RDA (MM)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

For the transition period from                       to                        

Commission file number: 001-34943

Securities registered or to be registered pursuant to Section 12(b) of the Act:

*Not for trading, but only in connection with the listing on The NASDAQ Stock Market of the American depositary shares, each representing six ordinary shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

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Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes    x No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes    x No

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.

x Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

x Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17    o Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes    x No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

o Yes    o No

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INTRODUCTION

Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to:

·                    “we,” “us,” “our company,” “our,” and “RDA” refer to RDA Microelectronics, Inc., a Cayman Islands company, and its consolidated subsidiaries;

·                    “RDA Hong Kong” refers to RDA Technologies Limited; “RDA Shanghai” refers to RDA Microelectronics (Shanghai) Co., Ltd.; “RDA Beijing” refers to RDA Microelectronics (Beijing) Co., Ltd.;

·                    “China” or “PRC” refers to the People’s Republic of China, and for the purpose of this annual report, excludes Taiwan, Hong Kong and Macau;

·                    “shares” or “ordinary shares” refers to our ordinary shares, par value $0.01 per share; and

·                    “ADSs” refers to our American depositary shares, each of which represents six ordinary shares, and “ADRs” refers to any American depositary receipts that evidence our ADSs.

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These forward-looking statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “is expected to,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

You should read thoroughly this annual report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. Other sections of this annual report, including the Risk Factors and Operating and Financial Review and Prospects, discuss factors which could adversely impact our business and financial performance as well as the pending acquisition of our company. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all 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. We qualify all of our forward-looking statements by these cautionary statements.

You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

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Notes:

(1)                   Share-based compensation was allocated in operating expenses as follows (in thousands of US$):

(2)                   Research and development expenses include amortization of newly acquired baseband and television intellectual property in the following amounts during the periods presented:

(3)                   Each ADS represents six ordinary shares

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

RISK FACTORS

Risks Related to Our Business

If we fail to develop and introduce new products and enhancements or to manage product transitions, or if our products do not achieve market acceptance on a timely basis or at all, our ability to attract and retain customers could be impaired and our competitive position may be harmed, which could have a material adverse effect on our revenue and results of operations.

The markets for semiconductors generally, and for wireless systems-on-chip and radio-frequency semiconductors in particular, are characterized by rapidly changing technology, evolving industry standards, rapid changes in customer requirements and frequent product introductions. We must continually design, develop and introduce new products with improved features in a cost-effective manner to be competitive, which requires us to devote substantial financial and other resources to research and development. Our research and development expense was $32.8 million, $54.6 million and $64.9 million in 2011, 2012 and 2013, representing 11.3%, 14.0% and 18.8% of our revenues during those three periods, respectively. If we do not continue to make substantial investments in research and development, we may not remain competitive. However, if our investments in research and development do not result in new products and enhancements that meet customer needs in a timely manner, or at all, our results of operations and financial condition may be materially adversely affected.

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On March 22, 2012, we acquired the baseband intellectual property and business of Coolsand Technologies (Hong Kong) Limited, or Coolsand, a privately owned company also controlled by entities affiliated with Warburg Pincus. The consideration paid was $46 million, including cash, ordinary shares and offset of accounts receivable due. We hired most of Coolsand’s engineers and began to sell baseband products in April 2012. Baseband products represented a substantial part of our revenues for the years ended December 31, 2012 and 2013, and we have invested significant time and effort into developing baseband products that we might otherwise have spent developing other products. The development of baseband products is complex and requires a substantial commitment of resources to meet increasingly demanding industry standard protocols. If we are unable to manage our transition into the baseband product market, our competitive position will be harmed and our future results may be materially adversely impacted.

Our current and future products may not achieve market acceptance or adequately address the changing needs of the market, and we may not be successful in developing and marketing new products or enhancements to our existing products on a timely and cost-effective basis. The introduction of products incorporating new technologies, the emergence of new industry standards or changes in customer requirements could render our existing products obsolete and unmarketable. For example, we have been developing additional products for WCDMA and LTE smartphones and plan to develop new products for TD-SCDMA smartphones in order to address changes in consumer demand, but there is no assurance that we will be successful in developing these products or that these products will compete successfully in the marketplace. Furthermore, inventory is particularly susceptible to obsolescence in our industry due to the rapid pace of innovation. For example, in 2011 we completed our migration to 55 nanometer geometry process, which led to our writing down the unsold inventory of 130 and 110 nanometer products. In addition, if we or our customers are unable to manage product transitions in a timely and cost-effective manner, our business and results of operations will suffer.

The development of our products is highly complex. Occasionally, we have experienced delays in completing the development and introduction of new products and product enhancements, and we could experience delays in the future. Unanticipated problems in developing products could also divert substantial research and development and engineering resources, which may impair our ability to develop new products and enhancements and could substantially increase our costs. Even if we introduce new and enhanced products to the market, we may not be able to achieve market acceptance of these products in a timely manner or at all.

If we cannot successfully develop new smartphone products, our total addressable market may shrink and our business and revenues will decline.

To date, the vast majority of our revenues have come from the sales of products for use in feature phone handsets. We are in the process of developing baseband products for the smartphone market, but we expect that we will continue to rely on feature phone products for a substantial part of our revenue for some time to come. Consumers in many markets have been gradually replacing their feature phones with smartphones, though the rate at which this transition occurs varies from market to market. If consumers abandon feature phones more quickly than we anticipate, we would have less time to develop smartphone products to compensate for the decline in the feature phone market. If we cannot successfully transition from feature phone products to smartphone products in a timely fashion, our total addressable market may shrink and our business and revenues will decline.

If we are not able to compete effectively, we may be unable to increase or maintain revenue and market share.

We may not be able to compete successfully against current or potential competitors. We compete with large semiconductor companies who offer a wide range of stand-alone and integrated semiconductor solutions in our markets and with companies that compete with us in one particular product or product family. Many of our current and potential competitors have longer operating histories and significantly greater financial, manufacturing, technical, marketing, sales and other resources than we do. This may allow them to respond more quickly than us to new or emerging technologies or changes in industry standards or customer requirements. Some of our competitors may have greater credibility with our existing and potential customers. In addition, some of our larger competitors may be able to provide greater incentives to customers through rebates and similar programs, which may make it difficult for us to gain or maintain market share. If we cannot compete effectively, we may be unable to increase or maintain revenue and market share.

As we enter new markets, we may face new competitors. Following our acquisition of Coolsand’s business, which primarily includes its baseband intellectual property, we entered the baseband market in April 2012. The baseband market is highly competitive, with some of the key competitors being very large and well-known multinational companies. Furthermore, baseband products are complex and present difficult challenges for development. The development of baseband products is complex and requires a substantial commitment of resources to meet increasingly demanding industry standard protocols. If we cannot compete effectively in this field, we may be unable to increase or maintain revenue and market share.

Some of our competitors with multiple product lines bundle the sale of or integrate their products, which may allow them to price competing products more aggressively or increase their market share. Companies who compete with us in one product but do not have other competing product lines may even seek to deny us revenues from our products in those other product lines by bundling their competing product with products from unrelated third parties. Some of our competitors may design their products to make it more difficult for customers to use products from third parties such as us. We expect that semiconductors will become increasingly highly integrated, and if we cannot provide semiconductors that integrate the features or functions that our customers demand, we may be unable to compete effectively.

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If our mobile handset customers fail to keep up with market standards, our business and results of operations may be materially and adversely affected.

The majority of our customers are China-based mobile handset manufacturers that sell their products in many different countries in the world. The mobile handset markets that our customers operate in are characterized by evolving wireless communication standards, changing end user preferences and demand for new and advanced functions and applications on mobile handsets, rapid product obsolescence and price erosion, intense competition, and wide fluctuations in product supply and demand. Our customers are subject to constant pressure to develop and upgrade their product offerings in response to updates in wireless communication standards in any country that they sell products to. Most of our mobile handset customers currently manufacture products for second-generation wireless communication standards. In recent years, many countries have been upgrading their wireless communication standards to third-generation or fourth-generation standards, which requires mobile handset manufacturers to adopt new technologies and more advanced technological know-how. Furthermore, smartphones with more functionalities and more advanced computing ability and connectivity are gaining popularity in some of the countries where our customers operate. We cannot assure you that our customers will be able to develop new products to meet updated standards or consumer preference for smartphones or whether their new products will be successful in the many markets where they sell such products. In addition, most of our mobile handset customers are not associated with a well-known brand, and if well-known brands gain popularity and market share, our customers may be less successful. If any of our major handset customers is unsuccessful in its mobile handset sales, it may downsize or discontinue its mobile handset business, which in turn could materially and adversely affect the demand for our products, our business and result of operations.

Because we do not have long-term commitments from our customers, we must estimate customer demand, and our ability to accurately forecast demand for and sales of our products is limited, which may have a material adverse effect on our inventory levels, sales and results of operations.

We typically sell products pursuant to purchase orders and do not have long-term purchase commitments. Customers generally expect our products to ship within days after they place an order. We have limited visibility as to the volume of our products that our customers will sell to their customers or carry in their inventory and cannot accurately predict what or how many products our customers will need in the future. Anticipating demand is difficult because our customers face volatile pricing and unpredictable demand for their own products. We typically have to place orders with foundries eight or more weeks before we can receive the finished products, and we generally maintain four to five weeks of inventories. Our forecasts are based on multiple assumptions, each of which may introduce error into our estimates. If we overestimate customer demand, we may order products that we may not be able to sell and be left with excess inventory, which would reduce our gross margins and adversely affect our financial results. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is available, we would forgo revenue opportunities and potentially lose market share and damage our customer relationships.

Our pending acquisition by Tsinghua Unigroup Ltd. may disrupt our relationships with our customers, other business partners or employees, which could have a material adverse effect on our business and operations.

On November 11, 2013, we announced that we had entered into a definitive merger agreement with Tsinghua Unigroup. The merger agreement was further amended on December 20, 2013, and then was approved at an extraordinary general meeting of our shareholders on December 27, 2013. Completion of our acquisition by Tsinghua Unigroup remains subject to the satisfaction or waiver of customary closing conditions set forth in the merger agreement, including the receipt of the required regulatory approvals. We cannot assure you when, or whether, Tsinghua Unigroup will receive such regulatory approvals.

Our pending acquisition by Tsinghua Unigroup may cause us to incur significant expenses and distract our management and employees from developing our business. Our association with Tsinghua Unigroup and with companies controlled by Tsinghua Unigroup, including Spreadtrum Communications, Inc., another China-based fabless semiconductor company, or uncertainty about how the pending acquisition may affect our business operations, could affect our relations with customers and business partners. Customers and business partners may terminate or cancel their existing relationships with us, or delay or defer decisions to enter into or to renew those arrangements, which could have a material adverse effect on our business and operations. In addition, our current and prospective employees may experience uncertainty about their future roles with us, which may adversely affect our ability to attract and retain key management, sales, marketing and technical personnel.

The average selling prices of products in our markets have historically decreased rapidly and will likely continue to do so in the future, which could result in lower revenue and gross margins.

The products we develop and sell are subject to rapid declines in average selling prices over the life of the products. Competitors quickly introduce new products to compete with our products, and sometimes competitors will anticipate our entry into a market and start to lower the prices on their products before our entry. We have historically decreased the average selling prices of many of our products in order to meet market demand and under competitive pressures, and we expect that we will need to continue to reduce prices in the future to remain competitive. For example, the average selling price for our Bluetooth system-on-chip declined suddenly after a competitor aggressively cut the prices for its integrated baseband and Bluetooth product in the second half of 2009, which adversely affected our gross margin for 2009 and the first half of 2010, and this occurred again in the fourth quarter of 2011, adversely affecting our gross margin for 2011. The average selling price for our 2G power amplifiers fell significantly in 2012 as competition increased, as did the average selling price for our feature phone baseband products in 2013. Because we do not operate our own manufacturing, testing, or packaging facilities, we may not be able to reduce our cost of goods sold as rapidly as companies that operate their own facilities, and our costs may increase, which would reduce our margins. Our financial results will suffer if we are unable to offset any future reductions in our average selling prices by increasing our unit sales volumes, reducing our per unit costs, or developing new or enhanced products on a timely basis with higher selling prices or gross profit. While gross profit may decline as a result of reductions in average selling prices, we may continue to incur research and development costs at higher or existing levels to develop new products. Such continued spending would have an adverse impact on our results of operations if our revenue does not continue to grow or our gross margins decline. We expect to continue to face price pressure on our products, and there is no assurance that our gross margins will not continue to decline in the future. In addition, the average selling prices of our products can be adversely affected by depreciation in emerging market currencies, as most of our customers sell their products in emerging markets and attempt to pass any pricing pressure on to their suppliers, including us.

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If our customers do not comply with the regulations of the countries in which they sell their products, they may be unable to continue to sell their products in those countries and their demand for our products may decline, which could have a material adverse effect on our revenue and results of operations.

Our customers sell products in many different countries in the world. We cannot assure you that our customers have complied or will comply with regulatory requirements in all the countries in which they sell their products, and if such countries promulgate new regulations or more stringently enforce existing regulations, some of our customers may be unable to continue to sell their products in those countries. In 2010, the PRC government cracked down on certain Chinese handset manufacturers for not paying applicable import duties and for installing malware on their handsets, which disrupted production by these manufacturers and caused a slowdown in mobile phone shipments in June 2010. In 2011, the PRC government took further action against certain Chinese handset manufacturers, again for not paying applicable import duties, which caused a slowdown in mobile phone shipments in April and May of 2011. These slowdowns in shipments affected demand for our products.

Changes in industry standards could limit our ability to sell our products and force us to write down our inventory.

The markets for semiconductors are characterized by rapidly evolving industry standards. We must continuously develop new products or upgrade our existing products to keep pace with these evolving standards. Changes in industry standards, or the development of new industry standards, may make our products obsolete.

Our products comprise only a part of an electronic device. All components of these devices must uniformly comply with industry standards in order to operate efficiently together. We depend on companies that provide other components of the devices to support prevailing industry standards. Many of these companies are significantly larger and more influential in driving industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers or end users. If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected, which would harm our business. Where standards are controlled by the government, as in the PRC, changes in those standards can be difficult to predict, and they may be implemented without much advance notice.

Because it is not practicable to develop products that comply with all current standards and new standards that may be adopted in the future, our ability to compete effectively will depend on our ability to select industry standards that will be widely adopted by the market and to design our products to support those relevant industry standards. We may be required to invest significant effort and to incur significant expense to redesign our products to address relevant standards, and we may lose market share if we do not redesign our products quickly enough. If our products do not meet relevant industry standards that are widely adopted for a significant period of time, our results of operations, business, and prospects would be adversely affected.

Changes to the mix of products we sell may have a significant impact on our financial results.

We sell many products with different functionalities, costs and sales prices. The mix of our products sold to customers in any particular period may affect the average selling price and average cost of our products, which could substantially impact our revenues and gross margins. Our gross margins may vary from quarter to quarter for a number of reasons, such as market conditions, customer demand, changes in our customer base, our product mix and the sales volume, average selling price and cost for each product sold. When we introduce new products and discontinue old ones, our mix of products can change substantially. For example, baseband products have already come to represent a substantial part of our revenue since we entered that market in April 2012. To the extent that any change in our product mix results in a decline in our gross margins, our ability to recover our fixed costs or investments associated with a particular product, and our overall business, results of operations and financial conditions, could be materially adversely affected.

Our limited operating history may not serve as an adequate basis to assess our future prospects and results of operations.

We were founded in 2004 and we have been a public company since 2010. Our limited operating history makes the prediction of our future results of operations difficult, and therefore, past results of operations achieved by us should not be taken as indicative of the rate of growth, if any, that can be expected in the future. Our business model, technology and ability to achieve satisfactory financial results are unproven. As a result, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in a rapidly evolving and increasingly competitive market in China.

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If we are unable to manage our growth effectively, our business and financial results may be adversely affected.

We have experienced a period of rapid growth and expansion that has placed, and continues to place, significant strain on our management and resources. To accommodate our growth, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems, all of which require substantial management efforts. We also will need to continue to expand, train, manage and motivate our workforce and manage our relationships with customers, foundries, distributors, and testing and packaging vendors. All of these endeavors will require substantial management efforts and skills and require significant additional expenditures. We cannot assure you that we will be able to manage our growth effectively, and any failure to do so may have a material adverse effect on our business and financial results.

