##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from to
 Commission file number: 001-33576
 Airvana, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    04-3507654(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)
 19 Alpha Road
Chelmsford, Massachusetts 01824
(Address of Principal Executive Offices including Zip Code)
 (978) 250-3000
(Registrants Telephone Number, Including Area Code)
 o þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




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##### 



AIRVANA, INC.
  
 QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
Table of Contents
 Page No.PART I. FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of December 31, 2006, and September 30, 2007
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months Ended October 1, 2006 and September 30, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the three and nine months Ended October 1, 2006 and September 30, 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31PART II. OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    32Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 6.
    
    Exhibits
    
    
    46EX-10.1 - Amendment No. 10 to Development & Purchase & Sale Agreement For CDMA High Data Rate (1xEV-DO) ProductsEX-31.1 - Section 302 Certification of CEOEX-31.2 - Section 302 Certification of CFOEX-32.1 - Section 906 Certification of CEOEX-32.2 - Section 906 Certification of CFO




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##### Table of Contents



PART I  Financial Information
 
 Item 1  Condensed Consolidated Financial Statements (unaudited)
 AIRVANA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 December 31,
    
    
    September 30,2006
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    86,815
    
    
    $
    35,019Investments
    
    
    73,308
    
    
    
    174,992Accounts receivable
    
    
    46,072
    
    
    
    8,221Deferred product cost, current
    
    
    34,214
    
    
    
    1,323Prepaid taxes
    
    
    14,627
    
    
    
    8,962Prepaid expenses and other current assets
    
    
    2,327
    
    
    
    2,860Total current assets
    
    
    257,363
    
    
    
    231,377Property and equipment
    
    
    14,925
    
    
    
    17,725Less: accumulated depreciation and amortization
    
    
    9,122
    
    
    
    10,6225,803
    
    
    
    7,103Restricted investments
    
    
    193
    
    
    
    193Goodwill and intangible assets, net
    
    
    
    
    
    
    12,432Other assets
    
    
    848
    
    
    
    405Total assets
    
    $
    264,207
    
    
    $
    251,510Liabilities, redeemable convertible preferred stock and stockholders (deficit) equityCurrent liabilities:Accounts payable
    
    $
    2,988
    
    
    $
    3,596Accrued expenses and other current liabilities
    
    
    7,841
    
    
    
    9,968Accrued income taxes
    
    
    
    
    
    
    3,807Deferred revenue, current
    
    
    243,281
    
    
    
    192,177Total current liabilities
    
    
    254,110
    
    
    
    209,548Deferred revenue, long-term
    
    
    137
    
    
    
    82Other liabilities
    
    
    2,218
    
    
    
    1,898Warrants to purchase preferred stock
    
    
    490
    
    
    
    Total long-term liabilities
    
    
    2,845
    
    
    
    1,980Commitments (Note 9)
    
    
    
    
    
    
    Redeemable convertible preferred stock (at liquidation value) (Note 14):Series A redeemable convertible preferred stock, $0.01 par value: 10,937,500 shares
authorized, 10,937,500 shares issued and outstanding as of December 31, 2006 and no
shares authorized, issued or outstanding at September 30, 2007
    
    
    16,749
    
    
    
    Series B1 redeemable convertible preferred stock, $0.01 par value: 4,027,663 shares
authorized, 3,994,328 shares issued and outstanding at December 31, 2006 and no
shares authorized, issued or outstanding at September 30, 2007
    
    
    36,274
    
    
    
    Series B2 redeemable convertible preferred stock, $0.01 par value: 900,414 shares
authorized, 900,414 shares issued and outstanding as of December 31, 2006 and no
shares authorized, issued or outstanding at September 30, 2007
    
    
    7,362
    
    
    
    Series C redeemable convertible preferred stock, $0.01 par value: 25,093,051 shares
authorized, 25,031,017 shares issued and outstanding as of December 31, 2006 and no
shares authorized, issued or outstanding at September 30, 2007
    
    
    56,150
    
    
    
    Series D redeemable convertible preferred stock, $0.01 par value: 4,485,305 shares
authorized, 3,288,490 shares issued and outstanding at December 31, 2006 and no
shares authorized, issued or outstanding at September 30, 2007
    
    
    13,507
    
    
    
    Total redeemable convertible preferred stock
    
    
    130,042
    
    
    
    Stockholders (deficit) equity:Preferred stock, $0.001 par value: no shares authorized, issued or outstanding as of
December 31, 2006; 10,000,000 shares authorized, no shares issued or outstanding at
September 30, 2007
    
    
    
    
    
    
    Common
stock, $0.001 par value: 90,000,000 shares authorized, 13,814,535
shares issued and
outstanding at December 31, 2006 and 350,000,000 shares authorized, 63,522,516 shares
issued and outstanding at September 30, 2007, respectively (Note 14)
    
    
    14
    
    
    
    64Additional paid-in capital
    
    
    3,251
    
    
    
    189,098Accumulated deficit
    
    
    (126,055
    )
    
    
    (149,180
    )Total stockholders (deficit) equity
    
    
    (122,790
    )
    
    
    39,982Total liabilities, redeemable convertible preferred stock and stockholders equity
    
    $
    264,207
    
    
    $
    251,510
  3




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##### Table of Contents



AIRVANA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedOctober 1,
    
    
    September 30,
    
    
    October 1,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Revenue:Product
    
    $
    
    
    
    $
    
    
    
    $
    145,835
    
    
    $
    141,641Service
    
    
    1,513
    
    
    
    3,645
    
    
    
