The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
1. Organization and Summary of Significant Accounting Policies
Inphi Corporation (the “Company”), a Delaware corporation, was incorporated in November 2000. The Company is a fabless provider of high-speed analog and mixed signal semiconductor solutions for the communications and cloud markets. The Company’s semiconductor solutions are designed to address bandwidth bottlenecks in networks, maximize throughput and minimize latency in computing environments and enable the rollout of next generation communications and cloud infrastructures. In addition, the semiconductor solutions provide a vital high-speed interface between analog signals and digital information in high-performance systems such as telecommunications transport systems, enterprise networking equipment and data centers.
The Company is subject to certain risks and uncertainties and believes changes in any of the following areas could have a material adverse effect on the Company’s future financial position or results of operations or cash flows: ability to sustain profitable operations due to losses incurred and accumulated deficit, dependence on a limited number of customers for a substantial portion of revenue, product defects, risks related to intellectual property matters, lengthy sales cycle and competitive selection process, lengthy and expensive qualification process, ability to develop new or enhanced products in a timely manner, market development of and demand for the Company’s products, reliance on third parties to manufacture, assemble and test products and ability to compete.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and include the accounts of the Company and subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Revisions
In connection with the preparation of the Company’s 2019 year-end consolidated financial statements, a classification error in the Company’s previously issued consolidated statements of cash flows was identified. Specifically, it was determined that payments made under the Company’s multi-year agreements for the purchase of internal use intangible assets should have been classified as use of cash for financing activities and not as use of cash for investing activities as originally presented. Such classification error had no impact on the Company’s consolidated balance sheets, statements of income (loss), statements of comprehensive income (loss) or statements of stockholders’ equity. The Company has concluded that such classification error did not result in the previously issued financial statements being materially misstated. However, the Company has revised the accompanying 2018 and 2017 consolidated statements of cash flows to correct for such classification error. The effect of the revisions on the consolidated statement of cash flows for the year ended December 31, 2018 was as follows: (i) cash used in investing activities decreased $21,311 from $56,961 to $35,650, and (ii) cash used in financing activities increased $21,311 from $12,630 to $33,941. The effect of the revisions on the consolidated statement of cash flows for the year ended December 31, 2017 was as follows: (i) cash used in investing activities decreased $13,688 from $38,341 to $24,653, and (ii) cash used in financing activities increased $13,688 from $20,384 to $34,072.
See also note 18 for further information regarding the impact of this classification error on the Company’s 2019 and 2018 unaudited interim condensed consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
On an ongoing basis, management evaluates its estimates, including those related to (i) the collectibility of accounts receivable and allowance for distributors’ price discounts; (ii) write-down for excess and obsolete inventories; (iii) warranty obligations; (iv) the value assigned to and estimated useful lives of long-lived assets; (v) the realization of tax assets and estimates of tax liabilities and tax reserves; (vi) the measurement of non-marketable equity securities; (vii) amounts recorded in connection with acquisitions; (viii) recoverability of intangible assets and goodwill; and (ix) the recognition and disclosure of fair value of convertible debt and contingent liabilities. These estimates are based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The Company engages third party valuation specialists to assist with estimates related to the valuation of certain financial instruments and assets associated with various contractual arrangements, and valuation of assets acquired in connection with acquisitions. Such estimates often require the selection of appropriate valuation methodologies and models, and significant judgment in evaluating ranges of assumptions and financial inputs. Actual results may differ from those estimates under different assumptions or circumstances.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Foreign Currency Translation
The Company and its subsidiaries use the U.S. dollar as its functional currency. Foreign currency assets and liabilities are remeasured into U.S. dollars at the end-of-period exchange rates except for non-monetary assets and liabilities, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at the exchange rate in effect during the period the transaction occurred, except for those expenses related to balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency transactions are included in the consolidated statements of income (loss) as part of “other income, net.” Foreign currency gain (loss) in 2019, 2018 and 2017 were ($453), ($135) and $22, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. The Company maintains its cash and cash equivalents with major financial institutions and, at times, such balances with any one financial institution may exceed Federal Deposit Insurance Corporation insurance limits. Cash equivalents primarily consist of money market funds.
Fair Market Value of Financial Instruments
The carrying amount reflected in the balance sheet for cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and other current liabilities, approximate fair value due to the short-term nature of these financial instruments.