We depend on independent foundries to manufacture our products, and any failure to obtain sufficient foundry capacity could significantly delay our ability to ship our products and damage our customer relationships.

Access to foundry capacity is critical to our business because we are a fabless semiconductor company. We depend on a number of independent foundries to manufacture our semiconductor wafers, including Semiconductor Manufacturing International Corporation (SMIC) in China, Taiwan Semiconductor Manufacturing Company Limited (TSMC) in Taiwan, IBM in the United States and GlobalFoundries in Singapore for our “complementary metal oxide semiconductor” (CMOS) products and WIN Semiconductors and Wavetek Microelectronics Corporation in Taiwan for our gallium arsenide products.

Because we outsource our manufacturing, we face several significant risks, including:

As we migrate to more advanced geometry processes and introduce innovative new products, it may become more difficult, at least initially, for us to secure foundry capacity to meet our needs. For example, we were unable to secure enough manufacturing capacity for our integrated passive device (IPD) power amplifier products in the fourth quarter of 2010 and the first quarter of 2011 because there is only one foundry that can meet our needs for these products. This shortage in manufacturing capacity caused delays in the shipment of our products, and some of our customers cancelled their orders as a result.

The ability of foundries to provide us with semiconductor wafers is limited at any given time by their available capacity. We do not have a guaranteed level of manufacturing capacity with foundries and it is generally difficult to accurately forecast our capacity needs. We do not have a long-term agreement with foundries and we place our orders on a purchase order basis. As a result, if foundries raise their prices or are not able to meet our required capacity for various reasons, including natural disasters (such as tsunamis, flooding or earthquakes) or shortages or delays in shipment of semiconductor equipment or materials used by foundries to manufacture our semiconductors, or if our business relationship with any of the foundries we currently use deteriorates, we may not be able to obtain the required capacity from it and would have to seek alternative foundries, which may not be available on commercially reasonable terms, or at all.

Qualifying new foundries, if such are available, exposes us to additional risks. Using foundries with which we have no established relationships could expose us to potentially unfavorable pricing, unsatisfactory quality or insufficient capacity allocation. We place our orders on the basis of our customers’ purchase orders and sales forecasts; however, foundries can allocate capacity to the production of other companies’ products and reduce deliveries to us on short notice. It is possible that certain customers of the foundries we use may be larger than we are or may have long-term agreements with such foundries, and as a result they may receive preferential treatment from the foundries in terms of price, capacity allocation and payment terms. Reallocation of capacity by foundries to its other customers could impair our ability to secure the supply of semiconductors that we need, which could significantly delay our ability to ship our products, reduce our revenue, and damage our customer relationships. In addition, if we do not accurately forecast our capacity needs, foundries may not have available capacity to meet our immediate needs or we may be required to pay higher costs to fulfill those needs, either of which could adversely affect our business, results of operations or financial condition.

If our third-party foundries do not achieve satisfactory yields or quality, our relationships with our customers and our reputation will be harmed.

The manufacturing of semiconductor wafers is a complex and technically demanding process. The foundries we use have from time to time experienced manufacturing defects and reduced manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by the foundries we use could result in lower than anticipated manufacturing yields or unacceptable performance. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Poor yields from the foundries we use could lead to defects, integration issues, or other performance problems in our products, which could cause us significant customer relations and business reputation problems, harm our financial results, and result in financial or other damage to our customers. Our customers could also seek damages from us for their losses, which would harm our reputation and our relationships with our customers.

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We may experience difficulties in transitioning to smaller geometry process technologies, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.

To reduce our cost of revenues and improve our gross margins, we expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to redesign some of our products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs. We completed migration from 110 nanometer to 55 nanometer geometry processes in 2011, and we completed migration from 55 nanometer to 40 nanometer geometry processes for baseband products in 2013. We are in the process of developing 28 nanometer geometry processes for baseband products now. Shifting to smaller geometry process technologies or new manufacturing processes may result in reduced manufacturing yields, delays in product deliveries and increased expenses, particularly higher mask and prototyping costs as well as additional expenditures for engineering design tools and related computer hardware.

We are dependent on our relationships with third-party foundries to transition to smaller geometry processes successfully. We cannot assure you that the foundries that we use will be able to effectively manage the transition in a timely manner, or at all, or that we will be able to maintain our existing foundry relationships or develop new ones. If we or any of our third-party foundries experience significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and our results of operations.

The loss of the services of our independent testing, and packaging vendors could significantly disrupt our shipments, harm our customer relationships and reduce our sales.

We use a number of different independent vendors to carry out testing and packaging functions. We do not directly control our product delivery schedules or quality assurance and control. These independent vendors also test and package products for other companies, including our competitors. We do not have long-term agreements with independent testing and packaging vendors that guarantee us access to capacity. We typically procure services from our vendors on a per-order basis. Since we do not have long-term agreements with the independent testing and packaging vendors that we use, they may give priority to orders from other customers when demand for their service is high. If any of our vendors experiences capacity constraints or financial difficulties, raises its prices, suffers any damage to its facilities, is acquired and restructures its business or terminates its relationship with us, or if there is any other disruption of testing and packaging capacity, we may have to seek alternative services, which may not be available on commercially reasonable terms, or at all, or which may expose us to risks associated with qualifying new vendors. We currently estimate that it would take us three to six months to locate and qualify a new testing and packaging vendor. Because of the amount of time that it takes us to qualify third-party testing and packaging vendors, we could experience significant delays in product shipments if we are required to find alternative vendors for our products on short notice. In addition, we may be required to pay higher testing and packaging costs. Any problems that we may encounter with the delivery or quality of our products could damage our reputation, cause us to lose customers, and adversely affect our business and financial results.

Our business depends substantially on the continuing efforts of our executive officers and key employees, and our business may be severely disrupted if we lose their services.

Our future success depends substantially on the continued efforts of our executive officers and key employees, especially Mr. Shuran Wei, our co-founder and our chief executive officer and chief technology officer, and Mr. Liang Zhang, our president. If one or more of our executive officers or key employees were unable or unwilling to continue in their present positions, we may not be able to replace them easily, in a timely manner, or at all. Our business may be severely disrupted, our financial conditions and results of operations may be materially and adversely affected and we may incur additional expenses to recruit, train and retain personnel. If any of our executive officers or key employees joins a competitor or forms a competing company, we may lose customers, suppliers, know-how and key professionals and staff members. Each of our executive officers and key employees has entered into an employment agreement with us that contains non-compete provisions. However, if any dispute arises between our executive officers and us, we cannot assure you that we would be able to enforce these non-compete provisions in China, where these executive officers reside, in light of uncertainties with China’s legal system. See “— Risks Relating to Doing Business in China — Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”

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If we are unable to attract, train and retain qualified personnel, our business may be materially and adversely affected.

Our future success depends, to a significant extent, on our ability to attract, train and retain qualified personnel, particularly technical personnel with expertise in the radio-frequency and mixed-signal semiconductor industry, or software engineers with semiconductor industry experience if we engage in more complicated system integration development efforts. Since our industry is characterized by high demand and intense competition for talent, there can be no assurance that we will be able to attract or retain qualified technical staff or other highly-skilled employees that we will need to achieve our strategic objectives. As we are still a relatively young company, our ability to train and integrate new employees into our operations may not meet the growing demands of our business. If we are unable to attract, train, and retain qualified personnel, our business may be materially and adversely affected.

Our existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders.

As of February 28, 2014, entities affiliated with Warburg Pincus beneficially owned approximately 35.4% of our outstanding share capital. As a result, Warburg Pincus has substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. Warburg Pincus may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders.

Our products are becoming more complex and defects or errors in our products could result in unexpected expenses or loss of customers, adversely affecting our results of operations and market share.

Highly complex products such as our wireless systems-on-chip and radio-frequency semiconductors and the related reference designs we provide to our customers may contain defects and errors when they are first introduced or as new versions are released. We have experienced these defects and errors from time to time in the past, and may again in the future. If any of these problems are not found until after we have commenced volume production of a new product, we may be required to incur additional development costs and product recall, repair and replacement costs. If any of our products sold to customers have reliability, quality, or compatibility problems, we may be unable to correct these problems in a manner satisfactory to our customers, if we are able to correct these problems at all. As our products become more complex, we face higher risk of undetected defects. Any errors or defects in our products, or the perception that there may be errors or defects in our products, could result in customers rejecting our products, damage to our reputation, lost revenue, diversion of development resources, write-down of unsold inventories and increases in customer service and support costs and other expenses. For example, due to a design defect, we had to write down inventory of our power amplifier products by approximately $3.2 million in 2011. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend. In addition, defects in our existing or new products could result in significant support, repair or replacement costs, and divert the attention of our engineering personnel from our product development efforts.

Our gallium arsenide semiconductors may cease to be competitive with CMOS-based alternatives.

As a significant part of our product portfolio, we design and sell gallium arsenide semiconductor devices and components, principally power amplifiers and switches. The production of gallium arsenide semiconductors is more costly than the production of ones that use CMOS technology. Some of our competitors offer or are currently developing CMOS-based power amplifiers, as are we. CMOS-based semiconductor technologies are widely used process technologies for certain semiconductors and these technologies continue to improve in performance. If we do not continue to offer gallium arsenide products that provide sufficiently superior performance to justify the cost differential or succeed in developing CMOS-based alternatives, our results of operations may be materially and adversely affected. We expect the costs of producing gallium arsenide devices will continue to exceed the costs of producing their CMOS-based counterparts. We may not continue to identify products and markets that require performance attributes of gallium arsenide solutions.

We will have difficulty selling our products if customers do not design our products into their product offerings.

Our products are not sold directly to the end-users, but are components or subsystems of other products. Our products are generally incorporated into our customers’ products at the design stage. As a result, we rely on our customers to select our products from among alternative offerings to be designed into the products they sell. If they do not include our products in their designs, we will have difficulty selling our products. Even after a customer designs our products into the products it sells, the customer is not obligated to purchase our products and can choose at any time to reduce or discontinue their use of our products, for example if its own products are not commercially successful, or for any other reason. In addition, we often incur significant expenditures on the development of a new product without any assurance that our product will be designed into our customers’ products. Once a customer designs a competitor’s product into its product offering, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers involves significant cost, time, effort and risk for the customer. Our customers may not continue to design our products into their products or we might not be able to convert any such design into actual sales, either of which could materially and adversely affect our results of operations.

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Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation expenses or licensing expenses or be prevented from selling certain of our products if these claims are successful.

In the ordinary course of our business, we may receive claims of infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in protracted and expensive litigation for many companies. We may be unaware of intellectual property rights of others that may cover some of our technology, products and services. Third parties may claim that we or our customers are infringing or contributing to the infringement of their intellectual property rights. We or our customers may be required to obtain licenses for such patents and if we need to license any such patents, we could be required to pay royalties on certain of our products. There can be no assurances that if we are required to obtain patent licenses to develop and sell our products, we will be able to obtain such patent licenses on commercially reasonable terms or at all, or that if our customers are required to obtain such patent licenses, our customers’ businesses will not be adversely affected. Our inability to obtain these patent licenses on commercially reasonable terms or at all could have a material adverse impact on our business, results of operations, financial condition or prospects.

We have in the past received several claims that we have infringed on the intellectual property rights of other parties. In one case, we were forced to defend a lawsuit when we refused to settle one such claim. Although we prevailed on that occasion, we incurred legal fees and other expenses in defending ourselves, and we cannot assure you that we would prevail in any lawsuits that may be brought against us in the future or that such lawsuits may not be material.

Any litigation regarding patents or other intellectual property could be costly and time consuming and could divert our management and key personnel from our business operations. Because of the complexity of the technology involved and the uncertainty of litigation generally, any intellectual property litigation involves significant risks. Moreover, patent litigation has increased in recent years due to the increased numbers of cases asserted by intellectual property licensing entities and increasing competition and overlap of product functionality in our markets. If there is a successful claim of intellectual property infringement against us, we might be required to pay substantial damages to the party claiming infringement, refrain from further sale of our products, develop non-infringing technology or enter into costly royalty or license agreements on an on-going basis or indemnify our customers. However, we may not be able to obtain royalty or license agreements on terms acceptable to us or at all. Parties asserting infringement claims may also be able to obtain an injunction against development and sale of our products that contain the allegedly infringing intellectual property. We are required under our distribution agreements to indemnify our distributors and customers for any losses they suffer or any costs they incur due to our products having infringed intellectual property rights. Any intellectual property litigation or successful claim could have a material adverse effect on our business, results of operations or financial condition.

To the extent that we are subject to a patent infringement or other lawsuits in China, it may be difficult for us to evaluate the outcome of court proceedings and we may not enjoy the level of legal protection that we would in more developed legal systems. See “— Risks Relating to Doing Business in China — Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”

We rely upon third parties for technologies that are integrated into some of our products, and if we are unable to continue to use these technologies and future technologies, our ability to design and sell technologically advanced products would be limited.

We rely on third parties for technologies that are integrated into some of our products. Our ability to keep pace with the rapidly evolving market depends on our ability to obtain such technologies from third parties on commercially reasonable terms to allow our products to remain competitive. If licenses to such technologies are not available on commercially reasonable terms and conditions, or such products become unavailable for any other reason, and we cannot otherwise integrate such technologies, our products or our customers’ products could become unmarketable or obsolete, and we could lose market share. In such instances, we could also incur substantial unanticipated costs or scheduling delays to develop or acquire substitute technologies to deliver competitive products.

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.

Our future success depends in part upon our proprietary technology. We seek to protect our technology through a combination of patents, copyrights, trade secrets, and confidentiality agreements. It is possible that any patents held by us may be invalidated, circumvented, or challenged. There can be no assurance that such patents will provide us with competitive advantages or adequately safeguard our proprietary rights. Existing patents are granted for prescribed time periods and will expire at various times in the future. Trade secrets are difficult to protect, and our trade secrets may be leaked or otherwise become known or be independently discovered by competitors. Confidentiality agreements may be breached, and we may not have adequate remedies for any breach.

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It is often difficult to create and enforce intellectual property rights in China. Even where adequate laws exist in China, it may not be possible to obtain swift and equitable enforcement of such laws, or to obtain enforcement of a judgment or an arbitration award by a court of another jurisdiction, and accordingly, we may not be able to effectively protect our intellectual property rights or enforce agreements in China. In addition, the laws of other countries in which our products are sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. Policing any unauthorized use of our intellectual property is difficult and costly and the steps we have taken may be inadequate to prevent the misappropriation of our technology.

Any dispute involving intellectual property could also include our distributors or customers, which could trigger our indemnification obligations to them and result in substantial expense to us.

In any dispute involving intellectual property, our distributors or customers could also become the target of litigation. Because we have undertaken in our distribution agreements to indemnify our distributors and customers for intellectual property claims made against them for products incorporating our technology, any litigation could trigger these indemnification obligations and result in substantial expenses to us. Such litigation could severely disrupt or shut down the business of our distributors and customers, which in turn could hurt our relations with them and cause the sale of our products to decrease.

We currently sell most of our products to customers through a small number of independent, non-exclusive distributors, which exposes us to substantial credit risk as well as to the risk of material disruption to our sales operations.

We currently sell most of our products to customers through a small number of independent, non-exclusive distributors, including Auctus Technologies Group Limited, Arrow Asia Pac Ltd. and China Achieve Limited. For the years ended December 31, 2011, 2012 and 2013, 90%, 92% and 90 % of our total revenue were from sales through distributors. Our distributors maintain inventories of our products, provide storage, shipping, and other services to us, and provide payment terms to our customers. Sales to Auctus Technologies Group Limited accounted for 52%, 49% and 48 % of our revenues in 2011, 2012 and 2013, respectively; sales to China Achieve Limited accounted for 18%, 19% and 22 % of our revenue in 2011, 2012 and 2013, respectively; and sales to Arrow Asia Pac Ltd. accounted for 14%, 13% and 8 % of our revenues in 2011, 2012 and 2013, respectively. As of December 31, 2013, we had $ 41.5 million of accounts receivable, of which 70 % were due from Auctus Technologies Group Limited , 8% were due from China Achieve Limited and 7 % were due from Arrow Asia Pac Ltd. As of December 31, 2013, we also had $ 54.9 million in inventory, of which $ 5.7 million was held by our distributors. Our agreements with our distributors are effective until terminated by either party and may be terminated by either party without cause with 30 days’ written notice. If any of our distributors were to default on its obligations and fail to pay our invoices or ship our products in a timely fashion, we may be unable to collect our accounts receivable, recover our inventory, or complete sales to the customers who had placed orders through that distributor, and we may find it difficult to replace that distributor. In the limited cases where we sell directly to our customers, we may also provide credit to them and face similar risks of their defaulting.

