Cayman Islands (State or other jurisdiction of incorporation or organization) |
7389 (Primary Standard Industrial Classification Code Number) |
N.A. (I.R.S. Employer Identification No.) |
Proposed maximum | Proposed maximum | |||||||||||||||||||||
Title of each class of | Amount to be | offering price per | aggregate offering | Amount of | ||||||||||||||||||
securities to be registered | registered(1) (2) | ordinary share(3) | price(3)(4) | registration fee | ||||||||||||||||||
Ordinary shares, par value
$0.00002 per share
|
78,814,628 | $ | 0.23 | 18,153,635.98 | $ | 1,294.35 | ||||||||||||||||
(1) | The ordinary shares are represented by the Registrants American Depositary Shares, or ADSs. Each ADS represents 15 ordinary shares. The Registrants ADSs issuable on deposit of the ordinary shares registered hereby have been registered under a separate registration statement on Form F-6 originally filed on April 8, 2005 (File No. 333-123939), as amended. | |
(2) | Represents the number of ordinary shares that the Registrant has issued upon conversion of certain 8% senior secured convertible promissory notes with an aggregate principal amount of US$10 million. Pursuant to Rule 416(a) under the Securities Act of 1933, this Registration Statement shall be deemed to cover any additional number of ordinary shares that may be issued from time to time upon conversion of such notes as a result of stock dividends, splits, subdivisions, reclassifications or combinations or a merger, sale of substantially all of the Registrants assets or shares or similar transactions that require the approval of the Registrants shareholders or other transactions or series of transactions that otherwise result in a change in control of the Registrant. No additional consideration will be received for the issuance of such additional ordinary shares, and, therefore, no registration fee is required. | |
(3) | Estimated pursuant to Rule 457(c) solely for the purpose of calculating the registration fee based on the average of the high and low sales prices of the Registrants ADSs on September 29, 2010 as reported on the NASDAQ Global Market, respectively. | |
(4) | Estimated solely for the purpose of determining the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933. |
2
Page | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
8 | ||||||||
9 | ||||||||
10 | ||||||||
11 | ||||||||
12 | ||||||||
15 | ||||||||
16 | ||||||||
20 | ||||||||
21 | ||||||||
22 | ||||||||
23 | ||||||||
30 | ||||||||
31 | ||||||||
32 | ||||||||
33 | ||||||||
34 | ||||||||
F-1 | ||||||||
II-1 | ||||||||
II-4 | ||||||||
II-7 | ||||||||
EX-5.1 | ||||||||
EX-23.1 | ||||||||
EX-23.3 |
3
4
5
| our anticipated growth strategies; | ||
| our future business development, results of operations and financial condition; | ||
| our plans to develop into the branded mobile phone business and the game business; | ||
| competition in the highly competitive mobile handset market in China; | ||
| the expected growth in consumer spending, average income levels and advertising spending levels; | ||
| growth of the mobile and online game business and market in China; and | ||
| PRC governmental policies relating to our business. |
6
7
8
Number of ADSs | Number of ADSs | |||||||||||||||||||
Owned Before the | Percentage Owned | Number of ADSs | Owned After the | Percentage Owned | ||||||||||||||||
Name of Selling Shareholders | Offering | Before the Offering | Offered Hereby | Offering (1) | After the Offering | |||||||||||||||
IDG-Accel China Growth Fund
II L.P. |
4,857,083 | 9.2 | % | 4,857,083 | 0 | | ||||||||||||||
IDG-Accel China Investors
II L.P. |
397,226 | 0.8 | % | 397,226 | 0 | |
(1) | We do not know when or in what amounts each Selling Shareholder may offer ADSs for sale. The Selling Shareholders might not sell a portion or all of the ADSs offered by this prospectus. Because each Selling Shareholder may offer all or some of the ADSs pursuant to this offering, we cannot estimate the number of ADS that will be held by each Selling Shareholder after the completion of this offering. However, for purposes of this table, we have assumed that, after completion of this offering, none of the ADSs covered by this prospectus will be held by either Selling Shareholder. |
9
As of June 30, 2010 | As of June 30, 2010 | |||||||
Actual | Pro Forma | |||||||
(Unaudited) | (Unaudited) | |||||||
(in thousands) | ||||||||
Indebtedness |
||||||||
Convertible notes and embedded derivatives |
11,362 | | ||||||
Total
indebtedness |
$ | 11,362 | $ | | ||||
Shareholders equity |
||||||||
Ordinary shares, US$0.00002 par value,
50,000,000,000 shares authorized; 715,172,111 shares issued and outstanding |
14 | 16 | ||||||
Additional paid-in capital |
126,292 | 142,025 | ||||||
Statutory reserve |
10,993 | 10,993 | ||||||
Retained earnings |
70,003 | 70,003 | ||||||
Accumulated comprehensive income |
25,220 | 25,220 | ||||||
Non-controlling interest |
3,320 | 5,049 | ||||||
Total shareholders equity |
235,842 | 253,306 | ||||||
Total capitalization
|
$ | 247,204 | $ | 253,306 | ||||
10
11
| ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| block trades in which the broker-dealer will attempt to sell the ADSs as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
| purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| an exchange distribution in accordance with the rules of the applicable exchange; |
| privately negotiated transactions; |
| settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part; |
| broker-dealer may agree with the Selling Shareholders to sell a specified number of such ADSs at a stipulated price per share; |
| through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; |
| a combination of any such methods of sale; or |
| any other method permitted pursuant to applicable law. |
12
13
14
SEC registration fee |
$ | 1,294.35 | ||
Transfer agent fees |
4,000 | |||
Legal fees and expenses |
80,000 | |||
Accounting fees and expenses |
60,000 | |||
Miscellaneous |
2,000 | |||
Total |
$ | 147,294.35 |
15
16
17
| the statutory provisions as to majority vote have been met; |
| the shareholders have been fairly represented at the meeting in question; |
| the arrangement is such that a businessman would reasonably approve; and |
| the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law. |
18
19
20
Trading Price | ||||||||
High | Low | |||||||
US$ | US$ | |||||||
Annual High and Low |
||||||||
2005 |
19.88 | 7.8 | ||||||
2006 |
18.00 | 6.58 | ||||||
2007 |
11.13 | 4.01 | ||||||
2008 |
6.98 | 0.71 | ||||||
2009 |
3.93 | 1.11 | ||||||
Quarterly Highs and Lows |
||||||||
First Quarter 2008 |
6.79 | 3.40 | ||||||
Second Quarter 2008 |
6.98 | 4.00 | ||||||
Third Quarter 2008 |
4.60 | 0.85 | ||||||
Fourth Quarter 2008 |
1.33 | 0.71 | ||||||
First Quarter 2009 |
1.94 | 1.11 | ||||||
Second Quarter 2009 |
2.69 | 1.31 | ||||||
Third Quarter 2009 |
3.85 | 1.95 | ||||||
Fourth Quarter 2009 |
3.93 | 2.88 | ||||||
First Quarter 2010 |
3.65 | 2.58 | ||||||
Second Quarter 2010 |
2.98 | 1.91 | ||||||
Monthly Highs and Lows |
||||||||
March |
3.37 | 2.68 | ||||||
April |
2.75 | 2.35 | ||||||
May |
2.98 | 1.91 | ||||||
June |
2.97 | 2.34 | ||||||
July |
3.16 | 2.49 | ||||||
August |
3.45 | 2.74 | ||||||
September
(through September 29, 2010) |
3.70 | 3.20 |
21
22
23
Six Months Ended | ||||||||
June 30 | ||||||||
2009 | 2010 | |||||||
Revenues: |
||||||||
ODP |
$ | 98,516 | $ | 110,774 | ||||
Brand name phone sales |
| 12,844 | ||||||
Game |
| 2,791 | ||||||
Total net revenues |
98,516 | 126,409 | ||||||
Cost of revenues: |
||||||||
ODP |
80,222 | 89,118 | ||||||
Brand name phone sales |
| 7,906 | ||||||
Game |
| 112 | ||||||
Total cost of revenues |
80,222 | 97,136 | ||||||
Gross profit |
18,294 | 29,273 | ||||||
Operating expenses: |
||||||||
General and administrative |
(5,254 | ) | (6,160 | ) | ||||
Research and development |
(6,285 | ) | (5,759 | ) | ||||
Selling and marketing |
(1,426 | ) | (2,872 | ) | ||||
Total operating expenses |
(12,965 | ) | (14,791 | ) | ||||
Government subsidy income |
17 | 151 | ||||||
Income from operations |
5,346 | 14,633 | ||||||
Income before income taxes |
7,720 | 19,232 | ||||||
Income tax expenses |
(1,113 | ) | (4,108 | ) | ||||
Net income |
6,607 | 15,124 | ||||||
Less: Net
loss (income) attributable to the noncontrolling
interest |
18 | (987 | ) | |||||
Net income attributable to Techfaith |
$ | 6,625 | $ | 14,137 | ||||
24
June 30, 2010 | ||||
Cash and cash equivalents |
$ | 170,879 | ||
Accounts receivable |
17,613 | |||
Inventories |
22,218 | |||
Total assets |
277,701 | |||
Total current liabilities |
30,340 | |||
Total non-current liabilities |
11,519 | |||
Total liabilities and equity |
277,701 |
25
26
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
(In thousands) | ||||||||
Net cash provided by operating activities |
$ | 23,830 | $ | 29,856 | ||||
Net cash (used in) provided by investing activities |
(626 | ) | 9,664 | |||||
Cash provided by financing activities |
9,750 | | ||||||
Effect of exchange rate changes on cash and cash equivalents |
(86 | ) | 815 | |||||
Net increase in cash and cash equivalents |
32,868 | 40,335 | ||||||
Cash and cash equivalents at the beginning of period |
78,926 | 130,554 | ||||||
Cash and cash equivalents at the end of period |
$ | 111,794 | $ | 170,879 |
27
28
29
| Our 2009 20-F, filed with the SEC on May 19, 2010; and | ||
| The description of our ADSs contained in our Registration Statement on Form F-1 (File no. 333-123921), filed with the SEC on April 7, 2005, as amended from time to time. |
30
Noon Buying Rate | ||||||||||||||||
Period End | Average(1) | Low | High | |||||||||||||
Period | (RMB per US$1.00) | |||||||||||||||
2005 |
||||||||||||||||
2006 |
7.8041 | 7.9579 | 8.0702 | 7.8041 | ||||||||||||
2007 |
7.2946 | 7.5806 | 7.8127 | 7.2946 | ||||||||||||
2008 |
6.8225 | 6.9193 | 7.2946 | 6.7800 | ||||||||||||
2009 |
6.8259 | 6.8295 | 6.8470 | 6.8176 | ||||||||||||
2010 |
||||||||||||||||
March |
6.8258 | 6.8262 | 6.8270 | 6.8254 | ||||||||||||
April |
6.8247 | 6.8256 | 6.8275 | 6.8229 | ||||||||||||
May |
6.8305 | 6.8275 | 6.8310 | 6.8245 | ||||||||||||
June |
6.7815 | 6.8184 | 6.8323 | 6.7815 | ||||||||||||
July |
6.7735 | 6.7762 | 6.7807 | 6.7709 | ||||||||||||
August |
6.8069 | 6.7873 | 6.8069 | 6.7670 | ||||||||||||
September (through September 24, 2010) |
6.7035 | 6.7514 | 6.8102 | 6.7035 |
(1) | Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period. |
31
32
| recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or | ||
| entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States. |
33
34
CHINA TECHFAITH |
||||
F - 2 | ||||
F - 4 | ||||
F - 5 | ||||
F - 6 | ||||
F - 8 | ||||
CITYLEAD LIMITED |
||||
F - 36 | ||||
F - 37 | ||||
F - 38 | ||||
F - 39 | ||||
F - 40 | ||||
F - 41 | ||||
F - 50 |
F-1
As of | As of | |||||||
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 130,544 | $ | 170,879 | ||||
Accounts receivable, net of allowances of $9,151 and $10,078
as of December 31, 2009 and as of June 30, 2010, respectively |
28,992 | 17,613 | ||||||
Amount due from a related party |
9,941 | 4,103 | ||||||
Inventories |
22,937 | 22,218 | ||||||
Prepaid expenses and other current assets |
12,420 | 14,104 | ||||||
Total current assets |
204,834 | 228,917 | ||||||
Plant, machinery and equipment, net |
44,582 | 43,861 | ||||||
Acquired intangible assets, net |
645 | 3,075 | ||||||
Goodwill |
606 | 1,848 | ||||||
TOTAL ASSETS |
$ | 250,667 | $ | 277,701 | ||||
LIABILITIES AND EQUITY
|
||||||||
Current liabilities: |
||||||||
Accounts payable (including accounts payable of the
consolidated variable interest entities without recourse to
China Techfaith Wireless Communication Technology
Limited, $30 and $nil as of December 31, 2009 and
June 30, 2010, respectively) |
$ | 10,514 | $ | 9,727 | ||||
Amounts due to related parties |
266 | 43 | ||||||
Accrued expenses and other current liabilities (including
accrued expenses and other current liabilities of
the consolidated variable interest entities without
recourse to China Techfaith Wireless Communication
Technology Limited, $223 and $595 as of December
31, 2009 and June 30, 2010, respectively) |
10,026 | 8,644 | ||||||
Advance from customers (including advance from customers
of the consolidated variable interest entities without recourse
to China Techfaith Wireless Communication Technology
Limited, $178 and $338 as of December 31, 2009
and June 30, 2010, respectively) |
4,720 | 7,351 | ||||||
Deferred revenue |
755 | 889 | ||||||
Income tax payable (including income tax payable of
consolidated variable interest entities without recourse to
China Techfaith Wireless Communication Technology
Limited, $25 and $797 as of December 31, 2009 and
June 30, 2010, respectively) |
1,162 | 2,366 | ||||||
Put option liability |
1,257 | 1,320 | ||||||
Total current liabilities |
28,700 | 30,340 | ||||||
F-2
As of | As of | |||||||
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
Convertible notes and embedded derivatives |
15,441 | 11,362 | ||||||
Deferred tax liability-noncurrent |
| 157 | ||||||
Total liabilities |
44,141 | 41,859 | ||||||
Commitments (Note 19) |
||||||||
Equity: |
||||||||
Ordinary shares of par value $0.00002
50,000,000,000,000 shares authorized; shares issued and
outstanding, 650,156,045 and 715,172,111 as of December 31,
2009 and June 30, 2010, respectively) |
13 | 14 | ||||||
Additional paid-in capital |
113,657 | 126,292 | ||||||