    23,139
    
    
    
    18,529Total revenue
    
    
    1,513
    
    
    
    3,645
    
    
    
    168,974
    
    
    
    160,170Cost of revenue:Product
    
    
    37
    
    
    
    13
    
    
    
    39,233
    
    
    
    33,944Service
    
    
    1,523
    
    
    
    1,676
    
    
    
    4,332
    
    
    
    5,198Total cost of revenue
    
    
    1,560
    
    
    
    1,689
    
    
    
    43,565
    
    
    
    39,142Gross (loss) profit
    
    
    (47
    )
    
    
    1,956
    
    
    
    125,409
    
    
    
    121,028Operating expenses:Research and development
    
    
    13,323
    
    
    
    20,395
    
    
    
    39,184
    
    
    
    54,976Selling and marketing
    
    
    1,842
    
    
    
    3,029
    
    
    
    4,788
    
    
    
    8,791General and administrative
    
    
    1,151
    
    
    
    1,743
    
    
    
    3,247
    
    
    
    4,980In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,340Total operating expenses
    
    
    16,316
    
    
    
    25,167
    
    
    
    47,219
    
    
    
    71,087Operating (loss) income
    
    
    (16,363
    )
    
    
    (23,211
    )
    
    
    78,190
    
    
    
    49,941Interest income, net
    
    
    1,573
    
    
    
    2,514
    
    
    
    4,638
    
    
    
    7,101(Loss) income before income tax (benefit) expense and cumulative effect
of change in accounting principle
    
    
    (14,790
    )
    
    
    (20,697
    )
    
    
    82,828
    
    
    
    57,042Income tax (benefit) expense
    
    
    
    
    
    
    (2,478
    )
    
    
    (10,742
    )
    
    
    7,944(Loss) income before cumulative effect of change in accounting principle
    
    
    (14,790
    )
    
    
    (18,219
    )
    
    
    93,570
    
    
    
    49,098Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (330
    )
    
    
    Net (loss) income
    
    $
    (14,790
    )
    
    $
    (18,219
    )
    
    $
    93,240
    
    
    $
    49,098Net (loss) income per common share applicable to common stockholders:Basic
    
    $
    (1.22
    )
    
    $
    (0.35
    )
    
    $
    1.61
    
    
    $
    0.80Diluted
    
    $
    (1.22
    )
    
    $
    (0.35
    )
    
    $
    1.44
    
    
    $
    0.70Weighted average common shares outstanding:Basic
    
    
    13,574
    
    
    
    53,814
    
    
    
    13,504
    
    
    
    27,098Diluted
    
    
    13,574
    
    
    
    53,814
    
    
    
    18,736
    
    
    
    34,238
  4




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AIRVANA, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedOctober 1,
    
    
    September 30,
    
    
    October 1,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Operating activitiesNet (loss) income
    
    $
    (14,790
    )
    
    $
    (18,219
    )
    
    $
    93,240
    
    
    $
    49,098Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    555
    
    
    
    754
    
    
    
    1,651
    
    
    
    2,258Amortization of intangible assets
    
    
    
    
    
    
    268
    
    
    
    
    
    
    
    446In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,340Stock-based compensation
    
    
    194
    
    
    
    819
    
    
    
    393
    
    
    
    2,072Deferred tax benefit
    
    
    
    
    
    
    (960
    )
    
    
    
    
    
    
    (955
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    330
    
    
    
    Amortization of investments
    
    
    (338
    )
    
    
    (1,436
    )
    
    
    100
    
    
    
    (4,023
    )Amortization of leasehold incentive
    
    
    (130
    )
    
    
    (131
    )
    
    
    (411
    )
    
    
    (391
    )Non-cash interest income
    
    
    104
    
    
    
    
    
    
    
    19
    
    
    
    (103
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (13,371
    )
    
    
    8,547
    
    
    
    (5,781
    )
    
    
    37,851Deferred product cost
    
    
    (371
    )
    
    
    (622
    )
    
    
    33,073
    
    
    
    32,891Prepaid taxes
    
    
    (36
    )
    
    
    3,214
    
    
    
    (11,475
    )
    
    
    5,665Prepaid expenses and other current assets
    
    
    161
    
    
    
    (609
    )
    
    
    466
    
    
    
    (338
    )Accounts payable
    
    
    62
    
    
    
    987
    
    
    
    (3,155
    )
    
    
    302Accrued expenses and other current liabilities
    
    
    1,300
    
    
    
    2,340
    
    
    
    (3,195
    )
    
    
    1,784Accrued income taxes
    
    
    
    
    
    
    (4,630
    )
    
    
    
    
    
    
    3,807Deferred revenue
    
    
    28,260
    
    
    
    27,171
    
    
    
    (101,262
    )
    
    
    (51,329
    )Net cash provided by operating activities
    
    
    1,600
    
    
    
    17,493
    
    
    
    3,993
    
    
    
    81,375Investing activitiesPurchases of property and equipment
    
    
    (475
    )
    
    
    (812
    )
    
    
    (1,914
    )
    
    
    (3,071
    )Restricted investments
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    Purchase of 3-Way Networks, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,907
    )Purchases of investments
    
    
    (72,987
    )
    
    
    (134,385
    )
    
    
    (123,208
    )
    
    
    (298,195
    )Maturities of investments
    
    
    55,620
    
    
    
    76,940
    
    
    
    122,550
    
    
    
    200,534Other assets
    
    
    (4
    )
    
    
    (30
    )
    
    
    (2
    )
    
    
    (117
    )Net cash used in investing activities
    
    
    (17,846
    )
    