We may be adversely affected by the cyclicality of the semiconductor industry.

Our industry is highly cyclical and is characterized by short product life cycles and wide fluctuations in product supply and demand. The industry has, from time to time, experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both semiconductor companies’ and their customers’ products and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns may reduce our revenue and result in us having excess inventory. Furthermore, any upturn in the semiconductor industry could result in increased competition for access to limited third-party foundry, testing, and packaging capacity.

Demand for our products is highly dependent on the consumer electronics market, which is characterized by short product life cycles and subject to risks related to product transitions and supply of other components.

We derive almost all of our revenue from products that are used in consumer electronic devices, particularly mobile handsets. The consumer electronics market in general and the mobile handset market in particular are characterized by intense competition, rapidly changing technology, and continuously evolving consumer preferences. These factors result in the frequent introduction of new products, short product life cycles, and significant price competition. A decrease in demand for consumer electronics, especially a decrease in demand for mobile handsets, will also decrease demand for our products, which will adversely affect our business and results of operations. If the demand for consumer electronics shifts away from mobile handsets towards new devices for which we do not yet offer products or for which we do not offer as many products, such as tablets or mobile television devices, demand for our products would also decrease and our revenues would be materially and adversely affected.

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Our business benefits from certain tax incentives and government subsidies. Expiration or elimination of, or other adverse changes to, these tax incentives and subsidies could have a material adverse effect on our results of operations.

In 2010, RDA Hong Kong started to have substantial involvement in manufacturing arrangements in the PRC, and began to claim 50% of its profits as offshore sourced and excluded from profits subject to the 16.5% prevailing profits tax rate. We evaluated the business operations of RDA Hong Kong and determined that RDA Hong Kong should have technical grounds to apply for the 50:50 manufacturing offshore claim. In October 2011, RDA Hong Kong received an inquiry letter from the Hong Kong Inland Revenue Department requesting supporting documents for the 50:50 manufacturing offshore claim lodged for the year ended December 31, 2010. After we submitted a reply letter in June 2012, the Hong Kong Inland Revenue Department issued a follow-up inquiry letter in March 2013 on the 50:50 manufacturing offshore claim and the research and development fees we paid to our subsidiaries for the year ended December 31, 2010. RDA Hong Kong is awaiting feedback from the Hong Kong Inland Revenue Department after submission of a reply December 2013. If the Hong Kong Inland Revenue Department determines that RDA Hong Kong should not be eligible for the 50:50 manufacturing offshore claim, RDA Hong Kong would be subject to additional $2.4 million, $4.5 million, $4.4 million and $2.3 million in tax liabilities for the years ended December 31, 2010, 2011, 2012 and 2013 respectively.

The PRC government has provided various tax incentives and subsidies to domestic companies in the semiconductor industry, including RDA Shanghai and RDA Beijing, in order to encourage development of the industry. RDA Shanghai and RDA Beijing currently benefit from tax incentives provided by the PRC tax authorities in the form of preferential tax treatment. See “Operating and Financial Review and Prospects — Taxation.” The PRC tax authorities could reduce or eliminate any or all of these tax incentives at any time in the future, which could in turn have a material adverse effect on our financial condition and results of operations. Our research and development expenses have been partially offset by government research subsidies we have received from the PRC government authorities. For the years ended December 31, 2011, 2012 and 2013, we recorded nil, $1.8 million and $0.9 million in government subsidies as a deduction to research and development expenses after all the conditions were met. As of December 31, 2011 and 2013, we recorded deferred liability for cash subsidy received from the PRC government of approximately $1.7 million and $3.7 million, respectively, because the government had not completed its inspection of the research and development projects qualified for these subsidies at the end of the respective periods. (We recorded a deferred liability for cash subsidy received from the PRC government of nil as of December 31, 2012.) There can be no assurances that we will receive any subsidies in the future.

Our results of operations are subject to substantial quarterly and annual fluctuations due to a number of factors that could adversely affect our business and the trading price of our ADSs.

Our revenue and results of operations have fluctuated and are likely to fluctuate in the future. These fluctuations may occur on a quarterly and on an annual basis and may be due to a number of factors, many of which are beyond our control. These factors include, among others:

·                   changes in end-user demand for the products manufactured and sold by our customers;

The foregoing factors and other factors that might materially and adversely affect our quarterly or annual results of operations are difficult to forecast. We typically are required to incur substantial development costs in advance of a prospective sale with no certainty that we will ever recover these costs. A substantial amount of time may pass between the acceptance of our design and the generation of revenue related to the expenses previously incurred, which can potentially cause our results of operations to fluctuate significantly from period to period. In addition, a significant amount of our operating expenses are relatively fixed in nature due to our significant sales, research and development costs. If our strategies to reduce our costs through the development of products utilizing our integrated passive device technology and the migration to more advanced process technologies prove to be unsuccessful, our gross margin may decline.

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In the future, we may pursue selective acquisitions to complement our organic growth, which may not be successful and may divert financial and management resources from more productive uses.

If we identify appropriate opportunities, we may acquire or invest in technologies, businesses or assets that are strategically important to our business or form alliances with key players in the semiconductor industry to further expand our business. If we decide to pursue a strategy of selective acquisitions, we may not be successful in identifying suitable acquisition opportunities or completing such transactions. Our competitors may be more effective in executing and closing acquisitions in competitive bid situations than us. Our ability to enter into and complete acquisitions may be restricted by, or subject to, various approvals under PRC law or may not otherwise be possible, may result in a possible dilutive issuance of our securities, or may require us to seek additional financing. We also may experience difficulties integrating acquired operations, technology, and personnel into our existing business and operations. Completed acquisitions may also expose us to potential risks, including risks associated with unforeseen or hidden liabilities, the diversion of resources from our existing business, and the potential loss of, or harm to, relationships with our employees as a result of our integration of new businesses. In addition, following completion of an acquisition, our management and resources may be diverted from their core business activities due to the integration process, which diversion may harm the effective management of our business. Furthermore, it may not be possible to achieve the expected level of any synergy benefits on integration and/or the actual cost of delivering such benefits may exceed the anticipated cost. Any of these factors may have an adverse effect on our competitive position, results of operations and financial condition.

If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.

We are subject to the reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring every public company to include a report of management on the effectiveness of such company’s internal control over financial reporting in its annual report. In addition, an independent registered public accounting firm must issue an attestation report on the effectiveness of our internal control over financial reporting. During the course of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404, we may identify deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.

If we fail to maintain effective internal control over financial reporting in the future, we and our independent registered public accounting firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. This could in turn result in the loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our ADSs. Furthermore, we have incurred and anticipate that we will continue to incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act. If we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by the SEC, the NASDAQ Stock Market or other regulatory authorities. Any such action could adversely affect our financial results and the market price of our ADSs.

We granted employee stock options and other share-based awards in the past and will continue to do so in the future. We recognize share-based compensation expenses in our consolidated statement of income in accordance with the relevant rules under U.S. GAAP, which may have a material adverse effect on our net income.

We adopted share incentive plans in August 2005 and November 2009 for the purpose of granting stock options, restricted shares and restricted share units to employees, directors and consultants of our company. Under the 2005 plan, we were permitted to issue options to purchase up to 30,000,000 ordinary shares. As of February 28, 2014, we have granted options to purchase 29,883,933 of the ordinary shares reserved under the 2005 plan. Under the 2009 plan, we may issue restricted shares, restricted share units, or options to purchase up to 30,000,000 ordinary shares. As of February 28, 2014, we had granted 7,541,743 options, 6,077,140 restricted share units and 794,213 restricted shares under the 2009 plan. As a result of these grants and potential future grants under the plan, we incurred in the past and expect to continue to incur in future periods significant share-based compensation expenses. We account for compensation costs for all stock options based on the fair market value on the grant date and recognize expenses in our consolidated statement of income in accordance with the relevant rules under U.S. GAAP. The expenses associated with share-based compensation will reduce our net income, perhaps materially, and the additional securities issued under share-based compensation plans will dilute the ownership interests of our shareholders, including holders of our ADSs. However, if we limit the scope of our share incentive plans, we may not be able to attract or retain key personnel who are expected to be compensated by incentive shares or options.

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We have limited insurance coverage and may incur losses resulting from product liability claims or business interruptions.

As the insurance industry in China is still in an early stage of development, insurance companies in China currently offer limited business insurance products. We do not have any product liability insurance or business interruption insurance. Any business disruption, natural disaster, or product liability claim could result in our incurring substantial costs and diversion of resources, which would have an adverse effect on our business and results of operations.

U.S. regulations regarding the use of conflict minerals may affect our ability to have our products manufactured at competitive prices.

U.S. regulation defines certain minerals that are sourced from the Democratic Republic of Congo or neighboring countries as conflict minerals. Conflict minerals that may be used in the manufacturing of semiconductors include tantalum, tin, gold and tungsten. The SEC has adopted regulations that will require companies such as ours to disclose their use of conflict materials and to take certain steps to verify that disclosure with their suppliers. Although we expect that we will be able to comply with the requirements of these new regulations, there can be no guarantee that we will be able to gather all the information required. In addition, there is increasing public sentiment that companies should avoid using conflict minerals. There can be no guarantee that we or the foundries that we use to manufacture our semiconductors will be able to obtain adequate supplies of the required materials from other sources. A failure to obtain the necessary information or to maintain adequate supplies of materials that are not classified as conflict minerals may delay production, increasing the risk of our losing customers and business. Further, due to the fact that we outsource production to foundries, we may not be able to trace all usage of conflict minerals and may face reputational harm resulting from disclosure of the use of such conflict minerals.

Risks Relating to Doing Business in China

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

Substantially all of our assets and most of our customers are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over Chinese economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. The PRC government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, which could in turn reduce the demand for our services and adversely affect our results of operations and financial condition.

Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.

The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which legal cases have limited value as precedents. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly increased the protections afforded to various forms of foreign or private-sector investment in China. Our Chinese operating subsidiaries, RDA Shanghai and RDA Beijing, are foreign-invested enterprises and are subject to laws and regulations applicable to foreign-invested enterprises as well as various Chinese laws and regulations generally applicable to companies in China. These laws and regulations are still evolving, and their interpretation and enforcement involve uncertainties. From time to time, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property), and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.

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Under the PRC enterprise income tax law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment.

Under the PRC enterprise income tax law that became effective on January 1, 2008, an enterprise established outside the PRC with “de facto management bodies” within the PRC should be considered a “resident enterprise” and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Under the implementation regulations to the enterprise income tax law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, a circular issued by the State Administration of Taxation on April 22, 2009 sets out the standards and procedures for determining the location of the “effective management” of an enterprise registered outside of the PRC and funded by Chinese enterprises as controlling investors. This circular specifies that certain PRC-invested enterprises will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, the company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. Although this circular explicitly provides that the above standards shall apply only to enterprises which are registered outside the PRC and funded by Chinese enterprises as controlling investors, it is still uncertain whether such standards under this circular may also be relevant when considering whether our “effective management” is in the PRC or not, and whether we may be considered a resident enterprise under the PRC enterprise income tax law.

Most of our net income on an unconsolidated basis is earned by RDA Hong Kong, our Hong Kong subsidiary. If the PRC tax authorities determine that RDA Hong Kong or any of our other non-PRC entities is a PRC resident enterprise for PRC enterprise income tax purposes, then the income of those entities could be subject to PRC tax at a rate of 25%, which could materially reduce our net income.

Furthermore, although dividends paid by one PRC tax resident to another PRC tax resident should qualify as “tax-exempt income” under the enterprise income tax law, the PRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have not yet issued guidance with respect to the processing of outbound remittances to offshore entities that are treated as resident enterprises for PRC enterprise income tax purposes. Currently, dividend payments from our PRC subsidiaries to our Hong Kong subsidiary are subject to withholding tax at a preferential rate of 5% under the arrangement to avoid double taxation between Hong Kong and the central government of the PRC, while dividend payments are not subject to withholding tax in Hong Kong, the British Virgin Islands, or the Cayman Islands. If the PRC tax authorities determine that our Hong Kong subsidiary, our BVI subsidiaries, or our Cayman Islands holding company is a PRC resident enterprise for PRC enterprise income tax purposes, or if they determine that our Hong Kong subsidiary is not eligible for the preferential withholding tax rate, a higher rate of withholding tax may be assessed on our dividend payments, which could reduce the amount of dividends that we could pay to our shareholders, including the holders of our ADSs. Further, if we are classified as a PRC resident enterprise, dividends we pay to non-PRC resident shareholders will be subject to PRC withholding tax.

Finally, foreign ADS holders may be subject to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is sourced from within the PRC. Although our holding company is incorporated in the Cayman Islands, it remains unclear whether gains realized by our foreign ADS holders will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any such tax may reduce the returns on your investment in our ADSs.

The M&A rules establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

Six PRC regulatory agencies promulgated regulations effective on September 8, 2006 that are commonly referred to as the M&A Rules. The M&A Rules establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese domestic enterprise. We may expand our business in part by acquiring complementary businesses. Complying with the requirements of the M&A Rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

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PRC regulations relating to offshore investment activities by PRC residents may limit our subsidiaries’ ability to increase their registered capital or distribute profits to us, limit our ability to inject capital into our PRC subsidiaries, or otherwise expose us to liability under PRC law.

The PRC State Administration of Foreign Exchange, or SAFE, promulgated regulations in October 2005 and additional implementing regulations in May 2013 that require PRC residents to register with local branches of SAFE if they use assets or equity interests in PRC entities as capital contributions to establish offshore companies, or if they inject assets or equity interests of their PRC entities into offshore companies to raise capital overseas. In addition, any PRC resident who makes, or has previously made, direct or indirect investments in such an offshore company (referred to in the SAFE regulations as an “offshore special purpose company”) is required to further update that registration for such things as increases or decreases in the offshore special purpose company’s share capital, transfers or swaps of its shares, mergers, long-term equity or debt investments, and the creation of any security interest.

While our PRC counsel, Jun He Law Offices, has advised us that the aforementioned SAFE regulations do not apply to us as our corporate structure was not formed with any assets or equity interests in any PRC entities, we cannot assure you that SAFE shares the same view. If SAFE is of the view that any of our beneficial owners who are PRC residents are subject to the aforementioned SAFE regulations and such beneficial owners fail to make the required SAFE registration, our PRC subsidiaries may be prohibited from making distributions of profits to our Hong Kong subsidiary and from paying our Hong Kong subsidiary the proceeds from any reduction in capital, share transfer or liquidation, and we may also be prohibited from injecting additional capital into our PRC subsidiaries. Furthermore, failure to comply with the various SAFE registration requirements described above may result in liability for our PRC shareholders and our PRC subsidiaries under PRC laws governing foreign exchange registration evasion.

In the event that the aforementioned SAFE regulations are deemed applicable to us, we cannot assure you that all of our beneficial owners who are PRC residents would comply with a request from us to complete any required registrations. Restrictions on our ability to transfer money to or from our PRC subsidiaries would hinder our ability to fund our operations and manage our working capital, which could have a material adverse effect on our results of operations and our ability to distribute our profits to our shareholders.

On February 15, 2012, SAFE promulgated the SAFE Circular on Relevant Issues Concerning the Foreign Exchange Administration for Domestic Individuals’ Participation in the Share Incentive Schemes of Overseas-Listed Companies, or Circular 7. Circular 7 supersedes a SAFE circular regarding share option plans issued in March 2007. Circular 7 also requires domestic employees who participate in stock incentive plans in overseas-listed companies, including employee stock holding plans, share option plans or similar plans, to register with the relevant local SAFE branch through a PRC agent. A PRC agent may be the domestic company involved in the stock incentive plan or a domestic institution that is qualified to engage in an assets custodian business and has been duly designated by that domestic company. We and our PRC employees who have been granted stock options, restricted share units and restricted shares will be subject to these regulations. Any failure of our PRC stock option holders, restricted share unit holders or restricted share holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to us, or otherwise materially adversely affect our business.

