GCT Semiconductor Holding, Inc 10-Q for FY2024 Q3
GCT Semiconductor Holding, Inc. (GCTS)
About this 10-Q
GCT Semiconductor Holding, Inc filed this 10-Q on November 14, 2024, covering the quarter ended September 30, 2024 (FY2024 Q3).
Headline figures
Quarter ended September 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.61M
- down 41.7% from $4.48M a year earlier
- Net loss
- $7.12M
- compared with a net loss of $4.35M a year earlier
- Diluted EPS
- -$0.16
- compared with -$0.18 a year earlier
00
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Not Applicable
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No
As of November 11, 2024, the registrant had
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10‑Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about our financial condition, results of operations, earnings outlook and our prospects. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Forward-looking statements are typically identified by words such as “plan,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project,” “continue,” “could,” “may,” “might,” “possible,” “potential,” “predict,” “should,” “would” and other similar words and expressions, but the absence of these words does not mean that a statement is not forward-looking.
The forward-looking statements are based on the current expectations of our management and are inherently subject to uncertainties and changes in circumstances and their potential effects and speak only as of the date of such statement. These forward-looking statements involve a number of risks, uncertainties or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, the following:
i
A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” contained in our Form S‑1 filed with the Securities and Exchange Commission (“SEC”) on May 22, 2024, as amended. These forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10‑Q, and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. New risk factors emerge from time to time, and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
ii
Table of Contents
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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iii
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
GCT SEMICONDUCTOR HOLDING, INC.
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except per share amounts)
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September 30, 2024 |
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December 31, 2023 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventory |
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Contract assets |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Intangibles, net |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders’ Deficit |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Contract liabilities |
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Accrued and other current liabilities |
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Common stock forward liability |
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— |
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Borrowings |
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Convertible promissory notes, current |
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Operating lease liabilities, current |
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Total current liabilities |
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Convertible promissory notes, net of current |
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Net defined benefit liabilities |
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Long-term operating lease liabilities |
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Income taxes payable |
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Warrant liabilities |
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— |
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Other liabilities |
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Total liabilities |
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Stockholders’ deficit: |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital(1) |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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Total stockholders’ deficit |
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Total liabilities and stockholders’ deficit |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
GCT SEMICONDUCTOR HOLDING, INC.
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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2024 |
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2023 |
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2024 |
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2023 |
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Net revenues: |
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Product |
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$ |
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$ |
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$ |
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$ |
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Service |
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Total net revenues |
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Cost of net revenues: |
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Product |
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Service |
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Total cost of net revenues |
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Gross profit |
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Operating expenses: |
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Research and development |
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Sales and marketing |
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General and administrative |
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Gain on extinguishment of liability |
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— |
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— |
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— |
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Total operating expenses |
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Loss from operations |
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Interest expense |
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Other income (expenses), net |
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Loss before provision for income taxes |
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Provision for income taxes |
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Net loss |
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$ |
( |
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$ |
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$ |
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$ |
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Net loss per common share(1): |
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Basic and diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted-average common shares outstanding(1): |
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Basic and diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
GCT SEMICONDUCTOR HOLDING, INC.
Condensed Consolidated Statements of Comprehensive Loss
(unaudited, in thousands)
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Three Months Ended |
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Nine Months Ended |
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2024 |
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2023 |
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2024 |
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2023 |
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Comprehensive loss, net of taxes: |
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Net loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Foreign currency translation adjustment |
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( |
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Comprehensive loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
GCT SEMICONDUCTOR HOLDING, INC.
Condensed Consolidated Statements of Stockholders’ Deficit
(unaudited, in thousands)
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-In |
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Comprehensive |
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Accumulated |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Income (Loss) |
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Deficit |
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Deficit |
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Balance as of December 31, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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Reverse recapitalization |
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( |
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( |
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— |
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— |
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— |
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Balance as of December 31, 2023(1) |
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( |
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Reverse recapitalization transaction, net of transaction costs |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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Balance as of March 31, 2024 |
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( |
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( |
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( |
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Issuance of common stock under common stock purchase |
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— |
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— |
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— |
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Issuance of commitment shares in connection with common |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock to underwriter |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balance as of June 30, 2024 |
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( |
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( |
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Issuance of common stock under common stock purchase |
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— |
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— |
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— |
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Issuance of common stock and common stock warrants |
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— |
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— |
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— |
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Issuance of common stock upon exercise of stock options |
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— |
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— |
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— |
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Forfeiture of unvested sponsor earnout shares |
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( |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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( |
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— |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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( |
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( |
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Balance as of September 30, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
GCT SEMICONDUCTOR HOLDING, INC.
Condensed Consolidated Statements of Stockholders’ Deficit
(unaudited, in thousands)
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-In |
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Comprehensive |
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Accumulated |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Income (Loss) |
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Deficit |
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Deficit |
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Balance as of December 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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Reverse recapitalization |
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( |
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( |
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— |
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— |
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— |
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Balance as of December 31, 2022(1) |
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( |
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( |
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( |
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Issuance of common stock upon exercise of stock options(1) |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balance as of March 31, 2023(1) |
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( |
) |
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( |
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( |
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Issuance of common stock upon exercise of stock options(1) |
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— |
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— |
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— |
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Issuance of common stock from convertible promissory notes |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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|
— |
|
|
|
|
||
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance as of June 30, 2023(1) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|||
Issuance of common stock upon exercise of stock options(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Issuance of common stock from convertible promissory notes |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance as of September 30, 2023(1) |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
GCT SEMICONDUCTOR HOLDING, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Operating lease right-of-use amortization |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
|
||
Issuance of common stock to underwriter |
|
|
|
|
|
— |
|
|
Change in credit loss allowance |
|
|
( |
) |
|
|
|
|
Change in fair value of convertible promissory notes |
|
|
|
|
|
( |
) |
|
Change in fair value of warrant liabilities |
|
|
( |
) |
|
|
— |
|
Loss from initial recognition of common stock forward liability |
|
|
|
|
|
— |
|
|
Gain on extinguishment of liability |
|
|
( |
) |
|
|
— |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
( |
) |
|
|
( |
) |
Inventory |
|
|
( |
) |
|
|
|
|
Contract assets |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
|
|
Other assets |
|
|
|
|
|
|
||
Accounts payable |
|
|
( |
) |
|
|
( |
) |
Contract liabilities |
|
|
|
|
|
|
||
Accrued and other current liabilities |
|
|
( |
) |
|
|
|
|
Net defined benefit liabilities |
|
|
|
|
|
|
||
Income tax payable |
|
|
|
|
|
( |
) |
|
Lease liabilities |
|
|
( |
) |
|
|
( |
) |
Other liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
Investing activities: |
|
|
|
|
|
|
||
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Financing activities: |
|
|
|
|
|
|
||
Proceeds from reverse recapitalization and PIPE Financing, net of transaction costs |
|
|
|
|
|
— |
|
|
Proceeds from issuance of convertible promissory notes |
|
|
|
|
|
— |
|
|
Proceeds from issuance of common stock under common stock purchase agreement |
|
|
|
|
|
— |
|
|
Proceeds from issuance of common stock and common stock warrants in a private placement |
|
|
|
|
|
— |
|
|
Proceeds from borrowings |
|
|
|
|
|
|
||
Proceeds from exercise of stock options |
|
|
|
|
|
|
||
Repayments of borrowings |
|
|
( |
) |
|
|
( |
) |
Repayments of convertible promissory notes |
|
|
( |
) |
|
|
— |
|
Payments of financial lease liabilities |
|
|
— |
|
|
|
( |
) |
Net cash provided by financing activities |
|
|
|
|
|
|
||
Effect of exchange rate changes on cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
( |
) |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
Cash paid for income taxes |
|
$ |
|
|
$ |
|
||
Cash paid for operating leases |
|
$ |
|
|
$ |
|
||
Non-cash financing activities: |
|
|
|
|
|
|
||
Issuance of common stock from conversion of convertible promissory notes |
|
$ |
|
|
$ |
|
||
Settlement of common stock forward liability in equity |
|
$ |
|
|
$ |
— |
|
|
Proceeds from issuance of common stock withheld for outstanding payables |
|
$ |
|
|
$ |
— |
|
|
Operating lease right-of-use assets obtained in exchange for operating lease liabilities |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Liquidity
Description of Business
GCT Semiconductor Holding, Inc. (formerly known as Concord Acquisition Corp III) and its wholly owned subsidiaries (collectively “GCT” or the “Company”) is headquartered in San Jose, California with international offices in South Korea, China, Taiwan, and Japan. The Company is a fabless semiconductor company that specializes in the design, manufacturing, and sale of communication semiconductors, including high-speed wireless communication technologies such as 5G/4.75G/4.5G/4G transceivers and modems, which are essential for a wide variety of industrial, B2B and consumer applications.
On March 26, 2024 (the “Closing Date” or “Closing”), Concord Acquisition Corp III (“Concord III”), a Delaware corporation, consummated a series of transactions that resulted in the combination of Gibraltar Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Concord III (“Merger Sub”), and GCT Semiconductor, Inc. ( “Legacy GCT”), pursuant to a Business Combination Agreement, dated November 2, 2023 (as amended, the “Business Combination Agreement”), by and among Concord III, Merger Sub and Legacy GCT. Pursuant to the terms of the Business Combination Agreement, Merger Sub merged with and into Legacy GCT, with Legacy GCT surviving the merger as a wholly-owned subsidiary of Concord III (the “Business Combination”). On the Closing Date, Concord III changed its name from Concord III to “GCT Semiconductor Holding, Inc.”
The Business Combination was accounted for as a reverse recapitalization with Legacy GCT being the accounting acquirer and Concord III identified as the acquired company for accounting purposes. Accordingly, all historical financial information presented in the unaudited condensed consolidated financial statements represent the accounts of Legacy GCT. Subsequent to the Business Combination, the shares and net loss per common share information prior to the Closing have been retroactively restated as shares reflecting the exchange ratio established in the Closing of approximately
Prior to the Business Combination, Concord III’s public shares and public redeemable warrants were listed on the New York Stock Exchange (“NYSE”) under the symbols “CNDB.U,” “CNDB,” and “CNDB.WS,” respectively. On March 27, 2024, the Company’s common stock and public warrants began trading on the NYSE under the symbols “GCTS” and “GCTSW,” respectively. In connection with the Closing, Concord III’s Class A common stock and Class B common stock were recapitalized into a single class of common stock. See Note 3 for additional information.
Liquidity
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business. Through September 30, 2024, the Company has incurred operating losses and negative cash flows from operating activities and had an accumulated deficit of $
In March 2024, the Company received $
Management believes that the available financing under the Purchase Agreement and other capital resources available to the Company, including future sales of products and services, will be sufficient to fund the Company’s operations for at least 12 months after the filing date of this Quarterly Report on Form 10‑Q. To fund its operations over the longer term, the Company will need to start generating positive cash flows, renegotiate its existing debt obligations and raise additional capital through debt or equity financing. There can be no assurance that such additional debt or equity financing will be available on terms acceptable to the Company or at all.