    
    (58,287
    )
    
    
    (2,474
    )
    
    
    (111,756
    )Financing activitiesPayments on long-term debt
    
    
    
    
    
    
    (514
    )
    
    
    
    
    
    
    (567
    )Proceeds from initial public offering, net of offering costs
    
    
    
    
    
    
    53,089
    
    
    
    
    
    
    
    51,380Proceeds from leasehold incentive
    
    
    
    
    
    
    
    
    
    
    789
    
    
    
    Proceeds from sale of Series D redeemable convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    Payments of cash dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72,707
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (96
    )Proceeds from exercise of stock options
    
    
    50
    
    
    
    56
    
    
    
    218
    
    
    
    558Net cash provided by (used in) financing activities
    
    
    50
    
    
    
    52,631
    
    
    
    2,007
    
    
    
    (21,432
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (35
    )
    
    
    16
    
    
    
    17Net (decrease) increase in cash and cash equivalents
    
    
    (16,196
    )
    
    
    11,802
    
    
    
    3,542
    
    
    
    (51,796
    )Cash and cash equivalents at beginning of period
    
    
    39,611
    
    
    
    23,217
    
    
    
    19,873
    
    
    
    86,815Cash and cash equivalents at end of period
    
    $
    23,415
    
    
    $
    35,019
    
    
    $
    23,415
    
    
    $
    35,019Supplemental Disclosure of Cash Flow InformationCash paid for income taxes
    
    $
    56
    
    
    $
    45
    
    
    $
    4,034
    
    
    $
    100Supplemental Disclosure of Noncash ActivitiesAccretion of dividends on redeemable convertible preferred stock
    
    $
    1,834
    
    
    $
    363
    
    
    $
    5,495
    
    
    $
    4,032Retirement of property and equipment
    
    $
    
    
    
    $
    
    
    
    $
    113
    
    
    $
    
  5




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AIRVANA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. Operations
 Business Description
  2. Summary of Significant Accounting Policies
 Basis of Presentation and Principles of Consolidation
  Unaudited Interim Financial Statements
  Use of Estimates
   6




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Fiscal Year
  Cash and Cash Equivalents
  Investments
  Revenue Recognition
 Software
Revenue Recognition.
     7




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8




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Segment and Geographic Information
 Disclosures About Segments of an
Enterprise and Related Information
 Stock-Based Compensation
 Share-Based Payment
 Comprehensive Income
 Reporting Comprehensive Income
 Income Taxes
 Accounting for Income
Taxes
 Accounting for Uncertainty in Income Taxes
 9




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##### Table of Contents



3. Investments
 Accounting for Certain Investments in Debt and Equity
Securities
  December 31, 2006
    
    September 30, 2007Amortized
    
    Fair Market
    
    Amortized
    
    Fair MarketCost
    
    Value
    
    Cost
    
    ValueCorporate debt securities
    
    $
    61,007
    
    
    $
    61,018
    
    
    $
    148,853
    
    
    $
    149,397Asset-backed securities
    
    
    12,301
    
    
    
    12,302
    
    
    
    26,139
    
    
    
    26,156$
    73,308
    
    
    $
    73,320
    
    
    $
    174,992
    
    
    $
    175,553
  4. Income Taxes
    Accounting for Uncertainty in Income Taxes
   10




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5. Property and Equipment
  December 31,
    
    
    September 30,Estimated Useful Life

    
    2006
    
    
    2007Computer equipment and purchased software
    
    1.5 - 3 years
    
    $
    4,972
    
    
    $
    5,281Test and lab equipment
    
    3 years
    
    
    3,883
    
    
    
    5,102Leasehold improvements
    
    Shorter of life of lease or 5 years
    
    
    5,600
    
    
    
    6,486Office furniture and equipment
    
    3 - 5 years
    
    
    470
    
    
    
    856Total property and equipment
    
    
    
    
    
    
    14,925
    
    
    
    17,725Less: Accumulated depreciation and
amortization
    
    
    
    
    
    
    (9,122
    )
    
    
    (10,622
    )$
    5,803
    
    
    $
    7,103
  6. Concentrations of Credit Risk and Significant Customers
   7. Common Stock
 Stock Option Plans
   11




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Share-Based Payment.
  Weighted
    
    
    Average
    
    
    
    
    
    
    AverageAverage
    
    
    Remaining
    
    
    
    
    
    
    FairNumber of
    
    
    Exercise Price
    
    
    Contractual
    
    
    Aggregate
    
    
    ValueShares
    
    
    per Share
    
    
    Term in Years
    
    
    Intrinsic Value
    
    
    Per ShareOutstanding at December 31, 2006
    
    
    10,007,812
    
    
    $
    2.05
    
    
    
    7.67
    
    
    $
    55,641Granted
    
    
    3,806,711
    
    
    
    3.30
    
    
    
    
    
    
    
    
    
    
    $
    6.15Exercised
    
    
    (386,389
    )
    
    
    1.45
    
    
    
    
    
    
    $
    2,012Cancelled
    
    
    (408,855
    )
    
    
    2.94Outstanding at September 30, 2007
    
    
    13,019,279
    
    
    
    2.06
    
    
    
    7.21
    
    
    $
    51,895Exercisable at September 30, 2007
    
    
    6,417,855
    
    
    
    1.23
    
    
    
    6.13
    
    
    $
    30,916Options outstanding at September
30, 2007 expected to vest
    
    
    12,628,701
    
    
    $
    2.06
    
    
    