PRC regulation of direct investment and loans by offshore holding companies to PRC entities may delay or limit us from making additional capital contributions or loans to our PRC subsidiaries.

Any capital contributions or loans that we, as an offshore entity, make to our PRC subsidiaries are subject to PRC regulations. For example, none of our loans to a PRC subsidiary can exceed the difference between its total amount of investment and its registered capital approved under relevant PRC laws, and the loans must be registered with the local branch of SAFE. Our capital contributions to our PRC subsidiaries must be approved by the Ministry of Commerce or its local counterpart. We cannot assure you that we will be able to complete the necessary registration or obtain the necessary approval on a timely basis, or at all. If we fail to complete the necessary registration or obtain the necessary approval, our ability to make loans or equity contributions to our PRC subsidiaries may be negatively affected, which could adversely affect our PRC subsidiaries’ liquidity and their ability to fund their working capital and expansion projects and meet their obligations and commitments.

Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.

The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The PRC government allowed the Renminbi to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation was halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. As a consequence, the RMB fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again, and it has appreciated by more than 10% since then. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

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There remains significant international pressure on the Chinese government to adopt a substantial liberalization of its currency policy, which could result in further appreciation in the value of the RMB against the U.S. dollar. To the extent that we need to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

Risks Relating to Our ADSs

If the acquisition of our company by Tsinghua Unigroup is not consummated, the market price of our ADSs could fall significantly and without warning.

Beginning in September 2013, the market price of our ADSs has been heavily influenced by proposals from other parties to acquire our company. On September 27, 2013, we announced an acquisition proposal from Shanghai Pudong Science and Technology Investment Co., Ltd . for $15.50 per ADS. The closing price of our ADSs increased from $13.88 on September 26, 2013, to $15.54 on September 27, 2013. On November 7, 2013, we announced an acquisition proposal from Tsinghua Unigroup Ltd. for $18.00 per ADS. The closing price of our ADSs increased from $15.55 on November 6, 2013, to $17.24 on November 7, 2013. On November 11, 2013, we announced that we had entered into a definitive merger agreement with Tsinghua Unigroup at $18.50 per ADS. The closing price of our ADSs increased from $17.53 on November 8, 2013, to $18.14 on November 11, 2013. On December 20, 2013, we announced that we had entered into an amendment to the definitive merger agreement with Tsinghua Unigroup. The closing price of our ADSs increased from $17.54 on December 19, 2013, to $17.95 on December 20, 2013. The merger agreement with Tsinghua Unigroup was approved at an extraordinary general meeting of our shareholders on December 27, 2013. In the first quarter of 2014, the closing price of our ADSs has remained between $17.58 and $18.28.

Upon completion of the acquisition, we will become a privately held company, our ADSs will no longer be listed on the NASDAQ Stock Market and the American Depositary Shares program for the ADSs will terminate. Each ordinary share in our company, including ordinary shares represented by ADSs, will be canceled in exchange for the right to receive $3.083333 in cash. As each ADS represents six ordinary shares, each ADS holder will receive $18.50 per ADS upon completion of the acquisition in exchange for the cancellation of the underlying ordinary shares, plus an additional $0.05 per ADS to reimburse the holder for the fees payable by the holder to cancel the ADSs under the deposit agreement.

Completion of the acquisition by Tsinghua Unigroup remains subject to the satisfaction or waiver of customary closing conditions set forth in the merger agreement, including the receipt of the required regulatory approvals. We cannot assure you when, or whether, Tsinghua Unigroup will receive such regulatory approvals. If our acquisition by Tsinghua Unigroup is not consummated, there can be no assurance that any other potential acquiror would be interested in attempting to acquire us, and the market price of our ADSs could fall significantly and without warning. Any event or development that delays or casts doubt on the ultimate consummation of the acquisition could also adversely affect the market price of our ADSs.

In addition, we may be required to pay Tsinghua Unigroup a termination fee of RMB450 million ($74.3 million) if the merger agreement is terminated because our board of directors approves another acquisition proposal, or if we receive another acquisition proposal and breach the merger agreement and then are acquired within 12 months of the termination of the merger agreement, or if the acquisition by Tsinghua Unigroup is not consummated because of U.S. regulatory action or inaction.

The trading prices of our ADSs are likely to be volatile, which could result in substantial losses to investors.

The closing trading prices of our ADSs ranged from $9.07 to $18.14 in 2013. The price of our ADSs may fluctuate in response to a number of events and factors, including the following:

·                   any event or development that delays, casts doubt on, or prevents the consummation of the acquisition of our company by Tsinghua Unigroup;

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In addition, the stock market in general, and the market prices for internet-related companies and companies with operations in China in particular have experienced volatility that often has been unrelated to the operating performance of such companies. The securities of some China-based companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of the securities of these China-based companies after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other China-based companies may also negatively affect the attitudes of investors towards China-based companies in general, including us, regardless of whether we have engaged in any inappropriate activities. In particular, the global financial crisis and the ensuing economic recessions in many countries have contributed and may continue to contribute to extreme volatility in the global stock markets, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009 and the second half of 2011. These broad market and industry fluctuations may adversely affect the price of our ADSs, regardless of our operating performance. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted share-based awards.

Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by the Public Company Accounting Oversight Board and, as such, investors may be deprived of the benefits of such inspection.

Our independent registered public accounting firm that issued the audit reports included in this annual report filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by the PCAOB.

Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections and lose confidence in our reported financial information and procedures and the quality of our financial statements.

We may be adversely affected by the outcome of the administrative proceedings brought by the SEC against the Big 4 PRC-based accounting firms.

In December 2012, the SEC brought administrative proceedings against the Big 4 accounting firms in China, including our independent registered public accounting firm, alleging that these accounting firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ audit papers and other documents related to certain PRC-based companies that are publicly traded in the United States.

On January 22, 2014, the Administrative Law Judge presiding over the matter reached an initial decision that the firms had each violated the SEC’s rules of practice by failing to produce the audit work papers and related documents directly to the SEC. The initial decision further determined that each of the firms should be censured and barred from practicing before the SEC for a period of six months. The Big 4 PRC-based accounting firms recently appealed the initial administrative law decision to the SEC. The initial administrative law decision will not become effective until and unless it is endorsed by the full SEC. The accounting firms can then further appeal the final decision of the SEC through the federal appellate courts.

While we cannot predict the outcome of the SEC’s review, nor that of any subsequent appeal process, if the Big 4 PRC-based accounting firms, including our independent registered public accounting firm, are ultimately temporarily barred from practicing before the SEC, we may not be able to meet the reporting requirements under the Exchange Act following the listing of our ADSs in the U.S., which may ultimately result in our deregistration by the SEC and delisting from the NASDAQ Stock Market, in which case our market capitalization may decline sharply and the value of your investment in our ADSs may be materially and adversely affected.

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If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about us or our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.

The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.

Sales of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in our initial public offering in 2010 and in our follow-on public offering in 2013 are freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act. As of February 28, 2014, we had 289,889,146 ordinary shares outstanding, of which 102,620,652 ordinary shares, or 35.4 %, were held by Warburg Pincus entities. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder will have on the market price of our ADSs. If any existing shareholder or shareholders sell a substantial amount of ordinary shares, the market price of our ADSs could decline.

We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax consequences for U.S. holders.

Depending upon the nature of our assets and income over time, we could be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. We will be classified as a PFIC for any taxable year if either (i) 75% or more of our gross income consists of certain types of “passive” income or (ii) 50% or more of the value of our assets (determined on the basis of a quarterly average) produce or are held for the production of passive income. We do not believe we were a PFIC for the 2013 taxable year, but there can be no assurance that we will not be a PFIC for the current or any future taxable year, as PFIC status is tested each taxable year and depends on the composition of our assets and income and the value of our assets in such taxable year. See “Taxation — United States Federal Income Taxation — Passive Foreign Investment Company Considerations” and “ — Passive Foreign Investment Company Rules.”

If we are classified as a PFIC in any taxable year in which you hold our ADSs or ordinary shares, and you are a U.S. taxpayer, you would generally be subject to increased taxes, characterization of a portion of any gain from the sale or exchange of our ADSs or ordinary shares as ordinary income, and other disadvantageous tax treatment with respect to our ADSs or ordinary shares. For more information on the U.S. tax consequences to you that would result from our classification as a PFIC, see “Taxation — United States Federal Income Taxation — Passive Foreign Investment Company Rules.”

Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

Our articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares to the extent there are available authorized but unissued preferred shares. These preferred shares may have special voting rights as compared to our ordinary shares, in the form of ADSs or otherwise, and could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be diluted.

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

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The Cayman Islands courts are also unlikely:

·                   to recognize or enforce against us judgments of courts of the United States based on civil liability provisions of U.S. securities laws; and

·                   to impose liabilities against us, in original actions brought in the Cayman Islands, based on civil liability provisions of U.S. securities laws that are penal in nature.

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.

Certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands company and all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, a majority of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your ordinary shares.

As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. Under our amended and restated memorandum and articles of association, the minimum notice period required for convening a general meeting is seven days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NASDAQ Stock Market corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the NASDAQ Stock Market corporate governance listing standards.

As a Cayman Islands company listed on the NASDAQ Stock Market, we are subject to the NASDAQ Stock Market corporate governance listing standards. However, NASDAQ Stock Market rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NASDAQ Stock Market corporate governance listing standards. For example, neither the Companies Law of the Cayman Islands nor our memorandum and articles of association requires a majority of our directors to be independent and we could include non-independent directors as members of our compensation committee and (if we chose to have one) our nominating committee, and our independent directors would not necessarily hold regularly scheduled meetings at which only independent directors are present. In addition, while NASDAQ Stock Market rules require that an issuer listing common stock hold an annual meeting of shareholders no later than one year after the end of the issuer’s fiscal year-end, neither the Companies Law of the Cayman Islands nor our articles of association contains such a requirement, and we followed the practices of Cayman Islands with respect to this matter and did not hold an annual general meeting of shareholders in 2011, although we did hold an annual general meeting of shareholders on June 1, 2012 and an extraordinary general meeting of shareholders on December 27, 2013. To the extent that we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would under the NASDAQ Stock Market corporate governance listing standards applicable to U.S. domestic issuers. For example, NASDAQ Stock Market rules require shareholder approval in certain circumstances when an issuer increases its outstanding shares by 20% or more, but neither the Companies Law of the Cayman Islands nor our memorandum and articles of association contains a similar requirement, and if we chose to follow home country practice under such circumstances, our existing shareholders would not have an opportunity to vote to approve or disapprove of such an increase.

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The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings unless:

·                   we have failed to timely provide the depositary with notice of meeting and related voting materials;

·                   we have instructed the depositary that we do not wish a discretionary proxy to be given;

·                   we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

·                   a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

·                   the voting at the meeting is to be made on a show of hands.

The effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions that it or the custodian receives on ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.

You may not be able to participate in rights offerings and may experience dilution of your holdings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

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You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

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Upon completion of the acquisition, we will become a privately held company, our ADSs will no longer be listed on the NASDAQ Stock Market and the American Depositary Shares program for the ADSs will terminate. Each ordinary share in our company, including ordinary shares represented by ADSs, will be canceled in exchange for the right to receive $3.083333 in cash. As each ADS represents six ordinary shares, each ADS holder will receive $18.50 per ADS upon completion of the acquisition in exchange for the cancellation of the underlying ordinary shares, plus an additional $0.05 per ADS to reimburse the holder for the fees payable by the holder to cancel the ADSs under the deposit agreement.

Under the merger agreement, Tsinghua Unigroup may be required to pay us a termination fee of RMB450 million ($74.3 million) if the merger agreement is terminated (i) by us or Tsinghua Unigroup if the acquisition is not completed within three months after the announcement and effectiveness of the implementation rules of the PRC State Council Notice Regarding the Publication of Catalogue of Investment Projects Subject to Governmental Approval (2013 Version), and such non-completion of the acquisition is due to Tsinghua Unigroup’s failure to obtain the required PRC government approvals; or (ii) by us if Tsinghua Unigroup shall not have either (A) obtained a confirmation letter or its equivalent from the PRC National Development and Reform Commission with respect to the acquisition or (B) completed the required registration of the acquisition with the National Development and Reform Commission under the implementation rules in all material respects within 60 days after the announcement and effectiveness of the implementation rules, in each case of (i) and (ii), other than as a result of a breach of the merger agreement by us. We may be required to pay Tsinghua Unigroup a termination fee of RMB450 million ($74.3 million) if the merger agreement is terminated because our board of directors approves another acquisition proposal, or if we receive another acquisition proposal and breach the merger agreement and then are acquired within 12 months of the termination of the merger agreement, or if the acquisition by Tsinghua Unigroup is not consummated because of U.S. regulatory action or inaction.

B. Business Overview

We are a China-based fabless semiconductor company that designs, develops and markets wireless systems-on-chip and radio-frequency semiconductors for cellular, connectivity, and broadcast applications. We shipped our first product in 2005, and our diversified product portfolio currently includes feature phone baseband, smartphone baseband, radio-frequency front end modules, power amplifiers, Wi-Fi, transceivers, Bluetooth systems-on-chip, set-top box tuners, Bluetooth and FM combo chips, FM radio receivers, walkie-talkie transceivers, LNB satellite down converters, analog mobile television receivers and CMMB mobile television receivers. Since inception, we have been dedicated to meeting the specific needs of the manufacturers of wireless devices based in China. In particular, we seek to provide the high levels of product integration, rapid time-to-market and flexible design as well as the local sales service and engineer support valued by this customer base.

Our core competency is the design of highly integrated, high-performance radio-frequency and mixed-signal systems-on-chip. We have developed our core competency through a combination of technical know-how, system- and application-level knowledge and expertise in mixed-signal integrated circuits which convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. Through internal development, licensing and acquisition, we have assembled an extensive library of radio-frequency, mixed-signal, and digital signal processing building blocks which enables us to develop our comprehensive system-level intellectual property. Our system-level intellectual property includes feature phone baseband and smartphone baseband, FM, Bluetooth, WiFi, GPS, analog mobile television, CMMB, DAB, and other radio-frequency components including 2G and 3G transceivers, DVB-T and DVB-S tuners, and power amplifiers. Our technology platform, comprising all the above, enables us to improve our design efficiency, increase the productivity of our engineers and develop new products quickly to meet customer requirements.

We initially focused on developing radio-frequency products for the wireless semiconductor market. Our radio-frequency product line has expanded over the years from power amplifiers to a broad range of technologies, including Bluetooth systems-on-chip. More recently, we have introduced a highly integrated combo chip containing FM, Bluetooth and WiFi capabilities and power amplifiers designed for the 3G market. In April 2012, we entered the baseband market with our acquisition of Coolsand’s baseband business and intellectual properties, and since then we have shipped over 200 million 2G baseband chips. Our new EDGE baseband chip is also in volume production.

We currently have more than 1,100 customers, most of which are located in our primary market, China. Our customers include the top branded handset manufacturers in China, including ZTE, Huawei, Tianyu, and TCL, and the top design houses in China, including Longcheer, Huiye, Tinno and Wingtech. We have started to expand our customer base outside of China by selling TD-SCDMA transceivers, DVB-S tuners, GSM power amplifier switch modules, and Edge transceivers to Samsung and DVB-S tuners to LG Innotek. In addition, we expanded sales of our TD-SCDMA transceivers to tier-one handset providers such as ZTE and Huawei, which use our TD-SCDMA products in their smartphones for the China market. Since our inception, over two billion RDA units have been incorporated into mobile handsets, set-top boxes, MP3 players and other wireless and consumer electronic devices and sold to consumers in China, Southeast Asia, India, the Middle East, Africa, Russia, and Latin America.

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We recorded revenue of $288.9 million and net income of $51.6 million in 2011, revenue of $391.3 million and net income of $52.9 million in 2012, and revenue of $345.0 million and net income of $28.0 million in 2013. See “Item 5. Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting Our Results of Operations — Revenue” for a discussion of the seasonality of our revenues.

Products

We design, develop, and market wireless systems-on-chip and radio-frequency semiconductors for a broad range of cellular, connectivity, and broadcast applications in consumer electronics devices, principally in mobile handsets.