Treasury stock, at cost (918,000 and nil shares
as of December 31, 2009 and June 30 2010, respectively) |
(199 | ) | | |||||
Accumulated other comprehensive income |
23,863 | 25,220 | ||||||
Statutory reserve |
10,993 | 10,993 | ||||||
Retained earnings |
55,866 | 70,003 | ||||||
Total China Techfaith Wireless Communication
Technology Limited shareholders equity |
204,193 | 232,522 | ||||||
Noncontrolling interests |
2,333 | 3,320 | ||||||
Total equity |
206,526 | 235,842 | ||||||
TOTAL LIABILITIES AND EQUITY |
$ | 250,667 | $ | 277,701 | ||||
F-3
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
Revenues: |
||||||||
ODP |
$ | 98,516 | $ | 110,774 | ||||
Brand name phone sales |
| 12,844 | ||||||
Game |
| 2,791 | ||||||
Total net revenues |
98,516 | 126,409 | ||||||
Cost of revenues: |
||||||||
ODP |
80,222 | 89,118 | ||||||
Brand name phone sales |
| 7,906 | ||||||
Game |
| 112 | ||||||
Total cost of revenues |
80,222 | 97,136 | ||||||
Gross profit |
18,294 | 29,273 | ||||||
Operating expenses: |
||||||||
General and administrative |
(5,254 | ) | (6,160 | ) | ||||
Research and development |
(6,285 | ) | (5,759 | ) | ||||
Selling and marketing |
(1,426 | ) | (2,872 | ) | ||||
Total operating expenses |
(12,965 | ) | (14,791 | ) | ||||
Government subsidy income |
17 | 151 | ||||||
Income from operations |
5,346 | 14,633 | ||||||
Interest expenses |
(92 | ) | (530 | ) | ||||
Interest income |
333 | 390 | ||||||
Other income |
38 | 193 | ||||||
Change in fair value of put option |
(18 | ) | (63 | ) | ||||
Change in fair value of derivatives embedded in convertible notes |
2,113 | 4,609 | ||||||
Income before income taxes |
7,720 | 19,232 | ||||||
Income tax expenses |
(1,113 | ) | (4,108 | ) | ||||
Net income |
6,607 | 15,124 | ||||||
Less: Net loss (income) attributable to noncontrolling interests |
18 | (987 | ) | |||||
Net income attributable to China Techfaith Wireless
Communication Technology Limited |
$ | 6,625 | $ | 14,137 | ||||
Net income per share attributable to China Techfaith
Wireless Communication Technology Limited: |
||||||||
Basic |
$ | 0.01 | $ | 0.02 | ||||
Diluted |
$ | 0.01 | $ | 0.02 | ||||
Weighted average shares used in computation: |
||||||||
Basic |
650,034,590 | 700,601,047 | ||||||
Diluted |
664,671,776 | 826,715,923 | ||||||
F-4
Equity | ||||||||||||||||||||||||||||||||||||||||||||
attributable to | ||||||||||||||||||||||||||||||||||||||||||||
Accumulated | China Techfaith | |||||||||||||||||||||||||||||||||||||||||||
Additional | other | Wireless | Non- | |||||||||||||||||||||||||||||||||||||||||
Ordinary Shares | paid-in | Treasury | comprehensive | Statutory | Retained | Communication | controlling | Total | Comprehensive | |||||||||||||||||||||||||||||||||||
Number | Amount | capital | stock | income | reserve | earning | Technology Limited | interests | equity | Income | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2008 |
650,034,590 | $ | 13 | $ | 105,846 | | $ | 24,095 | $ | 8,542 | $ | 51,980 | $ | 190,476 | $ | 1,340 | $ | 191,816 | ||||||||||||||||||||||||||
Vesting of non-vested shares |
| | 2 | | | | | 2 | | 2 | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | (588 | ) | | | (588 | ) | | (588 | ) | $ | (588 | ) | ||||||||||||||||||||||||||||
Net income |
| | | | | | 6,625 | 6,625 | (18 | ) | 6,607 | 6,607 | ||||||||||||||||||||||||||||||||
Balance at June 30, 2009 |
650,034,590 | $ | 13 | $ | 105,848 | | $ | 23,507 | $ | 8,542 | $ | 58,605 | $ | 196,515 | $ | 1,322 | $ | 197,837 | $ | 6,019 | ||||||||||||||||||||||||
Balance at December 31, 2009 |
650,156,045 | $ | 13 | $ | 113,657 | $ | (199 | ) | $ | 23,863 | $ | 10,993 | $ | 55,866 | $ | 204,193 | $ | 2,333 | $ | 206,526 | ||||||||||||||||||||||||
Shares issued for acquisition of Citylead |
65,934,066 | 1 | 12,834 | | | | | 12,835 | | 12,835 | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | 1,357 | | | 1,357 | | 1,357 | $ | 1,357 | ||||||||||||||||||||||||||||||||
Cancellation of treasury stock |
(918,000 | ) | | (199 | ) | 199 | | | | | | | | |||||||||||||||||||||||||||||||
Net income |
| | | | | | 14,137 | 14,137 | 987 | 15,124 | 15,124 | |||||||||||||||||||||||||||||||||
Balance at June 30, 2010 |
715,172,111 | $ | 14 | $ | 126,292 | | $ | 25,220 | $ | 10,993 | $ | 70,003 | $ | 232,522 | $ | 3,320 | $ | 235,842 | $ | 16,481 | ||||||||||||||||||||||||
F-5
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
Operating activities: |
||||||||
Net income |
$ | 6,607 | $ | 15,124 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Loss on disposal of plant, machinery and equipment |
211 | (6 | ) | |||||
Amortization of acquired intangible assets |
184 | 327 | ||||||
Warranty provision |
923 | 51 | ||||||
Bad debts expense |
1,311 | 3,036 | ||||||
Depreciation of plant, machinery and equipment |
2,292 | 1,559 | ||||||
Change in fair value of put option |
18 | 63 | ||||||
Amortization of share-based compensation |
2 | | ||||||
Change in fair value of derivatives associated with convertible notes |
(2,113 | ) | (4,609 | ) | ||||
Change in fair value of contigent consideration receivable associated
With business acquisition |
| (19 | ) | |||||
Amortization of convertible notes interest |
59 | 530 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
10,510 | 7,617 | ||||||
Notes receivable |
(608 | ) | | |||||
Inventories |
10,121 | 2,817 | ||||||
Prepaid expenses and other current assets |
(3,073 | ) | 1,358 | |||||
Deferred income tax |
(81 | ) | (13 | ) | ||||
Accounts payable |
(3,294 | ) | (1,010 | ) | ||||
Accrued expenses and other current liabilities |
225 | (938 | ) | |||||
Advance from customers |
1,511 | 2,631 | ||||||
Deferred revenue |
(975 | ) | 134 | |||||
Income tax payable |
| 1,204 | ||||||
Net cash provided by operating activities |
23,830 | 29,856 | ||||||
Investing activities: |
||||||||
Purchase of plant, machinery and equipment |
(519 | ) | (575 | ) | ||||
Proceeds from sale of plant, machinery and equipment |
29 | 55 | ||||||
Purchase of intangible assets |
(217 | ) | (499 | ) | ||||
Decrease in restricted cash |
81 | | ||||||
Cash acquired from business acquisition of Citylead, net of cash
consideration paid of $500 |
| 10,683 | ||||||
Net cash (used in) provided by investing activities |
(626 | ) | 9,664 | |||||
F-6
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
Financing activities: |
||||||||
Proceeds from issuance of convertible notes,
net of issuance cost paid of $250 |
9,750 | | ||||||
Cash provided by financing activities |
9,750 | | ||||||
Effect of exchange rate changes on cash and cash equivalents |
(86 | ) | 815 | |||||
Net increase in cash and cash equivalents |
32,868 | 40,335 | ||||||
Cash and cash equivalents at the beginning of the year |
78,926 | 130,544 | ||||||
Cash and cash equivalents at the end of the period |
$ | 111,794 | $ | 170,879 | ||||
Supplemental cash flow information: |
||||||||
Cash paid during the year for: |
||||||||
Interest expenses |
$ | 10 | $ | 31 | ||||
Income taxes |
$ | 1,109 | $ | 3,071 | ||||
F-7
1. | BASIS OF PREPARATION |
The accompanying unaudited condensed consolidated financial statements include the financial information of China Techfaith Wireless Communication Technology Limited (the Company), its subsidiaries, and its variable interest entities (the VIEs) (collectively, the Group). All intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Security and Exchange Commission and U.S. generally accepted accounting standards for interim financial reporting. The results of operations for the six months periods ended June 30, 2009 and 2010 are not necessarily indicative of the results for the full years. The Group believes that the disclosures are adequate to make the information presented not misleading. |
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto. In opinion of the management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented. |
The financial information as of December 31, 2009 presented in the unaudited condensed financial statements is derived from our audited consolidated financial statements for the year ended December 31, 2009. |
The accompanying unaudited condensed consolidated financial statements have been prepared using the same accounting policies as used in the preparation of the Companys consolidated financial statements on Form 20-F for the fiscal year ended December 31, 2009. |
Acquisition of Citylead Limited in 2010 |
In February 2010, the Company acquired Citylead Limited (Citylead) together with its subsidiaries and VIE. Through this acquisition, the Group commenced to operate a new operating segment for the sales of brand name phones. The detail of this acquisition and the related contractual arrangements with the consolidated VIE is set out in Note 3. |
F-8
1. | BASIS OF PREPARATION continued |
The following financial statement amounts and balances of the Groups VIEs were included in the accompanying consolidated financial statements as of and for the periods ended: |
As of | As of | |||||||
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
Total assets |
$ | 7,090 | $ | 29,193 | ||||
Total liabilities |
$ | 456 | $ | 1,730 | ||||
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
Net revenues |
$ | 153 | $ | 16,065 | ||||
Net (loss) profit |
$ | (42 | ) | $ | 4,127 | |||
Business combinations |
Business combinations are recorded using the purchase method of accounting. |
The assets acquired, the liabilities assumed, and any noncontrolling interest of the acquiree at the acquisition date, if any, are measured at their fair values as of that date. Goodwill is recognized and measured as the excess of the total consideration transferred plus the fair value of any noncontrolling interest of the acquiree, if any, at the acquisition date over the fair values of the identifiable net assets acquired. |
Common forms of the consideration made in acquisitions include cash and common equity instruments. Consideration transferred in a business acquisition is measured at the fair value as at the date of acquisition. For shares issued in a business combination, the Group has estimated the fair value as of the date of acquisition. Where the consideration in an acquisition includes contingent consideration the payment of which depends on the achievement of certain specified conditions post-acquisition, the contingent consideration is recognized and measured at its fair value at the acquisition date and if recorded as a liability it is subsequently carried at fair value with changes in fair value reflected in earnings. |
Changes in the Groups ownership interest while the Group retains its controlling financial interest in its subsidiary are accounted for as equity transactions (investments by owners and distributions to owners acting in their capacity as owners). Therefore, no gain or loss is recognized in consolidated net income or comprehensive income. The carrying amount of the noncontrolling interest is adjusted to reflect the change in its ownership interest in the subsidiary. Any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted is recognized in equity attributable to the parent. |
F-9
1. | BASIS OF PREPARATION continued |
Goodwill |
The excess of the purchase price over the fair value of net assets acquired is recorded on the consolidated balance sheet as goodwill. |
The Group completes a two-step goodwill impairment test. The first step compares the fair value of each reporting unit (operating segment or one level below an operating segment) to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting units goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. The annual impairment test is performed as of December 31of every year. |
Impairment of long-lived assets and certain identifiable intangibles |
The Group reviews its long-lived assets for impairment whenever events or change in circumstances indicate that the carrying amounts of an asset may no longer be recoverable. When these events occur, the Group measures impairment by comparing the carrying values of the long- lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amounts of the assets, the Group would recognize an impairment loss based on the fair values of the assets. |
Segment Reporting |
As a result of acquisition of Citylead in February 2010, the Group adjusted its segment reporting since then. The business activities of previously reported handset design segment and product sales segment are now combined into one segment, named as original developed products (the ODP) segment. The business activities of QIGI Technology acquired in 2010 are now representing a new segment of the Group, named as brand name phone sales segment. Prior-year figures have been adjusted retrospectively. |
F-10
2. | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
(1) | Newly Adopted Accounting Pronouncement | ||
In June 2009, the Financial Accounting Standards Board (the FASB) issued an authoritative pronouncement that changes how a company determines whether an entity should be consolidated when such entity is insufficiently capitalized or is not controlled by the company through voting (or similar rights). The determination of whether a company is required to consolidate an entity is based on, among other things, the entitys purpose and design and the companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. The pronouncement retains the scope of previously issued pronouncements but added entities previously considered qualifying special purpose entities, since the concept of these entities was eliminated by the FASB. The pronouncement is effective as of the beginning of the first fiscal year that begins after November 15, 2009. | |||