    7.21
    
    
    $
    50,338
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedOctober 1,
    
    
    September 30,
    
    
    October 1,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Cost of service revenue
    
    $
    15
    
    
    $
    45
    
    
    $
    22
    
    
    $
    122Research and development
    
    
    129
    
    
    
    506
    
    
    
    187
    
    
    
    1,250Selling and marketing
    
    
    30
    
    
    
    185
    
    
    
    42
    
    
    
    501General and administrative
    
    
    20
    
    
    
    83
    
    
    
    142
    
    
    
    199Total stock-based compensation
    
    $
    194
    
    
    $
    819
    
    
    $
    393
    
    
    $
    2,072
 12




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##### Table of Contents



8. Net Income Per Share
 Earnings Per
Share
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedOctober 1,
    
    
    September 30,
    
    
    October 1,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Numerator:Income before cumulative effect of change in accounting principle
    
    $
    (14,790
    )
    
    $
    (18,219
    )
    
    $
    93,570
    
    
    $
    49,098Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (330
    )
    
    
    Net (loss) income
    
    $
    (14,790
    )
    
    $
    (18,219
    )
    
    $
    93,240
    
    
    $
    49,098Allocation of net (loss) income:Basic:Accretion of redeemable preferred stock
    
    $
    1,834
    
    
    $
    363
    
    
    $
    5,496
    
    
    $
    4,032Dividend allocated to preferred stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,434Undistributed net income allocated to preferred stockholders
    
    
    
    
    
    
    
    
    
    
    66,056
    
    
    
    Net income applicable to preferred stockholders
    
    
    1,834
    
    
    
    363
    
    
    
    71,552
    
    
    
    27,466Net (loss) income applicable to common stockholders before
cumulative effect of change in accounting principle
    
    
    (16,624
    )
    
    
    (18,582
    )
    
    
    22,019
    
    
    
    21,632Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (330
    )
    
    
    Net (loss) income applicable to common stockholders
    
    
    (16,624
    )
    
    
    (18,582
    )
    
    
    21,689
    
    
    
    21,632Net (loss) income
    
    $
    (14,790
    )
    
    $
    (18,219
    )
    
    $
    93,240
    
    
    $
    49,098Diluted:Accretion of redeemable preferred stock
    
    $
    1,834
    
    
    $
    363
    
    
    $
    5,496
    
    
    $
    4,032Dividend allocated to preferred stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21,181Undistributed net income allocated to preferred stockholders
    
    
    
    
    
    
    
    
    
    
    60,771
    
    
    
    Net income applicable to preferred stockholders
    
    
    1,834
    
    
    
    363
    
    
    
    66,267
    
    
    
    25,213Net (loss) income applicable to common stockholders before
cumulative effect of change in accounting principle
    
    
    (16,624
    )
    
    
    (18,582
    )
    
    
    27,303
    
    
    
    23,885Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (330
    )
    
    
    Net (loss) income applicable to common stockholders
    
    
    (16,624
    )
    
    
    (18,582
    )
    
    
    26,973
    
    
    
    23,885Net (loss) income
    
    $
    (14,790
    )
    
    $
    (18,219
    )
    
    $
    93,240
    
    
    $
    49,098Denominator:Basic weighted average shares
    
    
    13,574
    
    
    
    53,814
    
    
    
    13,504
    
    
    
    27,098Dilutive effect of common stock equivalents
    
    
    
    
    
    
    
    
    
    
    5,232
    
    
    
    7,140Diluted weighted average shares
    
    
    13,574
    
    
    
    53,814
    
    
    
    18,736
    
    
    
    34,238Calculation of net income per share:Basic:Net (loss) income applicable to common stockholders
    
    $
    (16,624
    )
    
    $
    (18,582
    )
    
    $
    21,689
    
    
    $
    21,632Weighted average shares of common stock outstanding
    
    
    13,574
    
    
    
    53,814
    
    
    
    13,504
    
    
    
    27,098Net income per share
    
    $
    (1.22
    )
    
    $
    (0.35
    )
    
    $
    1.61
    
    
    $
    0.80Diluted:Net (loss) income applicable to common stockholders
    
    $
    (16,624
    )
    
    $
    (18,582
    )
    
    $
    26,973
    
    
    $
    23,885Weighted average shares of common stock outstanding
    
    
    13,574
    
    
    
    53,814
    
    
    
    18,736
    
    
    
    34,238Net income per share
    
    $
    (1.22
    )
    
    $
    (0.35
    )
    
    $
    1.44
    
    
    $
    0.70Cumulative effect of change in accounting principleBasic
    
    $
    
    
    
    $
    
    
    
    $
    0.02
    
    
    $
    Diluted
    
    $
    
    
    
    $
    
    
    
    $
    0.02
    
    
    $
    
 13




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##### Table of Contents



9. Lease Commitments
     Fiscal year:Remainder of 2007
    
    $
    3832008
    
    
    1,3512009
    
    
    1,3492010
    
    
    1,3862011
    
    
    1,393Thereafter
    
    
    279$
    6,141
 10. Deferred Revenue and Deferred Product Cost
    Current
    
    
    Long-Term
    
    
    TotalDeferred revenue related to April 2005 specified upgrade
    
    $
    328
    
    
    $
    
    
    
    $
    328Deferred revenue related to September 2006 specified upgrade
    
    
    146,887
    
    
    
    
    
    
    
    146,887Deferred revenue related to June 2007 specified upgrade
    
    
    44,195
    
    
    
    
    
    
    
    44,195Other deferred revenue
    
    
    767
    
    
    