Cellular Products.

Our cellular products, including power amplifiers, switches, front end modules, transceivers and basebands for mobile handsets, comprise the basic platform for wireless voice, data or video transmission. The digital baseband performs digital processing on the signal, implementing the wireless modulation scheme and encoding and extracting voice signals in and out of the transmission protocol. The transceiver sits between the power amplifier and the baseband and plays an important role in transmission and reception quality. The power amplifier amplifies the radio signal from the transceiver and sends the output through the antenna, while the switch allows multi-band power amplifiers and multi-band receivers to share the same antenna. Front end modules integrate power amplifiers and switches. In 2013, we introduced our first EDGE smartphone product, a single chip system-on-chip that integrates an ARM ® Cortex™-A5 processor, advanced graphic engine and multi-mode video decoder, EDGE modem, radio frequency transceiver, power management unit and audio codec in a 40 nanometer process.

The following table shows our principal cellular products currently in production, in each case showing the first year when the product was introduced:

Connectivity Products.

Connectivity products are products that enrich user experience by incorporating additional two-way communications features into mobile handsets and other devices. We produce highly integrated Bluetooth system-on-chip with radio transceiver and baseband processor that are compliant with Bluetooth 2.1 + EDR specification and provide an optimal solution for data and voice applications. Bluetooth functionality in a mobile device allows the user to connect to an earphone or a hands-free car speaker phone or to share files with other mobile devices. We have succeeded in integrating Bluetooth with an FM radio receiver as a system-on-chip. In 2013, we introduced a first generation Bluetooth earphone and remote controller product.

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The following table shows our principal connectivity products currently in production, in each case showing the first year of volume production:

Broadcast Products.

Our broadcast products, including radio and television receivers and tuners, receive rich media content via broadcast technology on mobile handsets, set-top boxes, portable media players, and other devices. Our FM radio receivers are highly integrated single-chip broadcast FM stereo radio receivers with a small form factor. They permit reception of FM broadcasts through mobile handsets, portable media players, and other portable devices. We also have an FM product that has a receiver and transmitter, which allows the user to share music with others wirelessly. Our DVB-S tuner is a fully integrated satellite set-top-box tuner compliant with the DVB-S and DVB-S2 and China’s ABS-S standards and can provide all of the radio-frequency functions in set-top boxes. Our DVB-T tuner offers phase noise reduction and low implementation cost, and its fully integrated design reduces board space requirements and simplifies radio-frequency layout, thus lowering system cost. Our LNB satellite down converter can convert 10 gigahertz satellite signals into a lower frequency which set-top boxes can receive and replaces the traditional discrete components, which improves factory throughput and product consistency. Our analog mobile television receiver is a fully integrated system-on-chip that allows the user to receive analog television broadcasts on a mobile handset or other mobile device. In 2013, we introduced a TV tuner for the mainstream TV market.

The following table shows our principal broadcast products currently in production, in each case showing the first year of volume production:

Technology

We have developed high-performance CMOS-based radio-frequency and mixed-signal technology, system-on-chip technology and gallium arsenide-based technology. CMOS, which stands for “complementary metal oxide semiconductor,” is the most common technology for manufacturing semiconductors and enables us to produce low cost, power efficient products. The gallium arsenide (or GaAs) fabrication process is more expensive, but it has advantages for designing semiconductors for certain products, including particularly power amplifiers, because it provides greater linearity and higher power output.

We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs. We completed migration from 110 nanometer to 55 nanometer geometry processes in 2011, and we completed migration from 55 nanometer to 40 nanometer geometry processes for baseband products in 2013. We are in the process of developing 28 nanometer geometry processes for baseband products now.

An integrated wireless product is typically partitioned into three major components: the controller, the radio-frequency component, and the digital signal processing component. We believe that the primary complexity of creating larger wireless system-level products is with the radio-frequency and digital signal processing components, which requires expertise in analog and mixed-signal technologies. The majority of our engineers specialize in software digital design and radio-frequency design. Implementation-level techniques for our radio-frequency and digital signal processing blocks are refined every time we tape out a new product, allowing us to further improve device performance and reduce die sizes. We develop the controllers by using CPUs licensed by third parties like ARM, and protocol and software stacks we developed, licensed or acquired. We believe that we have considerable expertise in both front-end design and back-end layout. In radio-frequency design, front-end design (i.e., circuit topology) determines the ultimate performance limitations, and back-end layout determines to what degree this performance can be achieved.

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We have built a wireless system-on-chip technology platform that we can utilize to increase design efficiency and raise the productivity of our engineers. This allows us to achieve shorter product cycles and faster time-to-market.

Customers

We currently have more than 1,100 customers, most of which are located in our primary market, China. We sell our products primarily to mobile handset design houses and manufacturers, set-top box design houses and manufacturers, and other consumer electronics manufacturers. Over two billion units of our products have been incorporated into mobile handsets, set-top boxes, MP3 players and other wireless and consumer electronic devices and sold to consumers in China, Southeast Asia, India, the Middle East, Africa, Russia, and Latin America. Our customers include the top branded handset manufacturers in China, including ZTE, Huawei, Tianyu, and TCL, and the top design houses in China, including Longcheer, Huiye, Tinno and Wingtech. We have started to expand our customer base outside of China by selling TD-SCDMA transceivers, DVB-S tuners, GSM power amplifier switch modules, and Edge transceivers to Samsung and DVB-S tuners to LG Innotek. In addition, we expanded sales of our TD-SCDMA transceivers to tier-one handset providers such as ZTE and Huawei, which use our TD-SCDMA products in their smartphones for the China market.

We have a diversified customer base and none of our customers accounted for 10% or more of our revenue in 2011 or 2012. Two of our customers accounted for more than 10% of our revenue in 2013, with 11.5% and 10.4%. In the aggregate, our ten largest customers accounted for 33.3%, 40.3% and 52.4% for 2011, 2012 and 2013, respectively. As we have been providing more favorable incentives to our top customers, for example higher rebates, they have tended to increase their orders with us.

We contact our customers frequently, sometimes on a weekly basis, to assess their needs, and we adjust inventory levels and foundry orders accordingly. However, guidance we receive from our customers about future orders is not binding until they actually place an order. See “Risk Factors — Risks Related to Our Business — Because we do not have long-term commitments from our customers, we must estimate customer demand, and our ability to accurately forecast demand for and sales of our products is limited, which may have negative effects on our inventory levels, sales and results of operations.”

We currently sell most of our products to customers through a small number of independent, non-exclusive distributors, including Auctus Technologies Group Limited, Arrow Asia Pac Ltd. and China Achieve Limited. For the years ended December 31, 2011, 2012 and 2013, 90%, 92% and 90 % of our total revenue were from sales through distributors. Our distributors maintain inventories of our products, provide storage, shipping, and other services to us, and provide payment terms to our customers. Sales to Auctus Technologies Group Limited accounted for 52%, 49% and 48 % of our revenues in 2011, 2012 and 2013, respectively; sales to China Achieve Limited accounted for 18%, 19% and 22 % of our revenue in 2011, 2012 and 2013, respectively; and sales to Arrow Asia Pac Ltd. accounted for 14%, 13% and 8 % of our revenues in 2011, 2012 and 2013, respectively. We currently have a total of eight distributors and we add and drop distributors from time to time. While we issue invoices to our distributors and ship products to them, we do not consider them to be customers. Only in limited cases do we sell directly to our customers.

We have entered into distribution agreements with each of our distributors. Under the terms of these agreements, we provide a one-year warranty on our products to the customers who buy through our distributors. We refund the net purchase price for any defective products returned under the warranty. We undertake to indemnify the distributors for any losses they suffer or any costs they incur due to our conduct or defects in our products, and to indemnify both the distributors and our customers for any losses they suffer due to our products having infringed intellectual property rights. We warrant to our distributors that we are the owner or licensee of all intellectual property incorporated in our products. Our distribution agreements are effective until terminated by either party and may be terminated by either party without cause with 30 days’ written notice. In the event of termination, we are required to repurchase unsold inventory from the distributor, and if the distributor terminates without cause, the repurchase price will be reduced by a 5% handling charge.

We decide what products will be available through our distributors, what prices the distributors pay for products, and what prices the customers pay for products. We bill the distributor at the time that the products are shipped to the distributor, and we require payment from distributors within 30 to 60 days. (For the small number of direct sales to customers, we require payment within 60 to 90 days.) Because the distributors may return any unsold products of ours for a full refund, we do not book revenue until the products are sold to customers and we treat products shipped to distributors as our inventory. We generally maintain four to five weeks of inventory for each product, some of which is held by our distributors.

Sales and Marketing

We market our products through our direct sales force and through independent distributors. We organize our direct sales force by region and have sales teams based in Beijing, Shanghai, Shenzhen, Korea and India.

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We believe our sales force and distributors’ industry knowledge helps make targeted approaches to potential customers more efficient and more effective than mass marketing and advertising, in particular because we must invest significant time and effort into completing a sale after we have initially identified and approached a potential customer.

Due to the complex and innovative nature of our products, our experienced field application engineers work closely with customers during the design process. A considerable amount of effort is typically required prior to any sale to assist the customer in incorporating our products into its design. We provide our customers with reference designs for complete systems integration including schematics, printed circuit board layout files and software to accelerate time to market and facilitate the design-in and application customization of our products in their devices.

Our field application engineers (and, when necessary, our R&D engineers) also provide on-site technical support to our customers both before and after sales are made.

Competition

As we target and supply products to multiple markets and applications, we face competition from a large number of firms. We compete with MediaTek in a number of products related to mobile handsets in China as well as with multinationals such as Qualcomm, Broadcom, Intel, and STMicroelectronics that offer a broad line-up of stand-alone and integrated semiconductor solutions. In addition, there are companies that we compete with in one particular product or product family, such as Spreadtrum in baseband, RF Micro Devices, Skyworks, Triquint, Avago and Murata in power amplifiers, switches and front end modules; NXP and Silicon Laboratories in FM radio receivers; Maxim and Zarlink in DVB-S tuners; Maxim, MaxLinear and NXP in DVB-T tuners; Newport Media in analog mobile television receivers; Samsung and CSR plc in Bluetooth solutions; Marvell, Qualcomm Atheros, CSR plc and Texas Instruments in WiFi combo chips; and Newport Media, Innofidei, Maxscend, TelePath Technologies and Siano in CMMB television. As we enter new markets, we may face new competitors.

The markets for semiconductors generally, and for wireless systems-on-chip and radio-frequency semiconductors in particular, are intensely competitive. We anticipate that the market for our products will continually evolve and will continue to experience rapid technological change, evolving industry standards, shifting customer requirements, and frequent product introductions. This is particularly true with baseband technology, which is complex and requires diverse expertise in many different disciplines. We must continually design, develop and introduce new products with improved features to be competitive. We believe the principal competitive factors in our industry are:

Many of our competitors and potential competitors have longer operating histories, greater brand recognition, access to larger customer bases, complementary product offerings, and significantly greater financial, sales and marketing, research and development, manufacturing, distribution, technical and other resources than we do. Current and potential competitors have established or may establish financial and strategic relationships between themselves or with our existing or potential customers, suppliers, or other third parties. Our competitors may also offer bundled products, which may negatively impact our competitive position despite the technical merits or advantages of our products. In addition, our customers could develop products or technologies internally that would replace their need for our products and would become a source of competition.

Intellectual Property

Our future success depends in part upon our proprietary technology. We seek to protect our technology through a combination of patents, copyrights, trade secrets, trademarks and confidentiality agreements. As of February 28, 2014, we have 69 patents issued by the State Intellectual Property Office of the PRC in the integrated circuit field and an additional 28 patent applications pending. There can be no assurance that patents will ever be issued with respect to these applications. We claim copyright protection for proprietary documentation for our products. We have registered the visual images of 17 integrated circuits with the State Intellectual Property Office of the PRC. We have also registered the “RDA” logo as a trademark in China. We rely in some circumstances on trade secrets to protect our technology.

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With respect to the proprietary rights to our intellectual property, we have entered into research and development service agreements with our two PRC operating entities, RDA Shanghai and RDA Beijing, under which all intellectual property to the technologies developed in the process of rendering research and development services by RDA Shanghai or RDA Beijing shall be owned by RDA Hong Kong.

We intend to protect our rights vigorously, but there can be no assurance that our efforts will be successful. Furthermore, it is often difficult to create and enforce intellectual property rights in China. In addition, the laws of other countries in which our products are sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. See “Risk Factors — Risks Related to Our Business — We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.”

We license some of the intellectual property that we use in our business. We have a non-exclusive license for certain semiconductor technology that we believe to be material to our business under a license agreement with ARM Limited. This agreement has an indefinite term and remains valid unless terminated by either party. The agreement may only be terminated by ARM under certain specified circumstances, including a material breach by us that cannot be remedied or is not remedied within 60 days or winding-up or similar proceedings by or against us. ARM is obligated to provide us with updates, support, and commercially reasonable efforts to correct any defects in the technology they license to us. Our non-exclusive license with ARM Limited has been renewed under two annexes to the license agreement dated June 22, 2009.

We also entered into a non-exclusive license agreement with Silicon Labs in 2010, under which we license certain intellectual property that we believe to be material to our business relating to FM and AM/FM integrated circuits. We and Silicon Labs also released and discharged each other from any claims of patent infringement occurring on or prior to the effective date of the agreement, subject to compliance with the terms of the agreement. We have also promised not to assert any infringement claims against Silicon Labs or its customers during the term of this agreement, and we have agreed with Silicon Labs to negotiate in good faith to license to Silicon Labs the right to manufacture (or have manufactured) and to sell our satellite tuner integrated circuits. Neither we nor Silicon Labs can terminate this agreement without the express written agreement of the other party, except for cause. The original three-year term of the license has been extended now until May 2016.

On December 29, 2011, we signed an intellectual property license and development agreement with Trident Microsystems. Under this agreement, we paid $16.0 million in cash to secure a non-exclusive, worldwide, non-transferable license to develop, manufacture and sell derivative versions of the Trident SX5 Digital TV system-on-chip platform for a period of 10 years. We use this intellectual property to develop products for the television and display markets.

On March 22, 2012, we acquired all of the baseband intellectual property of Coolsand Technologies (Hong Kong) Limited, or Coolsand, a privately owned company controlled by Warburg Pincus entities. The consideration paid was $46 million, including cash, ordinary shares and offset of accounts receivable due. Handset functionalities are increasing rapidly and as a result the integrated circuits used in the handset require a higher level of integration. Connectivity functions such as Bluetooth and FM radio are being integrated into the baseband and standalone Bluetooth and FM radio products may eventually become redundant. We made the decision to acquire Coolsand’s baseband technology in part to enable us to cope with the higher level of integration that we expect and in part to allow us to enter the baseband market and thus increase our total addressable market.

Many participants in the semiconductor and electronics industries have a significant number of patents and have frequently demonstrated a readiness to commence litigation based on allegations of patent and other intellectual property infringement. From time to time, third parties may assert infringement claims against us. As we grow in size and enter new markets and encounter new competitors, we may encounter such claims more frequently. We may not prevail in any such litigation or may not be able to license any valid and infringed patents from third parties on commercially reasonable terms, if at all. Litigation, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time. Any such litigation could materially adversely affect us. See “Risk Factors — Risks Related to Our Business — Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation expenses or licensing expenses or be prevented from selling certain of our products if these claims are successful.”

Manufacturing

We use third-party foundries and independent testing and packaging vendors to manufacture, test and package our products. This outsourced manufacturing approach allows us to focus our resources on the design, sale, and marketing of our products. Our engineers work closely with the foundries we use and other subcontractors to increase yield, lower manufacturing costs, and improve product quality.

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Wafer Fabrication.

We use industry-standard CMOS manufacturing process technology for our radio-frequency semiconductors and gallium arsenide technology for our power amplifier semiconductors. We use a number of different foundries to fabricate our semiconductor wafers, including Semiconductor Manufacturing International Corporation (SMIC) in China, Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan, IBM in the United States and GlobalFoundries in Singapore for our CMOS semiconductors and WIN Semiconductors and Wavetek Microelectronics Corporation in Taiwan for our gallium arsenide semiconductors. We completed migration from 110 nanometer to 55 nanometer geometry processes in 2011, and we completed migration from 55 nanometer to 40 nanometer geometry processes for baseband products in 2013. We are in the process of developing 28 nanometer geometry processes for baseband products now. The number of foundries worldwide that can meet our fabrication needs is limited, especially for gallium arsenide semiconductors and for our IPD front end modules.

