Exhibit 99.2
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | Page
Number |
Balance Sheets | 1 |
Statements of Operations | 2 |
Statements of Stockholders’ Equity | 3 |
Statements of Cash Flows | 4 |
Notes to Financial Statements | 5 |
Terasquare Co., Ltd.
Interim balance sheets
June 30, 2015
| (In Korean Won) | | June 30 | | | December 31 | |
| | | 2015 | | | 2014 | |
| | | | | | (audited) | |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents (Note 3) | | | 393,112,855 | | | | 153,552,629 | |
| Restricted Cash (Note 3) | | | 265,979,411 | | | | 311,803,037 | |
| Short-term financial instruments (Note 4) | | | 54,600,000 | | | | 156,479,966 | |
| Account receivable | | | - | | | | 28,732,330 | |
| Advance payments | | | 19,036,519 | | | | 28,704,837 | |
| Prepaid expenses | | | 931,242 | | | | 999,186 | |
| Prepaid income taxes | | | 65,570 | | | | 1,352,720 | |
| Prepaid value added tax | | | 92,000 | | | | - | |
| Total current assets | | | 733,817,597 | | | | 681,624,705 | |
| Property and equipment, net (Note 5) | | | 33,420,528 | | | | 42,211,845 | |
| Intangible assets, net | | | 4,654,356 | | | | 3,199,810 | |
| Other non-current assets (Note 6) | | | 174,879,000 | | | | 144,879,000 | |
| Total assets | | | 946,771,481 | | | | 871,915,360 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
| Current liabilities: | | | | | | | | |
| Account payables | | | 182,399,751 | | | | 294,061,877 | |
| Withholdings | | | 13,188,480 | | | | 20,270,880 | |
| Accrued expenses | | | 11,730,158 | | | | 16,790,875 | |
| Unearned government grant | | | 265,979,411 | | | | 311,803,037 | |
| Value added tax withheld | | | 6,183,264 | | | | - | |
| Short-term borrowing (Note 7) | | | 194,000,000 | | | | - | |
| Convertible bonds (Note 8) | | | 500,000,000 | | | | - | |
| Total current liabilities | | | 1,173,481,064 | | | | 642,926,669 | |
| Long-term borrowings (Note 7) | | | 50,000,000 | | | | - | |
| Redeemable convertible preferred stock (Note 9) | | | 5,483,661,960 | | | | 5,483,661,960 | |
| Total liabilities: | | | 6,707,143,024 | | | | 6,126,588,629 | |
| Commitments and contingencies | | | | | | | | |
| Stockholders' deficit | | | | | | | | |
| Common stock (Note 10) | | | 399,997,500 | | | | 399,997,500 | |
| Accumulated deficit | | | (6,160,369,043 | ) | | | (5,654,670,769 | ) |
| Total stockholders’ deficit | | | (5,760,371,543 | ) | | | (5,254,673,269 | ) |
| Total liabilities and stockholders’ deficit | | | 946,771,481 | | | | 871,915,360 | |
The accompanying notes are an integral parts of these interim financial statements.
Terasquare Co., Ltd.
Interim statements of operations
For the six months ended June 30
| (In Korean Won) | | 2015 | | | 2014 | |
| | | | | | | |
| Revenues | | | 310,227,273 | | | | 5,515,760 | |
| Cost of sales | | | - | | | | - | |
| Gross profit | | | 310,227,273 | | | | 5,515,760 | |
| Operating expenses | | | | | | | | |
| Research and development expense (Note 11) | | | 329,189,947 | | | | 289,019,853 | |
| Selling, general and administrative expense (Note 12) | | | 480,817,769 | | | | 723,980,653 | |
| Total operating expenses | | | 810,007,716 | | | | 1,013,000,506 | |
| Loss from operations | | | (499,780,443 | ) | | | (1,007,484,746 | ) |
| Interest income (expense), net | | | (4,366,170 | ) | | | 6,063,764 | |
| Other income (expense), net | | | (1,551,661 | ) | | | 21,129 | |
| Net and comprehensive loss | | | (505,698,274 | ) | | | (1,001,399,853 | ) |
The accompanying notes are an integral parts of these interim financial statements.