The Group adopted this pronouncement since January 1, 2010. The adoption of this pronouncement did not have a significant impact on the Groups financial position or results of operations, other than the additional disclosure made regarding the assets of the VIEs for which can be used only to settle obligations of the VIEs and liabilities of the VIEs for which creditors (or beneficial interest holders) did not have recourse to the general credit of the Group on the face of the balance sheets as required by the guidance. | |||
(2) | Recently Issued Accounting Pronouncement Not Yet Adopted | ||
In October 2009, the FASB issued an authoritative pronouncement regarding the revenue arrangements with multiple deliverables. This pronouncement was issued in response to practice concerns related to the accounting for revenue arrangements with multiple deliverables under existing pronouncement. Although the new pronouncement retains the criteria from exiting pronouncement for when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting, it removes the previous separation criterion under existing pronouncement that objective and reliable evidence of the fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. The new pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement (1) prospectively to new or materially modified arrangements after the pronouncements effective date or (2) retrospectively for all periods presented. Early application is permitted; however, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also do the following in the period of adoption: (1) retrospectively apply this pronouncement as of the beginning of that fiscal year and (2) disclose the effect of the retrospective adjustments on the prior interim periods revenue, income before taxes, net income, and earnings per share. The Group is in the process of evaluating the effect of adoption of this pronouncement. |
F-11
2. | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS continued |
(2) | Recently Issued Accounting Pronouncement Not Yet Adopted continued | ||
In October 2009, the FASB issued an authoritative pronouncement regarding software revenue recognition. This new pronouncement amends existing pronouncement to exclude from their scope all tangible products containing both software and non-software components that function together to deliver the products essential functionality. That is, the entire product (including the software deliverables and non-software deliverables) would be outside the scope of software revenue recognition and would be accounted for under other accounting literature. The new pronouncement include factors that entities should consider when determining whether the software and non-software components function together to deliver the products essential functionality and are thus outside the revised scope of the authoritative literature that governs software revenue recognition. The pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement (1) prospectively to new or materially modified arrangements after the pronouncements effective date or (2) retrospectively for all periods presented. Early application is permitted; however, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also do the following in the period of adoption: (1) retrospectively apply this pronouncement as of the beginning of that fiscal year and (2) disclose the effect of the retrospective adjustments on the prior interim periods revenue, income before taxes, net income, and earnings per share. The Group is in the process of evaluating the effect of adoption of this pronouncement. | |||
In January 2010, the FASB issued authoritative guidance on accounting for distributions to shareholders with components of stock and cash. The objective of this new guidance is to clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected prospectively in earnings per share and is not considered a stock dividend for purposes of accounting treatment of equity and earnings per share. This new guidance is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Group does not expect the adoption of this guidance would have a significant effect on its consolidated financial position or results of operations. |
F-12
2. | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS continued |
(2) | Recently Issued Accounting Pronouncement Not Yet Adopted continued | ||
In January 2010, the FASB issued authoritative guidance to clarify the scope of accounting and reporting for decreases in ownership of a subsidiary. The objective of this guidance is to address implementation issues related to changes in ownership provisions. This guidance clarifies certain conditions, which need to apply to this guidance, and it also expands disclosure requirements for the deconsolidation of a subsidiary or derecognition of a group of assets. This guidance is effective in the period in which an entity adopts the authoritative guidance on noncontrolling interests in consolidated financial statements. If an entity has previously adopted the guidance on noncontrolling interests in consolidated financial statements, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. Retrospective application to the first period that an entity adopted the guidance on noncontrolling interests in consolidated financial statements is required. The Group does not expect the adoption of this guidance would have a significant effect on its consolidated financial position or results of operations. | |||
In April 2010, the FASB issued an authoritative pronouncement on milestone method of revenue recognition. The scope of this pronouncement is limited to arrangements that include milestones relating to research or development deliverables. The pronouncement specifies guidance that must be met for a vendor to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance applies to milestones in arrangements within the scope of this consensus regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting. The pronouncement will be effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early application is permitted. Companies can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. The Group is in the process of evaluating the effect of adoption of this pronouncement. | |||
In April 2010, the FASB issued an authoritative pronouncement on effect of denominating the exercise price of a share based payment award in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entitys functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entitys equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The pronouncement will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. The Group is in the process of evaluating the effect of adoption of this pronouncement. |
F-13
3. | ACQUISITION |
On February 10, 2010, the Group acquired Citylead together with its subsidiaries and VIE, QIGI&BODEE Technology (Beijing) Co., Ltd. (QIGI Technology), a domestic mobile phone trading company. |
The consideration paid includes $500 of cash and 65,934,066 ordinary shares of the Company at a fair value of $0.19 per ordinary share as of the acquisition date. There are contingent receivables according to the acquisition agreements based on QIGI Technologys operating performance. If QIGI Technology does not meet the performance target for year 2010 or 2011 as stipulated in the share purchase agreement, the former shareholders of Citylead are obligated to return certain number of ordinary shares of the Company back to the Group based on a pre-determined formula. Such contingent share receivable was initially recorded as contingent consideration receivable at fair value as of the acquisition date and subsequently remeasured at fair value at each period end. |
Citylead, through its wholly owned subsidiary, QIGI&BODEE International Technology (Beijing) Co., Ltd (QIGI International), entered into a series of agreements with equity owners of QIGI Technology and QIGI Technology on February 5, 2010. The series of agreements include (i) exclusive business cooperation agreements under which QIGI International provides complete business support services and consulting services to QIGI Technology in exchange for a fee that constitutes substantially all of QIGI Technologys net income, (ii) Power of attorney under which the equity owners of QIGI Technology executed an irrevocable power of attorney appointing the person(s) designated by QIGI International as their attorney-in-fact to vote on their behalf on all matters of QIGI Technology requiring shareholder approval under PRC laws and regulations and the article of association of QIGI Technology, (iii) equity interest transfer agreement which irrevocably grants an exclusive right to QIGI International to purchase, to the extent permitted by under PRC law, all or part of the equity interests in QIGI Technology at a price of one Renminbi (RMB) unless otherwise legally required, and (iv) equity interest pledge agreements under which the ultimate owners agreed to pledge all their respective rights and interests in QIGI Technology, in favour of QIGI International. Therefore, QIGI International is the primary beneficiary of QIGI Technology and QIGI Technology becomes a VIE of Citylead. |
Through this acquisition the Group expanded its branding business to target enterprise users and operator tailored customers. |
The transaction was considered an acquisition of a business and accordingly the purchase method of accounting has been applied. The amounts assigned to the identifiable intangible assets of the acquired business are based on the preliminary assessment of their fair values and are subject to change pending the finalization of the valuations of these intangibles. The finalization of those valuations could affect the amounts assigned to the intangible assets or goodwill of the acquired business of Citylead and the related periodic changes for these intangible assets. |
The purchase price allocation of the transaction was determined by the Group with the assistance of an independent valuation firm, which was allocated to assets acquired and liabilities assumed as of the date of acquisition as follows: |
Cash consideration |
$ | 500 | ||
Fair value of ordinary shares |
12,835 | |||
Fair value of contingent receivable |
(196 | ) | ||
Total consideration |
$ | 13,139 | ||
F-14
3. | ACQUISITION continued | |
The purchase price was preliminarily allocated as follows: |
Amortization | ||||||||
period | ||||||||
Cash acquired |
$ | 11,183 | ||||||
Intangible assets: |
||||||||
Contract backlog |
20 | 0.1 year | ||||||
Customer base |
680 | 5 years | ||||||
Trade name & domain name |
1,670 | Indefinite life | ||||||
Goodwill |
1,242 | |||||||
Deferred tax liability |
(170 | ) | ||||||
Other net liabilities acquired |
(1,486 | ) | ||||||
Total |
$ | 13,139 | ||||||
The goodwill is mainly attributable to intangible assets that cannot be recognized separately as identifiable assets under U.S. GAAP, and comprise (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the synergy resulting from the acquisition. |
The change of fair value of the contingent consideration from date of acquisition to June 30, 2010 was determined to be an increase in asset of $19, which was recognized in the other income in the consolidated statement of operations in the six months period ended June 30, 2010. |
The following pro forma information summarizes the results of operations for the Group as if the acquisition had occurred as of January 1, 2009 and 2010. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisition been completion at the beginning of the periods indicated, nor is it indicative of future operating results: |
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
Total revenue |
$ | 107,498 | $ | 127,872 | ||||
Net income
attributable to China Techfaith Wireless Communication Technology Limited |
$ | 8,359 | $ | 14,420 | ||||
Net income per share attributable to China Techfaith
Wireless Communication Technology Limited |
||||||||
Basic |
$ | 0.01 | $ | 0.02 | ||||
Diluted |
$ | 0.01 | $ | 0.02 | ||||
F-15
4. | ACCOUNTS RECEIVABLE |
Accounts receivable consists of the following: |
As of | As of | |||||||
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
Billed receivables |
$ | 28,316 | $ | 17,613 | ||||
Unbilled receivables |
676 | | ||||||
$ | 28,992 | $ | 17,613 | |||||
Unbilled receivables represent amounts earned under handset design service contracts in progress but not billable at the respective balance sheet dates. These amounts become billable according to the contract terms, which usually consider the achievement of certain milestones or completion of the project. The Group anticipates that substantially all of such unbilled amounts will be billed and collected within twelve months of balance sheet date. |
Movement of allowance for doubtful accounts is as follows: |
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
Balance at beginning of the period |
$ | 7,128 | $ | 9,151 | ||||
Charge to expenses |
1,311 | 3,036 | ||||||
Utilized during the period |
| (2,166 | ) | |||||
Exchange difference |
| 57 | ||||||
Balance at end of the period |
$ | 8,439 | $ | 10,078 | ||||
