductible for tax purposes, has been allocated to the semiconductor products reportable segment.
(3) | HISTORICAL FINANCIAL STATEMENTS |
Wavesat
The historical financial statements of Wavesat as at and for the year ended December 31, 2010 presented in the unaudited pro forma condensed combined financial statements were derived from the audited consolidated financial statements included in Exhibit 99.4 on Form 8-K of Wavesat acquisition filed on April 8, 2011. The consolidated financial statements of Wavesat were prepared in accordance with Canadian GAAP. The reconciliation of net loss and shareholders deficit from Canadian GAAP to US GAAP is presented under Note 22 of the notes to consolidated financial statements of Wavesat from which the first column has been derived. The below financial information contained therein was denominated in Canadian dollars and was translated to US dollars using the closing exchange rate at December 31, 2010 of $1.0015 for the balance sheet amounts and the average exchange rate for the year ended December 31, 2010 of $0.9706 for statement of operation amounts, for purposes of this pro forma. Certain amounts in the consolidated historical financial statements of Wavesat have been reclassified in the below financial information to conform to the Companys financial statement presentation.
CONSOLIDATED BALANCE SHEET | Wavesat | |||||||
(amounts in thousands) | As at December 31, 2010 | |||||||
In CAD$ | In US$ | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 73 | $ | 73 | ||||
Accounts receivable, net |
46 | 46 | ||||||
Inventories |
21 | 21 | ||||||
Prepaid expenses and other current assets |
2,403 | 2,407 | ||||||
Total current assets |
2,543 | 2,547 | ||||||
Property and equipment, net |
1,366 | 1,368 | ||||||
Intangible assets, net |
716 | 717 | ||||||
Total assets |
$ | 4,625 | $ | 4,632 | ||||
Liabilities and Stockholders Deficit |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 5,041 | $ | 5,049 | ||||
Accrued expenses and other current liabilities |
1,384 | 1,386 | ||||||
Loans payable |
1,570 | 1,572 | ||||||
Convetible loans |
38,846 | 38,904 | ||||||
Deferred revenue |
199 | 199 | ||||||
Total liabilities |
47,040 | 47,111 | ||||||
Redeemable preferred stock |
25,498 | 25,536 | ||||||
Stockholders deficit |
||||||||
Common stockholders equity |
35,153 | 35,206 | ||||||
Accumulated deficit |
(103,066 | ) | (103,221 | ) | ||||
Total stockholders deficit |
(67,913 | ) | (68,015 | ) | ||||
Total liabilities, redeemable preferred stock and stockholders deficit |
$ | 4,625 | $ | 4,632 | ||||
CONSOLIDATED STATEMENT OF OPERATIONS | Wavesat | |||||||
(amounts in thousands) | For the year ended December 31, 2010 |
|||||||
In CAD$ | In US$ | |||||||
Net revenue |
$ | 882 | $ | 856 | ||||
Cost of revenue |
324 | 314 | ||||||
Gross profit |
558 | 542 | ||||||
Operating expenses: |
||||||||
Research and development |
11,563 | 11,223 | ||||||
Sales, general and administrative |
6,642 | 6,447 | ||||||
Total operating expenses |
18,205 | 17,670 | ||||||
Loss from operations |
(17,647 | ) | (17,129 | ) | ||||
Other income (expense), net: |
||||||||
Interest expense |
(4,714 | ) | (4,576 | ) | ||||
Others |
213 | 207 | ||||||
Total other income, net |
(4,501 | ) | (4,369 | ) | ||||
Loss before income tax expense |
(22,148 | ) | (21,497 | ) | ||||
Income tax expense |
| | ||||||
Net loss |
$ | (22,148 | ) | $ | (21,497 | ) | ||
Accretion on redeemable preferred stocks |
8,932 | 8,670 | ||||||
Net loss attributable to common stockholders |
$ | (31,080 | ) | $ | (30,167 | ) | ||
Celestial Semiconductor
The historical balance sheet and statement of operations of Celestial Semiconductor presented in the unaudited pro forma condensed combined financial statements was derived from its financial statements presented in Exhibit 99.1 to this current report on Form 8-K/A. The historical statement of operations of Celestial Semiconductor was derived by adding the results of operations for the nine months ended December 31, 2010 and the three months ended March 31, 2010. The three months ended March 31, 2010 can be derived by subtracting the results of operations for the year ended March 31, 2010 and the nine months ended December 31, 2009.
