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Exhibit 99.1

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Independent Auditor’s Report

To the Board of Directors and Stockholders of

Terasquare Co., Ltd.

We have audited the accompanying financial statements of Terasquare Co., Ltd, which comprise the balance sheets as of December 31, 2014 and 2013, and the related statement of operations, changes in stockholders’ deficit and cash flows for the years then ended.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Terasquare Co., Ltd as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

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Yeil Accounting Corporation

Seoul, Korea

December 3, 2015

 

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(in Korean Won)		December 31
		2014				2013
ASSETS
Current assets:
Cash and cash equivalents (Note 3)			153,552,629				321,451,039
Restricted Cash (Note 3)			311,803,037				74,130,334
Short-term financial instruments (Note 4)			156,479,966				551,809,428
Account receivable			28,732,330				33,901,612
Advance payments			28,704,837				16,896,000
Prepaid expenses			999,186				911,100
Prepaid income taxes			1,352,720				5,344,474
Total current assets			681,624,705				1,004,443,987
Property and equipment, net (Note 5)			42,211,845				68,281,368
Intangible assets, net			3,199,810				-
Other non-current assets (Note 6)			144,879,000				144,879,000
Total assets			871,915,360				1,217,604,355
LIABILTIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Account payables			294,061,877				72,457,703
Withholdings			20,270,880				14,106,400
Unearned government grant			311,803,037				74,130,334
Accrued expenses			16,790,875				17,552,235
Total current liabilities			642,926,669				178,246,672
Redeemable convertible preferred stock (Note 7)			5,483,661,960				4,493,829,050
Total liabilities			6,126,588,629				4,672,075,722
Commitments and contingencies
Stockholders' deficit
Capital stock (Note 8)			399,997,500				399,997,500
Accumulated deficit (Note 9)			(5,654,670,769	)			(3,854,468,867	)
Total stockholders’ deficit			(5,254,673,269	)			(3,454,471,367	)
Total liabilities and stockholders’ deficit			871,915,360				1,217,604,355

 

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

 

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

 

1.	General  information

Terasquare Co., Ltd (“The Company”) was incorporated on December, 2010 under the laws of the Republic of Korea to design and sell semiconductors.

The Company’s business is made up of industry leading 100Gbps+ datacom solutions for Ethernet, Fiber Channel, and Infiniband Data Center connectivity.

As of December 31, 2014, the Company’s common stockholders are as follows:

2.	Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the year presented, unless otherwise stated.

2.1 Basis for preparation

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to allowances for doubtful accounts, valuation of long-lived assets, including property and equipment and identified intangible assets, valuation of deferred taxes and contingencies. The Company bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumption that are believed to be reasonable under the circumstances, when these carrying values are not readily available from other sources. Actual results could differ from these estimates.

 

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2.2 Revenue recognition

Revenue from sales of optical drivers and receivers, multi-chip modules (MCMs), ASICs and other products is recognized when persuasive evidence of a sales arrangement exists, transfer of title occurs, the sales price is fixed or determinable and collection of the resulting receivable is reasonably assured. Revenue for product shipments is recognized upon delivery of the product to the customer. Provisions are made for sales returns and warranties at the time revenue is recorded.

2.3 Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, demand deposits, and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. The Company considers investments with maturities of three months or less on acquisition date to be cash and cash equivalents.

2.4 Restricted cash

Restricted cash as of December 31, 2014 was KRW 311,803 thousand which is primarily subject to withdrawal restrictions to government-sponsored research and development projects and other activities.

2.5 Financial instruments

Financial instruments, such as time deposits and restricted bank deposits, which are traded by financial institutions and are held for short-term cash management purposes or which will mature within one year, are accounted for as short-term financial instruments. Financial instruments other than cash equivalents and short-term financial instruments are recorded as long-term financial instruments.

2.6 Allowance for doubtful accounts

The Company provides an allowance for doubtful accounts in consideration of estimated total losses that may arise from the non-collection of its receivables. The estimate of losses, if any, is based on a review of the aging and current status of the outstanding receivables.

2.7 Property and equipment, net

Property and equipment are recorded at cost and depreciation using the declining balance method over their estimated useful lives, 5 years. Repairs and maintenance costs are charged to expenses as incurred.