7
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
2. Summary of Significant Accounting Policies and Basis of Presentation
Principles of Consolidation and Basis of Presentation
The unaudited condensed consolidated financial statements and accompanying notes include the accounts of the Company and its wholly owned subsidiaries, after elimination of intercompany balances and transactions. The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”) for interim financial information. Certain information and disclosures normally included in unaudited consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2023, which are included in the Company’s Form 8‑K filed with the SEC on April 1, 2024. The information as of December 31, 2023 included in the condensed consolidated balance sheets was derived from the audited consolidated financial statements. Certain amounts reported in the audited consolidated financial statements for the year ended December 31, 2023 have been reclassified to conform to the current year’s presentation.
The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair presentation of the Company’s financial information. The unaudited condensed consolidated results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or for any other future annual or interim period.
Use of Estimates
The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates, and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. These judgments, estimates, and assumptions are used for but not limited to revenue recognition, provision for credit losses, deferred income taxes and related valuation allowances, inventory obsolescence, recoverability of long-lived assets, certain accrued expenses, stock-based compensation, determination of the fair value of the Company’s financial instruments, including convertible promissory notes, common stock of Legacy GCT prior to the reverse recapitalization, warrant liabilities, stock options, and common stock forward liability. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from these estimates, and these differences may be material.
Fair Value of Financial Instruments
The carrying amount of certain financial instruments held by the Company, such as cash equivalents, accounts receivable, contract assets and liabilities, accounts payable, and accrued and other current liabilities, approximate fair value due to their short maturities. The carrying amount of the liabilities for the convertible promissory notes and the historical convertible promissory notes (see Note 5) represents their fair value. The carrying amounts of the Company’s bank borrowings and lease liabilities approximate their fair values due to the market interest rates that these obligations bear and interest rates available to the Company.
Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:
Level 1 |
|
Unadjusted quoted prices in active markets for identical assets or liabilities. |
Level 2 |
|
Inputs other than quoted prices included within Level 1 that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. |
Level 3 |
|
Unobservable inputs that are supported by little or no market activity for the related assets or liabilities. |
8
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
A financial instrument's categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s Level 3 financial instruments consist of a common stock forward liability, convertible promissory notes, and warrant liabilities.
Risk and Uncertainties
The Company is subject to certain risks and uncertainties and believes changes in any of the following areas could have a material adverse effect on the Company’s future financial position or results of operations or cash flows: 5G and other new product development, including market receptivity, the ability to satisfy obligations under development agreements with major partners, litigation or claims against the Company based on intellectual property, patent, product regulation or other factors, competition from other products, general economic conditions, the ability to attract and retain qualified employees and ultimately to sustain profitable operations.
The semiconductor industry is characterized by rapid technological change, competition, competitive pricing pressures, and cyclical market patterns. The Company’s financial results are affected by a wide variety of factors, such as general economic conditions specific to the semiconductor industry and the Company’s particular market, the timely implementation of new 5G and other new products, new manufacturing process technologies, and the ability to safeguard patents and intellectual property in a rapidly evolving market. In addition, the semiconductor market has historically been cyclical and subject to significant economic downturns. As a result, the Company may experience significant period-to-period fluctuations in unaudited condensed consolidated operating results due to the abovementioned factors.
The Company’s revenue may be impacted by its ability to obtain adequate wafer supplies from foundries and back-end production capacity from the Company’s test and assembly subcontractors. The foundries with which the Company currently has arrangements may not be willing or able to satisfy all of the Company’s manufacturing requirements on a timely basis or at favorable prices. The Company is also subject to the risks of service disruptions, raw material shortages and price increases by its foundries. Such disruptions, shortages and price increases could harm the Company’s consolidated operating results.
Provision for Credit Losses
The provision for credit losses is based on the Company’s assessment of the collectibility of its customer accounts. The Company reviews the provision for credit losses by considering certain factors such as historical experience, industry data, credit quality, age of balances, and current economic conditions that may affect a customer’s ability to pay. Uncollectible receivables are written off when all efforts to collect have been exhausted and recoveries are recognized when they are recovered. The Company determined that provisions for credit losses of approximately $
Concentration of Credit Risk
The Company’s financial instruments subject to credit risk concentration consist of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents primarily with one financial institution located in the United States and another located in South Korea, where amounts deposited may exceed Federal Deposit Insurance Corporation or Korea Deposit Insurance Corporation limits. The Company’s accounts receivable balances are primarily derived from revenues recognized from customers located in the United States, China, South Korea, Japan, and Taiwan. The Company performs ongoing credit evaluations of the financial condition of its customers and distributors and generally does not require collateral.
The Company’s net revenues and accounts receivable are concentrated among a few significant customers, which could expose the Company to financial risk in the event of adverse developments.
Customer |
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Customer A |
|
|
% |
|
|
— |
% |
|
Customer H |
|
|
% |
|
|
% |
||
Customer I |
|
|
% |
|
|
% |
||
Customer J |
|
|
% |
|
|
% |
||
Customer K |
|
|
— |
% |
|
|
% |
|
9
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table includes customers that individually accounted for more than 10% of the Company’s net revenues in the periods indicated:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
Customer |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Customer A |
|
|
— |
% |
|
|
— |
% |
|
|
% |
|
|
— |
% |
|
Customer B |
|
|
% |
|
|
— |
% |
|
|
% |
|
|
— |
% |
||
Customer C |
|
|
— |
% |
|
|
— |
% |
|
|
% |
|
|
— |
% |
|
Customer D |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
% |
|
Customer F |
|
|
— |
% |
|
|
% |
|
|
— |
% |
|
|
% |
||
Customer H |
|
|
% |
|
|
— |
% |
|
|
% |
|
|
— |
% |
||
Customer I |
|
|
— |
% |
|
|
% |
|
|
— |
% |
|
|
— |
% |
|
Customer J |
|
|
— |
% |
|
|
% |
|
|
— |
% |
|
|
% |
||
Management closely monitors the creditworthiness and performance of these key customers and has established credit limits and terms to mitigate potential credit risks. The Company also continues diversifying its customer base and exploring opportunities to reduce its reliance on a few major customers.
Foreign Currency
Financial statements of foreign subsidiaries that use the local currency as their functional currency are translated into U.S. dollars at the end-of-period exchange rates or at historical exchange rates for purposes of consolidation. Revenues and expenses are translated using average exchange rates during the reporting period. Translation adjustments are included in accumulated other comprehensive loss within stockholders’ deficit. Gains and losses resulting from transactions denominated in a currency other than the functional currency are included in other income (expenses), net in the unaudited condensed consolidated statements of operations. The Company recognized foreign currency exchange losses of $
Convertible Promissory Notes
The Company has elected the fair value option to account for its outstanding convertible promissory notes. Changes in the estimated fair value of the outstanding convertible promissory notes are recognized in other income (expenses), net in the condensed consolidated statements of operations.
Common Stock Warrants
Common stock warrants are classified as liabilities if they do not meet equity classification requirements based on their settlement mechanism upon a change of control and similar transactions. The corresponding liability is remeasured at fair value while the common stock warrants remain outstanding, with changes in fair value recognized in other income (expenses), net in the unaudited condensed consolidated statements of operations. Common stock warrants that meet equity classification requirements are credited to stockholders’ deficit on their issuance dates and are not subsequently remeasured.
Certain Equity Contracts
The Company’s promises to potentially issue additional shares in the future based on certain market conditions, including the Legacy GCT Earnout Shares and the Sponsor Earnout Shares, are discussed in Note 3. These financial instruments were determined to be equity classified and credited to the stockholders’ deficit upon consummation of the Business Combination.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS” Act). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards using private company timelines. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these unaudited condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
10
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Recent Accounting Pronouncements Adopted
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020‑06, Debt—Debt with Conversion and Other Options (Subtopic 470‑20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815‑40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020‑06 reduces the number of accounting models for convertible instruments and allows more contracts to qualify for equity classification. The Company
In October 2021, the FASB issued ASU 2021‑08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which provides an exception to fair value measurement for contract assets and contract liabilities related to revenue contracts acquired in a business combination. ASU 2021-08 requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The Company
In June 2022, the FASB issued ASU 2022‑03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”). ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring the fair value of the equity security and cannot be recognized as a separate unit of account. ASU 2022-03 also requires the investor to disclose the fair value of equity securities subject to contractual sale restrictions, the nature and remaining duration of the restrictions, and the circumstances that could cause a lapse in the restrictions. ASU 2022-03 is effective for annual and interim periods beginning after December 15, 2024, with early adoption permitted. The Company retrospectively
Recent Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for annual periods beginning after December 15, 2023 and for interim periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the effect of the adoption of ASU 2023-07 on its unaudited condensed consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which requires companies to disclose, on an annual basis, specific categories in the effective tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. In addition, companies are required to disclose additional information about income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The standard is required to be adopted on a prospective basis; however, retrospective application is permitted. The Company is currently evaluating the effect of the adoption of ASU 2023-09 on its unaudited condensed consolidated financial statements.
11
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
3. Reverse Recapitalization
In connection with the Business Combination described in Note 1, Concord III completed the acquisition of Legacy GCT and acquired
Immediately after the Closing, the Company’s outstanding common stock included the following components (in thousands):
|
|
Shares |
|
|
Common stock of Concord III outstanding prior to the Business Combination |
|
|
|
|
Less: redemption of Concord III’s common stock |
|
|
( |
) |
Sponsor earnout common stock outstanding prior to the Business Combination |
|
|
|
|
Common stock of Concord III issued and outstanding |
|
|
|
|
Common stock issued in PIPE Financing |
|
|
|
|
Legacy GCT common stock |
|
|
|
|
Total common stock issued and outstanding |
|
|
|
|
The Business Combination was accounted for as a reverse recapitalization under U.S. GAAP because Legacy GCT was determined to be the accounting acquirer, and Concord III was identified as the accounting acquiree for financial reporting purposes. Accordingly, the consolidated financial statements of the Company represent a continuation of the consolidated financial statements of Legacy GCT, with the Business Combination treated as the equivalent of Legacy GCT issuing its common stock for the net assets of Concord III, accompanied by a recapitalization, and the net assets of Concord III were recorded at historical cost, with
Legacy GCT was determined to be the accounting acquirer based the following facts and circumstances:
PIPE Financing
Concurrent with the execution of the Business Combination Agreement, certain investors entered into agreements and committed to purchase in a private placement an aggregate of
Private Placement Warrants and Public Warrants
In November 2021, Concord III issued warrants to purchase shares of Concord III’s common stock that were assumed by the Company at the Closing of the Business Combination on the same terms and conditions: (i)
12
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The Private Placement Warrants were reallocated at the Closing of the Business Combination as follows: (i)
Subsequent to the Closing, the outstanding Private Placement Warrants and Public Warrants remained liability-classified as the applicable provisions precluding classification in equity did not change as a result of the Business Combination.
Legacy GCT Earnout Shares
At the Closing of the Business Combination, former Legacy GCT stockholders and other investors of Legacy GCT have the right to receive up to
In the event of a future transaction that results in a change in control in which shares of the Company common stock are converted into the right to receive cash or other consideration having a value equal to or in excess of a triggering event, then the Legacy GCT Earnout Shares subject to the applicable triggering event that have not been previously issued will be issued to the Legacy GCT stockholders effective as of immediately prior to the consummation of such transaction. In the event of a transaction that results in a change in control in which shares of Company common stock are converted into the right to receive cash or other consideration having a value less than a triggering event, then the Legacy GCT Earnout Shares subject to the applicable triggering event that have not been previously issued will be forfeited.