(4) PRO FORMA ADJUSTMENTS
The historical financial information has been adjusted to give effect to pro forma events that are (i) directly attributable to the acquisition, (ii) factually supportable, and (iii) with respect to the statement of operations, expected to have a continuing impact on the combined results of the companies. The following pro forma adjustments are included in the unaudited pro forma condensed combined financial statements:
Adjustments related to acquisition of Wavesat
(a) | To record the $10.0 million total cash used to fund the acquisition of Wavesat and adjust the related cash balance of Wavesat amounting to $73,000 not acquired as per the asset purchase agreement. |
(b) | To adjust the related assets and liabilities of Wavesat not acquired or assumed by the Company as per the asset purchase agreement. |
(c) | To adjust the acquired inventory to the preliminary estimate of its fair value. |
(d) | To reclassify the total software cost amounting to $441,000 classified as intangible assets in Wavesats historical financial statements to property and equipment and adjusts the acquired property and equipment to the preliminary estimate of its fair value. The fair value of the acquired property and equipment will be depreciated over its remaining useful life using the straight-line method to conform to the Companys accounting policy. Wavesat was using accelerated method to depreciate these property and equipment. The difference in total depreciation expense for the year ended December 31, 2010 using straight-line and accelerated method was not material, thus, the difference was not reflected as a pro forma adjustment in the condensed combined statement of operations. |
(e) | To record the preliminary estimate of the fair value of identifiable intangible assets and goodwill acquired from the acquisition of Wavesat. See detailed discussions in Note 2 to the unaudited pro forma condensed combined financial statements. |
(f) | To adjust the related accrued liabilities of Wavesat not assumed by the Company, net of the estimated fair value of the assumed liability related to unpaid employment liabilities (e.g. accrued vacation payable, payroll liability) as per the asset purchase agreement of approximately $874,000 which was already accrued in Wavesats historical balance sheet as at December 31, 2010, additional accrual of sales tax of $72,000 with respect to the acquired assets and additional accrual of other assumed liabilities of $1.54 million. |
In addition, to record an adjustment to accrue the estimated transaction costs of approximately $1.8 million incurred by both the Company and Wavesat subsequent to December 31, 2010. |
(g) | To eliminate the historical stockholders equity and redeemable preferred stock of Wavesat and record the estimated transaction costs of approximately $1.8 million (see (f) above) assumed to have been incurred as at December 31, 2010 in the accumulated deficit. |
(h) | To record the amortization of the preliminary fair value of the identifiable intangible assets from the acquisition of Wavesat calculated as follows: |
(Dollars in thousands) | Intangible Assets |
Estimated useful life (in years) |
Pro forma amortization for the year ended December 31, 2010 |
|||||||||
Existing technology |
$ | 2,500 | 6.0 | $ | 417 | |||||||
Core technology |
900 | 6.0 | 150 | |||||||||
Trademarks |
300 | 6.0 | 50 | |||||||||
Total |
$ | 3,700 | $ | 617 | ||||||||
The total pro forma amortization of $617,000 was recorded as part of cost of sales.