Testing and Packaging.

Upon the completion of silicon processing at the foundry, we forward the finished silicon wafers to our third-party subcontractors for testing and packaging. We use a number of different subcontractors to carry out testing and packaging functions, including United Test and Assembly Center (UTAC), Suzhou ASEN Semiconductor Company Ltd (ASEN), Unisem, Sigurd Microelectronics, Carsem (m) Sdn Bld, Jiangsu Changjiang Electronics Technology, Nantong Fujitsu Microelectronics and Powertech Technology Inc. The market for outsourcing testing and packaging services is less concentrated than the market for foundry services, and we believe that we are not dependent upon any single subcontractor for our testing and packaging needs. We develop our own tests for our subcontractors to use in testing our products.

Quality Assurance.

We have implemented significant quality assurance procedures to assure high levels of product quality for our customers. We closely monitor the work-in-progress information and production records maintained by our suppliers, and communicate with our third-party subcontractors to assure high levels of product quality and an efficient manufacturing time cycle. Upon successful completion of the quality assurance procedures, all of our products are stored and shipped to our customers or distributors directly from our third-party subcontractors in accordance with our shipping instructions.

We do not have long-term agreements with foundries or with testing and packaging vendors. We typically have to place orders with foundries eight or more weeks before we can receive the finished products, and we generally maintain four to five weeks of inventories to accommodate anticipated demand. Meanwhile, we typically sell products pursuant to purchase orders and do not have long-term purchase commitments. See “Risk Factors — Risks Related to Our Business — Because we do not have long-term commitments from our customers, we must estimate customer demand, and our ability to accurately forecast demand for and sales of our products is limited, which may have negative effects on our inventory levels, sales and operating results.”

Research and Development

We have 230 R&D engineers (152 of whom have advanced degrees) as of December 31, 2013, compared to 219 R&D engineers as of December 31, 2012 and 153 R&D engineers as of December 31, 2011. We generally recruit directly from universities, typically graduates with advanced degrees, because we find that skills developed with other semiconductor designers are not necessarily transferable to our business. In many cases, the R&D engineers who originally developed a product are also directly involved in supporting the customers who use it.

Our Shanghai operating subsidiary, RDA Microelectronics (Shanghai), Inc., has been certified in conformity with the ISO 9001:2008 standard in its research and development of wireless communication circuitry.

We incurred research and development expenses of $32.8 million, $54.6 million and $64.9 million in 2011, 2012 and 2013, representing 11.3%, 14.0% and 18.8% of our revenues in those years, respectively.

Insurance

We maintain various insurance policies to safeguard against risks and unexpected events. We insure the shipment of our products at each stage from the foundry to the subcontractors to the distributors, but we do not insure the products that are held by the subcontractors or distributors. We bear the risk of loss when our products are being tested and packaged by our subcontractors, but our distributors bear the risk of loss when they hold the finished products in inventory for us. We have purchased all risk property insurance covering certain property, principally our lab testing equipment. We also provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance for our employees. In addition, we provide group life insurance for all our employees. We do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain product liability insurance or key-man life insurance. We consider our insurance coverage to be in line with that of other technology companies of similar size in China.

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REGULATION

The semiconductor industry in China is subject to a number of laws and regulations. This section summarizes the principal PRC regulations currently relevant to our business and operations in China.

Regulations and Policies that Encourage the Development of Semiconductor Design Companies

China has had preferential policies on investment, financing, tax, industrial process, technology, income distribution and export-related matters concerning integrated circuit design enterprises since 2000. On January 28, 2011, the State Council promulgated a notice regarding measures to encourage the development of the software and integrated circuit industry which, among other things, further stipulates and/or restates encouragement policies in respect of the integrated circuit design industry. To facilitate the implementation of this notice, the Treasury Department and the State Administration of Taxation promulgated a circular on April 20, 2012 to further specify or restate the policy of preferential treatment and set forth the qualifications for eligible integrated circuit companies. On December 3, 2013, the Ministry of Industry and Information Technology, the National Development and Reform Commission, the Ministry of Finance and the State Administration of Taxation issued a notice for administration of accreditation of integrated circuit design enterprises, to further clarify the regulations and rules governing integrated circuit design enterprises and accelerate the development of the industry of integrated circuit design.

Accreditation of Integrated Circuit Design Enterprises

Duly accredited integrated circuit design enterprises may qualify for certain preferential industrial policies. In order to obtain accreditation, an integrated circuit design enterprise must:

·                   be a legally established enterprise whose principal business is integrated circuit design;

·                   have a ratio of employees who have signed a labor contract holding a junior college or a higher academic degree to the total average monthly employees in the current year of not less than 40%, and a ratio of research and development staff to the total average monthly employees in the current year of not less than 20%;

·                   be in possession of certain core technology and carry out business activities based on it. The ratio of the total R&D expenses to the total sales (business) income of enterprise must be not less than 6%, and the ratio of R&D expenses incurred in China to the total R&D expenses must be not less than 60%;

·                   have a ratio of IC design and sales (business) income to total income of not less than 60%, and a ratio of independent IC design sales (business) income to total income of not less than 50%;

·                   have independent intellectual property rights for its main business;

·                   have the means and capacity to ensure the quality of designed products, and establish the quality management system meeting the requirements of integrated circuits and provide archive records of the process of effective operations;

·                   have production premises, hardware and software equipment and other developmental environments which are compatible with integrated circuit design, and the technical supporting environment related to the provision of services;

In order to renew the accreditation as integrated circuit design enterprise s, in addition to fulfilling the abovementioned requirements, the sales ( business ) income of the enterprise for the previous fiscal year shall normally be no less than RMB2,000,000.

The Ministry of Industry and Information Industry is the authorized examination and approval administration for accreditation of integrated circuit design enterprises and has designated the China Semiconductor Industry Association and two other agencies to conduct the accreditation of integrated circuit design enterprises.

We conduct our integrated circuit design in China through RDA Shanghai and RDA Beijing, which were initially accredited as integrated circuit design enterprises by the Ministry of Industry and Information Industry of China in 2007 and 2008, respectively. Both RDA Shanghai and RDA Beijing have passed the latest annual review of this accreditation.

Foreign Investment Policy

Foreign investment in integrated circuit design falls into the “encouraged” category and may be eligible for certain types of preferential treatment.

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Preferential Taxation Policies

Exemption of Customs Duties and Import-Related Value-added Tax . An integrated circuit design enterprise generally does not need to pay customs duty or import-related value-added tax on any imported equipment necessary for its own use or any technology, ancillary parts and spare parts that are included in the contract for the equipment, except where such equipment, technology and parts are specifically identified as ineligible for the exemption. RDA Shanghai and RDA Beijing have in the past applied for and successfully obtained exemptions from customs duty and import-related value-added tax and expect to continue to apply for such exemptions in accordance with relevant regulations in the future.

Exemption, Setoff and Refund Measures for Export-Related Value-added Tax. Effective May 1, 2011, integrated circuit design enterprises that have been established for more than two years are entitled to preferential treatment when they engage in (i) the export of goods that they independently developed and designed and other enterprises processed, or (ii) the export of goods whose production and processing they entrusted to other domestic enterprises, or (iii) the export of goods which such enterprises entrusted to overseas enterprises for processing and imported into China to be re-exported under their own brand name. The preferential treatment includes exemptions, setoffs and refunds of the export-related value-added tax. RDA Shanghai and RDA Beijing are not currently engaged in the export of goods and thus do not make use of this preferential treatment.

Enterprise Income Tax. An accredited integrated circuit design enterprise is entitled to take advantage of the preferential policies for enterprise income tax. Before December 31, 2017, from the year in which an eligible integrated circuit design enterprise first has positive accumulated earnings, it is exempted from enterprise income tax for two years and is entitled to a 50% reduction in the enterprise income tax for the succeeding three years. In addition, a qualified high-technology company may benefit from a preferential tax rate of 15% as a “high and new technology enterprise” if it owns its core intellectual properties and belongs to one of the enumerated industries. However, an enterprise may not simultaneously enjoy both the 50% reduction and the 15% preferential tax rate. RDA Beijing and RDA Shanghai have each qualified as a “high and new technology enterprise,” and in 2011, RDA Shanghai successfully renewed its qualification as a “high and new technology enterprise” for three years.

RDA Shanghai wa s eligible for the 15% preferential tax rate as a high and new technology enterprise in 2012 and 2013 . RDA Shanghai intends to renew its qualification as a “high and new technology enterprise” in 2014 to continue enjoying the 15% preferential tax rate . RDA Beijing wa s eligible for the 50% exemption as an accredited integrated design enterprise in 2012. RDA Beijing wa s eligible for the 15% preferential tax rate as a high and new technology enterprise in 201 3 and is eligible for the 15% preferential tax rate as a high and new technology enterprise in 201 4 .

Integrated circuit design enterprises also benefit from other forms of preferential tax treatment in addition to the five-year full and partial exemption discussed above, such as being allowed to deduct the actual amount of employee training expenses in the calculation of its taxable income.

Business Tax and Value-added Tax . In 2012 and 2013, the PRC government implemented a pilot program to levy a 6% value-added tax on revenues generated from certain kinds of services in lieu of the 5% business tax. RDA Shanghai and RDA Beijing have been subject to a 6% value-added tax on all of their revenue since January 2012 and September 2012, respectively. However, revenue from technology transfer and related R&D services can be exempted from value-added tax, subject to government approval on a case-by-case basis. Before the PRC government phased in the value-added tax to replace the 5% business tax, RDA Shanghai and RDA Beijing had been subject to the 5% business tax on their revenue . The business tax had also been subject to exemption by government approval on a case-by-case basis.

Intellectual Property Protection for Semiconductors

China has laws relating to intellectual property rights, including the Patent Law, the Copyright Law and the Trademark Law. China is also a signatory to the main international conventions on intellectual property rights, including the Paris Convention for the Protection of Industrial Property of the World Intellectual Property Organization and the Washington Treaty on Intellectual Property in Respect of Integrated Circuits, and China became a member of the Agreement on Trade Related Aspects of Intellectual Property Rights upon its accession to the World Trade Organization in December 2001.

We seek to protect our technology through a combination of patents, copyrights, trade secrets, trademarks and confidentiality procedures. As of February 28, 2014, we have 69 patents issued by the State Intellectual Property Office of the PRC in the integrated circuit field and an additional 28 patents application pending.

Protection of Integrated Circuit Layout Design

Under the 2001 Regulations for the Protection of the Layout Design of Integrated Circuits, an integrated circuit layout design is defined as a three-dimensional configuration in a semiconductor that has two or more components, at least one of which is an active component, and part or all of the interconnected circuitry or the three-dimensional configuration has been prepared for the production of semiconductors.

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The following persons and entities can hold proprietary rights in the layout designs that they create: (i) PRC natural persons, legal persons or other organizations; (ii) foreign persons or companies who are creators of an integrated circuit layout design and whose layout designs are first commercially used in China; and (iii) foreign persons or companies from a country that either has an agreement with China concerning the protection of layout designs or is a signatory to an international treaty concerning the protection of layout designs to which China is also a signatory.

A holder of proprietary rights in a layout design may:

·                    duplicate the entire protected layout design or any part of the original design; and

·                    use the protected layout design, the integrated circuit containing the layout design, or commodities containing the integrated circuit commercially.

The proprietary rights are valid after the layout design is registered with the State Intellectual Property Office of the PRC.

Proprietary rights in a layout design are granted for ten years, commencing from the earlier of the date of the application for registration of the layout design or the first date of its commercial use anywhere in the world. However, a layout design is not entitled to any protection beyond 15 years from the time of its creation, regardless of when the layout design is registered or put into commercial use. The holder of the proprietary rights may transfer those rights to another party or grant permission for use of the design.

The State Intellectual Property Office decides on applications for registration of layout designs. An application must be made within two years of the design being put in commercial use anywhere in the world, or the application will be rejected.

As of February 28, 2014, we have registered the visual images of 17 integrated circuits with the State Intellectual Property Office of the PRC.

Compulsory Licenses for Exploitation of Semiconductor Patents

A company may request the State Intellectual Property Office to grant a compulsory license to use a patent if: (i) the patentee, after the lapse of three full years from the date when patent is granted and after the lapse of four full years from the date when a patent application is filed, fails to exploit or to fully exploit the patent without any justifiable reason; or (ii) the patentee’s act of exercising the patent rights is determined as a monopolizing act and the compulsory license would eliminate or reduce the adverse consequences of the monopolizing act on competition. A compulsory license for the use of a semiconductor technology patent is restricted to public and non-commercial uses and subject to the circumstance described in item (ii) above.

The Intellectual Property Administration Department of the State Council may grant a non-voluntary license to use a layout design in the event of a national emergency or any extraordinary state of affairs, where public interest so requires, or where the holder is engaging in unfair competition that requires a remedy, as determined by a court or the Department of Supervision and Inspection against Unfair Competition. The scope and duration of the license will be determined in accordance with the reasons justifying the grant. The scope shall be limited to non-commercial use for public purposes or to remedy the holder’s unfair competitive actions.

Our PRC patents and layout designs may be subject to the compulsory licenses in accordance with the relevant regulations.

Regulations on Foreign Exchange

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended on August 5, 2008. Under these regulations, the RMB is freely convertible for current account items, including the distribution of dividends, interest payments, and trade and service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments, and investments in securities outside of China, unless the prior approval of SAFE is obtained and prior registration with SAFE is completed.

On August 29, 2008, SAFE issued a circular regulating the conversion of foreign currency into RMB by a foreign-invested company by restricting how the converted RMB may be used. The circular requires that the registered capital of a foreign-invested enterprise settled in RMB that is converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the registered capital of foreign-invested enterprises settled in RMB converted from foreign currencies. The use of such RMB capital may not be changed without SAFE’s approval, and may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. On May 11, 2013, SAFE further issued a circular on regulating domestic direct investment by foreign investors . The circular requires that the foreign exchange capital and RMB capital obtained through foreign exchange settlement shall actually be used only by and for such enterprises themselves within their business scopes. Violations of the circulars may result in severe penalties, such as heavy fines.

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Regulations on Dividend Distribution

Wholly foreign-owned companies in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards. Remittance of dividends by a wholly foreign-owned enterprise out of China is subject to examination by the banks designated by SAFE. Wholly foreign-owned companies may not pay dividends unless they set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds, until such time as the accumulative amount of such fund reaches 50% of the wholly foreign-owned company’s registered capital. In addition, these companies also may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds, at their discretion. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

SAFE Regulations on Offshore Special Purpose Companies

The PRC State Administration of Foreign Exchange, or SAFE, promulgated regulations in October 2005 and additional implementing regulations in May 2013 that require PRC residents to register with local branches of SAFE if they use assets or equity interests in PRC entities as capital contributions to establish offshore companies, or if they inject assets or equity interests of their PRC entities into offshore companies to raise capital overseas. In addition, any PRC resident who makes, or has previously made, direct or indirect investments in such an offshore company (referred to in the SAFE regulations as an “offshore special purpose company”) is required to further update that registration for such things as increases or decreases in the offshore special purpose company’s share capital, transfers or swaps of its shares, mergers, long-term equity or debt investments, and the creation of any security interest.

While our PRC counsel, Jun He Law Offices, has advised us that the aforementioned SAFE regulations do not apply to us as our corporate structure was not formed with any assets or equity interests in any PRC entities, we cannot assure you that SAFE shares the same view. See “Risk Factors — Risks Relating to Doing Business in China — PRC regulations relating to offshore investment activities by PRC residents may limit our subsidiaries’ ability to increase their registered capital or distribute profits to us, limit our ability to inject capital into our PRC subsidiaries, or otherwise expose us to liability under PRC law.”