The Legacy GCT Earnout Shares were recognized at a fair value of approximately $
Sponsor Earnout Shares
Concurrently with entering into the Business Combination Agreement, the sponsor parties and the Company entered into that certain sponsor support agreement, as amended, modified, or supplemented (the “Sponsor Support Agreement”). Pursuant to the terms of the Sponsor Support Agreement, the sponsor parties have the right to receive up to
The Sponsor Earnout Shares were recognized at a fair value of approximately $
In July 2024, the number of Sponsor Earnout Shares subject to the market-based vesting condition was reduced to
13
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
4. Disaggregation of Revenue
All product revenue presented in the condensed consolidated statement of operations is recognized at a point in time, and all service revenue is recognized over time. Net revenues are categorized by customer location as follows (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
South Korea |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
United States |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Germany |
|
|
|
|
|
|
|
|
|
|
|
|
||||
China |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Contract Assets and Liabilities
Net revenues recognized during the nine months ended September 30, 2024 and 2023 for the amounts included in the contract liabilities balance at the beginning of the respective annual periods are less than $
As of September 30, 2024 and December 31, 2023, the contract assets were $
5. Fair Value of Measurements
Recurring Fair Value Measurements
The following financial instruments are measured at fair value on a recurring basis (in thousands):
|
|
September 30, 2024 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Convertible promissory notes |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
|
||
Warrant liabilities |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Common stock forward liability |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
|
|
December 31, 2023 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Convertible promissory notes |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
14
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Valuation techniques and the inputs
The table below presents valuation techniques and inputs used in the fair value measurement categorized within Level 3 of the fair value hierarchy (in thousands):
|
|
Valuation techniques |
|
Inputs |
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Convertible promissory notes, current |
|
Discounted Cash Flow Model (“DCF”) |
|
Discount rate, risk-free rate, credit spread, contractual cash flows |
|
$ |
|
|
$ |
— |
|
|
|
|
PWERM |
|
Scenario of initial public offering (“IPO”) and merger and acquisition (“M&A”) |
|
|
— |
|
|
|
|
|
Common stock forward liability |
|
DCF |
|
Various utilization scenarios, risk-free rate, remaining term |
|
|
|
|
|
— |
|
|
Convertible promissory notes, net of current |
|
Binomial Lattice Model (“BLM”) |
|
Stock price, volatility, remaining term, risk-free rate, credit spread |
|
|
|
|
|
— |
|
|
|
|
PWERM |
|
Scenario of initial public offering (“IPO”) and merger and acquisition (“M&A”) |
|
|
— |
|
|
|
|
|
Warrant liabilities |
|
Black Scholes Merton |
|
Exercise price, term to expiration, volatility, risk-free rate |
|
|
|
|
|
— |
|
|
As of September 30, 2024, the key inputs for the convertible promissory notes valuation using the DCF model were as follows: remaining term ranging from
As of September 30, 2024, the key inputs for the common stock forward valuation using the DCF model were as follows: a remaining term of
As of September 30, 2024, the key inputs for the private placement warrants using the BSM were as follows: exercise price of $
As of December 31, 2023, the PWERM was used as Legacy GCT was a private company. After the Closing, and as of September 30, 2024, the valuation techniques used reflect that the Business Combination was consummated.
The following table sets forth a summary of the changes in the fair value of the convertible promissory notes (in thousands):
As of December 31, 2023 |
|
$ |
|
|
Conversion |
|
|
( |
) |
Borrowing |
|
|
|
|
|
|
|
||
As of March 31, 2024 |
|
|
|
|
Repayment |
|
|
( |
) |
|
|
( |
) |
|
As of June 30, 2024 |
|
|
|
|
Repayment |
|
|
( |
) |
|
|
|
||
As of September 30, 2024 |
|
$ |
|
15
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table sets forth a summary of the changes in the fair value of the warrant liabilities (in thousands):
As of December 31, 2023 |
|
$ |
— |
|
Fair value of warrants assumed at Closing |
|
|
|
|
Change in fair value |
|
|
|
|
As of March 31, 2024 |
|
|
|
|
Change in fair value |
|
|
( |
) |
As of June 30, 2024 |
|
|
|
|
Change in fair value |
|
|
( |
) |
As of September 30, 2024 |
|
$ |
|
The following table sets forth a summary of the changes in the fair value of the common stock forward liability (in thousands):
As of March 31, 2024 |
|
$ |
— |
|
Loss from initial recognition |
|
|
|
|
Settlement in equity |
|
|
( |
) |
As of June 30, 2024 |
|
|
|
|
Settlement in equity |
|
|
( |
) |
As of September 30, 2024 |
|
$ |
|
6. Balance Sheet Components
Inventory
Inventories consist of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work-in-process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
Total inventory |
|
$ |
|
|
$ |
|
||
There were
Prepaid expenses and other assets
Prepaid expenses and other assets consist of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Prepaid expenses |
|
$ |
|
|
$ |
|
||
Prepaid insurance |
|
|
|
|
|
— |
|
|
Prepaid research and development |
|
|
|
|
|
— |
|
|
Prepaid inventory |
|
|
|
|
|
|
||
Lease deposit |
|
|
|
|
|
|
||
Other receivables and current assets |
|
|
|
|
|
|
||
Deferred transaction costs |
|
|
— |
|
|
|
|
|
Total prepaid expenses and other current assets |
|
$ |
|
|
$ |
|
||
16
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Accrued and other current liabilities
Accrued and other current liabilities consist of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Payroll and related expenses |
|
$ |
|
|
$ |
|
||
Accrued payables |
|
|
|
|
|
|
||
Other taxes payable |
|
|
|
|
|
|
||
Current portion of interest payable |
|
|
|
|
|
|
||
Professional fees |
|
|
|
|
|
|
||
Product warranty liabilities |
|
|
|
|
|
|
||
Royalty and license fee |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total accrued and other current liabilities |
|
$ |
|
|
$ |
|
||
7. Debt
The Company’s outstanding debt was as follows (in thousands):
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||||||||||
|
|
Outstanding |
|
|
Fair Value |
|
|
Outstanding |
|
|
Fair Value |
|
||||
Convertible promissory notes: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Historical convertible promissory notes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
2024 convertible promissory note |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Total convertible promissory notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
KEB Hana Bank |
|
|
|
|
|
|
|
|
|
|
|
|
||||
IBK Industrial Bank |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Note payable (one individual investor) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Mujin Electronics Co., Ltd. |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
M-Venture Investment, Inc. |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Anapass, Inc., related party |
|
|
|
|
|
|
|
|
|
|
|
|
||||
i Best Investment Co., Ltd |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Kyeongho Lee, related party |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total debt |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
||||
Less: current portion |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Debt, net of current portion |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Expected future minimum principal payments under the Company’s total debt is as follows as of September 30, 2024 (in thousands):
Years |
|
Convertible |
|
|
Borrowings |
|
|
Total |
|
|||
2024, remainder |
|
$ |
|
|
$ |
|
|
$ |
|
|||
2025 |
|
|
|
|
|
|
|
|
|
|||
2026 |
|
|
|
|
|
— |
|
|
|
|
||
Total debt |
|
$ |
|
|
$ |
|
|
$ |
|
|||
17
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Convertible Promissory Notes
Historical Convertible Promissory Notes
Between 2017 and 2022, the Company issued convertible promissory notes to various investors with maturity dates ranging from October 2020 to April 2025. The annual interest rates varied between
2023 and 2024 Convertible Promissory Notes
In November 2023, February 2024 and March 2024, the Company issued convertible promissory notes to certain investors (the “CVT Investors”), pursuant to which the CVT Investors agreed to lend to the Company an aggregate principal amount of $
In February 2024, the Company issued a convertible promissory note to a strategic investor for a principal amount of $
Borrowings Pursuant to Term Loan and Security Agreements
The amounts in Korean Won (“KRW”) presented below were converted into US dollars based on the applicable historical exchange rates.
KEB Hana Bank
In July 2016, the Company entered into an unsecured term loan agreement with KEB Hana Bank, pursuant to which it borrowed
IBK Industrial Bank
In January 2017, the Company entered into a term loan agreement with IBK Industrial Bank, pursuant to which the Company borrowed KRW
18
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note Payable (One Individual Investor)
In June 2021, the Company entered into a note payable agreement with an individual investor, pursuant to which the Company borrowed $
M-Venture Investment, Inc.
In October 2021, the Company entered into a term loan and security agreement with M-Venture Investment, Inc. pursuant to which the Company borrowed KRW
In April 2022, the Company entered into a term loan and security agreement with M-Venture Investment, Inc., pursuant to which the Company borrowed amounts in two draws of KRW
Mujin Electronics Co., Ltd.
In July 2024, the Company executed agreement with M-Venture Investment, Inc. and Mujin Electronics Co., Ltd., in which Mujin Electronics Co., Ltd. fully assumed the remaining M-Venture Loan with the same principal amount of KRW
Anapass, Inc., Related Party
In July 2016, the Company entered into a loan agreement with Anapass, Inc. pursuant to which the Company borrowed KRW
In May and September 2022, the Company entered into two term loan agreements with Anapass, Inc. pursuant to which the Company borrowed KRW
i Best Investment Co., Ltd
Between 2022 and 2023, the Company entered into multiple term loans and security agreements with i Best Investment Co., Ltd pursuant to which it borrowed principal amounts in six draws with an aggregate principal balance of KRW
19
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Kyeongho Lee, Related Party
Between 2017 and 2021, the Company entered into multiple promissory note and term loan agreements with Kyeongho Lee pursuant to which the Company borrowed (a) KRW
8. Commitments and Contingencies
Litigations
The Company is subject to various claims arising in the ordinary course of business. Although no assurance can be given, the Company believes that it is not a party to any litigation of which the outcome, if determined adversely, would individually, or in the aggregate, be reasonably expected to have a material adverse effect on the business, consolidated operating results, cash flows or financial position of the Company as of September 30, 2024.
Third parties have from time to time claimed, and others may claim in the future, that the Company has infringed their past, current or future intellectual property rights. These claims, whether meritorious or not, could be time-consuming, result in costly litigation, require expensive changes in the Company’s methods of doing business or could require the Company to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm the Company’s business, consolidated operating results, cash flows, and financial position.
Purchase Commitments
The Company has certain commitments for outstanding purchase orders related to the manufacture of certain wafers utilized by the Company and other services that, once the wafers are placed into production, are noncancelable. Otherwise, these production agreements are cancellable at any time with the Company required to pay all costs incurred through the cancellation date. However, the Company does not have a history of cancelling these agreements once production has started. As of September 30, 2024, the Company had outstanding noncancelable purchase commitments for these production agreements of $
Samsung Agreement Liability Release
In July 2020, the Company entered into a research and development agreement with Samsung Electronics Co., Ltd (“Samsung”). According to the agreement, the Company would design 5G chip products and Samsung would provide development and intellectual property support, mass production set up support including mask sets for manufacturing and engineering sample chip supply to the Company for a specific product. The total fee amount for the research and development (“R&D”) services pursuant to the agreement was $
Alpha Foundry Product Development Agreement
In February 2024, the Company and Alpha Holdings Co., Ltd. (“Alpha”) entered into a foundry product development agreement related to 5G chip development for a total fee of $
20
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Assets Pledged as Collateral
The Company has provided collateral to Anapass, Inc., a related party (see Note 14), for borrowings from KEB Hana Bank, IBK Industrial Bank and Anapass, Inc. in the amount of $
The following table includes a summary of the carrying amounts related to collateral provided to Anapass, Inc. (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Accounts receivable |
|
|
|
|
|
|
||
Inventory |
|
|
|
|
|
|
||
Property and equipment |
|
|
|
|
|
|
||
Intangible assets and others |
|
|
|
|
|
|
||
9. Common Stock
B. Riley Purchase Agreement
Pursuant to the Purchase Agreement, the Company has the right, but not the obligation, to sell to B. Riley, from time to time, up to $
The Purchase Agreement was determined to be an equity-linked contract that contains a purchased put option on the Company’s common stock and variable share forward. These freestanding instruments are precluded from equity classification since the Purchase Agreement requires shareholder approval for the issuance of shares in excess of the applicable ownership limitation caps, which is not an input in a fixed-for-fixed option or forward on equity shares.