F-16
5. | INVENTORIES |
Inventories consist of the following: |
As of | As of | |||||||
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
Work in progress |
$ | 480 | $ | 602 | ||||
Raw materials |
21,443 | 20,658 | ||||||
Finished goods |
1,014 | 958 | ||||||
Inventories, net |
$ | 22,937 | $ | 22,218 | ||||
Inventories are written down for provisions for obsolescence to net realizable value based upon estimates of future demand, technology developments, and market conditions. |
6. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets consist of the following: |
As of | As of | |||||||
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
Advance to EMS providers |
$ | 4,216 | $ | 4,867 | ||||
Supplier rebate receivable |
2,817 | 3,866 | ||||||
Value added taxes recoverable |
3,739 | 2,445 | ||||||
Prepaid advertising fee |
| 629 | ||||||
Prepaid software license fee |
280 | 410 | ||||||
Rental deposits |
358 | 387 | ||||||
Staff advances |
217 | 245 | ||||||
Rental receivable |
| 220 | ||||||
Contingent acquisition consideration receivable |
| 215 | ||||||
Prepaid testing and tooling fee |
261 | 208 | ||||||
Interest receivable |
65 | 96 | ||||||
Prepaid commercial insurance |
94 | 49 | ||||||
Other prepaid and current assets |
373 | 467 | ||||||
$ | 12,420 | $ | 14,104 | |||||
F-17
7. | PLANT, MACHINERY AND EQUIPMENT, NET |
Plant, machinery and equipment, net consist of the following: |
As of | As of | |||||||
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
Construction in progress |
$ | 23,680 | $ | 24,195 | ||||
Office building |
19,236 | 19,362 | ||||||
Leasehold improvements |
1,653 | 1,760 | ||||||
Motor vehicles |
721 | 725 | ||||||
Plant and machinery |
11,988 | 12,019 | ||||||
Furniture, fixtures and equipment |
4,968 | 4,841 | ||||||
Software |
7,555 | 7,574 | ||||||
69,801 | 70,476 | |||||||
Less: Accumulated depreciation |
(25,219 | ) | (26,615 | ) | ||||
Plant, machinery and equipment, net |
$ | 44,582 | $ | 43,861 | ||||
The Group recorded depreciation expenses of $2,292 and $1,599 for the six months period ended June 30, 2009 and 2010, respectively. |
8. | ACQUIRED INTANGIBLE ASSETS, NET |
Acquired intangible assets, net consist of the following: |
December 31, 2009 | June 30, 2010 | |||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||
carrying | Accumulated | carrying | carrying | Accumulated | carrying | |||||||||||||||||||
amount | amortization | amount | amount | amortization | amount | |||||||||||||||||||
Software license |
2,593 | (1,962 | ) | 631 | 2,980 | (2,213 | ) | 767 | ||||||||||||||||
Certification of internet
content provider |
15 | (1 | ) | 14 | 15 | (4 | ) | 11 | ||||||||||||||||
Customer base |
| | | 680 | (53 | ) | 627 | |||||||||||||||||
Contract backlog |
| | | 20 | (20 | ) | | |||||||||||||||||
Trade name and domain
name |
| | | 1,670 | | 1,670 | ||||||||||||||||||
2,608 | (1,963 | ) | 645 | 5,365 | (2,290 | ) | 3,075 | |||||||||||||||||
F-18
8. | ACQUIRED INTANGIBLE ASSETS, NET continued |
The Group had recorded amortization expenses of $184 and $327 for the six months period ended June 30, 2009 and 2010, respectively. |
The future amortization expenses for the net carrying amount of intangible assets with definite lives as of June 30, 2010 were as follows: |
Six-month ending December 31, 2010 |
$ | 323 | ||
Year 2011 |
406 | |||
Year 2012 |
373 | |||
Year 2013 |
174 | |||
Year 2014 |
129 | |||
$ | 1,405 | |||
9. | GOODWILL |
Changes in the carrying amount of goodwill by reportable segments for the six months peirods ended June 30, 2009 and 2010, consisted of the following: |
Brand name | ||||||||||||||||
ODP | phone sales | Game | Total | |||||||||||||
Balance as of January 1, 2009 |
$ | 606 | $ | | $ | | $ | 606 | ||||||||
Balance as of June 30, 2009 |
$ | 606 | $ | | $ | | $ | 606 | ||||||||
Balance as of January 1, 2010 |
$ | 606 | $ | | $ | | $ | 606 | ||||||||
Acquisition of Citylead (Note 3) |
| 1,242 | | 1,242 | ||||||||||||
Balance as of June 30, 2010 |
$ | 606 | $ | 1,242 | $ | | $ | 1,848 | ||||||||
F-19
10. | LONG-TERM INVESTMENT | |
BYTE |
On March 15, 2007, BYTE Holding Ltd. (BYTE) was established by Techfaith Wireless Technology Group Limited (Techfaith BVI) and BYD Co., Ltd. (BYD) in the BVI. BYTEs registered capital is $2,724, of which Techfaith BVI and BYD injected $nil and $2,724, and owns 31% and 69% equity interest, respectively, up to June 30, 2010. BYTE is principally engaged in providing one-stop EMS to global leading handset customers. |
BYTE was accounted for as an equity method investment before January 1, 2009. Since the Group had no obligation to fund BYTEs loss, the Group did not record its share of BYTEs result as of December 31, 2008 and the investment was with carrying amount of zero as of December 31, 2008. |
The Group could not obtain BYTEs financial statements since 2009. Therefore, the investment was reported as a cost method investment with zero cost as the Group does not have the ability to exercise significant influence over BYTEs operating and financial policies. | ||
Arasor |
On July 20, 2007, the Company and Arasor International Group (Arasor) jointly formed a company named Joined Fame Technology Limited (Joined Fame) in the BVI to expand the wireless handset opportunities in the worlds emerging markets. As of June 30, 2010, both the Company and Arasor had not injected capital in Joined Fame and Joined Fame had not started its business. |
11. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consist of the following: |
As of | As of | |||||||
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
Social insurance payables |
$ | 931 | $ | 1,552 | ||||
Accrued royalty and license fee |
1,116 | 1,417 | ||||||
Payable to service suppliers |
1,076 | 866 | ||||||
Accrued professional fees |
752 | 864 | ||||||
Payable for purchase of software |
799 | 687 | ||||||
Business tax, value added tax and other tax payables |
1,840 | 658 | ||||||
Accrued testing fee |
988 | 591 | ||||||
Accrued salary |
416 | 456 | ||||||
Warranty provision |
377 | 333 | ||||||
Accrued utilities fee |
481 | 287 | ||||||
Rental payable |
149 | 254 | ||||||
Customer deposits for minimum purchase |
218 | 148 | ||||||
Government grants |
59 | 59 | ||||||
Others |
824 | 472 | ||||||
$ | 10,026 | $ | 8,644 | |||||
F-20
12. | INCOME TAXES |
As of June 30, 2010, operating loss carry forwards amounted to $45,662 which will begin to expire in 2011. The Group determines whether or not a valuation allowance is required at the level of each taxable entity. The greater part of deferred tax assets arise in companies which are not expected to have any significant taxable income in the foreseeable future and consequently a full provision has been made in respect of those. |
13. | PUT OPTION LIABILITY |
In March 2006, the Group entered into Series A Preferred Shares Purchase and Sell Agreement (the Agreement) with QUALCOMM Incorporated (QUALCOMM ) to establish a 70%-owned subsidiary, TechSoft Holding, which engaged in the business of developing software applications for wireless communication devices. The Group and QUALCOMM subscribed 70% and 30% of the issued series A preferred shares of TechSoft Holding, respectively. QUALCOMM is granted the right to, upon the occurrence of certain conditions, require the Group to purchase back any or all of its Series A Preferred Shares (Put option); and the right to, upon the occurrence of certain conditions, purchase any or all of the Series A Preferred Shares held by the Group at the price and on the terms pre-defined (Call option). The exercise price payable for each of the option shares shall be the higher of, the original per share purchase price paid by QUALCOMM or the Group, increased at a continuous compounded growth rate of ten percent (10%) per annum including the date of full payment of the option price, as well as any declared and unpaid dividends accrued or accruing thereupon up until the date of redemption; and the amount equivalent to the business valuation performed by an independent professional valuation company that is mutually agreed upon by QUALCOMM and the Group, in proportion to QUALCOMMs percentage of shareholding on a fully-diluted as converted basis. |
F-21
13. | PUT OPTION LIABILITY continued | |
The exercise price of the put option is the higher of a) calculated value (the calculated value), which is defined as the original per share purchase price paid by QUALCOMM increased at a continuous compounded growth rate of ten percent (10%) per annum including the date of full payment of the option price, as well as any declared and unpaid dividends accrued or accruing thereupon up until the date of redemption; and b) fair value, which is defined as the amount equivalent to the business valuation of TechSoft Holding performed by an independent professional valuation company that is mutually agreed upon by QUALCOMM and the Group, in proportion to QUALCOMMs percentage of shareholding on a fully-diluted as converted basis. | ||
As the valuation of the put option is based on the valuation of TechSoft Holding, a non-public company, it requires significant management judgment due to the absence of quoted market prices, and the lack of observable inputs. As a result, the Group has determined that the fair value of the put option is classified as Level 3 valuation within the fair value hierarchy under Authoritative pronouncement issued relating fair value measurement (see Note 15). | ||
The fair value of TechSoft Holdings ordinary share is determined using the income approach valuation methodology that includes discounted cash flows of TechSoft Holding. The discounted cash flows were based on discrete four-year forecast developed by management for planning purposes, discounted at weighted average cost of capital of 23%. The fair value of TechSoft Holdings ordinary shares as of June 30, 2010 is less than the calculated value and therefore the value of the put option is based on the difference between the calculated value and the fair value of the ordinary shares of TechSoft Holding, having regard to the probability of Qualcomm exercising the option. | ||
A reconciliation of the beginning and ending balances of the put option measured at fair value, on a recurring basis, using Level 3 inputs follows: |
Balance at January 1, 2009 |
$ | 1,173 | ||
Change in fair value of the put option |
18 | |||
Balance at June 30 2009 |
$ | 1,191 | ||
Balance at January 1, 2010 |
$ | 1,257 | ||
Change in fair value of the put option |
63 | |||
Balance at June 30 2010 |
$ | 1,320 | ||
F-22
14. | CONVERTIBLE NOTES | |
On June 9, 2009, 798 Entertainment Limited (798 Entertainment, formerly known as Leo Technology Limited), a subsidiary of the Group, issued $10,000 principal amount of senior secured convertible promissory notes due June 8, 2012, (the Convertible Notes) to a group of third-party investors (the Note Holders). The Convertible Notes were issued at par and bear interest at a rate of 8% per annum, compounded annually. Interest is due on the notes maturity date and payable in cash. | ||
The key terms of the Convertible Notes are as follows: | ||
Conversion | ||
The Note Holders have the right, at any time on or before the tenth day before the maturity date, to convert the outstanding principal amount, or a portion thereof, into that number of |
(i) | 798 Entertainments Class B Ordinary Shares, par value $0.01 per share at the conversion price of $28.92 per share, or | ||
(ii) | The Companys ordinary shares, par value $0.00002 per share at the conversion price of $0.0793 per share. The total number of the Companys shares the Note holders convert the notes into cannot be more than 129,941,915, subject to adjustment for forward and reverse stock splits, recapitalization and the like. |
The conversion prices will be adjusted if one of the following conditions occurs: |
a. | if the Company or 798 Entertainment issues any additional equity security at a price per share (the New Issuance per share) that is lower than the conversion price per share then in effect, then the conversion price per share is adjusted to the New Issuance price per share. | ||
b. | Stock splits, combinations and dividends |
However, the conversion price will not be adjusted upwards except in the case of stock combinations. | ||
The Convertible Notes will automatically convert into 798 Entertainments Class B Ordinary Shares at the conversion price then in effect upon the closing of a Qualified Public Offering of 798 Entertainment. A Qualified Public Offering is defined as an initial public offering of 798 Entertainments ordinary shares on an internationally recognized stock exchange outside the PRC, at a price per share in the public offering that values 798 Entertainment at more than $200,000 immediately prior to such public offering. |
F-23
14. | CONVERTIBLE NOTES continued | |
Dividend premium | ||
In the event the 798 Entertainment declares any dividend or other distribution on 798 Entertainment Class B Ordinary Shares or Ordinary Shares, the Note Holders are entitled to an interest payment (a Dividend Premium), payable at the same time when any such dividend or distribution is paid by the 798 Entertainment, in an amount equal to which the Note Holders would have received had the convertible notes been converted into the 798 Entertainments Class B Ordinary Shares or then into the 798 Entertainments Ordinary Shares. | ||