    82
    
    
    
    849Total deferred revenue
    
    $
    192,177
    
    
    $
    82
    
    
    $
    192,259Deferred product cost related to September 2006 specified upgrade
    
    $
    681
    
    
    $
    
    
    
    $
    681Deferred product cost related to June 2007 specified upgrade
    
    
    642
    
    
    
    
    
    
    
    642Total deferred product cost
    
    $
    1,323
    
    
    $
    
    
    
    $
    1,323
 14




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##### Table of Contents



Current
    
    
    Long-Term
    
    
    TotalDeferred revenue related to April 2005 specified upgrade
    
    $
    156,899
    
    
    $
    
    
    
    $
    156,899Deferred revenue related to September 2006 specified upgrade
    
    
    85,820
    
    
    
    
    
    
    
    85,820Other deferred revenue
    
    
    562
    
    
    
    137
    
    
    
    699Total deferred revenue
    
    $
    243,281
    
    
    $
    137
    
    
    $
    243,418Deferred product cost related to April 2005 specified upgrade
    
    $
    33,849
    
    
    $
    
    
    
    $
    33,849Deferred product cost related to September 2006 specified upgrade
    
    
    365
    
    
    
    
    
    
    
    365Total deferred product cost
    
    $
    34,214
    
    
    $
    
    
    
    $
    34,214
 11. Accrued Expenses and Other Current Liabilities
  December 31,
    
    
    September 30,2006
    
    
    2007Payroll and related accruals
    
    $
    5,301
    
    
    $
    6,243Accrued rent expense
    
    
    569
    
    
    
    593Accrued legal fees
    
    
    591
    
    
    
    45Other accruals
    
    
    1,380
    
    
    
    3,087$
    7,841
    
    
    $
    9,968
 12. Acquisition
   EstimatedUseful Life
    
    
    Fair ValueDeveloped Technology
    
    60 months
    
    $
    3,340Customer Relationships
    
    48 months
    
    
    1,350Non-Compete Agreements
    
    36 months
    
    
    190Total Intangible Assets
    
    
    
    
    
    $
    4,880
  15




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Pro Forma Results of Operations
  Three Months
    
    Nine MonthsEnded
    
    EndedOctober 1,
    
    September 30,
    
    October 1,
    
    September 30,2006
    
    2007
    
    2006
    
    2007Pro forma revenues
    
    $
    1,822
    
    
    $
    3,645
    
    
    $
    169,974
    
    
    $
    160,629Pro forma net (loss) income
    
    $
    (14,734
    )
    
    $
    (18,219
    )
    
    $
    93,418
    
    
    $
    49,629Pro forma (loss) earnings per share
    
    $
    (1.22
    )
    
    $
    (0.35
    )
    
    $
    1.61
    
    
    $
    0.81
 13. Special Cash Dividend
  14. Reverse Stock Split
  15. Related Party Transactions
  16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This quarterly report on Form 10-Q contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could
cause our results to differ materially from those expressed or implied by such forward-looking
statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include any expectation of earnings, revenues, billings or other
financial items; any statements of the plans, strategies and objectives of management for future
operations; factors that may affect our operating results; statements concerning new products or
services; statements related to future capital expenditures; statements related to future economic
conditions or performance; statements as to industry trends and other matters that do not relate
strictly to historical facts or statements of assumptions underlying any of the foregoing. These
statements are often identified by the use of words such as, but not limited to, anticipate,
believe, continue, could, estimate, expect, intend, may, will, plan, target,
continue, and similar expressions or variations intended to identify forward-looking statements.
These statements are based on the beliefs and assumptions of our management based on information
currently available to management. Such forward-looking statements are subject to risks,
uncertainties and other important factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such differences include, but are not limited
to, those identified below, and those discussed in the section titled Risk Factors included
elsewhere in this Form 10-Q and in our other filings with the SEC. Furthermore, such
forward-looking statements speak only as of the date of this report. We undertake no obligation to
update any forward-looking statements to reflect events or circumstances after the date of such
statements.
 Overview
     17




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Our OEM Business Model
    Software Revenue Recognition.
 18




---



##### Table of Contents



Impact of SOP No. 97-2, Software Revenue Recognition
     19




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
 
 
 
 
  20




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Key Elements of Financial Performance
 Revenue
  Product Revenue.
    Service Revenue.
 21




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Product and Service Billings
    22




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Three Months Ended
    
    
    Nine Months EndedOctober 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007Revenue
    
    $
    1,513
    
    
    $
    3,645
    
    
    $
    168,974
    
    
    $
    160,170Less: deferred revenue acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (171
    )Deferred revenue, at end of period
    
    
    171,862
    
    
    
    192,259
    
    
    
    171,862
    
    
    
    192,259Less: deferred revenue, at beginning of period
    
    
    (143,602
    )
    
    
    (165,088
    )
    
    
    (273,124
    )
    
    
    (243,418
    )Product and service billings
    
    $
    29,773
    
    
    $
    30,816
    
    
    $
    67,712
    
    
    $
    108,840
 Deferred Revenue
  Cost of Revenue
  
    
    cost for channel card hardware provided by contract manufacturers;
    
    cost of hardware for our radio network controllers and network management systems;
    
    license fees for third-party software and other intellectual property used in our products; and
    
    other related overhead costs.
  Cost Related to Product and Service Billings
  23




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##### Table of Contents



Deferred Product Cost
  Gross Margin
  Operating Expenses
 Research and Development.
 