As of April 2024, the Company determined that the fair value of the put option was nominal due to the short settlement period of one day or less, and the Company recognized a liability of $
In connection with the Purchase Agreement, the Company issued
During the three months ended June 30, 2024, the Company sold an aggregate of
During the three months ended September 30, 2024, the Company sold an aggregate of
21
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Issuance of Common Stock to Underwriter
In April 2024, the Company authorized the issuance of
Private Placement
In September 2024, the Company executed a securities purchase agreement with Anapass, Inc, and issued
Common Stock Reserved for Issuance
Upon the Closing of the Business Combination in March 2024, the Company increased its total number of authorized shares to
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Common stock warrants |
|
|
|
|
|
|
||
Legacy GCT Earnout Shares |
|
|
|
|
|
— |
|
|
Shares available for future grant from 2024 plan |
|
|
|
|
|
— |
|
|
Convertible promissory notes |
|
|
|
|
|
|
||
Options issued and outstanding |
|
|
|
|
|
|
||
Shares available for future grant from 2024 ESPP |
|
|
|
|
|
— |
|
|
RSUs outstanding |
|
|
|
|
|
|
||
Shares available for future grant from 2011 plan |
|
|
— |
|
|
|
|
|
Total |
|
|
|
|
|
|
||
10. Warrants
The following table represents a summary of warrants to purchase shares of the Company’s common stock that are outstanding (in thousands, except for exercise price):
Issue Date |
|
September 30, 2024 |
|
|
Exercise Price |
|
Expiration |
|
February 2023 - June 2023 |
|
|
|
|
$ |
|
February 2026 – June 2026 |
|
July 2023 |
|
|
|
|
$ |
|
July 2026 |
|
October 2023 |
|
|
|
|
$ |
|
October 2026 |
|
Private and public warrants |
|
|
|
|
$ |
|
March 2029 |
|
September 2024 |
|
|
|
|
$ |
|
September 2029 |
|
Total |
|
|
|
|
|
|
|
|
22
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
11. Stock-Based Compensation
2011 Incentive Compensation Plan
Legacy GCT’s 2011 Incentive Compensation Plan (the “2011 Plan”) permitted the grant of options, stock awards, and RSUs. In connection with the Closing of the Business Combination, the 2011 Plan was terminated, the remaining unallocated shares reserved under the 2011 Plan were cancelled. In March 2024, each award of Legacy GCT stock options and RSUs were converted into equivalent Company stock options and RSUs with the same terms and conditions under the plan described below.
2024 Incentive Compensation Plan
In March 2024, the Company adopted the 2024 Omnibus Incentive Compensation Plan (the “2024 Plan”), under which
Stock options outstanding under the 2024 Plan were as follows (in thousands, except per share amounts and years):
|
|
Number of |
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
||||
Balance as of December 31, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Reverse recapitalization |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
Balance as of December 31, 2023(1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercised |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Balance as of September 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Vested and expected to vest as of September 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Exercisable as of September 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Founder Awards to Board of Directors
In 2021, an aggregate of
Restricted Stock Units
In December 2023, various employees and directors of Legacy GCT were granted
In June 2024, the Company granted to the members of its board of directors certain share-based awards with a fixed monetary amount of $
23
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
In August 2024, the Company granted various employees
RSUs outstanding under the 2024 Plan were as follows (in thousands, except per share amounts):
|
|
Number of RSUs |
|
|
Weighted |
|
||
Balance as of December 31, 2023 |
|
|
|
|
$ |
|
||
Reverse recapitalization |
|
|
( |
) |
|
|
|
|
Balances as of December 31, 2023(1) |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Cancelled |
|
|
( |
) |
|
|
|
|
Balance as of September 30, 2024 |
|
|
|
|
$ |
|
||
The Company recognized $
Stock-Based Compensation
The following table summarizes stock-based compensation included in the Company’s condensed consolidated statements of operations:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Cost of revenues |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales and marketing |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
12. Income Taxes
For financial reporting purposes, the Company’s effective tax rate used for the interim periods is based on the estimated full-year income tax rate. For the three and nine months ended September 30, 2024, the Company’s effective tax rate differs from the statutory rate primarily due to the valuation allowance recorded against the net deferred tax asset balance.
For the nine months ended September 30, 2024 and 2023, the Company recorded income tax of $
As of September 30, 2024 the Company had unrecognized tax benefits of $
A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most likely outcome. The Company adjusts these reserves, as well as the related interest, considering changing facts and circumstances.
24
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
13. Employee Benefit Plans
Under Korean law, the Company is required to make severance payments to Korean employees leaving their employment. The Company’s severance pay liability to its Korean employees, which is a function of the employee’s salary, years of employment, and severance factor, is reflected in the accompanying unaudited condensed consolidated balance sheets as the net defined benefit liabilities on an accrual basis.
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Liability for severance payments, gross |
|
$ |
|
|
$ |
|
||
Plan assets |
|
|
( |
) |
|
|
( |
) |
Liability for severance payments, net |
|
$ |
|
|
$ |
|
||
14. Related Party Transactions
A summary of balances and transactions with the related parties who are stockholders of the Company were as follows (in thousands):
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||||||||||
|
|
Anapass |
|
|
Kyeongho Lee |
|
|
Anapass |
|
|
Kyeongho Lee |
|
||||
Borrowings |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
For each of the three and nine months ended September 30, 2024, the Company recorded $
15. Segments and Information
The Company operates in
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
South Korea |
|
$ |
|
|
$ |
|
||
United States |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
16. Net Loss Per Share
The following outstanding potentially dilutive common stock equivalents were excluded from the computation of diluted net loss per share for the periods indicated because including them would have been antidilutive (in thousands):
|
|
September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Warrants |
|
|
|
|
|
|
||
Legacy GCT Earnout Shares |
|
|
|
|
|
— |
|
|
Sponsor Earnout Shares |
|
|
|
|
|
— |
|
|
Convertible promissory notes |
|
|
|
|
|
|
||
Options |
|
|
|
|
|
|
||
RSU |
|
|
|
|
|
— |
|
|
Total |
|
|
|
|
|
|
||
25
GCT SEMICONDUCTOR HOLDING, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
17. Subsequent Events
Mujin Electronics Co., Ltd.
i Best Investment Co., Ltd
Historical Convertible Promissory Notes
In October 2024, the Company repaid one of the convertible promissory notes that was issued in 2017 with a principal amount of $
Purchase Agreement
In October 2024, the Company sold
Kyeongho Lee, Related Party
In November 2024, the Company entered into a term loan agreement with Kyeongho Lee, a member of the Company’s board of directors, pursuant to which the Company borrowed KRW
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
On March 26, 2024 (the “Closing Date” or “Closing”), GCT Semiconductor, Inc. (“Legacy GCT”) and Concord Acquisition Corp III, a Delaware corporation (“Concord III”), consummated the Merger pursuant to the Business Combination Agreement and Concord III changed its name to GCT Semiconductor Holding, Inc. (“GCT”). As a result, the financial statements of Legacy GCT are now the financial statements of GCT. This discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2024 and related notes appearing elsewhere in this Quarterly Report and Legacy GCT’s audited consolidated financial statements as of and for the years ended December 31, 2023 and 2022 and related notes included in our Form 8‑K filing with the Securities and Exchange Commission (“SEC”) on April 1, 2024.
This discussion may contain forward-looking statements including, but not limited to, our expectations or predictions of future financial or business performance or conditions. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions. You should read the sections in this Quarterly Report titled “Risk Factors” and “Special Note of Forward-Looking Statements” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by these forward-looking statements. Unless otherwise indicated, the terms “GCT,” “the Company,” “we,” “us,” or “our” refer to GCT Semiconductor Holding Inc., a Delaware corporation, together with our consolidated subsidiaries.
Overview
We are a fabless semiconductor company that specializes in the design, manufacturing and sale of communication semiconductors, including high-speed wireless communication technologies such as 5G/4.75G/4.5G/4G transceivers (“RF”) and modems, which are essential for a wide variety of industrial, B2B and consumer applications. We have successfully developed and supplied communication semiconductor chipsets and modules to leading wireless operators worldwide, as well as to original design manufacturers (“ODMs”) and original equipment manufacturers (“OEMs”) for portable wireless routers (e.g., Mobile Router/MiFi), indoor and outdoor fixed wireless routers (e.g., CPE), industrial M2M applications and smartphones.
We oversee sales, marketing, and accounting operations from our headquarters in San Jose, California. The Company conducts product design, development, and customer support through our wholly owned subsidiaries located in South Korea, one of which serves as our research and development center. In addition, we utilize separate sales offices for local technical support and sales in Taiwan, China, and Japan.
Our current product portfolio includes RF and modem chipsets based on 4th generation (“4G”), known as Long Term Evolution (“LTE”), technology offering a variety of chipsets differentiated by speed and functionality. These include 4G LTE, 4.5G LTE Advanced (twice the speed of LTE), and 4.75G LTE Advanced-Pro (four times the speed of LTE) chipsets. The Company also develops and sells cellular Internet of Things (“IoT”) chipsets for low-speed mobile networks such as eMTC/NB- IOT/Sigfox, and other network protocols.
Since inception, we have financed our operations primarily through cash receipts from customers, the issuance of convertible promissory notes, borrowings, issuance of capital stock, and the exercise of stock options.
Business Combination
On the Closing Date, Concord III, a Delaware corporation, consummated a series of transactions that resulted in the combination of Gibraltar Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Concord III (“Merger Sub”), and Legacy GCT, pursuant to a Business Combination Agreement, dated November 2, 2023 (the “Business Combination Agreement”), by and among Concord III, Merger Sub and Legacy GCT. Pursuant to the terms of the Business Combination Agreement, Merger Sub merged with and into Legacy GCT, with Legacy GCT surviving the merger as a wholly-owned subsidiary of Concord III (the “Business Combination”). On the Closing Date, Concord III changed its name from Concord III to “GCT Semiconductor Holding, Inc.”
The Business Combination was accounted for as a reverse recapitalization, with Legacy GCT being the accounting acquirer and Concord III being the acquired company for financial reporting purposes. As a result, Legacy GCT’s consolidated financial statements for historical periods will be included in GCT’s future periodic reports filed with the SEC.