Terasquare Co., Ltd.
Interim statements of changes in stockholders’ deficit
For the six months ended June 30
| (In Korean Won) | | Common stock | | | Accumulated | | | | |
| | | Shares | | | Amount | | | Deficit | | | Total | |
| January 1, 2014 | | | 3,999,975 | | | | 399,997,500 | | | | (3,854,468,867 | ) | | | (3,454,471,367 | ) |
| Net loss | | | - | | | | - | | | | (1,001,399,853 | ) | | | (1,001,399,853 | ) |
| June 30, 2014 | | | 3,999,975 | | | | 399,997,500 | | | | (4,855,868,720 | ) | | | (4,455,871,220 | ) |
| | | | | | | | | | | | | | | | | |
| January 1, 2015 | | | 3,999,975 | | | | 399,997,500 | | | | (5,654,670,769 | ) | | | (5,254,673,269 | ) |
| Net loss | | | - | | | | - | | | | (505,698,274 | ) | | | (505,698,274 | ) |
| June 30, 2015 | | | 3,999,975 | | | | 399,997,500 | | | | (6,160,369,043 | ) | | | (5,760,371,543 | ) |
The accompanying notes are an integral parts of these interim financial statements.
Terasquare Co., Ltd.
Interim statements of cash flows
For the six months ended June 30
| (In Korean Won) | | 2015 | | | 2014 | |
| | | | | | | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | | (505,698,274 | ) | | | (1,001,399,853 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation | | | 9,762,117 | | | | 15,702,400 | |
| Provision for severance and retirement benefits | | | 25,889,353 | | | | 14,760,253 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Account receivable | | | 28,732,330 | | | | 31,966,692 | |
| Advance payments | | | 9,668,318 | | | | (18,301,990 | ) |
| Prepaid expenses | | | 67,944 | | | | (88,086 | ) |
| Prepaid income tax | | | 1,287,150 | | | | 4,483,214 | |
| Prepaid value added tax | | | (92,000 | ) | | | (48,765,737 | ) |
| Account payable | | | (137,551,479 | ) | | | 341,760,676 | |
| Accrued expenses | | | (5,060,717 | ) | | | 8,567,295 | |
| Withholdings | | | (7,082,400 | ) | | | 770,098 | |
| Value added tax withheld | | | 6,183,264 | | | | - | |
| Net cash used in operating activities | | | (573,894,394 | ) | | | (650,545,038 | ) |
| Cash flows from investing activities: | | | | | | | | |
| Proceeds from sale of short-term financial instruments | | | 101,879,966 | | | �� | 551,809,428 | |
| Payment of additional leasehold deposits | | | (30,000,000 | ) | | | - | |
| Purchase of property and equipment | | | (970,800 | ) | | | (2,638,000 | ) |
| Purchase of intangible assets | | | (1,454,546 | ) | | | (700,000 | ) |
| Net cash provided by investing activities | | | 69,454,620 | | | | 548,471,428 | |
| Cash flows from financing activities: | | | | | | | | |
| Increase in short-term borrowings | | | 194,000,000 | | | | - | |
| Increase in long-term borrowings | | | 50,000,000 | | | | - | |
| Proceeds from issuance of convertible bonds | | | 500,000,000 | | | | - | |
| Net cash provided by financing activities | | | 744,000,000 | | | | - | |
| Net increase (decrease) in cash and cash equivalents | | | 239,560,226 | | | | (102,073,610 | ) |
| Cash and cash equivalents at beginning of year | | | 153,552,629 | | | | 321,451,039 | |
| Cash and cash equivalents at end of year | | | 393,112,855 | | | | 219,377,429 | |
The accompanying notes are an integral parts of these interim financial statements.
Terasquare Co., Ltd.
Notes to the interim financial statements
For the six months ended June 30
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 June 30, 2015, the Company’s common stockholders are as follows:
| Name of stockholders | | Shares of common stock | | | Percentage of Ownership | |
| Hyunmin Bae | | | 2,846,250 | | | | 71 | % |
| Hyungsuk Yoon | | | 846,225 | | | | 21 | % |
| Jinho Park | | | 307,500 | | | | 8 | % |
| | | | 3,999,975 | | | | 100 | % |
| 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.