Late charges for due amount of principal and interests | ||
Nine percent (9%) per annum (accrued daily and compounded annually) from the date unpaid amount was due until the same is paid in full. | ||
Interest rate reset | ||
The interest rate of the Convertible Notes will reset from 8% to 20%, exclusive of dividend premiums and late charges paid or payable, at the earlier of (i) the occurrence of a default event or (ii) December 9, 2011 if the Qualified Public Offering has not occurred by such date. If either of these two conditions occurs, the Note Holders may require 798 Entertainment to redeem all or any portion of the Convertible Notes for cash. | ||
If 798 Entertainment fails to pay the redemption price to the Note holders, the Note holders have the option but not the obligation, to convert all or part of the redemption price into the Companys ordinary shares at a conversion price equal to the lesser of (i) the conversion price to convert the Convertible Notes to the Companys ordinary share then in effect, and (ii) the weighted average price of the Companys ordinary shares during the period beginning on and including the date when the redemption price is due and ending on and including the date when the Note Holders submit a notice to 798 Entertainment. | ||
The conversion right to the Companys ordinary shares, the dividend premium feature, and the interest reset feature, are embedded derivatives that are bifurcated for measurement purposes, and are presented on a combined basis with the Convertible Notes. | ||
The initial fair value of these derivatives was $12,759 on the issuance date. The change in the fair value of derivatives during the six months period ended June 30, 2009 and 2010 was $2,113 and $4,609, respectively, and were recorded in earnings in these periods. | ||
The fair value of the derivatives at the issuance date with the amount of $12,759 and the issuance cost with the amount of $417 resulted in a debt discount totaling $13,176. The debt discount was amortized into interest expense over the term of the Convertible Notes using the effective interest rate method. During the six months period ended June 30, 2009 and 2010, the amortized discount of $59 and $530 were recorded as part of the interest expense in these periods. |
F-24
15. | FAIR VALUE | |
Authoritative literature provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows: |
| Level 1 inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. | ||
| Level 2 inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | ||
| Level 3 inputs are generally unobservable and typically reflect managements estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. |
The following section describes the valuation methodologies the Group uses to measure financial assets and liabilities at fair value on a recurring basis. |
(a) | Assets and liabilities measured at fair value on a recurring basis |
(i) | Put Option | ||
The Put Option the Group offered to QUALCOMM was recorded as a liability at fair value. The Group measured the fair value for the Put Option with the assistance of an independent valuation firm. | |||
The Put Option was classified as a Level 3 liability because the Group used unobservable inputs to value it, reflecting the Groups assessment of the assumptions market participants would use in valuing these derivatives. The fair value of the Put Option as of December 31, 2009 and June 30, 2010 was $1,257 and $1,320, respectively (see Note13). | |||
(ii) | Derivatives of Convertible Notes | ||
The Group issued $10,000 convertible notes to a group of third party investors in June 2009. The conversion right to the Companys ordinary shares, the dividend premium feature, and the interest reset feature, are identified as derivatives and required to be bifurcated from the debt host. These derivatives are recorded at fair value initially and marked to market subsequently. The Group measured the fair value for these derivatives with the assistance of an independent valuation firm. |
F-25
15. | FAIR VALUE continued |
(a) | Assets and liabilities measured at fair value on a recurring basis continued |
(ii) | Derivatives of Convertible Notes continued | ||
Value of the conversion right includes value of the conversion right to the Companys ordinary shares and value of the conversion right to 798 Entertainments class B ordinary shares, and is calculated as the difference between the value of the converted shares and the value of pure debt component when conversion occurs. The value of the conversion right to the Companys ordinary shares is the excess of conversion value over conversion right to 798 Entertainments class B ordinary shares. The fair value of the dividend premium feature is $nil as the Company does not expect to declare dividends in the future. The interest reset feature will obligate the Group to pay extra interest payments. The present value of such payments, multiplied by the corresponding probabilities, as estimated by the management, of no Qualified IPO within the 30-month period after issuance or a default event, will be the expected value of the interest reset feature. These derivatives were classified as Level 3 liabilities because the Group used unobservable inputs to value them, reflecting the Groups assessment of the assumptions market participants would use in valuing these derivatives. | |||
As of June 30, 2010, the fair value of the derivatives associated with the Convertible Notes, which amounted to $13,421, is recorded together with the principal of the Convertible Notes. During the six months period ended June 30, 2009 and 2010, $2,113 and $4,609 of gains on the change of the fair value of these derivatives, respectively, were recognized in the consolidated statement of operations. | |||
(iii) | Contingent Consideration Receivable | ||
The Group acquired Citylead together with its subsidiary and VIE on February 10, 2010. An amount of contingent consideration receivable of $196 was recognized at fair value on the acquisition date. This contingent consideration receivable is considered Level 3 asset because the Group used unobservable inputs, reflecting the Groups assessment of the assumptions market participants would use in valuing this asset. The fair value of the contingent consideration receivable at the acquisition date and June 30, 2010 was $196 and $215, respectively. |
F-26
15. | FAIR VALUE continued |
December 31, 2009 | ||||||||||||||||
Quoted price | ||||||||||||||||
in active | Significant | |||||||||||||||
markets | other | Significant | ||||||||||||||
for identical | observable | unobservable | ||||||||||||||
investments | inputs | inputs | ||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities: |
||||||||||||||||
Put Option |
$ | | $ | | $ | 1,257 | $ | 1,257 | ||||||||
Derivatives related to the
Convertible Notes |
$ | | $ | | $ | 18,029 | $ | 18,029 | ||||||||
Total liabilities at fair value |
$ | | $ | | $ | 19,286 | $ | 19,286 | ||||||||
June 30, 2010 | ||||||||||||||||
Quoted price | ||||||||||||||||
in active | Significant | |||||||||||||||
markets | other | Significant | ||||||||||||||
for identical | observable | unobservable | ||||||||||||||
investments | inputs | inputs | ||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Contingent consideration receivable |
$ | | $ | | $ | (215 | ) | $ | (215 | ) | ||||||
Total asset at fair value |
$ | | $ | | $ | (215 | ) | $ | (215 | ) | ||||||
Liabilities: |
||||||||||||||||
Put Option |
$ | | $ | | $ | 1,320 | $ | 1,320 | ||||||||
Derivatives related to the
Convertible Notes |
$ | | $ | | $ | 13,421 | $ | 13,421 | ||||||||
Total liabilities at fair value |
$ | | $ | | $ | 14,741 | $ | 14,741 | ||||||||
F-27
15. | FAIR VALUE continued | |
The following table summarizes the movement of the balances of the Groups financial asset and liabilities measured at fair value on a recurring basis: |
Balance at January 1, 2009 |
$ | 1,173 | ||
Change in fair value of the put option |
18 | |||
Initial recognition of fair value of the derivatives
embedded in convertible notes |
12,759 | |||
Change in fair value of the derivatives embedded in convertible notes |
(2,113 | ) | ||
Balance at June 30, 2009 |
$ | 11,837 | ||
Balance at January 1, 2010 |
$ | 19,350 | ||
Change in fair value of the put option |
63 | |||
Change in fair value of the derivatives embedded in convertible notes |
(4,609 | ) | ||
Initial recognition of fair value of the contingent consideration receivable |
(196 | ) | ||
Change in fair value of the contingent consideration receivable |
(19 | ) | ||
Balance at June 30, 2010 |
$ | 14,589 | ||
(b) | Assets and liabilities measured at fair value on a nonrecurring basis | ||
The Group acquired Citylead on February 10, 2010. The Group measured the fair value for the asset acquired, with the assistance of an independent valuation firm, using discounted cash flow techniques, and the asset was classified as Level 3 asset because the Group used unobservable inputs to value it reflecting the Groups assessment of the assumptions market participants would use in valuing these purchased intangible asset. |
16. | SHARE-BASED PAYMENT | |
Share option | ||
In March 2005, the Group adopted the 2005 Share Incentive Plan (the Plan) which allows the Group to offer a variety of incentive awards to employees and directors of the Group. For the year ended December 31, 2005, options to purchase 40,000,000 ordinary shares were authorized under the Plan. Under the terms of the Plan, options are generally granted at prices equal to the fair market value of the Groups shares listed on NASDAQ and expire 10 years from the date of grant. The options vest in accordance with the terms of the agreement separately entered into by the Group and grantee at the time of the grant. |
F-28
16. | SHARE-BASED PAYMENT continued | |
Share option continued | ||
Under the plan, the Group granted certain stock options to its employees prior to 2009, which were all vested as of January 1, 2009. The Group did not recognize share-based compensation for the stock options granted during the six months periods ended June 30, 2009 and 2010, respectively. | ||
As of June 30, 2010, there were 131,636 exercisable options. The fair value of option as of the grant date and the weighted average exercise price was $0.62 and $1.083 respectively with a remaining contractual life of 5.2 years. | ||
Nonvested shares | ||
In August 2007, 65,818 nonvested shares were granted to an independent director with 25% of the number of nonvested shares, 16,455 vested immediately and the remaining 75%, 49,363 to be vested on August 12, 2008, 2009 and 2010 averagely. The fair value of nonvested shares as of the grant date was $0.28 per share. Accordingly, the Group had 16,455 nonvested shares outstanding as of January 1, 2010 and June 30, 2010, respectively. The Group recognized share based compensation expenses of $2 and $nil for these nonvested shares for the six months period ended June 30, 2009 and 2010, respectively. | ||
As of June 30, 2010, total unrecognized compensation expense relating to the nonvested shares was $1. The amount is expected to be recognized over a remaining vesting period of 0.16 years according to the straight line method. |
17. | RELATED PARTY TRANSACTIONS | |
Techfaith Technology (Shenyang) Ltd. (Techfaith Technology) and De Ming Technology (Hangzhou) Ltd. (De Ming) (formerly known as Kang Mu Ni Electronics (Hangzhou) Ltd.) are subsidiaries of Techfaith Electronics Limited, a company established in September 2007, of which the Groups Founder and CEO holds 43% equity interest. | ||
For the six months periods ended June 30, 2009 and 2010, purchase from related parties are as follow: |
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
Techfaith Technology |
$ | 1,968 | $ | 4,583 | ||||
De Ming |
793 | 115 | ||||||
Total |
$ | 2,761 | $ | 4,698 | ||||
F-29
17. | RELATED PARTY TRANSACTIONS continued | |
For the six months periods ended June 30, 2009 and 2010, sales to related parties are as follow: |
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
Techfaith Technology |
$ | 813 | $ | 629 | ||||
De Ming |
| 21 | ||||||
Total |
$ | 813 | $ | 650 | ||||
As of December 31, 2009 and June 30, 2010, amounts due from a related party are as follow: |
As of | As of | |||||||
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
Techfaith Technology |
$ | 9,941 | $ | 4,103 | ||||
As of December 31, 2009 and June 30, 2010, amounts due to related parties are as follows: |
As of | As of | |||||||
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
Techfaith Technology |
$ | 7 | $ | 12 | ||||
De Ming |
259 | 31 | ||||||
Total |
$ | 266 | $ | 43 | ||||
18. | OPERATING SEGMENT AND GEOGRAPHIC INFORMATION | |
The Groups chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Group. | ||
As a result of the acquisition of Citylead in February 2010, the Group adjusted its segment reporting since then. The business activities of previously reported handset design segment and product sales segment are now combined into one segment, named as original developed products (the ODP) segment. The business activities of QIGI Technology acquired in 2010 are now representing a new segment of the Group, named as brand name phone sales segment. Prior-year figures have been adjusted retrospectively. |
F-30
18. | OPERATING SEGMENT AND GEOGRAPHIC INFORMATION continued | |