The Company received $17.2 million cash proceeds from the Business Combination and private investment from public equity financing (“PIPE Financing”), net of transaction costs. Total direct and incremental transaction costs of Concord III and Legacy GCT were $22.0 million and treated as a reduction of the cash proceeds, of which $8.9 million was deducted from additional paid-in capital for underwriting, accounting, legal and other fees, and the remaining balance of $13.1 million was expensed in the period incurred by Concord III.
27
Key Factors Affecting Our Performance
We believe that our future success and financial performance depend on a number of factors that present significant opportunities for our business but also pose risks and challenges, including those in the section titled “Risk Factors” of this Quarterly Report.
Commercial Deployment of 4G LTE and 5G Market
Our business depends upon the continued commercial deployment of 4G and 5G wireless communications equipment, products, and services based on GCT’s technology. Deployment of new networks by wireless carriers requires significant capital expenditures well in advance of any revenue from such networks. If the rate of deployment of new networks by wireless carriers is slower than our expectation, this will reduce the sales of its products and could cause OEMs and ODMs to hold excess inventory. This would harm our revenues and our financial results. The worldwide commercial deployment and adoption of the narrow band LTE variants, Cat M and Cat NB, are expected to expand further the markets for Internet of Things devices. If deployments of the Cat M or Cat NB standards are delayed or if competing standards for Internet of Things devices become favored by wireless carriers, we may not be able to successfully increase sales of our Cat M and Cat NB products, which would harm our revenues and financial results.
Development of New Products
The markets in which we and our customers compete or plan to compete are characterized by rapidly changing technologies, industry standards, and technological obsolescence. Our ability to compete successfully depends on our ability to design, develop, market, and support new products and enhancements on a timely and cost-effective basis. A fundamental shift in technologies in any of our target markets, such as the 5G wireless communications markets, could harm our competitive position within these markets. Our failure to anticipate these shifts, develop new technologies, or react to changes in existing technologies could delay our development of new products, which could result in product obsolescence, decreased revenue, and loss of design wins.
The success of our new products will depend on accurate forecasts of long-term market demand, customer and consumer requirements, and future technological developments, as well as a variety of specific implementation factors, including:
If we fail to introduce new products that meet the demands of our customers or our target markets, or if we fail to penetrate new markets, our revenue will likely decrease over time, and our financial condition could suffer.
Semiconductor and Communications Industry
The semiconductor industry has historically exhibited a pattern of cyclicality, which at various times has included significant downturns in customer demand. Cyclical downturns can result in substantial declines in semiconductor demand, production overcapacity, high inventory levels, and accelerated erosion of average selling prices. Such downturns result from a variety of market forces, including constant and rapid technological change, quick product obsolescence, price erosion, evolving standards, short product life cycles, and wide fluctuations in product supply and demand.
28
Downturns in the semiconductor industry have been attributed to a variety of factors, including the COVID‑19 pandemic, ongoing trade disputes between the United States and China, weakness in demand and pricing for semiconductors across applications, and excess inventory. In addition, from the end of 2022, the semiconductor industry experienced a downturn due to inventory corrections and reduced consumer demands. These downturns have directly impacted GCT’s business, suppliers, distributors, and end customers. More recently the semiconductor industry has normalized however there have been lingering effects that continue to effect certain segments including that for 4G LTE, where channel inventories continue to exist and where demand has been reduced due to expedited customer transition from 4G LTE to 5G.
Because a significant portion of our expenses are fixed in the near term or are incurred in advance of anticipated sales, we may not be able to reduce our expenses rapidly enough to offset any unanticipated shortfall in revenue. If this situation were to occur, it could adversely affect our operating results, cash flow, and financial condition. In addition, the semiconductor industry has periodically experienced increased demand and production constraints. As a fabless semiconductor company, we rely exclusively on third-party foundries, including certain major semiconductor foundries such as UMC, Alpha and TSMC, for the manufacturing and supplies of its wafers and products. We do not have any formal foundry agreements that guarantee a minimum level of manufacturing capacity. In times of significant increasing demand for capacity, these foundries may experience production shortages and may not allocate sufficient manufacturing capacity to us. If this happens, we may not be able to produce sufficient quantities of our products to meet the increased demand. Any disruption in our supply chain can make it more difficult for us to obtain sufficient wafer, assembly, and test resources from our subcontract manufacturers. Any factor adversely affecting the semiconductor industry in general, or the particular segments of the industry that our products target, may adversely affect our ability to generate revenue and impact our operating results.
In addition, a shortage of manufacturing capacity can also impact the product development strategies of our major customers, which may, in turn, affect our business operations. For example, in 2022, the supply shortage caused our largest customer to change its priority on product development from 4G to the next generation of 5G products, which resulted in the reduction of 4G activity and a decline in demand for our products. Our business is expected to increase again with this customer after the launch of our 5G products.
In the past, the wireless communications industry has experienced pronounced downturns, and these cycles may continue in the future. A future decline in global economic conditions could have adverse, wide-ranging effects on demand for our products and for the products of our customers, particularly wireless communications equipment manufacturers or other members of the wireless industry, such as wireless network operators. Inflation, deflation, and economic recessions that adversely affect the global economy and capital markets also adversely affect our customers and our end consumers. For example, our customers’ ability to purchase or pay for our products and services, obtain financing, and upgrade wireless networks could be adversely affected, which may lead to many networking equipment providers slowing their research and development activities, canceling, or delaying new product development, reducing their inventories, and taking a cautious approach to acquiring our products, which would have a significant negative impact on our business. If this situation were to occur, it could adversely affect our operating results, cash flow, and financial condition. In the future, any of these trends may also cause our operating results to fluctuate significantly from year to year, which may increase the volatility of our stock price.
Public Company Costs
As a result of the Business Combination, we became the successor to an SEC-registered and NYSE-listed company, which requires us to hire additional personnel and implement procedures and processes to address and comply with public company regulatory requirements and customary practices. We have incurred, and expect to continue to incur, additional expenses as a public company including directors’ and officers’ liability insurance premiums, director fees, and additional internal and external accounting, legal and administrative costs.
Key Components of Results of Operations
Net Revenues
The timing of revenue recognition and the amount of revenue recognized in each case depends on various factors, including the specific terms of each arrangement and the nature of the underlying performance obligations. Our net revenues are comprised of product and service revenues.
29
Product Revenues
Our product sales are generated from the sale of mobile semiconductor products. Product revenues are recognized at a point in time once control has been transferred to a customer, which is generally at the time of shipment.
Service Revenues
Our service revenues are generated from the sale of mobile semiconductor platform solutions aimed at the 4G LTE and 5G industries, development services, technical advice, and maintenance services. Service revenues are generally recognized over time as the customer obtains control of the promised services.
Cost of Net Revenues
Our cost of net revenues consists of product and service costs. The cost of product net revenues consists of direct and indirect costs related to the manufacturing of our products. Direct costs include wafer costs and costs of assembly and testing performed by third-party contract manufacturers. Indirect costs consist of provisions for excess and obsolete inventory, royalties, allocated overhead for employee costs and facility costs, warranty, and the amortization of our production mask sets and certain intangible assets. Shipping and handling costs incurred for inventory purchases related to the units sold and costs of product shipments are also recorded in the cost of net product revenues. Service costs consist of non-recurring engineering costs for service projects.
Operating Expenses
Research and Development Expenses
Our research and development (“R&D”) expenses consist of costs incurred to develop our products and services. These expenses consist of personnel costs, including salaries, employee benefit costs, and stock-based compensation for employees engaged in R&D activities, software costs, computing costs, hardware and experimental supplies, and expenses for outside engineering consultants. We expense all R&D costs in the periods in which they are incurred.
Sales and Marketing Expenses
Our sales and marketing (“S&M”) expenses consist of employee-related expenses, including salaries, commissions, employee benefits costs, and stock-based compensation for all marketing, sales, and sales support employees. S&M expenses also include local and centralized advertising costs and the infrastructure required to support our marketing efforts. We expense S&M costs in the periods in which they are incurred.
General and Administrative Expenses
Our general and administrative (“G&A”) expenses consist of various components not related to R&D or S&M, such as personnel costs, regulatory fees, costs associated with maintaining and filing intellectual property, meals and entertainment expenses, travel expenses, insurance expenses, and other expenditures related to external professional services including legal, engineering, marketing, human resources, audit, and accounting services. Personnel costs include salaries, benefits, and stock-based compensation. As we continue to grow and expand our workforce and operations, and considering the increased costs associated with operating as a public company, we anticipate that our G&A expenses will increase for the foreseeable future.
Gain on Extinguishment of Liability
Gain on extinguishment of liability relates to the release by a vendor due to a contract termination during the period of amounts payable by us for research and development services received in prior years.
Interest Expense
Interest expense primarily consists of interest and amortization of related debt issuance costs related to our borrowings and convertible promissory notes.
Other Income (Expenses), Net
Other income (expenses), net consists of foreign currency gains and losses, changes in fair value of convertible promissory notes, gains and losses associated with the redemption of convertible notes, and other miscellaneous income and expenses.
30
Results of Operations
This section discusses the results of our operations for the periods indicated. The period-to-period comparison of financial results is not necessarily indicative of future results.
For the Three Months Ended September 30, 2024 and 2023
The following table sets forth our historical results for the periods indicated and the changes between periods (in thousands):
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|||||||
|
|
2024 |
|
|
2023 |
|
|
$ change |
|
|
% change |
|
||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product |
|
$ |
1,715 |
|
|
$ |
4,026 |
|
|
$ |
(2,311 |
) |
|
|
(57 |
)% |
Service |
|
|
895 |
|
|
|
450 |
|
|
|
445 |
|
|
|
99 |
% |
Total net revenues |
|
|
2,610 |
|
|
|
4,476 |
|
|
|
(1,866 |
) |
|
|
(42 |
)% |
Cost of net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product |
|
|
710 |
|
|
|
3,985 |
|
|
|
(3,275 |
) |
|
|
(82 |
)% |
Service |
|
|
274 |
|
|
|
(36 |
) |
|
|
310 |
|
|
|
(861 |
)% |
Total cost of net revenues |
|
|
984 |
|
|
|
3,949 |
|
|
|
(2,965 |
) |
|
|
(75 |
)% |
Gross profit |
|
|
1,626 |
|
|
|
527 |
|
|
|
1,099 |
|
|
|
209 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
|
4,210 |
|
|
|
2,367 |
|
|
|
1,843 |
|
|
|
78 |
% |
Sales and marketing |
|
|
949 |
|
|
|
744 |
|
|
|
205 |
|
|
|
28 |
% |
General and administrative |
|
|
2,379 |
|
|
|
1,433 |
|
|
|
946 |
|
|
|
66 |
% |
Total operating expenses |
|
|
7,538 |
|
|
|
4,544 |
|
|
|
2,994 |
|
|
|
66 |
% |
Loss from operations |
|
|
(5,912 |
) |
|
|
(4,017 |
) |
|
|
(1,895 |
) |
|
|
47 |
% |
Interest expense |
|
|
(667 |
) |
|
|
(1,220 |
) |
|
|
553 |
|
|
|
(45 |
)% |
Other income (expenses), net |
|
|
(481 |
) |
|
|
929 |
|
|
|
(1,410 |
) |
|
|
(152 |
)% |
Loss before provision for income taxes |
|
|
(7,060 |
) |
|
|
(4,308 |
) |
|
|
(2,752 |
) |
|
|
64 |
% |
Provision for income taxes |
|
|
61 |
|
|
|
38 |
|
|
|
23 |
|
|
|
61 |
% |
Net loss |
|
$ |
(7,121 |
) |
|
$ |
(4,346 |
) |
|
$ |
(2,775 |
) |
|
|
64 |
% |
Net Revenues
Net revenues decreased by $1.9 million, or 42%, to $2.6 million for the three months ended September 30, 2024 from $4.5 million for the three months ended September 30, 2023. The decrease was primarily attributable to a decrease of $2.3 million in product sales, partially offset by an increase of $0.4 million in service revenue.