    
    salaries, benefits and stock-based compensation related to our engineers;
    
    cost of prototypes and test equipment relating to the development of new products and the
enhancement of existing products;
    
    payments to suppliers for design and consulting services; and
    
    other related overhead costs.
  Sales and Marketing.
 
    
    salaries, benefits and stock-based compensation related to our sales, marketing and
customer support personnel;
    
    commissions payable to our sales personnel;
    
    travel, lodging and other out-of-pocket expenses;
    
    marketing program expenses; and
    
    other related overhead costs.
  24




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##### Table of Contents



General and Administrative.
 
    
    salaries, benefits and stock-based compensation related to our executive, finance,
legal, human resource and administrative personnel;
    
    professional services costs; and
    
    other related overhead costs.
  Stock-Based Compensation Expense
   Interest Income, Net
  Cash Flow from Operating Activities
   Fiscal Year
  25




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Critical Accounting Policies and Estimates
    Results of Operations
 Comparison of Three Months Ended October 1, 2006 and September 30, 2007
 Revenue and Product and Service Billings
 Three Months Ended
    
    
    Period-to-PeriodOctober 1, 2006
    
    
    September 30, 2007
    
    
    Change(dollars in thousands)Revenue
    
    $
    1,513
    
    
    $
    3,645
    
    
    $
    2,132Deferred revenue, end of period
    
    
    171,862
    
    
    
    192,259Less: deferred revenue, beginning of period
    
    
    (143,602
    )
    
    
    (165,088
    )Product and service billings
    
    $
    29,773
    
    
    $
    30,816
    
    
    $
    1,043
   Cost of Revenue and Cost Related to Product and Service Billings
 Three Months Ended
    
    
    Period-to-PeriodOctober 1, 2006
    
    
    September 30, 2007
    
    
    Change(dollars in thousands)Cost of revenue
    
    $
    1,560
    
    
    $
    1,689
    
    
    $
    129Deferred product cost, end of period
    
    
    33,893
    
    
    
    1,323Less: deferred product cost, beginning of period
    
    
    (33,522
    )
    
    
    (701
    )Cost related to product billings
    
    $
    1,931
    
    
    $
    2,311
    
    
    $
    380
 26




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##### Table of Contents



Gross Profit
  Operating Expenses
 Period-to-PeriodThree Months Ended
    
    
    ChangeOctober 1, 2006
    
    
    September 30, 2007
    
    
    Amount
    
    
    Percentage(dollars in thousands)Research and development
    
    $
    13,323
    
    
    $
    20,395
    
    
    $
    7,072
    
    
    
    53.1
    %Sales and marketing
    
    
    1,842
    
    
    
    3,029
    
    
    
    1,187
    
    
    
    64.4
    %General and administrative
    
    
    1,151
    
    
    
    1,743
    
    
    
    592
    
    
    
    51.4
    %Total operating expenses
    
    $
    16,316
    
    
    $
    25,167
    
    
    $
    8,851
    
    
    
    54.2
    %
 Research and Development
 Sales and Marketing
 General and Administrative
 27




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Comparison of Nine Months Ended October 1, 2006 and September 30, 2007
 Revenue and Product and Service Billings
 Nine Months Ended
    
    
    Period-to-PeriodOctober 1, 2006
    
    
    September 30, 2007
    
    
    Change(dollars in thousands)Revenue
    
    $
    168,974
    
    
    $
    160,170
    
    
    $
    (8,804
    )Less: deferred revenue acquired
    
    
    
    
    
    
    (171
    )Deferred revenue, end of period
    
    
    171,862
    
    
    
    192,259Less: deferred revenue, beginning of period
    
    
    (273,124
    )
    
    
    (243,418
    )Product and service billings
    
    $
    67,712
    
    
    $
    108,840
    
    
    $
    41,128
   Cost of Revenue and Cost Related to Product and Service Billings
 Nine Months Ended
    
    
    Period-to-PeriodOctober 1, 2006
    
    
    September 30, 2007
    
    
    Change(dollars in thousands)Cost of revenue
    
    $
    43,565
    
    
    $
    39,142
    
    
    $
    (4,423
    )Deferred product cost, end of period
    
    
    33,893
    
    
    
    1,323Less: deferred product cost, beginning of period
    
    
    (66,966
    )
    
    
    (34,214
    )Cost related to product billings
    
    $
    10,492
    
    
    $
    6,251
    
    
    $
    (4,241
    )
    28




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Gross Profit
   Operating Expenses
 Period-to-PeriodNine Months Ended
    
    
    ChangeOctober 1, 2006
    
    
    September 30, 2007
    
    
    Amount
    
    
    Percentage(dollars in thousands)Research and development
    
    $
    39,184
    
    
    $
    54,976
    
    
    $
    15,792
    
    
    
    40.3
    %Sales and marketing
    
    
    4,788
    
    
    
    8,791
    
    
    
    4,003
    
    
    
    83.6
    %General and administrative
    
    
    3,247
    
    
    
    4,980
    
    
    
    1,733
    
    
    
    53.4
    %In-process research and development
    
    
    
    
    
    
    2,340
    
    
    
    2,340
    
    
    
    nmTotal operating expenses
    
    $
    47,219
    
    
    $
    71,087
    
    
    $
    23,868
    
    
    
    50.5
    %
 Research and Development
 Sales and Marketing
 General and Administrative
 In-Process Research and Development
 29




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Liquidity and Capital Resources
 As of
    
    As ofDecember 31,
    
    September 30,2006
    
    2007Cash and cash equivalents
    
    $
    86,815
    
    
    $
    35,019Investments, short-term
    
    
    73,308
    
    
    