Terasquare Co., Ltd.
Notes to the interim financial statements
For the six months ended June 30
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 June 30, 2015 was KRW 265,979 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.
Terasquare Co., Ltd.
Notes to the interim financial statements
For the six months ended June 30
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.
Terasquare Co., Ltd.
Notes to the interim financial statements
For the six months ended June 30
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 June 30, 2015 and December 31, 2014. 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.
| 3. | Cash and cash equivalents |
Details of cash and cash equivalents as of June 30, 2015 and December 31, 2014 are as follows:
| (In thousands of Korean Won) | | 2015 | | | 2014 | |
| Bank deposits | | | 393,113 | | | | 153,553 | |
| Restricted bank deposits | | | 265,979 | | | | 311,803 | |
| | | | 659,092 | | | | 465,356 | |
Restricted cash as of June 30, 2015 was KRW 265,979 thousand which is primarily subject to withdrawal restrictions to government-sponsored research and development projects and other activities.
Terasquare Co., Ltd.
Notes to the interim financial statements
For the six months ended June 30
| 4. | Short-term financial instruments |
Details of short-term financial instruments as of June 30, 2015 and December 31, 2014 are as follows:
| (In thousands of Korean Won) | | 2015 | | | 2014 | |
| Bank deposits | | | 54,600 | | | | 156,480 | |
| | | | 54,600 | | | | 156,480 | |
| 5. | Property and equipment, net |
Property and equipment, net as of June 30, 2015 and December 31, 2014 consisted of following:
| (In thousands of Korean Won) | | 2015 | | | 2014 | |
| Vehicles | | | 33,150 | | | | 33,150 | |
| Equipment | | | 105,565 | | | | 104,594 | |
| Facilities | | | 63,440 | | | | 63,440 | |
| | | | 202,155 | | | | 201,184 | |
| Accumulated depreciation | | | (168,734 | ) | | | (158,972 | ) |
| Property and equipment, net | | | 33,421 | | | | 42,212 | |
Depreciation expense related to property and equipment was KRW 9,762 thousand and KRW 15,702 thousand for the six months ended June 30, 2015 and 2014, respectively.
| 6. | Other non-current assets |
Details of other non-current assets as of June 30, 2015 and December 31, 2014 are as follows:
| (In thousands of Korean Won) | | 2015 | | | 2014 | |
| Leasehold deposits | | | 174,749 | | | | 144,749 | |
| Other guarantee deposits | | | 130 | | | | 130 | |
| | | | 174,879 | | | | 144,879 | |
Terasquare Co., Ltd.
Notes to the interim financial statements
For the six months ended June 30
Details of borrowings as of June 30, 2015 and December 31, 2014 are as follows:
| (In thousands of Korean Won) | | 2015 | | | 2014 | |
| Short-term borrowings | | | | | | |
| Hyunmin Bae (Major shareholder) | | | 87,000 | | | | - | |
| Jinho Park (CEO) | | | 107,000 | | | | - | |
| | | 194,000 | | | | - | |
| Long-term borrowings | | | | | | | | |
| Gwangsuk Han | | | 50,000 | | | | - | |
| Total | | | 50,000 | | | | - | |
The Company issued convertible bond on June 19, 2015. Details of convertible bond as of June 30, 2015 and December 31, 2014 are as follows:
| (In thousands of Korean Won) | | 2015 | | | 2014 | |
| Convertible bonds | | | 500,000 | | | | - | |
| | | | 500,000 | | | | - | |
Terasquare Co., Ltd.