Product sales decreased by $2.3 million from $4.0 million for the three months ended September 30, 2023 to $1.7 million for the three months ended September 30, 2024. The decrease was due to excess LTE channel inventory and our largest customers changing their priorities on product development from 4G to the next generation 5G products during 2023, which resulted in the reduction of 4G activity and decline for demand during the three months ended September 30, 2024. Our net revenues are expected to increase with these customers after the launch of our 5G products.
Service revenues increased by $0.4 million, from $0.5 million for the three months ended September 30, 2023 to $0.9 million for the three months ended September 30, 2024. This increase was due to more significant service projects that were ongoing in the third fiscal quarter of 2024.
Cost of Net Revenues
Cost of net revenues decreased by $3.0 million, or 75%, to $1.0 million for the three months ended September 30, 2024 from $3.9 million for the three months ended September 30, 2023. Product costs decreased by $3.3 million from $4.0 million for the three months ended September 30, 2023 to $0.7 million for the three months ended September 30, 2024. The decrease was primarily driven by a decrease in direct product costs as we sold fewer units. Service costs were $0.3 million for the three months ended September 30, 2024. Service costs were nominal for the three months ended September 30, 2023.
31
Our gross margin increased to 62% for the three months ended September 30, 2024 from 12% for the three months ended September 30, 2023 primarily due to changes in the revenue mix. Specifically, we increased the share of reference platform sales and generated higher margins from our service offerings during the third fiscal quarter of 2024.
Research and Development Expenses
Research and development expenses increased by $1.8 million, or 78%, from $2.4 million for the three months ended September 30, 2023 to $4.2 million for the three months ended September 30, 2024. This change was primarily due to a $1.5 million increase in research and development expenses mainly related to professional services provided by Alpha related to the design of 5G chip products.
Sales and Marketing Expenses
Sales and marketing expenses increased by $0.2 million, or 28%, from $0.7 million for the three months ended September 30, 2023 to $0.9 million for the three months ended September 30, 2024. This increase was primarily due to personnel-related costs.
General and Administrative Expenses
General and administrative expenses increased by $0.9 million, or 66%, from $1.4 million for the three months ended September 30, 2023 to $2.4 million for the three months ended September 30, 2024. The change was primarily due to a $0.4 million increase in stock-based compensation related to RSUs, a $0.4 million increase in professional and other expenses related to the public company operations, and a $0.1 million increase in personnel-related costs.
Interest Expense
Interest expense decreased by $0.6 million or 45%, from $1.2 million for the three months ended September 30, 2023 to $0.7 million for the three months ended September 30, 2024. The decrease was primarily due to the conversion of significant amounts of outstanding convertible notes upon the closing of the Business Combination.
Other Income (Expenses), Net
Other expenses, net for the three months ended September 30, 2024 of $0.5 million was primarily from the loss of $1.0 million on foreign currency transactions and $0.2 million loss from the change in fair value of convertible promissory notes, partially offset by a $0.8 million gain on warrants valuation. Other income, net for the three months ended September 30, 2023 of $0.9 million was primarily from gains on foreign currency transactions.
32
For the Nine Months Ended September 30, 2024 and 2023
The following table sets forth our historical results for the periods indicated and the changes between periods (in thousands):
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|||||||
|
|
2024 |
|
|
2023 |
|
|
$ change |
|
|
% change |
|
||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product |
|
$ |
4,111 |
|
|
$ |
8,667 |
|
|
$ |
(4,556 |
) |
|
|
(53 |
)% |
Service |
|
|
3,232 |
|
|
|
3,172 |
|
|
|
60 |
|
|
|
2 |
% |
Total net revenues |
|
|
7,343 |
|
|
|
11,839 |
|
|
|
(4,496 |
) |
|
|
(38 |
)% |
Cost of net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product |
|
|
1,522 |
|
|
|
5,954 |
|
|
|
(4,432 |
) |
|
|
(74 |
)% |
Service |
|
|
1,321 |
|
|
|
1,006 |
|
|
|
315 |
|
|
|
31 |
% |
Total cost of net revenues |
|
|
2,843 |
|
|
|
6,960 |
|
|
|
(4,117 |
) |
|
|
(59 |
)% |
Gross profit |
|
|
4,500 |
|
|
|
4,879 |
|
|
|
(379 |
) |
|
|
(8 |
)% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
|
13,895 |
|
|
|
7,254 |
|
|
|
6,641 |
|
|
|
92 |
% |
Sales and marketing |
|
|
2,921 |
|
|
|
2,337 |
|
|
|
584 |
|
|
|
25 |
% |
General and administrative |
|
|
8,075 |
|
|
|
5,537 |
|
|
|
2,538 |
|
|
|
46 |
% |
Gain on extinguishment of liability |
|
|
(14,636 |
) |
|
|
— |
|
|
|
(14,636 |
) |
|
|
100 |
% |
Total operating expenses |
|
|
10,255 |
|
|
|
15,128 |
|
|
|
(4,873 |
) |
|
|
(32 |
)% |
Loss from operations |
|
|
(5,755 |
) |
|
|
(10,249 |
) |
|
|
4,494 |
|
|
|
(44 |
)% |
Interest expense |
|
|
(3,509 |
) |
|
|
(4,878 |
) |
|
|
1,369 |
|
|
|
(28 |
)% |
Other income, net |
|
|
2,044 |
|
|
|
2,946 |
|
|
|
(902 |
) |
|
|
(31 |
)% |
Loss before provision for income taxes |
|
|
(7,220 |
) |
|
|
(12,181 |
) |
|
|
4,961 |
|
|
|
(41 |
)% |
Provision for income taxes |
|
|
187 |
|
|
|
125 |
|
|
|
62 |
|
|
|
50 |
% |
Net loss |
|
$ |
(7,407 |
) |
|
$ |
(12,306 |
) |
|
$ |
4,899 |
|
|
|
(40 |
)% |
Net Revenues
Net revenues decreased by $4.5 million, or 38%, from $11.8 million for the nine months ended September 30, 2023 to $7.3 million for the nine months ended September 30, 2024. The decrease was primarily due to a decrease of $4.6 million in product sales.
Product sales decreased by $4.6 million, or 53%, from $8.7 million for the nine months ended September 30, 2023 to $4.1 million for the nine months ended September 30, 2024. This decrease is driven by a reduction of $4.7 million of LTE product sales partially offset by an increase of $0.1 million in LTE platform sales. This trend was primarily due to excess LTE channel inventory and the changing priorities of our largest customers that shifted their focus to the next generation 5G products. Our net revenues are expected to increase with these customers after we launch our 5G products. Service revenues remained comparable for both the nine months ended September 30, 2024 and 2023.
Cost of Net Revenues
Cost of net revenues decreased by $4.1 million, or 59%, from $7.0 million for the nine months ended September 30, 2023 to $2.8 million for the nine months ended September 30, 2024, driven primarily by the reduction in our product sales. Product costs decreased by $4.4 million, or 74%, from $6.0 million for the nine months ended September 30, 2023 to $1.5 million for the nine months ended September 30, 2024. This decrease in product costs was driven primarily by the reduction in direct product costs as we sold fewer units. Service costs increased by $0.3 million, or 31%, from $1.0 million for the nine months ended September 30, 2023 to $1.3 million for the nine months ended September 30, 2024. This increase in service costs was driven primarily by requirements of our ongoing service projects in 2024.
Our gross margins increased to 61% for the nine months ended September 30, 2024 compared to 41% for the nine months ended September 30, 2023 primarily due to changes in the revenue mix. Specifically, we increased the share of reference platform sales and generated higher margins from our service offerings during the nine months ended September 30, 2024.
Research and Development Expenses
Research and development expenses increased by $6.6 million, or 92% from $7.3 million for the nine months ended September 30, 2023 to $13.9 million for the nine months ended September 30, 2024, primarily in connection with our development projects. This increase
33
was primarily due to a $4.2 million increase in research and development expenses mainly related to professional services provided by Alpha related to the design of 5G chip products, a $2.1 million increase in expensed intellectual property costs related to our new 5G chip products, and a $0.4 million increase in stock-based compensation expense, partially offset by a $0.2 million decrease in personnel costs.
Sales and Marketing Expenses
Sales and marketing expenses increased by $0.6 million, or 25%, from $2.3 million for the nine months ended September 30, 2023 to $2.9 million for the nine months ended September 30, 2024. This change was primarily due to increase in personnel related costs.
General and Administrative Expenses
General and administrative expenses increased by $2.5 million, or 46%, from $5.5 million for the nine months ended September 30, 2023 to $8.1 million for the nine months ended September 30, 2024. The change was primarily due to a $1.6 million increase in stock-based compensation related to the vesting of equity awards with performance conditions met upon the closing of the Business Combination and a $0.8 million increase in professional expenses related to the public company operations.
Gain on Extinguishment of Liability
Gain on extinguishment of liability was $14.6 million for the nine months ended September 30, 2024 due to the release by a vendor of amounts payable by us for research and development services received in prior years. There was no similar transaction that took place during the comparable period of 2023.
Interest Expense
Interest expense decreased by $1.4 million, or 28%, from $4.9 million for the nine months ended September 30, 2023 to $3.5 million for the nine months ended September 30, 2024. The decrease of $1.4 million was primarily due to the conversion of significant amounts of outstanding convertible notes upon the closing of the Business Combination.
Other Income, Net
Other income, net for the nine months ended September 30, 2024 of $2.0 million was primarily from the net gain of $2.8 million from fair value remeasurement of our warrants based on the reduction in our stock price during the period then ended, a gain of $1.2 million from foreign currency transactions, partially offset by a net loss of $1.4 million related to the fair value measurement of our convertible promissory notes and a $0.6 million loss from the fair value measurement of our common stock forward liability. Other income, net for the nine months ended September 30, 2023 of $2.9 million was primarily from the fair value measurement of our convertible promissory notes and foreign currency gains.
Non-GAAP Financial Measures
Since inception, we have financed our operations primarily through cash receipts from customers, the issuance of convertible promissory notes, borrowings, issuance of capital stock and the exercise of stock options.
The discussion below includes earnings or losses before interest, taxes, depreciation and amortization (“EBITDA”), Adjusted EBITDA, and Free Cash Flow, as defined below, which are not determined under accounting principles generally accepted in the United States (“non-GAAP financial measures”). Management uses EBITDA, Adjusted EBITDA, and Free Cash Flow for business planning purposes, including managing our business against internally projected results of operations and measuring our performance and liquidity. These supplemental performance measures also provide another basis for comparing period-to-period results by excluding potential differences caused by non-operational and unusual or non-recurring items and may not be comparable to similarly titled measures used by other companies.