    174,992Accounts receivable, net
    
    
    46,072
    
    
    
    8,221Working capital
    
    
    3,254
    
    
    
    21,829
   Nine Months
    
    Nine MonthsEnded
    
    EndedOctober 1,
    
    September 30,2006
    
    2007Cash flow from operating activities
    
    $
    3,993
    
    
    $
    81,375Cash flow from investing activities
    
    
    (2,474
    )
    
    
    (111,756
    )Cash flow from financing activities
    
    
    2,007
    
    
    
    (21,432
    )
      30




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Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Foreign Currency Exchange Risk
  Interest Rate Sensitivity
   
 Item 4. Changes in Internal Controls over Financial Reporting and Procedures
  31




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PART II. OTHER INFORMATION
 
 Item 1A. Risk Factors
 Our business is subject to numerous risks. We caution you that the following important factors,
among others, could cause our actual results to differ materially from those expressed in
forward-looking statements made by us or on our behalf in filings with the SEC, press releases,
communications with investors and oral statements. Any or all of our forward-looking statements in
this Quarterly Report on Form 10-Q and in any other public statements we make may turn out to be
wrong. They may be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in the discussion below will be important in determining
future results. Consequently, no forward-looking statement can be guaranteed. Actual future results
may vary materially from those anticipated in forward-looking statements. We undertake no
obligation to update any forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any further disclosure we make in our
reports filed with the SEC.
 Risks Relating to Our Business
 We depend on a single OEM customer, Nortel Networks, for almost all of our revenue and billings,
and a significant shortfall in sales to Nortel Networks would significantly harm our business and
operating results.
  Because our OEM business model requires us to defer the recognition of most of our revenue from
product sales until we deliver specified upgrades, our revenue in any period is not likely to be
indicative of the level of our sales activity in that period.
  32




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Our revenue and billings growth may be constrained by our product concentration and lack of
revenue diversification.
  Our current products are based exclusively on the CDMA2000 air interface standard for wireless
communications, and therefore any movement by existing or prospective operator customers to a
different standard could impair our business and operating results.
   The introduction of fourth generation wireless technology could reduce spending on our EV-DO
products and therefore harm our operating results.
  33




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##### Table of Contents



The variable sales and deployment cycles for our EV-DO products are likely to cause our quarterly
billings to fluctuate materially
   If demand for mobile broadband services does not develop as quickly as we anticipate, or develops
in a manner that we do not anticipate, our revenue and billings may decline or fail to grow, which
would adversely affect our operating results
  Deployments of our EV-DO products by two large wireless operators account for a substantial
majority of our revenue and billings, and a decision by these operators to reduce their use of our
products would harm our business and operating results.
  34




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##### Table of Contents



If
the market for our FMC products does not develop as we expect, or our
FMC products do not achieve sufficient market acceptance, our business would
suffer.
  Our future sales will depend on our success in generating sales to a limited number of OEM
customers, and any failure to do so would have a significant detrimental effect on our business.
  The unpredictability of our future results may adversely affect the trading price of our common
stock.
  
    
    the effect of our OEM business model or changes to this model on our revenue
recognition;
    
    the timing of agreements or commitments with our OEM customers for new products or
software upgrades;
    
    the timing of our delivery of software upgrades;
    
    the unpredictable deployment and purchasing patterns of operators;
    
    fluctuations in demand for products of our OEM customers that are sold together with
our products, and the timing and size of orders for such products of our OEM customers;
    
    new product introductions and enhancements by our competitors and us;
    
    the timing and acceptance of software upgrades sold by our OEM customers to their
installed base of operators;
 35




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##### Table of Contents




    
    changes in our pricing policies or the pricing policies of our competitors;
    
    our ability to develop, introduce and deploy new products and product upgrades that
meet customer requirements in a timely manner;
    
    adjustments in the reporting of royalties and product sales by our OEM customers
resulting from reviews and audits of such reports;
    
    our and our OEM customers ability to obtain sufficient supplies of limited source
components or materials;
    
    our and our OEM customers ability to attain and maintain production volumes and
quality levels for our products; and
    
    general economic conditions, as well as those specific to the communications,
networking, wireless and related industries.
   We may not be able to achieve profitability for any period in the future or sustain cash flow from
operating activities.
  Claims by other parties that we infringe their proprietary technology could force us to redesign
our products or to incur significant costs.
  
    
    stop selling, incorporating or using our products that use the challenged intellectual
property;
    
    obtain from the owner of the infringed intellectual property right a license to sell or
use the relevant technology, which license may not be available on reasonable terms, or at
all;
    
    redesign those products that use any allegedly infringing technology, which may be
costly and time-consuming; or
 36




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##### Table of Contents




    
    refund deposits and other amounts received for allegedly infringing technology or
products.
   If we are not successful in obtaining from third parties licenses to intellectual property that is
required for GSM/UMTS products that we are developing, we may not be able to expand our business
as expected and our business may suffer.
  If we do not timely deliver new and enhanced products that respond to customer requirements and
technological changes, operators may not buy our products and our revenue and product and service
billings may decline significantly.
    37




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Our revenue and product and service billings growth will be limited if our OEM customers are
unable to continue to sell our products to large wireless operators or if we have to discount our
products to support the selling efforts of our OEM customers.
  We depend on sole sources for certain components of our products and our business would be harmed
if the supply from our sole sources were disrupted.
  The market for network infrastructure products is highly competitive and continually evolving, and
if we are not able to compete effectively, we may not be able to continue to expand our business
as expected and our business may suffer.
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##### Table of Contents