The Group uses gross profit as the measure of each operating segment. | ||
The financial information for each operating segment reflects that information which is specifically identifiable or which is allocated based on an internal allocation method. Selected financial information by operating segment1 is as follows: |
As of | As of | |||||||
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
Assets |
||||||||
ODP |
$ | 184,863 | $ | 187,291 | ||||
Brand name phone sales |
| 24,277 | ||||||
Game |
21,574 | 22,039 | ||||||
Reconciling amounts |
44,230 | 44,094 | ||||||
Total assets |
$ | 250,667 | $ | 277,701 | ||||
Reconciling amounts: |
||||||||
Corporate assets |
$ | 44,230 | $ | 44,094 | ||||
1 | The Groups chief operating decision maker only reviews revenue and cost for each operating segment. Expenses are not allocated to each segment. |
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
Total expenditures for additions to long-lived assets |
||||||||
ODP |
$ | 322 | $ | 129 | ||||
Brand name phone sales |
| | ||||||
Game |
104 | 587 | ||||||
Corporate assets |
310 | 358 | ||||||
Total capital expenditure |
$ | 736 | $ | 1,074 | ||||
F-31
18. | OPERATING SEGMENT AND GEOGRAPHIC INFORMATION continued |
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
Revenues |
||||||||
ODP |
$ | 98,516 | $ | 110,774 | ||||
Brand name phone sales |
| 12,844 | ||||||
Game |
| 2,791 | ||||||
Total net revenues |
$ | 98,516 | $ | 126,409 | ||||
Cost of sales |
||||||||
ODP |
$ | 80,222 | $ | 89,118 | ||||
Brand name phone sales |
| 7,906 | ||||||
Game |
| 112 | ||||||
Total cost of revenues |
$ | 80,222 | $ | 97,136 | ||||
Gross profit |
$ | 18,294 | $ | 29,273 | ||||
Geographic information | ||
Revenues, classified by the major geographic areas in which the Groups customers are located (for ODP revenue and brand name phone sales revenue, based on the address to which the Group ships product to; and for game related revenue, based on the address of the customer who contracted with the Group), were as follows: |
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
Revenues from countries other than the PRC: |
||||||||
India |
$ | 451 | $ | 3,543 | ||||
Brunei |
| 1,069 | ||||||
Japan |
2,815 | 11 | ||||||
United States |
1,616 | 102 | ||||||
Brazil |
1,301 | | ||||||
Other countries |
2,413 | 2,049 | ||||||
Total revenues from countries other than the PRC |
8,596 | 6,774 | ||||||
Revenues from the PRC |
89,920 | 119,635 | ||||||
Total revenues |
$ | 98,516 | $ | 126,409 | ||||
F-32
19. | COMMITMENTS |
(a) | Purchase commitments | ||
The Group used EMS providers to provide manufacturing services for its products. During the normal course of business, in order to reduce manufacturing lead times and ensure adequate component supply, the Group enters into contracts with certain manufacturers that allow them to procure inventory based on criteria defined by the Group. As of June 30, 2010, the Group had commitments under non-cancellable contracts that future minimum purchases are $3,889 in the one year period from July 1, 2010 to June 30, 2011. | |||
(b) | Operating lease as lessee | ||
The Group has entered into operating lease agreements principally for its office spaces in the PRC. These leases expire through 2011. Rental expenses under operating leases for the six months period ended June 30, 2009 and 2010 were $559 and $671, respectively. | |||
Future minimum rental lease payments under non-cancellable operating leases agreements as of June 30, 2010 were as follows: |
Six-month ending December 31, 2010 | $ | 491 | ||
Year 2011 | 222 | |||
$ | 713 |
(c) | Capital commitments | ||
As of June 30, 2010, capital commitments for construction of property and purchase of plant, machinery and equipment are $123 which will be due in the following year. |
20. | MAJOR CUSTOMERS | |
The following tables summarize net revenues and accounts receivable for customers that accounted for 10% or more of the Groups net revenues and accounts receivable: |
Net revenues | ||||||||
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
A |
| 15.8 | % | |||||
B |
| 15.6 | % | |||||
C |
| 11.7 | % | |||||
D |
26.0 | % | | |||||
E |
21.4 | % | | |||||
F |
12.1 | % | | |||||
59.5 | % | 43.1 | % | |||||
F-33
20. | MAJOR CUSTOMERS continued |
Accounts receivable | ||||||||
As of | As of | |||||||
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
G |
| 22.9 | % | |||||
H |
16.7 | % | 14.4 | % | ||||
I |
18.3 | % | | |||||
35.0 | % | 37.3 | % | |||||
21. | NET INCOME PER SHARE | |
The following table sets forth the computation of basic and diluted net income per share for the years indicated: |
Six months ended June 30, | ||||||||
2009 | 2010 | |||||||
Net income attributable to ChinaTechfaith
Wireless Communication Technology Limited
(numerator), basic |
$ | 6,625 | $ | 14,137 | ||||
Convertible notes interest |
59 | 530 | ||||||
Net income attributable to ChinaTechfaith
Wireless Communication Technology Limited
(numerator), diluted |
6,684 | 14,667 | ||||||
Shares (denominator): |
||||||||
Weighted average ordinary shares outstanding |
650,034,590 | 700,601,047 | ||||||
Effect of dilutive securities: |
||||||||
Weighted average shares from assumed vest of
nonvested shares |
6,404 | 11,471 | ||||||
Weighted average shares from convertible notes,
if converted |
14,630,782 | 126,103,405 | ||||||
Weighted average shares used in computing
diluted net income per share |
664,671,776 | 826,715,923 | ||||||
Net income attributable to ChinaTechfaith
Wireless Communication Technology Limited
per share, basic |
$ | 0.01 | $ | 0.02 | ||||
Net income attributable to ChinaTechfaith
Wireless Communication Technology Limited
per share, diluted |
$ | 0.01 | $ | 0.02 | ||||
F-34
21. | NET INCOME PER SHARE continued | |
For the six months period ended June 30, 2009 and 2010, the Group had 131,636 and 131,636 stock options outstanding that could have potentially diluted basic income per share in the future, but which were excluded in the computation of diluted income per share in the years presented, as their effects would have been anti-dilutive. | ||
22. | EMPLOYEE BENEFIT PLAN | |
Full time employees of the Group located in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The Group accrues for these benefits based on certain percentages of the employees salaries. | ||
The total provisions for such employee benefits were $1,657 and $1,823 for the six months period ended June 30, 2009 and 2010, respectively. | ||
23. | STATUTORY RESERVES | |
As stipulated by the relevant law and regulations in the PRC, the Companys subsidiaries and variable interest entities in the PRC are required to maintain non-distributable statutory surplus reserve. Appropriations to the statutory surplus reserve are required to be made at not less than 10% of profit after taxes as reported in these entities statutory financial statements prepared under the accounting principles generally accepted in the PRC. Once appropriated, these amounts are not available for future distribution to owners or shareholders. Once the general reserve is accumulated to 50% of these entities registered capital, these entities can choose not to provide more reserves. The statutory reserve may be applied against prior year losses, if any, and may be used for general business expansion and production and an increase in registered capital of these entities. Amounts contributed to the statutory reserve were $10,993 and $10,993 as of December 31, 2009 and June 30, 2010, respectively. | ||
24. | SUBSEQUENT EVENT | |
Issue of redeemable and convertible bond | ||
On August 31, 2010, the Company and Beijing E-town International Investment and Development Co., Ltd. (BEIID), a PRC stated-owned investment and financing company, entered into a redeemable and convertible bond purchase agreement (the Agreement). According to the Agreement, the Company will issue a redeemable and convertible bond at the principal amount of $30,000 with 0.5% interest per annum to BEIID. According to the Agreement, BEIID will be allowed to convert its interest in the redeemable and convertible bond into the Companys ordinary shares over the next 5 years at the price of $5 per ADS (1 ADS represents 15 ordinary shares) as long as each conversion is at the value of more than $10,000. The issuance of redeemable and convertible bond has not been completed as of September 30, 2010. |
F-35
F-36
Year ended December 31, | ||||||||
2008 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash |
$ | 3,638 | $ | 12,609 | ||||
Accounts receivable, net of allowances of nil
for both 2008 and 2009 |
| 483 | ||||||
Inventories |
163 | 19 | ||||||
Prepaid expenses and other current assets |
114 | 2,069 | ||||||
Deferred tax assets |
2 | 9 | ||||||
Total current assets |
3,917 | 15,189 | ||||||
Non-current assets: |
||||||||
Property and equipment, net |
45 | 27 | ||||||
TOTAL ASSETS |
$ | 3,962 | $ | 15,216 | ||||
LIABILITIES AND EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 574 | $ | 6,896 | ||||
Accrued expenses and other current liabilities |
159 | 500 | ||||||
Income tax payable |
995 | 1,643 | ||||||
Total current liabilities |
1,728 | 9,039 | ||||||
Total liabilities |
1,728 | 9,039 | ||||||
Commitment (Note 7) |
||||||||
Equity: |
||||||||
Ordinary shares of par value $1: |
||||||||
50,000 shares
authorized, 1 share issued and outstanding,
at December 31, 2008 and 2009 |
| | ||||||
Additional paid-in capital |
2,928 | 2,928 | ||||||
Accumulated other comprehensive income |
259 | 260 | ||||||
Statutory reserve |
| 389 | ||||||
Retained earnings (accumulated deficit) |
(953 | ) | 2,600 | |||||
Total equity |
2,234 | 6,177 | ||||||
TOTAL LIABILITIES AND EQUITY |
$ | 3,962 | $ | 15,216 | ||||
F-37
Year ended December 31, | ||||||||
2008 | 2009 | |||||||
Revenues |
$ | 12,401 | $ | 29,679 | ||||
Cost of revenues |
8,522 | 22,086 | ||||||
Gross Profit |
3,879 | 7,593 | ||||||
Operating expenses: |
||||||||
General and administrative |
360 | 459 | ||||||
Selling and distribution |
3,192 | 1,563 | ||||||
Total operating expenses |
3,552 | 2,022 | ||||||
Income from operations |
327 | 5,571 | ||||||
Interest income |
28 | 52 | ||||||
Income before income taxes |
355 | 5,623 | ||||||
Income tax expenses |
(812 | ) | (1,681 | ) | ||||
Net income (loss) |
$ | (457 | ) | $ | 3,942 | |||
F-38
Accumulated | (Accumulated | |||||||||||||||||||||||||||||||
Additional | other | deficit) | Com- | |||||||||||||||||||||||||||||
Ordinary shares | paid-in | comprehensive | retained | Statutory | Total | prehensive | ||||||||||||||||||||||||||
Number | Amount | capital | income | earnings | reserve | equity | (loss) income | |||||||||||||||||||||||||
Balance at January 1, 2008 |
1 | | $ | 2,928 | $ | 91 | $ | (496 | ) | | $ | 2,523 | ||||||||||||||||||||
Foreign currency translation
adjustments |
| | | 168 | | | 168 | $ | 168 | |||||||||||||||||||||||
Net loss |
| | | | (457 | ) | | (457 | ) | (457 | ) | |||||||||||||||||||||
Balance at December 31, 2008 |
1 | | $ | 2,928 | $ | 259 | $ | (953 | ) | $ | | $ | 2,234 | $ | (289 | ) | ||||||||||||||||
Foreign currency translation
adjustments |
| | | 1 | | | 1 | 1 | ||||||||||||||||||||||||
Net income |
| | | | 3,942 | | 3,942 | 3,942 | ||||||||||||||||||||||||
Provision for statutory reserve |
| | | | (389 | ) | 389 | | | |||||||||||||||||||||||
Balance at December 31, 2009 |
1 | | $ | 2,928 | $ | 260 | $ | 2,600 | $ | 389 | $ | 6,177 | $ | 3,943 | ||||||||||||||||||
F-39
Year ended December 31, | ||||||||
2008 | 2009 | |||||||
Operating activities: |
||||||||
Net income (loss) |
$ | (457 | ) | $ | 3,942 | |||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||
Depreciation of property and equipment |
13 | 18 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
| (483 | ) | |||||
Inventories |
(160 | ) | 144 | |||||
Prepaid expenses and other current assets |
11 | (1,955 | ) | |||||
Deferred tax assets |
(2 | ) | (7 | ) | ||||
Accounts payable |
564 | 6,322 | ||||||
Accrued expenses and other current liabilities |
113 | 341 | ||||||
Income tax payable |
814 | 648 | ||||||
Net cash provided by operating activities |
896 | 8,970 | ||||||
Investing activity: |
||||||||
Purchase of property and equipment |
(57 | ) | | |||||
Cash used in investing activity |
(57 | ) | | |||||
Effect of exchange rate changes on
cash |
198 | 1 | ||||||
Net increase in cash |
1,037 | 8,971 | ||||||
Cash at the beginning of the year |
2,601 | 3,638 | ||||||
Cash at the end of the year |
$ | 3,638 | $ | 12,609 | ||||
Supplemental cash flow information: |
||||||||
Cash paid during the year for: |
||||||||
Income taxes |
$ | | $ | 1,040 | ||||
F-40
1. | ORGANIZATION AND PRINCIPAL ACTIVITIES | |
Citylead Limited (the Company) was established in the British Virgin Islands (the BVI) on August 27, 2009. The Company was beneficially owned by two individuals (ultimate owners) and acted as investment holding company. China Techfaith Wireless Communication Technology Limited (Techfaith), the Company, and the ultimate owners entered into a Share Purchase Agreement dated January 1, 2010 relating to the sale and purchase of the entire interest of the Company together with its subsidiaries and variable interest entity (VIE) (collectively known as the Group) for a consideration which comprised of cash of $500 and 65,934,066 ordinary shares of Techfaith where such share consideration may be reduced based on a predetermined earn-out formula applied to the audited operating results for the year 2010 or 2011 (the transaction). This transaction was completed on February 10, 2010. | ||