 

 

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2.8 Long-lived assets and intangible assets

Long-lived assets include equipment, furniture and fixtures and intangible assets. When events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the Company tests for recoverability by comparing the estimate of undiscounted cash flows to be generated by the assets against the assets’ carrying amount. If the carrying value exceeds the estimated future cash flows, the assets are considered to be impaired. The amount of impairment equals the difference between the carrying amount of the assets and their fair value. Factors the Company considers important that could trigger an impairment review include continued operating losses, significant negative industry trends, significant underutilization of the assets and significant changes in how it plans to use the assets.

Intangible assets are amortized on a straight-line basis over their estimated economic lives.

2.9 Research and development expense

Research and development expenses are expensed as incurred. Research and development expense consists primarily of salaries and related expenses for research and development personnel, consulting and engineering design, non-capitalized tools and equipment, engineering related semiconductor masks, depreciation for equipment, engineering expenses paid to outside technology development suppliers.

2.10 Defined contribution plan

The Company introduced a contribution pension plan, where the Company pays fixed contributions to each employee, who selected the plan, every year. The Company has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expense when they are due.

2.11 Foreign currency

Transactions involving foreign currencies are recorded in the Company’s accounts at the exchange rates prevailing at the time the transactions are made. Monetary assets and liabilities denominated in foreign currencies are translated into Korean won at the appropriate exchange rates on the balance sheet dates. The resulting unrealized foreign currency translation gains (losses) are credited (charged) to current operations.

2.12 Current and deferred tax

The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

 

The Company must assess the likelihood that the Company’s deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not likely, the Company establishes a valuation allowance. Management judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. The Company recorded a full valuation allowance as of December 31, 2014, and 2013. Based on the available evidence, the Company believes it is more likely than not that it will not be able to utilize its deferred tax assets in the future. The Company intends to maintain valuation allowances until sufficient evidence exists to support the reversal of such valuation allowances. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with its plans. Should the actual amounts differ from the Company’s estimates, the carrying value of the Company’s deferred tax assets could be materially impacted.

The Company recognizes in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not believe there are any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date.

2.13 Government grants

Government grants are recognized where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognised as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. When the grant relates to an asset, it is recognised as income in equal amounts over the expected useful life of the related asset.

 

When the Company receives grants of non-monetary assets, the asset and the grant are recorded at nominal amounts and released to profit or loss over the expected useful life in a pattern of consumption of the benefit of the underlying asset by equal annual instalments.

 

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3.	Cash and cash equivalents

Details of cash and cash equivalents as of December 31, 2014 and 2013 are as follows:

Restricted cash as of December 31, 2014 was KRW 311,803 thousand which is primarily subject to withdrawal restrictions to government-sponsored research and development projects and other activities.

4.	Short-term financial instruments

Details of Short-term financial instruments as of December 31, 2014 and 2013 are as:

 

5.	Property and equipment, net

Property and equipment, net as of December 31, 2014 and 2013  consisted of following:

Depreciation expense related to property and equipment was KRW 32,564 thousand and KRW 50,866 thousand for the years then ended December 31, 2014 and 2013, respectively.

 

 

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6.	Other non-current assets

Details of other non-current assets as of December 31, 2014 and 2013 are as:

7.	Redeemable convertible preferred stock

The Company’s Series A preferred stock and Series B, B-1 preferred stocks are redeemable preferred stock that is convertible into a common stock.  As of December 31, 2014 and 2013, redeemable convertible preferred stocks are as follows:

The details of redeemable convertible preferred stock are as follows:

 

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8.	Capital stock

The Company’s common stock as of December 31, 2014 and 2013 are as follows:

9.	Statements of appropriations of accumulated deficit

10.	Research and development expenses

Research and development expenses for the years ended December 31, 2014 and 2013 are as follows:

 

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11.	Selling, general and administrative expenses

Selling, general and administrative expenses for the years ended December 31, 2014 and 2013 are as follows:

12.	Approval of financial statements

Financial statements as of and for the year ended December 31, 2014, was approved by the Board of Directors on March 13, 2015.

 

 

13.	Subsequent events

Change of major stockholder

On September 30, 2015, GigOptix, Inc. completed its acquisition of all of the outstanding common shares and redeemable convertible preferred shares of the Company from the four former stockholders of the Company.

Convertible bond

As of June 19, 2015, the Company issued convertible bond (KRW 500 million).

Borrowing from related party

The Company had borrowed from director and major stockholders, amounting to KRW 244 million for the years then ended.