Our agreement with our largest OEM customer, Nortel Networks, provides Nortel Networks with an
option to license some of our intellectual property to develop internally products competitive
with the products it currently purchases from us.
  Because our business depends on the continued strength of the communications industry, our
operating results will suffer if that industry experiences an economic downturn.
  Our ability to compete and the success of our business could be jeopardized if we are unable to
protect our intellectual property adequately.
  39




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We may engage in future acquisitions that could disrupt our business, cause dilution to our
stockholders and harm our financial condition and operating results.
  Future interpretations of existing accounting standards could adversely affect our operating
results.
   The loss of key personnel or an inability to attract and retain additional personnel may impair
our ability to grow our business.
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We have incurred, and will continue to incur, significant increased costs as a result of operating
as a public company as compared with our history as a private company, and our management will be
required to devote substantial time to public company compliance initiatives. If we are unable to
absorb these increased costs or maintain management focus on development and sales of our product
offerings and services, we may not be able to achieve our business plan.
    If we are unable to manage our growth and expand our operations successfully, our business and
operating results will be harmed and our reputation may be damaged.
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We may need additional capital in the future, which may not be available to us, and if it is
available, may dilute our existing stockholders ownership of our common stock.
  
    
    fund ongoing operations;
    
    take advantage of opportunities, including more rapid expansion of our business or
the acquisition of complementary products, technologies or businesses;
    
    develop new products; or
    
    respond to competitive pressures.
  Our ability to sell our products depends in part on the quality of our support and services
offerings, and our failure to offer high quality support and services would have a material
adverse effect on our sales and operating results.
  Our products are highly technical and may contain undetected software or hardware errors, which
could cause harm to our reputation and adversely affect our business.
  Our international sales and operations subject us to additional risks that can adversely affect
our operating results.
  
    
    the difficulty of managing and staffing foreign offices and the increased travel,
infrastructure and legal compliance costs associated with multiple international
locations;
    
    difficulties in enforcing contracts, collecting accounts receivable and longer
payment cycles, especially in emerging markets;
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
    
    the need to localize our products and licensing programs for international customers;
    
    tariffs and trade barriers and other regulatory or contractual limitations on our
ability to sell or develop our products in certain foreign markets;
    
    increased exposure to foreign currency exchange rate risk; and
    
    reduced protection for intellectual property rights in some countries.
  Risks Relating to Ownership of Our Common Stock
 The market price of our common stock may be volatile.
  
    
    fluctuations in our quarterly financial results or the quarterly financial results of
companies perceived to be similar to us;
    
    fluctuations in our revenue as a result of our revenue recognition policy, even
during periods of significant sales activity;
    
    changes in estimates of our financial results or recommendations by securities
analysts;
    
    failure of any of our products to achieve or maintain market acceptance;
    
    any adverse change in our relationship with Nortel Networks;
    
    changes in market valuations of similar companies;
    
    success of competitive products;
    
    changes in our capital structure, such as future issuances of securities or the
incurrence of debt;
    
    announcements by us or our competitors of significant products, contracts,
acquisitions or strategic alliances;
    
    regulatory developments in the United States, foreign countries or both;
    
    litigation involving our company, our general industry or both;
    
    additions or departures of key personnel;
    
    general perception of the future of CDMA technology;
    
    investors general perception of us; and
    
    changes in general economic, industry and market conditions.
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If equity research analysts do not publish research or reports about our business or if they issue
unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
  A significant portion of our total outstanding shares may be sold into the public market in the
near future, which could cause the market price of our common stock to drop significantly, even if
our business is doing well.
   Our directors and management will exercise significant control over our company.
  Provisions in our certificate of incorporation, our by-laws or Delaware law might discourage,
delay or prevent a change in control of our company or changes in our management and, therefore,
depress the trading price of our common stock.
  
    
    limitations on the removal of directors;
    
    a classified board of directors so that not all members of our board are elected at
one time;
    
    advance notice requirements for stockholder proposals and nominations;
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
    
    the inability of stockholders to act by written consent or to call special meetings;
    
    the ability of our board of directors to make, alter or repeal our by-laws; and
    
    the ability of our board of directors to designate the terms of and issue new series
of preferred stock without stockholder approval, which could be used to institute a rights
plan, or a poison pill, that would work to dilute the stock ownership of a potential
hostile acquirer, likely preventing acquisitions that have not been approved by our board
of directors.
   We do not currently intend to pay dividends on our common stock and, consequently, the ability to
achieve a return on an investment in our common stock will depend on appreciation in the price of
our common stock.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 (a) Sales of Unregistered Securities
  (b) Use of Proceeds from IPO
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Item 6. Exhibits.
 10.1*
    
    Amendment No. 10 to Development and Purchase And Sale Agreement For CDMA High Data Rate
(1xEV-DO) Products31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-
14(a), by Chief Executive Officer.31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule
13a-14(a)/15d-14(a), by Chief Financial Officer.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Chief Executive Officer.32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Chief Financial Officer.
 
 *
    
    Confidential treatment requested as to certain portions, which portions have been omitted and
filed separately with the Securities and Exchange Commission.
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SIGNATURES
  AIRVANA, INC.By:
    /s/ Randall S. BattatRandall S. BattatDate: November 8, 2007
    
    President and Chief Executive Officer(Principal Executive Officer)By:
    /s/ Jeffrey D. GliddenJeffrey D. GliddenDate: November 8, 2007
    
    Vice President, Chief Financial Officer

(Principal Financial Officer) 47