On February 15, 2012, SAFE promulgated the SAFE Circular on Relevant Issues Concerning the Foreign Exchange Administration for Domestic Individuals’ Participation in the Share Incentive Schemes of Overseas-Listed Companies, or Circular 7. Circular 7 supersedes a SAFE circular regarding share option plans issued in March 2007. Circular 7 also requires domestic employees who participate in stock incentive plans in overseas-listed companies, including employee stock holding plans, share option plans or similar plans, to register with the relevant local SAFE branch through a PRC agent. A PRC agent may be the domestic company involved in the stock incentive plan or a domestic institution that is qualified to engage in an assets custodian business and has been duly designated by that domestic company. We and our PRC employees who have been granted stock options, restricted share units and restricted shares are subject to these regulations.

PRC Technology Import and Export

Technology import and export is broadly defined under Chinese law to include, without limitation, the transfer or license of patents, software and know-how and the provision of services in relation to technology. The import and export of technology must be registered with a competent governmental authority.

From time to time, the PRC government promulgates catalogues of restricted and prohibited technology. Restricted technology may only be imported or exported with the approval of the Ministry of Commerce; prohibited technology may not be imported or exported at all. Technology that does not fall into either of the above two catalogues can be imported or exported upon registration with competent commercial administration authority.

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C. Organization Structure

The following diagram illustrates our corporate structure:

D. Property, Plants and Equipment

Our headquarters are located in Shanghai, and we maintain research facilities in both Shanghai and Beijing. We maintain small sales offices in Shenzhen and in Seoul, Korea, and we are expanding our office in Hong Kong to handle procurement, investment, strategic planning, and certain other functions in addition to sales. We lease an aggregate of approximately 2,424 square meters of office space in Shanghai, approximately 1,770 square meters of office space in Beijing, approximately 838 square meters of office space in Shenzhen, approximately 106 square meters of office space in Seoul and approximately 100 square meters of office space in Hong Kong.

We believe that our existing facilities are adequate for our current and foreseeable requirements.

See footnote 5 to our financial statements for further information about our property and equipment.

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In 2013, we introduced our first EDGE smartphone product, a single chip system-on-chip that integrates an ARM ® Cortex™-A5 processor, advanced graphic engine and multi-mode video decoder, EDGE modem, radio frequency transceiver, power management unit and audio codec in a 40 nanometer process. We also introduced an updated model of our GSM baseband product and a first generation Bluetooth earphone and remote controller product.

We are also migrating to smaller geometry process technologies to reduce our costs. We completed migration from 55 nanometer to 40 nanometer geometry processes for baseband products in 2013 and we are in the process of developing 28 nanometer geometry processes for baseband products now. We expect successful implementation of these plans to help reduce our costs and improve our gross margin.

We have grown rapidly since our inception. Our revenue increased from $1.2 million in 2005 to $391.3 million in 2012, and we also recorded a net income of $52.9 million in 2012, as compared to a net loss of $6.0 million in 2005. However, our revenue declined to $345.0 million in 2013 and our net income declined to $28.0 million.

We currently have more than 1,100 customers, most of which are located in China. We anticipate that most of our revenue will continue to be derived from sales to our customers in China. However, a significant number of mobile handsets, set-top-boxes, and other products designed and manufactured by our customers and incorporating our products are sold outside China, principally in emerging markets. We have a diversified customer base and none of our customers accounted for 10% or more of our revenue in 2011 or 2012. Two of our customers accounted for more than 10% of our revenue in 2013, with 11.5% and 10.4%. In the aggregate, our ten largest customers accounted for 33.3%, 40.3% and 52.4% for 2011, 2012 and 2013, respectively. As we have been providing more favorable incentives to our top customers, for example higher rebates, they have tended to increase their orders with us. We currently sell most of our products to customers through a small number of independent, non-exclusive distributors.

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Average Selling Price

As a product matures, we expect its average selling price to decline due to the greater availability of competing products. Changes in average selling prices cannot always be predicted with certainty. Sometimes the average selling price of a product may decline earlier or faster than we expect it to. Sometimes competitors will anticipate our entry into a market and start to lower their selling prices even before we introduce our product. Overall, our average selling price has dropped from year to year. Under certain circumstances, lower prices may increase our sales volume and thus our revenue, but a lower average selling price typically reduces our gross margin. We expect to continue to face price pressure on our products as average selling prices for semiconductor products generally decline over time, and there is no assurance that our gross margins will not continue to decline in the future.

Cost Reductions

We have been able to reduce the average per unit costs for our products primarily by redesigning our products to achieve smaller die sizes, which reduces material costs. We have been working to migrate our process technology to increasingly smaller sizes in order to improve our cost competitiveness. We began production of 110 nanometer designs in May 2010 and we have developed Bluetooth, FM, CMMB, WiFi + Bluetooth + FM combo and analog television using 55 nanometer designs in 2011. We completed migration from 55 nanometer to 40 nanometer geometry processes for baseband products in 2013 and we are in the process of developing 28 nanometer geometry processes for baseband products now. Integration also helps us reduce material costs. Our GSM baseband product integrates a quad-band radio-frequency transceiver, power management unit, Bluetooth, FM receiver, and class-K audio amplifier in a single-chip design that significantly reduces costs as compared to multiple separate chips. Our EDGE smartphone product is a single chip system-on-chip that integrates an ARM ® Cortex™-A5 processor, advanced graphic engine and multi-mode video decoder, EDGE modem, radio frequency transceiver, power management unit and audio codec in a 40 nanometer process

Our integrated passive device (IPD) technology has allowed us to reduce costs on certain front end module designs. We have also negotiated more favorable pricing with the foundries and the testing and packaging vendors we have used as the scale of our business has grown and we have achieved higher unit volumes. We have worked with foundries to reduce our costs by improving manufacturing yields. In general, new products tend to have higher unit cost due to the initially low production volumes required by our customers and initially low manufacturing yields. As we ramp up our production volumes, unit production costs tend to decrease. The cost of wafer fabrication and testing and packaging services, which are significant components of our cost of revenue, vary cyclically with overall demand for semiconductors and our suppliers’ available capacity for such products and services.

Description of Certain Line Items

Revenue

Our revenue is generated almost exclusively by sales of semiconductors. We sell our products primarily to mobile handset design houses and manufacturers, set-top box design houses and manufacturers, and other consumer electronics manufacturers. Our sales have historically been made on the basis of purchase orders rather than long-term agreements. Our sales are denominated in U.S. dollars.

We sell the vast majority of our products through distributors. We offer our distributors rights of return or price protection privileges on unsold products. Price protection rights give distributors the right to a credit in the event of declines in the price of our products. We defer recognition of revenue and the related cost of revenue on shipments to distributors because we cannot reliably estimate returns or price adjustments due to rapid changes in technology, consumer preferences, and prices.

We issue invoices to our distributors at the time that we ship our products to them, and we require them to pay us within 30 to 60 days of the date of the invoice. We book the invoice amounts as deferred revenue. When a product is sold to a customer, we credit the distributor with a rebate that reflects (1) the fee for their role in selling and distributing the product, expressed as a percentage of the sales price of the product, and (2) if the price to the customer was lower than the price paid to us by the distributor, the difference between the price to the customer and the price paid to us by the distributor. In addition, we also grant rebates directly to certain of our customers. Our revenue reflects the amount net of these rebates.

Our revenue and operating results have fluctuated in the past from quarter to quarter due in part to seasonal variations in demand for mobile handsets, set-top boxes, and other consumer electronics that incorporate our products. Typically, we have higher sales during the third quarter of each year as vendors in China stock up for the National Day holiday at the beginning of October. In addition, business activities in China generally slow down in the first quarter of each year during the Chinese New Year period, which adversely affects our sales and results of operations during the period. Due to our limited operating history, the seasonal trends that we have experienced in the past may not apply to, or be indicative of, our future operating results.

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Cost of Revenue

Our cost of revenue primarily consists of costs associated with the fabrication of wafers, testing and packaging, and inbound and outbound shipping of our products; cost of operating supplies; royalty costs; and write-downs caused by excess inventories and obsolescence from the transition of older to newer products, including losses for non-cancelable purchase commitments for inventory that has been ordered but not yet delivered to us. As we do not have long-term agreements with third-party foundries and testing and packaging vendors, and typically place orders with the vendors on a rolling basis, our costs for wafer fabrication, testing, and packaging are susceptible to changes based on cyclical demand in the global semiconductor market.

Operating Expenses

Our operating expenses primarily consist of research and development expenses and selling, general, and administrative expenses. Our operating expenses have been growing in absolute terms as we have expanded our business.

Research and Development Expenses

Research and development expenses consist primarily of salaries, bonuses, benefits, and share-based compensation for research and development personnel; wafer, packaging and test costs for products under development; tape out expenses for designing and drawing of new products; computer-aided design software licenses and intellectual property license costs; depreciation of lab testing equipment; and allocated office space cost. All these cost are expensed as incurred. Licenses purchased to support our ongoing research and development activities are capitalized only when related to products that have achieved technological feasibility or have an alternative future use, in which case they are capitalized as intangible assets and are amortized over their estimated useful lives. Research and development activities include the design of new products and software, refinement of existing products, and design of test methodologies to ensure compliance with required specifications. All research and development costs are expensed as incurred.

We expect that our total research and development expenses will increase as we continue to develop new products and migrate to more advanced geometry processes. Research and development expenses may fluctuate from period to period due to the timing of certain items related to new product development initiatives, such as engineering mask and wafer costs. We expect our research and development expenses to increase as we acquire more intellectual property for our technology platform.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses consist primarily of salaries, bonuses, benefits, share-based compensation, and related personnel costs; costs for professional services; and allocated office space cost. We expect that our total selling, general, and administrative expenses will increase as we expand our sales and marketing network to promote and sell our products, engage in additional marketing and promotional activities, and hire additional personnel and incur costs related to the anticipated growth of our business and our operation as a public company.

Taxation

Cayman Islands and British Virgin Islands . Under the current laws of the Cayman Islands and the British Virgin Islands, our holding company in the Cayman Islands and our subsidiaries in the British Virgin Islands are not subject to income or capital gains tax in those jurisdictions.

Hong Kong . Prior to 2010, RDA Hong Kong was a trading entity whose profits were fully subject to profits tax at the prevailing rate of 16.5%. In 2010, RDA Hong Kong started to have substantial involvement in manufacturing arrangements in the PRC and began to claim 50% of its profits as offshore sourced and excluded from profits subject to the 16.5% prevailing profits tax under Hong Kong law. This tax filing basis is being reviewed by the Hong Kong Inland Revenue Department and is subject to its agreement. See “Risk Factors—Risks Related to Our Business—Our business benefits from certain tax incentives and government subsidies. Expiration or elimination of, or other adverse changes to, these tax incentives and subsidies could have a material adverse effect on our results of operations.”

PRC . The PRC enterprise income tax law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies.

RDA Shanghai received preferential tax treatment from its local government and, as an accredited integrated circuit design enterprise, from the PRC national government as well. Taken together, the result was to reduce its income tax rate to 10% in 2009. RDA Shanghai has qualified as a “high and new technology enterprise” and was subject to income tax at a preferential rate of 15% in 2010. In 2011, RDA Shanghai completed the renewal of this qualification for the three years from 2011 through 2013. See “PRC Regulation — Regulations and Policies that Encourage the Development of Semiconductor Design Companies — Preferential Taxation Policies.” We intend to apply to renew this qualification during 2014.

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As an accredited integrated circuit design enterprise, RDA Beijing was exempt from income tax in 2009. RDA Beijing was subject to income tax at a preferential rate of 12.5% in 2010, 2011 and 2012 a s an accredited integrated circuit design enterprise and 15% in 2013 as a “high and new technology enterprise” and will be subject to income tax at a preferential rate of 15% in 2014. See “PRC Regulation—Regulations and Policies that Encourage the Development of Semiconductor Design Companies—Preferential Taxation Policies.”

RDA Shanghai and RDA Beijing have been subject to a 6% value-added tax on all of their revenue since January 2012 and September 2012, respectively. However, revenue from technology transfer and related R&D services can be exempted from value-added tax, subject to government approval on a case-by-case basis. Before the PRC government phased in the value-added tax to replace the 5% business tax, RDA Shanghai and RDA Beijing had been subject to the 5% business tax on their revenue . The business tax had also been subject to exemption by government approval on a case-by-case basis.

Dividends . Under the PRC enterprise income tax law, dividends from our PRC subsidiaries out of earnings generated after the new law came into effect on January 1, 2008, are subject to a withholding tax which may be as high as 20%, although under the detailed implementation rules promulgated by the PRC tax authorities the effective withholding tax is currently 10%. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax. Dividends of our PRC subsidiaries that are directly held by our Hong Kong subsidiary benefit from a reduced withholding tax rate of 5% (if RDA Hong Kong is qualified as the beneficial owner) under the arrangement to avoid double taxation between Hong Kong and the central government of the PRC. Dividend payments are not subject to withholding tax in Hong Kong, the British Virgin Islands, or the Cayman Islands.

Tax residence . Under the PRC enterprise income tax law, enterprises that are established under the laws of foreign countries or regions and whose “de facto management bodies” are located within PRC territory are considered PRC resident enterprises and are subject to the PRC enterprise income tax at the rate of 25% on their worldwide income. “De facto management bodies” are defined under the implementation rules as the bodies that have material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. We believe that we are not a PRC resident enterprise. However, we cannot assure you that we will not be deemed to be a PRC resident enterprise and subject to the PRC enterprise income tax at the rate of 25% on our worldwide income. See “Risk Factors — Risks Relating to Doing Business in China — Under the PRC enterprise income tax law, we may be classified as a PRC ‘resident enterprise,’ which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment.”

Critical Accounting Policies

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies, and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our consolidated financial statements. We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this annual report.

Revenue Recognition

In accordance with ASC 605, “Revenue Recognition,” we recognize revenue when the following criteria are met: persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery has occurred and collectability is reasonably assured.

We sell the majority of our products through distributors under arrangements allowing for price protection and product return. If we decrease the price of any products, a distributor will receive a credit to adjust the inventory held by the distributor to the new decreased price. In addition, if the price to the customer was lower than the price paid to us by the distributor, the distributor will receive a credit for the difference. The master agreements with distributors do not restrict the amount or time period of price protection on unsold products. We may be required to grant price discounts below the cost of a product if the market price for such product declines significantly. Through December 31, 2012 and 2013, we have not experienced such a price decline that would reduce selling price below cost. The amount and time period of return rights vary by distributor, but generally, distributors have the right to return unsold products. Due to rapid changes in technology, consumer preferences and prices, we cannot reliably estimate our returns or price adjustments. Accordingly, we do not recognize revenue until the products are sold to the customers by the distributors and the above criteria are met. The related products held by distributors are included in our inventory balance at lower of cost or market price. We record product shipping costs in cost of sales. Our distribution agreements are effective until terminated by either party and may be terminated by either party without cause with 30 days’ written notice. In the event of termination, we are required to repurchase unsold inventory from the distributor, and if the distributor terminates without cause, the repurchase price will be reduced by a 5% handling charge.

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We also provide cash rebates directly to certain selected customers where we agreed to reimburse these customers to the extent that the purchase price they paid to the distributors or to us exceeds the price that we agreed directly with them. The amount of cash rebate is recorded as a reduction of revenue. The revenue is recognized when all of the above criteria are met.

We do not accept product returns from customers except for returns subject to warranty. We accrue for warranty costs based on our historical experience.

Business Combination

U.S. GAAP requires that all business combinations be accounted for under the purchase method. In accordance with ASC 805, “Business combinations,” the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non controlling interests. The excess of the (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.

The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, and the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash flows over that period. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.

Long-Lived Assets

Intangible assets consists of software licenses and technologies that we purchased or acquired through business acquisition. Purchased intangible assets are stated at cost, net of accumulated amortization, and are amortized using the straight-line method over their estimated useful lives. Our research and development expenses for the years ended December 31, 2012 and 2013 included $5.8 million and $7.4 million, respectively, for the amortization of newly acquired baseband technologies and $1.5 million and $1.6 million, respectively, for the amortization of digital TV intellectual property.

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets.

Impairment of Long-lived Assets

In accordance with ASC 350, “Intangibles — Goodwill and Others,” we review the carrying value of goodwill for possible impairment on an annual basis, or more frequently when events or changes in circumstances indicate that it might be impaired. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares the fair value of the reporting unit to the net book value of the reporting unit. In determining fair value, several valuation methodologies are allowed, although quoted market prices are the best evidence of fair value. If the results of the first step demonstrate that the net book value is greater than the fair value, we shall proceed to step two of the analysis. Step two of the analysis compares the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. We test goodwill for impairment annually as of the first day of our fourth fiscal quarter and in interim periods if events occur that would indicate that the carrying value of goodwill may be impaired.