Notes to the interim financial statements
For the six months ended June 30
Conversion feature for 1st privately placed convertible bonds is as follows:
| | | Conversion feature |
| Amount issued | | 500,000,000 |
| Coupon rate | | 0% per annum |
| Guaranteed rate of convertible bonds | | 8% per annum |
| Date of issue | | June 19, 2015 |
| Maturity date | | June 18, 2016 |
| Conversion period | | 1 month after date issued until the day before maturity date |
| Conversion price | | 1,861 |
| 9. | 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 June 30, 2015 and December 31, 2014, redeemable convertible preferred stocks are as follows:
| (In thousands of Korean Won) | | 2015 | | | 2014 | |
| Redeemable convertible preferred stock | | | 5,483,662 | | | | 5,483,662 | |
| | | | 5,483,662 | | | | 5,483,662 | |
The details of redeemable convertible preferred stock are as follows:
| | Series A | | Series B | | Series B-1 |
| Par value | 100 per share | | 100 per share | | 100 per share |
| Issue price | 875 per share | | 3,467 per share | | 161 per share |
| Date of issue | December 16, 2010 | | December 5, 2012 | | July 17, 2014 |
| Issued stocks | 1,714,125 shares | | 865,350 shares | | 6,211,180 shares |
| Conversion ratio | One common stock per preferred stock | | One common stock per preferred stock | | One common stock per preferred stock |
| Voting right | Same as common stock | | Same as common stock | | Same as common stock |
| Dividend rate | One percent | | One percent | | One percent |
| Redemption amount | Issuing price per share plus 15 % (compound interest) per annum | | Issuing price per share plus 15 % (compound interest) per annum | | Issuing price per share plus 15 % (compound interest) per annum |
| Exercise period | Within 10 years from the date of issue | | Within 10 years from the date of issue | | Within 10 years from the date of issue |
Terasquare Co., Ltd.
Notes to the interim financial statements
For the six months ended June 30
The Company’s common stock as of June 30, 2015 and December 31, 2014 are as follows:
| | | 2015 | | | 2014 | |
| Authorized stocks | | 10,000,000 shares | | | 10,000,000 shares | |
| Par value | | | 100 | | | | 100 | |
| Issued stocks | | 3,999,975 shares | | | 3,999,975 shares | |
| Common stock | | | 399,997,500 | | | | 399,997,500 | |
| 11. | Research and development expenses |
Research and development expenses for the six months ended June 30, 2015 and 2014 are as follows:
| (In thousands of Korean Won) | | 2015 | | | 2014 | |
| Salaries | | | 266,709 | | | | 184,930 | |
| Bonuses | | | 32,421 | | | | 13,724 | |
| Others | | | 30,059 | | | | 90,366 | |
| | | | 329,189 | | | | 289,020 | |
| 12. | Selling, general and administrative expenses |
Selling, general and administrative expenses for the six months ended June 30, 2015 and 2014 are as follows:
| (In thousands of Korean Won) | | 2015 | | | 2014 | |
| | | | | | | |
| Salaries | | | 54,780 | | | | 61,974 | |
| Bonuses | | | 10,904 | | | | 10,529 | |
| Retirement benefits | | | 25,889 | | | | 14,760 | |
| Employee benefits | | | 46,499 | | | | 41,012 | |
| Travel | | | 36,460 | | | | 52,088 | |
| Meals & Entertainment | | | 11,262 | | | | 49,027 | |
| Communication | | | 2,760 | | | | 2,829 | |
| Tax and dues | | | 13,279 | | | | 11,180 | |
| Depreciation | | | 9,762 | | | | 15,702 | |
| Rent | | | 16,150 | | | | 20,530 | |
| Insurance | | | 23,664 | | | | 15,058 | |
| Vehicle maintenance | | | 3,549 | | | | 7,152 | |
| Transportation | | | 917 | | | | 1,446 | |
| Education | | | 420 | | | | 230 | |
| Printing | | | 1,129 | | | | 784 | |
| Office supplies | | | 2,032 | | | | 684 | |
| Supplies | | | 88,851 | | | | 9,442 | |
| Service fees | | | 42,994 | | | | 369,188 | |
| Advertising | | | - | | | | 2,200 | |
| Outsourcing | | | 89,517 | | | | 38,165 | |
| | | | 480,818 | | | | 723,980 | |
Terasquare Co., Ltd.
Notes to the interim financial statements
For the six months ended June 30
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.
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