As a condition for the completion of this transaction, the ultimate owners underwent a group restructuring plan as laid out in the Share Purchase Agreement. The group restructuring was completed on February 5, 2010 in the following steps: |
a) | The Company established a wholly owned subsidiary namely, QIGI&BODEE Technology Limited (QIGI HK) in Hong Kong and acted as an investment holding company. | ||
b) | QIGI HK established a wholly owned subsidiary namely QIGI&BODEE International Technology (Beijing) Co., Ltd (the QIGI International), in the Peoples Republic of China (PRC). | ||
c) | In February 2010, QIGI International entered into a series of agreements with the ultimate owners who were also the equity owners of QIGI&BODEE Technology (Beijing) Co., Ltd (QIGI Technology) with identical shareholdings. QIGI Technology was established on September 7, 2007 and was principally engaged in the sale of smart phone products with its own brand QIGI. The series of agreements include (i) exclusive business cooperation agreements under which QIGI International provides complete business support services and consulting services to QIGI Technology in exchange for a fee that constitutes substantially all of QIGI Technologys net income, (ii) Power of attorney under which the equity owners of QIGI Technology executed an irrevocable power of attorney appointing the person(s) designated by QIGI International as their attorney-in-fact to vote on their behalf on all matters of QIGI Technology requiring shareholder approval under PRC laws and regulations and the article of association of QIGI Technology, (iii) equity interest transfer agreement which irrevocably grants an exclusive right to QIGI International to purchase, to the extent permitted by under PRC law, all or part of the equity interests in QIGI Technology at a price of one Renminbi (RMB) unless otherwise legally required, and (iv) equity interest pledge agreements under which the ultimate owners agreed to pledge all their respective rights and interests in QIGI Technology, in favour of QIGI International. |
As a result of the group restructuring and through these contractual arrangements, the Company, through QIGI International, has the ability to receive the residual benefits and exercise effective control over the day-to-day operations and financial affairs of QIGI Technology. Accordingly, QIGI International is the primary beneficiary of QIGI Technology and QIGI Technology becomes a VIE of the Company. |
Since there was no change in control or ownership interests as a result of this group restructuring, this was accounted for as a legal reorganization of entities under common control. The accompanying consolidated financial statements have been prepared to reflect the consolidated financial position, results of operations and cash flows of the Company and its subsidiaries and VIE for all periods presented in a manner similar to the pool-of-interests method. |
F-41
1. | ORGANIZATION AND PRINCIPAL ACTIVITIES continued | |
The following financial statement amounts and balances of the Groups VIE were included in the accompanying consolidated financial statements as of and for the years ended: |
December 31, | ||||||||
2008 | 2009 | |||||||
Total assets |
$ | 3,962 | $ | 14,733 | ||||
Total liabilities |
$ | (1,728 | ) | $ | (8,607 | ) | ||
Years ended December 31, | ||||||||
2008 | 2009 | |||||||
Net revenue |
$ | 12,401 | $ | 29,196 | ||||
Net income (loss) |
$ | (457 | ) | $ | 3,890 | |||
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Basis of presentation | ||
The consolidated financial statements of the Group have been prepared in accordance with the accounting principles generally accepted in the United States of America (U.S. GAAP). | ||
Basis of consolidation | ||
The consolidated financial statements include the financial statements of the Company, its subsidiaries and its VIE. The accompanying consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented. All inter-company transactions and balances are eliminated upon consolidation. |
F-42
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued | |
Use of estimates | ||
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Groups financial statements include revenue recognition, allowance for doubtful accounts, provision for inventory write-down, useful lives and impairment for property and equipment and valuation allowance for deferred tax assets. | ||
Inventories | ||
Inventories of the Group consist of finished goods. Inventories are stated at the lower of cost or market. Inventory costs include expenses that are directly or indirectly incurred in the acquisition, including shipping and handling costs charged to the Group by suppliers. Cost is determined using the weighted average method. Inventories are written down for provisions for obsolescence to net realizable value based upon estimates of future demand, technology developments, and market conditions. There were no inventory provision recognized in 2008 and 2009, respectively. | ||
Allowance for doubtful accounts | ||
Accounts receivable represents those receivables derived in the ordinary course of business. The Group conducts credit evaluations of customers and generally do not require collateral or other security from their customers. The Group establishes an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk of specific customers. | ||
Property and equipment, net | ||
Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the following estimated useful lives: |
Furniture, fixtures and equipment | 4 years | |
Leasehold improvements | Shorter of the lease terms or 4 years |
F-43
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued | |
Impairment of long-lived assets | ||
The Group reviews its long-lived assets for impairment whenever events or change in circumstances indicate that the carrying amounts of an asset may no longer be recoverable. An impairment loss, measured based on the fair value of the asset, is recognized if expected future undiscounted cashflows are less than the carrying amount of the assets. The Group did not incur impairment losses during the years ended December 31, 2008 and 2009. | ||
Revenue recognition | ||
The Group generates revenue from sales of smart phone products under QIGI brand. The Group does not manufacture smart phone rather purchases produced phones from EMS providers. Revenue is recognized when the following four criteria are met, which is usually on the delivery of the smart phone products to the customers: (1) persuasive evidence of an arrangement exists, (2) the fee is fixed or determinable, (3) collection is reasonably assured, and (4) in the period in which delivery or performance has occurred. | ||
Operating lease | ||
Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating lease. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease periods. | ||
Advertising costs | ||
All advertising costs are expensed as incurred. Total advertising expenses were $1,535 and $1,001 in 2008 and 2009, respectively, and have been included in selling and distribution expenses. | ||
Foreign currency translation | ||
The functional and reporting currency of the Company is the United States dollar (U.S. dollar). The financial records of the Groups subsidiaries and VIE located in the PRC and Hong Kong, are maintained in their local currencies, the RMB and Hong Kong Dollars (HK$), respectively, which are also the functional currencies of these entities. | ||
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the statements of operations. | ||
The Groups entities with functional currency of RMB and HK$ translate their operating results and financial position into the U.S. dollar, the Groups reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are report as cumulative translation adjustments and are shown as a separate component of other comprehensive income. |
F-44
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued | |
Income taxes | ||
Current income taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. | ||
The impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Interest and penalties on income taxes will be classified as a component of the provisions for income taxes. | ||
Value added tax (VAT) and VAT refund | ||
VAT on sales is calculated at 17% on revenue from product and paid after deducting input VAT on purchases. Net VAT balance between input VAT and output VAT is included in the other taxes payable or receivable. | ||
Comprehensive income (loss) | ||
Comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments. Comprehensive income (loss) for the years presented has been disclosed within the consolidated statement of changes in equity and comprehensive income (loss). | ||
Financial instruments | ||
Financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses and other current liabilities. The carrying values of these financial instruments approximate or are equivalent to their fair values due to the short-term nature of these instruments. The Group does not use derivative instruments to manage risks. | ||
Concentration of credit risk | ||
Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and accounts receivable. The Group holds its cash with highly rated financial institutions. |
F-45
3. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets consist of the following: |
December 31, | ||||||||
2008 | 2009 | |||||||
Prepaid advertising expense |
$ | 10 | $ | 1,954 | ||||
Others |
104 | 115 | ||||||
$ | 114 | $ | 2,069 | |||||
4. | PROPERTY AND EQUIPMENT, NET | |
Property and equipment, net consist of the following: |
December 31, | ||||||||
2008 | 2009 | |||||||
Leasehold improvements |
$ | 46 | $ | 46 | ||||
Furniture, fixtures and equipment |
12 | 12 | ||||||
58 | 58 | |||||||
Less: Accumulated depreciation |
(13 | ) | (31 | ) | ||||
Property and equipment, net |
$ | 45 | $ | 27 | ||||
The Group recorded depreciation expenses of $13 and $18 for the years ended December 31, 2008 and 2009, respectively. |
5. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES | |
Accrued expenses and other current liabilities consist of the following: |
December 31, | ||||||||
2008 | 2009 | |||||||
Business tax, value added tax and other tax payables |
$ | 49 | $ | 303 | ||||
Social insurance payable |
73 | 154 | ||||||
Others |
37 | 43 | ||||||
$ | 159 | $ | 500 | |||||
F-46
6. | INCOME TAXES | |
The Company is a tax exempted company incorporated in the British Virgin Islands. |
No provision for Hong Kong Profits Tax was made for the year ended December 31, 2009 on the basis that QIGI HK did not have any assessable profits arising in or derived from Hong Kong for this year. |
QIGI Technology is incorporated in the PRC and is subject to a corporate income tax rate of 25%. |
The current and deferred components of the income tax expense appearing in the consolidated statements of operation are as follows: |
Year ended December 31, | ||||||||
2008 | 2009 | |||||||
Current tax |
$ | 814 | $ | 1,688 | ||||
Deferred tax |
(2 | ) | (7 | ) | ||||
$ | 812 | $ | 1,681 | |||||
The principal components of the Groups deferred tax assets are as follows: |
Year ended December 31, | ||||||||
2008 | 2009 | |||||||
Deferred tax assets current: |
||||||||
Accrued expenses |
$ | 2 | $ | 9 | ||||
Total gross deferred tax assets current |
2 | 9 | ||||||
Valuation allowance |
| | ||||||
Total net deferred tax assets current |
$ | 2 | $ | 9 | ||||
The Group determines whether or not a valuation allowance is required at the level of each taxable entity. The Group believes there will be sufficient operating income in the future years to utilize deferred tax assets recognized in 2008 and 2009, and no valuation allowance is provided. |
F-47
7. | INCOME TAXES continued |
Reconciliation between the provision for income tax computed by PRC enterprise income tax rate of 25% to income before income taxes and actual provision for income taxes is as follows: |
Year ended December 31, | ||||||||
2008 | 2009 | |||||||
Tax provision at PRC enterprise
income tax rate of 25% |
$ | 89 | $ | 1,406 | ||||
Non-deductible expenses for tax purpose |
723 | 288 | ||||||
Effect of the different income tax rates
in other jurisdiction |
| (13 | ) | |||||
$ | 812 | $ | 1,681 | |||||
The Group did not identify significant unrecognized tax benefits for years ended December 31, 2008 and 2009. The Group did not incur any interest and penalties related to potential underpaid income tax expenses and also believed that the Groups unrecognized tax benefits did not change significantly within 12 months from December 31, 2009. |
7. | COMMITMENTS |
Operating lease as lessee |
The Group has entered into operating lease agreements principally for its office spaces in the PRC. These leases expire through 2010. Rental expenses under operating leases for the years ended December 31, 2008 and 2009 were $55and $55, respectively. |
Future minimum rental lease payments under non-cancellable operating leases agreements were fall due within the year ending December 31, 2010 was $4. |
8. | EMPLOYEE BENEFIT PLAN |
Full time employees of the Group located in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The Group accrues for these benefits based on certain percentages of the employees salaries. |