Definitions and Limitations
EBITDA represents net loss before interest expense, interest income, income taxes and depreciation and amortization expense. Adjusted EBITDA represents EBITDA adjusted to eliminate stock-based compensation expense included in the results of our continuing operations.
We believe that the use of EBITDA and Adjusted EBITDA eliminates items that have less bearing on our operating performance, thereby highlighting trends in our core business which may not otherwise be apparent. We believe that the exclusion of stock-based compensation expense from Adjusted EBITDA provides a clearer view of the operating performance of our business and is appropriate given that grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular
34
time. We also present Adjusted EBITDA as a supplemental performance measure because we believe that this measure provides investors, securities analysts and other users of our consolidated financial statements with important supplemental information with which to evaluate our performance and to enable them to assess our performance on the same basis as management.
Free Cash Flow represents net cash provided by operating activities, less purchases of property and equipment.
We believe that Free Cash Flow provides meaningful information regarding our liquidity. Management believes that Free Cash Flow is useful for investors because it provides them with an important perspective on the cash available for strategic measures, after making necessary capital investments in property and equipment to support the Company’s ongoing business operations and provides them with the same measures that management uses as the basis of making capital allocation decisions.
These supplemental performance measures may vary from and may not be comparable to similarly titled measures used by other companies, including companies in the semiconductor industry. EBITDA, Adjusted EBITDA and Free Cash Flow are not recognized measurements under GAAP. When analyzing our performance with these three non-GAAP metrics, investors should (i) evaluate each adjustment in our reconciliation to the corresponding GAAP measure, and the explanatory footnotes regarding those adjustments, (ii) use EBITDA or Adjusted EBITDA in addition to, and not as an alternative to, net income attributable to common stock as a measure of operating results and (iii) use Free Cash Flow in addition to, and not as an alternative to, consolidated net cash provided by operating activities when evaluating our liquidity.
Adjusted EBITDA and Free Cash Flow have limitations as analytical tools, and users should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. These metrics should not be viewed as substitutes for, or superior to, net loss or net cash used in operating activities reported in accordance with GAAP as measures of profitability or liquidity. Some of these limitations include the following:
Because of these limitations, investors consideration should include EBITDA, Adjusted EBITDA, and Free Cash Flow alongside other financial performance measures, including net loss, net cash used in operating activities, and our other GAAP results.
Reconciliation to GAAP Measures
The following is a reconciliation of net loss to EBITDA and Adjusted EBITDA for the periods presented (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net loss |
|
$ |
(7,121 |
) |
|
$ |
(4,346 |
) |
|
$ |
(7,407 |
) |
|
$ |
(12,306 |
) |
Provision for income taxes |
|
|
61 |
|
|
|
38 |
|
|
|
187 |
|
|
|
125 |
|
Interest expense |
|
|
667 |
|
|
|
1,220 |
|
|
|
3,509 |
|
|
|
4,878 |
|
Depreciation and amortization |
|
|
149 |
|
|
|
264 |
|
|
|
528 |
|
|
|
654 |
|
EBITDA |
|
|
(6,244 |
) |
|
|
(2,824 |
) |
|
|
(3,183 |
) |
|
|
(6,649 |
) |
Stock-based compensation |
|
|
573 |
|
|
|
3 |
|
|
|
2,119 |
|
|
|
8 |
|
Adjusted EBITDA |
|
$ |
(5,671 |
) |
|
$ |
(2,821 |
) |
|
$ |
(1,064 |
) |
|
$ |
(6,641 |
) |
The following is a reconciliation of net cash used in operating activities to free cash flow for the periods presented (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net cash used in operating activities |
|
$ |
(4,627 |
) |
|
$ |
(1,549 |
) |
|
$ |
(28,689 |
) |
|
$ |
(7,920 |
) |
Purchases of property and equipment |
|
|
(54 |
) |
|
|
(62 |
) |
|
|
(185 |
) |
|
|
(284 |
) |
Free cash flow |
|
$ |
(4,681 |
) |
|
$ |
(1,611 |
) |
|
$ |
(28,874 |
) |
|
$ |
(8,204 |
) |
35
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through cash receipts from customers, the issuance of convertible promissory notes, borrowings, issuance of capital stock and the exercise of stock options.
With limited exceptions, we have incurred and expect that we will continue to incur significant operating losses. For the three and nine months ended September 30, 2024, we had a net loss of $7.1 million and $7.4 million, respectively. For the nine months ended September 30, 2024 and 2023, we had cash used in operating activities of $28.7 million and $7.9 million, respectively. As of September 30, 2024, we had an accumulated deficit of $557.1 million. Our unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary if we are unable to obtain adequate financing in the future.
In March 2024, we received $17.2 million in cash proceeds from the reverse recapitalization and PIPE Financing, net of transaction costs in connection with the closing of the Business Combination. As a result of the cash proceeds received in connection with the Business Combination and other capital resources available to us, including sales of our products and services and the Purchase Agreement discussed below, we believe we have sufficient cash to fund our operations for at least the next 12 months from the filing of this Quarterly Report on Form 10-Q.
In April 2024, we entered into a common stock purchase agreement (the “Purchase Agreement”) and a related registration rights agreement (the “Registration Rights Agreement”) with B. Riley Principal Capital II, LLC (“B. Riley”). Pursuant to the Purchase Agreement, we have the right but not the obligation, to sell, from time to time, to B. Riley up to $50.0 million in aggregate gross purchase price of shares of our common stock in our sole discretion, subject to certain conditions and limitations, during the term of 24 months. Pursuant to the Registration Rights Agreement, the Company filed a registration statement on Form S-1 to register the resale of shares of common stock to be sold to B. Riley, which became effective on June 6, 2024. Through September 30, 2024, we sold an aggregate of 2,100,177 shares of our common stock for $8.8 million under the Purchase Agreement and received cash proceeds of $7.8 million, which included $1.0 million that was withheld by B. Riley against the outstanding amounts payable. In addition, in October 2024 we sold 103,596 shares of our common stock under the Purchase Agreement and received cash proceeds of $0.3 million.
As of September 30, 2024, we have outstanding convertible promissory notes and borrowings with a total principal amount of $41.8 million, of which $36.8 million is contractually due within 12 months from this reporting date. During July and October 2024, we were able to renegotiate the timing of payments for some of the obligations that initially were due in the third fiscal quarter of 2024 and first fiscal quarter of 2025. However, our existing debt obligations largely remain due within one year from September 30, 2024. In November 2024, we entered into a term loan agreement with Kyeongho Lee pursuant to which the Company borrowed $2.9 million maturing in December 2024. We will need to start generating positive cash flows, renegotiate our existing debt obligations and raise additional capital through debt or equity financing. There can be no assurance that such additional debt or equity financing will be available on terms acceptable to us or at all.
While a portion of the cash proceeds received in connection with the Business Combination was expended to support our 5G activity and fund other operational expenses, we expect that further and significant ongoing operating expenditures will be necessary to successfully implement our business plan and market our products. With the start of manufacturing, shipments and commercialization of our first 5G chipset expected during the first half of 2025, we anticipate significant related expenditures in the form of production-related costs, including mask sets, wafers, and design service fees, and most such costs will be incurred prior to the commencement of manufacturing and production. If we do not have sufficient funds to make such payments, or if we cannot extend the terms of our existing commercial loans or to raise additional capital, the payments can be delayed, which may adversely affect our business operations and financial performance. For a more detailed description of such risks, please see the section entitled “Risk Factors” disclosed in our Registration Statement on Form S-1 filed with the SEC on May 22, 2024.
We intend to mitigate the risk of any working capital deficit by continuing to seek and execute appropriate actions to secure funding as a publicly traded company, including extension and refinancing of existing loans, executing public or private equity offerings, debt financings, and other means. We have historically been able to raise capital through the issuance and sale of equity and equity-linked instruments, such as redeemable convertible preferred stock, convertible promissory notes, and borrowings, although no assurance can be provided that we would continue to be successful in doing so in the future.
36
We expect to use such additional liquidity and the cash and cash equivalents available to us after the Closing to finance the following activities:
While we believe that we have a reasonable basis for our expectation and we will be available to raise additional funds, we cannot provide assurance that we will be able to complete additional financing in a timely manner. In addition, the sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and may include operating and financial covenants that would restrict our operations. We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all. Should we enter into definitive collaboration and/or joint venture agreements or engage in business combinations in the future, we may be required to seek additional financing.
Cash flow Comparison for the Nine Months Ended September 30, 2024 and 2023
The following table summarizes our cash flows for the periods indicated (in thousands):
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Net cash used in operating activities |
|
$ |
(28,689 |
) |
|
$ |
(7,920 |
) |
Net cash used in investing activities |
|
|
(185 |
) |
|
|
(284 |
) |
Net cash provided by financing activities |
|
|
31,596 |
|
|
|
7,591 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(1,168 |
) |
|
|
(665 |
) |
Net increase (decrease) in cash and cash equivalents |
|
$ |
1,554 |
|
|
$ |
(1,278 |
) |
Operating Activities
Cash used in operating activities of $28.7 million during the nine months ended September 30, 2024 was primarily attributable to our net loss of $7.4 million, non-cash adjustments of $12.2 million, and a net change in our operating assets and liabilities of $9.1 million. Non-cash adjustments consisted primarily of a $14.6 million gain from the extinguishment of liability, a $2.8 million gain from the change in fair value of warrant liabilities, a $0.5 million decrease in provision for credit loss, partially offset by $2.1 million in stock-based compensation, a $1.4 million loss from the change in fair value of convertible promissory notes, $0.7 million in non-cash expense related to the issuance of common stock to an underwriter, $0.5 million in depreciation and amortization charges, and a $0.5 million in operating lease right-of-use amortization. The change in our operating assets and liabilities of $9.1 million primarily resulted from a decrease of $3.0 million in accrued and other current liabilities due to the payment of costs incurred related to our Business Combination, a decrease of $2.3 million in accounts payable, an increase of $1.7 million in contract assets, an increase of $1.6 million in inventory, an increase or $0.9 million in accounts receivable, a decrease of $0.5 million in lease liabilities, and a decrease of $0.3 million in other liabilities, partially offset by an increase of $0.7 million in net defined benefit liabilities, an increase of $0.5 million in contract lease liabilities, and a decrease of $0.1 million in other assets.
Cash used in operating activities of $7.9 million during the nine months ended September 30, 2023 was primarily attributable to our net loss of $12.3 million, partially offset by $0.9 million in non-cash adjustments and $3.5 million change in our operating assets and liabilities. Non-cash adjustments consisted primarily of a $0.8 million increase in credit loss allowance, $0.7 million in depreciation and amortization charges, and $0.6 million in operating lease right-of-use amortization, partially offset by $1.1 million gain from the change in fair value of convertible promissory notes. The change in our operating assets and liabilities of $3.5 million primarily resulted from an increase of $7.4 million in our accrued and other current liabilities related to the timing of payments, a decrease of $1.8 million in inventory, a decrease of $0.8 million in prepaid expenses and other current assets, and a decrease of $0.1 million in other assets, partially offset by an increase of $3.3 million in accounts receivable, an increase of $2.0 million in in contract assets due to unbilled services provided under certain projects, a decrease of $0.8 million in lease liabilities and an decrease of $0.7 million in accounts payable and a decrease of $0.1 million in income tax payable.
Investing Activities
Cash used in investing activities during the nine months ended September 30, 2024 and 2023 was related solely to the purchases of property and equipment.