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For the impairment testing for long-lived assets other than goodwill, we apply ASC 360, “Property, Plant and Equipment”, in accordance with which we review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to be received from use of the assets and their eventual disposition. If the sum of the estimated undiscounted future cash flow is less than the carrying amount of the assets,we recognize an impairment loss equal to the excess of the carrying value over the fair value of the assets.

No impairment of long-lived assets was recorded for the periods presented and the fair value of the reporting unit is substantially in excess of the carrying value of the goodwill for the 2013 annual goodwill impairment test.

Share-Based Compensation

We have adopted ASC 718, “Stock Compensation,” which requires all grants of share-based awards, including restricted share units, restricted shares and stock options, to be recognized in the financial statements based on their grant date fair values.

We have made the following stock option and restricted share unit grants since January 1, 2013:

The fair value of the restricted share units was measured as the grant date fair value of our ordinary shares reduced by the present value of the dividends expected to be paid on the underlying shares during the requisite service period. Expected dividend yield is determined in view of our dividend history as well as expected future payout rate. Expected dividend yield is nil for all restricted share units.

We had 13,331,229 stock options outstanding as of December 31, 201 3 . The aggregate intrinsic value of all our stock options outstanding as of December 31, 201 3 was $34,570,135 based on a price of $ 2.98 per ordinary share or $ 17.88 per ADS.

Since our IPO in 2010, we have granted options under the 2009 plan on April 20, 2011, July 6, 2011 and May 9, 2012. Under ASC 718, we applied the binomial valuation model in determining the fair value of these options, as these options were granted in-the-money. The estimated value of options is determined based on the market price of the underlying ordinary shares, the exercise prices of the options and the following assumptions, using the binomial option pricing model:

(1)                   The risk-free interest rate is based on the market yield of U.S. treasuries with a maturity period that coincides with the contractual life of the share options.

(2)                   Once the options have become exercisable, we estimate that they will be exercised when the spot price reaches the indicated multiple of the exercise price.

(3)                   This refers to the expected volatility of the future share price. Since our transaction history was short, we based the expected price volatility on the historical price volatility of the shares of the comparable companies.

(4)                   At the times when we made these grants, we had no expectation of paying dividends on our ordinary shares, and no history of paying dividends on our ordinary shares other than a special one-time cash dividend of $0.20 per ordinary share, or $1.20 per ADS, paid on October 18, 2012 to shareholders of record as of the close of business on October 1, 2012. We adopted a quarterly dividend policy only after our 2013 grants had been made.

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Inventories

Inventories are stated at the lower of cost (weighted average) or market. Cost is comprised of direct material costs and, where applicable, shipping and handling and overhead incurred in bringing the inventories to their present location and condition. Inventory write-downs include write-downs for obsolete and excess inventory based on our forecasts of demand over specific future time periods and write-downs to value inventory at the lower of cost or market which rely on forecasts of average selling prices in future periods. If economic, competitive, or other factors cause market conditions to be less favorable than those we have projected, additional inventory write-downs may be required, which could have a material adverse effect on our future results of operations. We wrote down $11.0 million of inventory in 2011, which primarily included $3.2 million due to the migration to 55nm process and $3.2 million due to design defects in certain power amplifiers. We wrote down $7.2 million of inventory in 2012, which included $3.9 million due to excess inventory and quality issues with certain power amplifiers. We wrote down $10.4 million of inventory in 2013, which included $6.4 million and $1.5 million due to excess inventory and quality issues with certain power amplifiers and baseband products, respectively. Accordingly, as of December 31, 2011, 2012 and 2013, $8.5 million, $8.1 million and $11.3 million, respectively, of our inventory had been written down to a zero balance.

Income Taxes

Under ASC 740, “Income Tax,” which clarifies the accounting for uncertainty in income taxes recognized in our financial statements and prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded for loss carry-forwards and other deferred tax assets where it is more likely than not that such loss carry forwards and deferred tax assets will not be realized.

For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement, but it prohibits any discounting of any of the related tax for the time value of money. ASC 740 also mandates expanded financial statement disclosure about uncertainty in income tax reporting positions. The cumulative effect of applying ASC 740 is to be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. We did not incur a cumulative effect adjustment upon adoption of ASC 740. We have elected to classify interest and penalties related to an uncertain tax position, if any and when required, as other expenses.

Results of Operations

The following table sets forth a summary of our consolidated results of operations as a percentage of revenue for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The results of operations in any period are not necessarily indicative of the results that may be expected for any future period.

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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Revenue. Our revenue de creased by 11.8 % from $ 391.3 million for the year ended December 31, 201 2 to $ 345.0 million for the year ended December 31, 201 3 . The de crease in revenue was due to a 14.5 % de crease in unit volume offset by a 3.2 % increase in average selling price. The de crease in unit volume was mainly due to decreases in volumes of power amplifiers, Bluetooth and FM. After we entered the baseband market in 2012, the baseband competitors who used to design our power amplifier into their baseband platform gradually switched to other power amplifier suppliers by subsidizing their customers for using other companies’ power amplifiers. Furthermore, one baseband competitor introduced an integrated baseband solution in January 2013 that competed with the integrated baseband, Bluetooth and FM product that we had introduced in July 2012. As a result, the market for our stand-alone Bluetooth and FM products for the handset market shrinked significantly, since the majority of this baseband competitor’s customers had previously used our stand-alone Bluetooth and FM products. The increase in average selling price was primarily due to our shipping more baseband products, which carry a higher average selling price than our other products.

Cost of Revenue . Our cost of revenue de creased by 11.3 % from $ 265.5 million in 201 2 to $ 235.5 million in 201 3 . This de crease was due primarily to the de crease in unit volume offset to a lesser degree by an increase in average unit cost. Average unit cost rose primarily due to changes in our product mix, as we shipped much more baseband products in 2013 that carry a higher unit cost than other products, partially offset by cost reduction efforts across nearly all our products such as power amplifiers and switch modules , Bluetooth, FM tuners, Wifi, LNB satellite down converters and analog mobile television.

Gross Margin . Our gross margin de creased from 32.2 % in 201 2 to 3 1.7 % in 201 3 . The decrease of margin was primarily due to sever price erosion mainly from baseband, power amplifier and Wifi products because of competitive pressure.

Research and Development Expenses. Our research and development expenses increased by 18.9 % from $ 54.6 million in 201 2 to $ 64.9 million in 201 3 and increased as a percentage of revenue from 1 4.0 % to 1 8.8 %. The increase in research and development expenses was mainly due to higher intellectual property purchases for the development of future smartphone products and amortization of expenses relating to purchases of intellectual property, partly offset by lower employee performance driven compensation expenses.

Selling, General and Administrative Expenses . Our selling, general and administrative expenses de creased by 6.8 % from $ 17.0 million in 201 2 to $1 5.8 million in 201 3 and in creased as a percentage of revenue from 4.3 % to 4.6 %. The de crease in selling, general and administrative expenses was due primarily to lower employee performance driven compensation expenses.

Income Tax Expense . Our income tax expense decreased by 34.0% from $4.7 million in 2012 to $3.1 million in 2013 , primarily due to our having earned less taxable income in 2013. Our income tax expense as a percentage of our pre-tax income increased from 8.1% to 9.9% between 2012 and 2013 because a higher percentage of our profit in 2013 was generated by our PRC subsidiaries, which are subject to a higher income tax rate.

Net Income . As a result of the above, our net income de creased from $ 52.9 million or 1 3.5 % of revenue in 201 2 to $ 28.0 million or 8.1 % of revenue in 201 3 .

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenue. Our revenue increased by 35.5 % from $ 288.9 million for the year ended December 31, 201 1 to $ 391.3 million for the year ended December 31, 201 2 . The increase in revenue was due to a 24.1 % increase in unit volume as well as a 9.2 % increase in average selling price. The increase in unit volume was driven by the addition of baseband revenue from April 2012 as a result of our acquisition of Coolsand’s business, which primarily includes its baseband intellectual property, as well as strong growth of our power amplifier and switch module . Our average selling price increased primarily due to the addition of baseband products, which have a higher average selling price than our other product lines, to our product mix, partially offset by faster than expected 2G power amplifier price erosion due to competition .

Cost of Revenue . Our cost of revenue increased by 40. 4 % from $1 89.1 million in 201 1 to $ 265.5 million in 201 2 . This increase was due primarily to the increase in unit volume and to a lesser degree to an increase in average unit cost. Average unit cost rose primarily due to the higher unit cost of our new baseband products, partially offset by cost reduction efforts across all key products such as power amplifier and switch module , Bluetooth, FM tuner, LNB satellite down converter and analog mobile television products.

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Gross Margin . Our gross margin de creased from 34.5 % in 201 1 to 3 2.2 % in 201 2 . The decrease of margin was primarily due to the lower gross margin on the first generation of our baseband products, which we introduced in April 2012, although this was partially offset by the higher gross margin enjoyed by the second generation of our baseband products, which we introduced in August 2012. The decrease of margin in 2012 was also due to faster than expected 2G power amplifier price erosion due to competition .

Research and Development Expenses. Our research and development expenses increased by 66.7 % from $ 32 .8 million in 201 1 to $ 54.6 million in 201 2 and increased as a percentage of revenue from 1 1.3 % to 1 4.0 %. The increase in research and development expenses was due primarily to higher employee compensation and benefits expenses with the addition of more research and development engineers, increased investment in the development of future products for digital TV and smartphones, and the amortization of newly acquired baseband and television intellectual property.

Selling, General and Administrative Expenses . Our selling, general and administrative expenses increased by 20.5 % from $ 14.1 million in 201 1 to $1 7.0 million in 201 2 but decreased as a percentage of revenue from 4.9 % to 4. 3 %. The increase in selling, general and administrative expenses was due primarily to increases in employee compensation and benefits expenses with the addition of more field application engineers to support our expanded customer base and a corresponding increase in technical support requirements.

Income Tax Expense . Our income tax expense remained substantially unchanged between 2011 and 2012 at $4.7 million, primarily due to the fact that our income before taxes did not grow substantially from 2011 to 2012. Our income tax expense as a percentage of our pre-tax income decreased from 8.3% to 8.1% between 2011 and 2012.

Net Income . As a result of the above, our net income increased from $ 51.6 million or 1 7 . 9 % of revenue in 201 1 to $5 2.9 million or 1 3.5 % of revenue in 201 2 .

Inflation

Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2011, 2012 and 2013 were increases of 4.1%, 2.5% and 2.5%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.

Recent Accounting Pronouncements

In March 2013, the FASB issued Accounting Standards Update No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon De-recognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This accounting standards update requires the release of cumulative translation adjustments into net income when an entity ceases to have a controlling financial interest resulting in the complete or substantially complete liquidation of a subsidiary or group of assets within a foreign entity. The guidance will be effective prospectively for reporting periods beginning after December 15, 2013. We are currently evaluating the impact of adopting this guidance.

In April 2013, the FASB issued Accounting Standards Update No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. This guidance addresses when and how an entity should apply the liquidation basis of accounting. The amendments in this update are being issued to clarify when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The amendments apply to all entities that issue financial statements that are presented in conformity with U.S. GAAP except investment companies that are regulated under the Investment Company Act of 1940. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance.

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists. This accounting standards update clarifies that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance will be effective prospectively for reporting periods beginning after December 15, 2013. We are currently assessing the potential impact on the adoption of this guidance on our consolidated financial statements.

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Investing Activities

Net cash used in investing activities amounted to $ 20 .0 million for the year ended December 31, 201 3 , primarily due to the maturity of $ 446.2 million in time deposits, partially offset by our purchase of $ 402.0 million in time deposits, our deposit of $51.2 million in connection with the pending acquisition of our company by Tsinghua Unigroup, and payments of $ 7.1 million for intellectual property and $ 4.1 million for lab testing equipment and computer equipment.

Net cash provided by investing activities amounted to $6.0 million for the year ended December 31, 2012, primarily due to our sale of $356.8 million in time deposits, partially offset by our purchase of $323.6 million in time deposits and payments of $11.4 million for intellectual property, $6.8 million for lab testing equipment and computer equipment and $6.0 million for deposit fees for the acquisition of Coolsand’s business, which primarily includes its baseband intellectual property.

Net cash used by investing activities amounted to $83.2 million for the year ended December 31, 2011, primarily due to our purchase of short-term investments of $132.7 million in a time deposit, which was partially offset by the sale of short-term investments of $63.9 million, our prepayment of $7.5 million under our intellectual property license and development agreement with Trident Microsystems, our payment of $4.4 million for purchases of lab testing equipment, computer equipment and other items related to our product development activities and our payment for deposit fee of $2.2 million for IP acquisition.

Financing Activities

Net cash used in financing activities was $ 6.1 million for the year ended December 31, 201 3 , due primarily to the payment of a quarterly dividend of $4.7 million and the expenditure of $3.7 million to repurchase share s .

Net cash used in financing activities was $ 56.7 million for the year ended December 31, 2012, due primarily to the payment of a one-time dividend $55.6 million as well as the expenditure of $1.4 million to repurchase share s.

Net cash used in financing activities was $13.1 million for the year ended December 31, 2011, due primarily to our share repurchases. We spent $12.8 million to repurchase 1.57 million ADSs under a $15 million share repurchase program announced in 2011.

We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures for the 12 months following the date of this annual report. We do not anticipate that our current expansion plans will require significant capital commitments due to the scalability of our business model. We do, however, expect to invest in the further development of our technology platform to support our long-term growth.

Capital Expenditures

Our capital expenditures amounted to $4.4 million, $24.2 million and $1 1.2 million in 2011, 2012 and 2013, respectively. Our capital expenditures in 2013 included $7. 1 million for several intellectual property licenses. In the past, our capital expenditures consisted principally of purchases of lab testing equipment, intellectual property licenses, and software, development tools, computer equipment and other items related to our product development activities.

C. Research and Development, Patents and Licenses, Etc.

Technology

We have developed high-performance CMOS-based radio-frequency and mixed-signal technology and gallium arsenide-based technology. CMOS, which stands for “complementary metal oxide semiconductor,” is the most common technology for manufacturing semiconductors and enables us to produce low cost, power efficient products. The gallium arsenide (or GaAs) fabrication process is more expensive, but it has advantages for designing semiconductors for certain products, including particularly power amplifiers, because it provides greater linearity and higher power output.

We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs. We completed migration from 110 nanometer to 55 nanometer geometry processes in 2011, and we completed migration from 55 nanometer to 40 nanometer geometry processes for baseband products in 2013. We are in the process of developing 28 nanometer geometry processes for baseband products now.

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An integrated wireless product is typically partitioned into three major components: the controller, the radio-frequency component, and the digital signal processing component. We believe that the primary complexity of creating larger wireless system-level products is with the radio-frequency and digital signal processing components, which requires expertise in analog and mixed-signal technologies. The majority of our engineers specialize in radio-frequency and digital signal processing design. Implementation-level techniques for our radio-frequency and digital signal processing blocks are refined every time we tape out a new product, allowing us to further improve device performance and reduce die sizes. We develop the controllers by using CPUs licensed by third parties like ARM, and protocol and software stacks we developed, licensed or acquired. We believe that we have considerable expertise in both front-end design and back-end layout. In radio-frequency design, front-end design (i.e., circuit topology) determines the ultimate performance limitations, and back-end layout determines to what degree this performance can be achieved.

We have built a wireless system-on-chip technology platform that we can utilize to increase design efficiency and raise the productivity of our engineers. This allows us to achieve shorter product cycles and faster time-to-market.

Our research and development expenses, which mainly includes salaries, material costs, license fees paid to third parties for developed technologies and specific equipment depreciation, are expensed as incurred. We incurred $32.8 million, $54.6 million and $64.9 million of research and development expenses in 2011, 2012 and 2013, respectively. See “Item 4. Information on the Company — B. Business Overview — Research and Development” for a description of our research and development policies and expenses.

D. Trend Information

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since the beginning of our fiscal year 2013 that are reasonably likely to have a material effect on our net revenues, income from operations, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial condition.

E. Off-Balance Sheet Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.