(i) | To eliminate previously recorded non-recurring acquisition costs related to the acquisition of Wavesat amounting to $134,000 incurred by the Company and Wavesat for the year ended December 31, 2010. |
(j) | To eliminate the interest expense incurred by Wavesat in relation to its loans payable and convertible notes not assumed by the Company. |
(k) | To record the tax effect of the pro forma adjustments (h) and (i) calculated at the statutory rate of 35%. No pro forma income tax expense adjustment was made related to adjustment (j) since there was no income tax benefit recorded from such. |
(l) | To eliminate accretion expense on Wavesats redeemable preferred stock not assumed by the Company. |
Adjustments related to acquisition of Celestial Semiconductor
(z) | To record the $20.60 million total cash used to fund the acquisition of Celestial Semiconductor and adjust the related cash balance of Celestial Semiconductor amounting to $3.4 million not acquired as per the asset purchase agreement. |
(y) | To adjust the related assets and liabilities of Celestial Semiconductor not acquired or assumed by the Company as per the asset purchase agreement. |
(x) | To adjust the acquired inventory to the preliminary estimate of its fair value. |
(w) | To adjust the acquired property and equipment to the preliminary estimate of its fair value. |
(v) | To record the preliminary estimate of the fair value of identifiable intangible assets and goodwill acquired from the acquisition of Celestial Semiconductor. See detailed discussions in Note 2 to the unaudited pro forma condensed combined financial statements. |
(u) | To adjust the related accounts payable of Celestial Semiconductor, not assumed by the Company, net of the estimated fair value of accounts payable related to the purchases of inventory as at the closing date of approximately $368,000 and other assumed liabilities related to non-recurring engineering projects amounting to $3.38 million. |
(s) | To adjust the related accrued expense and other liabilities of Celestial Semiconductor, not assumed by the Company, net of the estimated fair value of assumed liability related to the unpaid employment liabilities (e.g. accrued vacation payable) as per the asset purchase agreement of approximately $117,000 and to accrue the estimated transaction costs of approximately $3.3 million incurred by both the Company and Celestial Semiconductor subsequent to December 31, 2010. In addition, to accrue the estimated fair value of contingent earn-out consideration to other selling shareholders of $3.43 million. |
(r) | To eliminate the historical stockholders equity and redeemable convertible preferred stock of Celestial Semiconductor and record the estimated transaction costs of approximately $3.3 million (see (s) above) assumed to have been incurred as at December 31, 2010 in the accumulated deficit. |
(q) | To record the issuance of 806,265 shares of the Companys common stock at $43.41 per share to Celestial Semiconductor, as part of the total price consideration as per the asset purchase agreement. See note 2 to the unaudited pro forma condensed combined financial statements for related discussions. |
(p) | To record the amortization of the preliminary fair value of the identifiable intangible assets from the acquisition of Celestial Semiconductor, Ltd. calculated as follows: |
(Dollars in thousands) | Intangible Assets |
Estimated useful life (in years) |
Pro forma amortization for the year ended December 31, 2010 |
|||||||||
Existing technology |
$ | 11,565 | 4.0 | $ | 2,891 | |||||||
Core technology |
3,000 | 4.0 | 750 | |||||||||
Customer contracts and relationships |
4,600 | 7.0 | 657 | |||||||||
Trademarks |
1,000 | 4.0 | 250 | |||||||||
Order backlog |
100 | 1.0 | 100 | |||||||||
Total |
$ | 20,265 | $ | 4,648 | ||||||||
Of the total pro forma amortization for the year ended December 31, 2010 of 4.6 million as per above, $4.0 million and $657,000 were classified as part of cost of sales and selling, general and administrative expense, respectively.
(n) | To eliminate previously recorded non-recurring acquisition costs related to the acquisition of Celestial Semiconductor amounting to $253,000 incurred by the Company and Celestial Semiconductor for the year ended December 31, 2010. |
(m) | To record the tax effect of the pro forma adjustments (p) and (n) calculated at the statutory rate of 35%. |
(l) | To eliminate non-controlling interest of Celestial Semiconductor. |
(k) | To adjust the weighted average shares used in computing basic and diluted net income (loss) per share for the number of shares issued in connection with the Celestial Semiconductor acquisition. See footnote (q). |