37
Financing Activities
Cash provided by financing activities of $31.6 million during the nine months ended September 30, 2024 consisted of $17.2 million from proceeds received from the reverse recapitalization and PIPE Financing, net of transaction costs, $16.3 million in proceeds from the issuance of convertible promissory notes, $7.8 million proceeds received from issuance of common stock to B. Riley under the Purchase Agreement, $3.7 million in proceeds from borrowings, and $2.2 million proceeds received from issuance of common stock in a private placement, partially offset by $14.1 million in repayment of our borrowings and $1.6 million repayment of convertible promissory notes.
Cash provided by financing activities of $7.6 million during the nine months ended September 30, 2023 primarily related to net proceeds from bank borrowings.
Commitments and Contractual Obligations
We have material commitments and contractual obligations, including leases, purchase commitments, and research and development agreements. We have various operating leases, under which we lease office equipment and office space. The operating leases have various expiration dates through 2026.
We have certain commitments for outstanding purchase orders related to the manufacture of certain wafers utilized by the Company and other services, and we have entered into a material research and development agreement. See Note 8 to our unaudited condensed consolidated financial statements included in this Form 10-Q for more information regarding our additional commitments and contractual obligations.
We have certain debt agreements in place related to convertible promissory notes and borrowings. See Note 7, to our unaudited condensed consolidated financial statements included in this Form 10-Q for more information regarding our debt arrangements.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts and related disclosures. We base our estimates on historical experience and various other factors that we believe to be reasonable under the circumstances, which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions due to the inherent uncertainty involved in making those estimates, and any such differences may be material.
There have been no material changes to our critical accounting estimates from those described in “Management’s Discussion and Analysis of Financial Condition,” “Results of Operations – Critical Accounting Policies and Significant Judgments and Estimates” disclosed in our Form 8-K filing with the SEC on April 1, 2024, except that from the Closing we have certain contracts in our own equity that are subject to liability classification and remeasurement each reporting periods.
Revenue Recognition
Our revenues are generated by the sale of mobile semiconductor solutions consisting of products and platform solutions aimed at the LTE and 5G industries, development services, and technical advice and maintenance services.
The timing of revenue recognition and the amount of revenue recognized in each case depends on various factors, including the specific terms of each arrangement and the nature of the underlying performance obligations. Revenues from sales of our products are recognized upon transfer of control to the customer, which is generally at the time of shipment. Service revenues from development services, technical advice, and maintenance services are generally recognized over time as these performance obligations are satisfied.
We make estimates of potential future returns and sales allowances related to current period product revenue. We analyze historical return rates and changes in customer demand when evaluating the adequacy of returns and sales allowances. Although we believe we have a reasonable basis for our estimates, such estimates may differ from actual returns and sales allowances. These differences may materially impact reported net product revenues and amounts ultimately collected on accounts receivable.
38
Provision for Credit Losses
Accounts receivable balances are primarily derived from revenues earned from customers located in the United States, China, South Korea, Japan, and Taiwan. We perform ongoing credit evaluations of the financial conditions of our customers and distributors, and generally do not require collateral from our customers. We continuously monitor collections and payments from customers and maintain a provision for credit losses based upon the collectibility of our customer accounts. We review the provision by considering certain factors such as historical experience, industry data, credit quality, age of balances and current economic conditions that may affect a customer’s ability to pay. Uncollectible receivables are written off when all efforts to collect have been exhausted and recoveries are recognized when they are recovered. We cannot guarantee that we will continue to experience the same credit loss rates that we had in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectibility of our accounts receivable and our future operating results. The provision for credit losses was $1.1 million and $1.6 million as of September 30, 2024 and December 31, 2023, respectively.
Fair Value of Convertible Promissory Notes
We have made an election to account for our convertible promissory notes under the fair value option, the convertible promissory notes are recorded at their initial fair value on the date of issuance and then are adjusted to fair value upon any modification and at each balance sheet date thereafter. Changes in the estimated fair value of the convertible promissory notes are recognized as non-cash gains or losses in the unaudited condensed consolidated statements of operations within other income (expenses), net.
Our convertible promissory notes are valued using a discounted cash flow (“DCF”) model or binomial lattice model (“BLM”), and, prior to the Business Combination, were valued using a combination of an option pricing model and Probability-Weighted Expected Return Method (“PWERM”), which are a Level 3 fair value measurements. Significant assumptions used in the DCF include the remaining term and discount rate. Significant assumptions used in the BLM include volatility, remaining term, risk-free rate, and credit spread. The PWERM is a scenario-based methodology that estimates the fair value based using an analysis of future values for the Company that assumes various outcomes. The value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available. The future value under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability-weighted to arrive at an indication of value. Significant assumptions used in the PWERM include volatility, discount rate, and the probability of a future liquidity event.
Contracts in Own Equity – Fair Value of Warrants
We classify contracts in equity, including warrants to purchase shares of the Company’s common stock, that do not meet the indexation guidance as liabilities. At the end of each reporting period, these liability-classified instruments are remeasured using an option pricing model or BLM. Significant assumptions are used in determining the fair value of our warrants and include volatility and the risk-free rate.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements included herein for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition and results of operations.
JOBS Act Accounting and Smaller Reporting Company Elections
We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until those standards apply to private companies.
We have elected to use this extended transition period for complying with certain new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our unaudited condensed consolidated financial statements may or may not be comparable to companies that comply with new or revised accounting pronouncements as of public companies’ effective dates.
We are also a “smaller reporting company,” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company.
39
We have elected to take advantage of certain of the scaled disclosures available to smaller reporting companies, and will be able to take advantage of these scaled disclosures for so long as the market value of our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non- affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company, as defined by Rule 12b‑2 under the Securities and Exchange Act of 1934, as amended (the Exchange Act) and in Item 10(f)(1) of Regulation S-K and are not required to provide the information under this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of September 30, 2024, management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2024, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently a party to any material legal proceedings. From time to time, we may, however, in the ordinary course of business become involved in legal proceedings. Regardless of outcome, litigation could have a material adverse effect on us due to defense and settlement costs, diversion of management resources, negative publicity, reputational harm and other factors, and there can be no assurances that favorable outcomes will be obtained.
ITEM 1A. Risk Factors.
Other than the risk factors discussed under this section, there have been no material changes to the risk factors we previously disclosed in our Registration Statement on Form S‑1 filed with the SEC on May 22, 2024. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business.
We have a history of losses, and we may not achieve or sustain profitability in the future, on a quarterly or annual basis.
We began operations in 1998 and have incurred losses on an annual basis since inception. We have incurred and will continue to incur significant operating losses. For the years ended December 31, 2023 and 2022, we had a net loss of $22.5 million and $26.4 million, respectively, and used cash in operating activities of $8.8 million and $18.1 million, respectively. For the nine months ended September 30, 2024, we had a net loss of $7.4 million, and used cash in operating activities of $28.7 million. As of September 30, 2024, we had an accumulated deficit of $557.1 million and negative working capital of approximately $41.9 million. We had short-term debt, including convertible promissory notes and borrowings, in the amount of $36.8 million as of September 30, 2024. As of December 31, 2023 , we had an accumulated deficit of $549.7 million and negative working capital of approximately $101.8 million. We had short-term debt in the amount of $72.3 million, including convertible promissory notes and borrowings as of December 31, 2023. We expect to incur significant expenses related to the research and development of our products and expansion of our business. Furthermore, the rapidly evolving wireless communications markets in which we sell our products, as well as other factors, make it difficult for us to forecast quarterly and annual revenue accurately. As a result, we could experience cash flow management problems, unexpected fluctuations in our results of operations and other difficulties, any of which would make it difficult for us to meet our debt obligations and achieve and maintain profitability.
Our condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary if we are unable to obtain adequate financing in the future. Accordingly, if we do not generate sufficient level of revenue or become profitable, we will be required to seek other sources of funding, such as issuance of equity or debt securities to raise capital. Any such financings may not be accessible on acceptable terms, if at all. The failure to raise additional capital or otherwise obtain funding for our operation will have a material adverse effect on our business, results of operations and financial position.
Our indebtedness could adversely affect our operations, including our ability to perform our obligations and fund working capital.
As of September 30, 2024, we have outstanding convertible promissory notes and borrowings with a total principal amount of $41.8 million, of which $36.8 million is contractually due within 12 months from the reporting date. We may also incur substantial additional indebtedness. Our indebtedness could have important consequences, including the following:
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If any of these consequences occur, our financial condition, results of operations and ability to pay dividends could be adversely affected. This, in turn, could negatively affect the market price of our Common Stock, and we may need to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds that may be realized from those sales, or that additional financing could be obtained on acceptable terms, if at all. In addition, while we were able to negotiate with our lenders of commercial loans to extend the maturity dates or modify payment schedules, there is no guarantee that we will be successful in negotiating such terms in the future, and failure to do so may result in defaults under the loans, which will have an adverse effect on our financial conditions and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
On November 11, 2024, the Company entered into a term loan agreement with Dr. Kyeongho Lee, Chairman of the Company’s board of directors, pursuant to which the Company borrowed KRW 4.0 billion ($2.9 million) from Dr. Lee. The loan has a maturity date of December 31, 2024 and bears an annual interest rate of 12.0%.
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ITEM 6. Exhibits.
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Exhibit Index |
Exhibit |
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Description |
4.1† |
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10.1 |
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10.2 |
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10.3 |
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31.1* |
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31.2* |
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32.1* |
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32.2* |
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101.INS |
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Inline XBRL Instance Document-the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
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Inline XBRL Taxonomy Extension Schema Document With Embedded Linkbase Documents. |
104 |
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Cover Page formatted as Inline XBRL and contained in Exhibit 101 |
* Filed herewith
† Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Registrant agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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GCT Semiconductor Holding, Inc. |
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Date: November 14, 2024 |
By: |
/s/ John Schlaefer |
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Name: |
John Schlaefer |
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Title: |
Chief Executive Officer |
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GCT Semiconductor Holding, Inc. |
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Date: November 14, 2024 |
By: |
/s/ Edmond Cheng |
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Name: |
Edmond Cheng |
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Title: |
Chief Financial Officer |
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EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John Schlaefer, certify that:
Dated: November 14, 2024
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/s/ John Schlaefer |
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John Schlaefer |
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Chief Executive Officer |
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(Principal Executive Officer) |
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EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Edmond Cheng, certify that:
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
Dated: November 14, 2024
/s/ Edmond Cheng |
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Edmond Cheng |
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Chief Financial Officer |
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(Principal Financial Officer) |
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, John Schlaefer, Chief Executive Officer of GCT Semiconductor Holding, Inc. (the “Company”), certify that:
1. the Quarterly Report on Form 10-Q of the Company for the three months ended September 30, 2024 as filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 14, 2024
/s/ John Schlaefer |
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John Schlaefer |
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Chief Executive Officer |
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(Principal Executive Officer) |
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EXHIBIT 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Edmond Cheng, Chief Financial Officer of GCT Semiconductor Holding, Inc. (the “Company”), certify that:
1. the Quarterly Report on Form 10-Q of the Company for the three months ended September 30, 2024 as filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 14, 2024
/s/ Edmond Cheng |
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Edmond Cheng |
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Chief Financial Officer |
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(Principal Financial Officer) |
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