The total provisions for such employee benefits were $90 and $110 for the years ended December 31, 2008 and 2009, respectively. |
F-48
9. | STATUTORY RESERVES |
As stipulated by the relevant law and regulations in the PRC, the Companys subsidiaries and variable interest entity in the PRC are required to maintain non-distributable statutory surplus reserve. Appropriations to the statutory surplus reserve are required to be made at not less than 10% of profit after taxes as reported in these entities statutory financial statements prepared under PRC GAAP. Once appropriated, these amounts are not available for future distribution to owners or shareholders. Once the general reserve is accumulated to 50% of these entities registered capital, these entities can choose not to provide more reserves. The statutory reserve may be applied against prior year losses, if any, and may be used for general business expansion and production and an increase in registered capital of these entities. Amounts contributed to the statutory reserve were nil and $389 as of December 31, 2008 and 2009, respectively. |
F-49
Number of Techfaith shares issued as stock consideration |
65,934,066 | |||
Closing price per ADS ( 1 ADS represent 15 shares) on
February 10, 2010, the date of acquisition |
2.92 | |||
Stock consideration |
12,835 | |||
Cash consideration |
500 | |||
Fair value of contingent consideration receivable |
(196 | ) | ||
Total Consideration |
13,139 | |||
Less: Fair value of assets acquired or liabilities assumed
|
||||
Cash |
11,183 | |||
Deferred tax liability |
(170 | ) | ||
Other net liabilities acquired |
(1,486 | ) | ||
Less: Identified intangible assets acquired: |
||||
Contract backlog |
20 | |||
Customer base |
680 | |||
Trade name & domain name |
1,670 | |||
Total identified acquired intangible assets |
2,370 | |||
Goodwill |
$ | 1,242 | ||
F-50
Adjustments | ||||||||||||||||
Historical | Historical | for the | Pro Forma | |||||||||||||
Techfaith(1) | Citylead(2) | Acquisition | Combined | |||||||||||||
Revenues |
||||||||||||||||
ODP |
$ | 210,588 | $ | | (2,196 | )(3) | $ | 208,392 | ||||||||
Brand name phone sales |
| 29,679 | 29,679 | |||||||||||||
Game |
488 | | 488 | |||||||||||||
Total net revenues |
211,076 | 29,679 | 238,559 | |||||||||||||
Cost of revenues |
||||||||||||||||
ODP |
172,801 | | (2,196 | )(3) | 170,605 | |||||||||||
Brand name phone sales |
| 22,086 | | 22,086 | ||||||||||||
Game |
64 | | 64 | |||||||||||||
Total Cost of revenues |
172,865 | 22,086 | 192,755 | |||||||||||||
Gross profit |
38,211 | 7,593 | 45,804 | |||||||||||||
Operating expenses |
||||||||||||||||
Selling and marketing |
(3,241 | ) | (1,563 | ) | (156 | )(4) | (4,960 | ) | ||||||||
General and administrative |
(9,600 | ) | (459 | ) | (10,059 | ) | ||||||||||
Research and development |
(12,040 | ) | | (12,040 | ) | |||||||||||
Total operating expenses |
(24,881 | ) | (2,022 | ) | (27,059 | ) | ||||||||||
Government subsidy income |
481 | | 481 | |||||||||||||
Income from operations |
13,811 | 5,571 | 19,226 | |||||||||||||
Interest expense |
(623 | ) | | (623 | ) | |||||||||||
Interest income |
667 | 52 | 719 | |||||||||||||
Other income |
115 | | 115 | |||||||||||||
Change in fair value of Put option |
(84 | ) | | (84 | ) | |||||||||||
Change in fair value of derivatives embedded
in convertible notes |
(5,270 | ) | | (5,270 | ) | |||||||||||
Income before income taxes |
8,616 | 5,623 | 14,083 | |||||||||||||
Income taxes expenses |
(3,642 | ) | (1,681 | ) | 34 | (5) | (5,289 | ) | ||||||||
Net income |
4,974 | 3,942 | 8,794 | |||||||||||||
Less: net loss attributable to noncontrolling interests |
1,363 | | 1,363 | |||||||||||||
Net income attributable to Techfaith |
6,337 | 3,942 | 10,157 | |||||||||||||
Net income per share attributable to Techfaith |
||||||||||||||||
Basic |
$ | 0.01 | $ | 0.01 | ||||||||||||
Diluted |
$ | 0.01 | $ | 0.01 | ||||||||||||
Weighted average shares used in computation |
||||||||||||||||
Basic |
650,057,866 | 65,934,066 | (6) | 715,991,932 | ||||||||||||
Diluted |
720,889,120 | 65,934,066 | (6) | 786,823,186 |
F-51
(1) | Derived from the audited consolidated statement of operations of Techfaith for the year ended December 31, 2009 on Form 20-F, other than the presentation changes as described in following. As a result of the Acquisition, Techfaith adjusted its segment reporting since the first quarter of 2010. The business activities of previously reported handset design segment and product sales segment are now combined into one segment, named as original developed products (the ODP) segment. The business activities of Citylead acquired in 2010 are now representing a new segment, named as brand name phone sales segment. The presentation of the revenues and cost of revenues for the year ended December 31, 2009 has been changed in conformity with the current presentation of Techfaith in 2010. | |
(2) | Derived from the audited consolidated statement of operations of Citylead for the year ended December 31, 2009, included elsewhere in this registration statement. | |
(3) | Elimination of sales from Techfaith to Citylead, and cost of sales of Citylead. | |
(4) | Represented the amortization of acquired intangible assets for the year 2009 and assuming the intangible assets identified in the preliminary purchase price allocation had been amortized over the following estimated useful lives on a straight-line basis. Tread name & domain name, which is with indefinite live as of the acquisition date, are assumed not to be impaired during this period. |
Contract backlog
|
0.1 year | |
Customer base
|
5 years | |
Trade name & domain name
|
Indefinite life |
(5) | To reflect the tax effect of the amortization of the intangible assets identified in the preliminary purchase price allocation as set out in above note (4) that would have been recognized since January 1, 2009, based on enterprise income tax rates of 25%. | |
(6) | Assuming the 65,934,066 shares of common stock of Techfaith issued in connection with the Acquisition had been issued and outstanding as of January 1, 2009. |
F-52
Adjustments | ||||||||||||||||
Historical | Historical | for the | Pro Forma | |||||||||||||
Techfaith(1) | Citylead(2) | Acquisition | Combined | |||||||||||||
Revenues |
||||||||||||||||
ODP |
$ | 110,774 | $ | | $ | 110,774 | ||||||||||
Brand name phone sales |
12,844 | 1,463 | 14,307 | |||||||||||||
Game |
2,791 | | 2,791 | |||||||||||||
Total net revenues |
126,409 | 1,463 | 127,872 | |||||||||||||
Cost of revenues |
||||||||||||||||
ODP |
89,118 | | 89,118 | |||||||||||||
Brand name phone sales |
7,906 | 864 | 8,770 | |||||||||||||
Game |
112 | | 112 | |||||||||||||
Cost of revenues |
97,136 | 864 | 98,000 | |||||||||||||
Gross profit |
29,273 | 599 | 29,872 | |||||||||||||
Operating expenses |
||||||||||||||||
Selling and marketing |
(2,872 | ) | (173 | ) | (15 | )(3) | (3,060 | ) | ||||||||
General and administrative |
(6,160 | ) | (16 | ) | (6,176 | ) | ||||||||||
Research and development |
(5,759 | ) | | (5,759 | ) | |||||||||||
Total operating expenses |
(14,791 | ) | (189 | ) | (14,995 | ) | ||||||||||
Government subsidy income |
151 | | 151 | |||||||||||||
Income from operations |
14,633 | 410 | 15,028 | |||||||||||||
Interest expense |
(530 | ) | | (530 | ) | |||||||||||
Interest income |
390 | 22 | 412 | |||||||||||||
Other expenses |
193 | | 193 | |||||||||||||
Change in fair value of Put option |
(63 | ) | | (63 | ) | |||||||||||
Change in fair value of derivatives embedded
in convertible notes |
4,609 | | 4,609 | |||||||||||||
Income before income taxes |
19,232 | 432 | 19,649 | |||||||||||||
Income taxes expenses |
(4,108 | ) | (138 | ) | 4 | (5) | (4,242 | ) | ||||||||
Net income |
15,124 | 294 | 15,407 | |||||||||||||
Less: net loss attributable to noncontrolling interests |
(987 | ) | | (987 | ) | |||||||||||
Net income attributable to Techfaith |
14,137 | 294 | 14,420 | |||||||||||||
Net income per share attributable to Techfaith |
||||||||||||||||
Basic |
$ | 0.02 | $ | 0.02 | ||||||||||||
Diluted |
$ | 0.02 | $ | 0.02 | ||||||||||||
Weighted average shares used in computation |
||||||||||||||||
Basic |
700,601,047 | 14,571,064 | (5) | 715,172,111 | ||||||||||||
Diluted |
826,715,923 | 14,571,064 | (5) | 841,286,987 |
F-53
(1) | Derived from the unaudited condensed consolidated statements of operations of Techfaith for the six months periods ended June 30, 2009 and 2010, which is included elsewhere in this registration statement. | |
(2) | Represented the results of operations of Citylead for the period from January 1, 2010 to February 10, 2010 (the date of acquisition). | |
(3) | Represented the amortization of acquired intangible assets for the period from January 1, 2010 to February 10, 2010 (the date of acquisition), assuming the intangible assets identified in the preliminary purchase price allocation had been amortized over the following estimated useful lives on a straight-line basis. Tread name & domain name, which is with indefinite live as of the acquisition date, are assumed not to be impaired during this period. | |
The estimated useful lives of the acquired intangible assets are as follows: |
Contract backlog
|
0.1year | |
Customer base
|
5 years | |
Trade name & domain name
|
Indefinite life |
(4) | To reflect the tax effect of the amortization of the intangible assets identified in the preliminary purchase price allocation as set out in above note (4) that would have been recognized for the period from January 1, 2010 to February 10, 2010 (the date of acquisition), based on enterprise tax income rates of 25%. | |
(5) | Assuming the 65,934,066 shares of common stock of Techfaith issued in connection with the Acquisition had been issued and outstanding as of January 1, 2009. |
F-54
Exhibit Number | Exhibit Title | |
4.4
|
Investor Rights Agreement dated June 9, 2009 among the Registrant, Leo Technology Limited, now renamed 798 Entertainment Limited, the Selling Shareholders, Infiniti Capital Limited and other parties thereto (1) | |
4.5
|
Registrants Specimen Certificate for American Depositary Receipts (2) | |
4.6
|
Registrants Specimen Certificate for Ordinary Shares (3) | |
4.7
|
Form of Deposit Agreement among the Registrant, the depositary and holder of the American Depositary Receipts (4) | |
5.1
|
Opinion of Maples and Calder | |
23.1
|
Consents of Deloitte Touche Tohmatsu CPA Ltd. | |
23.2
|
Consent of Maples and Calder (included in Exhibit 5.1) | |
23.3
|
Consent of Guan Teng Law Firm | |
24.1
|
Power of Attorney (included on signature page) |
(1) | Incorporated by reference to Exhibit 2.6 of the Registrants Annual Report on Form 20-F (File No. 000-51242) initially filed with the SEC on May 19, 2010. | |
(2) | Incorporated by reference to Exhibit 4.1 from our Registration Statement on Form F-1 (File no. 333-123921) filed with the SEC on April 7, 2005. | |
(3) | Incorporated by reference to Exhibit 4.2 from our Registration Statement on Form F-1/A (File no. 333-123921) filed with the SEC on April 20, 2005. | |
(4) | Incorporated by reference to Exhibit 4.3 of the registrants Registration Statement on Form F-1 (File No. 333-123921) initially filed with the SEC on April 7, 2005. |
II-1
II-2
II-3
II-4
China Techfaith Wireless Communication Technology Limited | ||||
By: | /s/ Defu Dong | |||
Name: | Defu Dong | |||
Title: | Chief Executive Officer | |||
Signature | Title | |
/s/
Defu Dong |
Chief Executive Officer (Principal Executive Officer) | |
/s/
Yuping Ouyang |
Chief Financial Officer (Principal Financial and Accounting Officer) | |
/s/
Deyou Dong |
Director and Chief Operating Officer | |
/s/
Jy-Ber Gilbert Lee |
Director | |
/s/ Hung
Hsin (Robert) Chen |
Independent Director | |
/s/
Ken Lu |
Independent Director | |
/s/
Ling Sui |
Independent Director | |
/s/ Hui
(Tom) Zhang |
Independent Director | |
II-5
Authorized U.S. Representative | ||||
By: | /s/ Kate Ledyard | |||
Name: | Kate Ledyard, on behalf of Law Debenture Corporate Services Inc. | |||
Title: | Manager |
II-6
Exhibit Number | Exhibit Title | |
4.4
|
Investor Rights Agreement dated June 9, 2009 among the Registrant, Leo Technology Limited, now renamed 798 Entertainment Limited, the Selling Shareholders, Infiniti Capital Limited and other parties thereto (1) | |
4.5
|
Registrants Specimen Certificate for American Depositary Receipts (2) | |
4.6
|
Registrants Specimen Certificate for Ordinary Shares (3) | |
4.7
|
Form of Deposit Agreement among the Registrant, the depositary and holder of the American Depositary Receipts (4) | |
5.1
|
Opinion of Maples and Calder | |
23.1
|
Consent of Deloitte Touche Tohmatsu CPA Ltd. | |
23.2
|
Consent of Maples and Calder (included in Exhibit 5.1) | |
23.3
|
Consent of Guan Teng Law Firm | |
24.1
|
Power of Attorney (included on signature page) |
(1) | Incorporated by reference to Exhibit 2.6 of the Registrants Annual Report on Form 20-F (File No. 000-51242) initially filed with the SEC on May 19, 2010. | |
(2) | Incorporated by reference to Exhibit 4.1 from our Registration Statement on Form F-1 (File no. 333-123921) filed with the SEC on April 7, 2005. | |
(3) | Incorporated by reference to Exhibit 4.2 from our Registration Statement on Form F-1/A (File no. 333-123921) filed with the SEC on April 20, 2005. | |
(4) | Incorporated by reference to Exhibit 4.3 of the registrants Registration Statement on Form F-1 (File No. 333-123921) initially filed with the SEC on April 7, 2005. |
II-7