Investments
Investments in marketable securities consist of available-for-sale securities. These investments are recorded at fair value with changes in fair value, net of applicable taxes, recorded as unrealized gains (losses) as a component of accumulated other comprehensive income in stockholders' equity. Realized gains and losses are included in Other income, net. The cost basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis. The Company periodically evaluates whether declines in fair values of its investments below their book values are other-than-temporary. When the fair value is lower than the amortized cost, the Company considers whether: (1) it has the intent to sell the security; (2) it is more likely than not that it will be required to sell the security before recovery; or (3) it expects to recover the entire amortized cost basis of the security. If the Company intends to sell the security or it is more likely than not that it will be required to sell the security, the entire difference between the amortized cost and fair value is recognized in other income, net. If the Company does not intend to sell a security and it is not more likely than not that it will be required to sell the security but the security has suffered an impairment related to credit, the credit loss is bifurcated from the total decline in value and recorded in other income, net with the remaining portion recorded within accumulated other comprehensive income in stockholders’ equity. Investments are made based on the Company’s investment policy which restricts the types of investments that can be made. The Company classified available-for-sale securities as short-term as the investments are available to be used in current operations.
On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities, which changed the way the Company accounts for non-marketable equity investments. The Company adjusts the carrying value of non-marketable equity investments to fair value upon observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). All gains and losses on non-marketable equity investments, realized and unrealized, are recognized in other income, net. There was no cumulative effect adjustment upon adoption of this guidance.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. Inventories are reduced for write-downs based on periodic reviews for evidence of slow-moving or obsolete parts. The write-down is based on the comparison between inventory on hand and forecasted customer demand for each specific product. Once written down, inventory write-downs are not reversed until the inventory is sold or scrapped. Inventory write-downs are also established when conditions indicate the net realizable value is less than cost due to physical deterioration, technological obsolescence, changes in price level or other causes.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is provided on property and equipment over the estimated useful lives on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the related lease term. Repairs and maintenance are charged to expense as incurred. Useful lives by asset category are as follows:
Asset Category
|
|
Years
|
|
Office equipment
|
|
3
|
|
Software
|
|
3
|
|
Leasehold improvements
|
|
Shorter of lease term or estimated useful life
|
|
Production equipment
|
|
2 - 5
|
|
Computer equipment
|
|
5
|
|
Lab equipment
|
|
5
|
|
Furniture and fixtures
|
|
7
|
|
Intangible Assets
Intangible assets represent rights acquired for developed technology, customer relationships, trademarks, patents and in-process research and development (“IPR&D”) in connection with business acquisitions. Intangible assets with finite useful lives are amortized over periods ranging from one to ten years using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed, or if that pattern cannot be reliably determined, using a straight-line amortization method. Acquired IPR&D is capitalized and amortization commences upon completion of the underlying projects. If any of the projects are abandoned, the Company would be required to impair the related IPR&D asset.
Impairment of Long-lived Assets and Goodwill
Long-lived Assets
The Company assesses the impairment of long-lived assets, which consist primarily of property and equipment and intangible assets, whenever events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. Events or changes in circumstances that may indicate that an asset is impaired include significant decreases in the market value of an asset, significant underperformance relative to expected historical or projected future results of operations, a change in the extent or manner in which an asset is utilized, significant declines in the estimated fair value of the overall Company for a sustained period, shifts in technology, loss of key management or personnel, changes in the Company’s operating model or strategy and competitive forces.
If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset are less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Fair value is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending on the nature of the asset.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Goodwill
Goodwill is recorded when consideration paid for a business acquisition exceeds the fair value of net tangible and intangible assets acquired. Goodwill is measured and tested for impairment on an annual basis during the fourth fiscal quarter or more frequently if the Company believes indicators of impairment exist.
To review for impairment, the Company first assesses qualitative factors to determine whether events or circumstances lead to a determination that it is more likely than not that the fair value of its reporting unit is less than its carrying amount. The qualitative assessment of the recoverability of goodwill, whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific factors. Those factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of its financial performance; or (iv) a sustained decrease in its market capitalization below its net book value. After assessing the totality of events and circumstances, if the Company determines that it is not more likely than not that the fair value of its reporting unit is less than its carrying amount, no further assessment is performed. If however, the Company determines that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, an impairment loss is recognized in an amount equal to the excess. There was no impairment of goodwill in 2019, 2018 and 2017.
Internal Use Software Costs
Certain external computer software costs acquired for internal use are capitalized. Training costs and maintenance are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized costs are included within property and equipment. If a cloud computing arrangement includes a software license, then the Company accounts for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the Company accounts for the arrangement as a service contract.
Revenue Recognition
Prior to January 1, 2018, the Company recognized revenue when there was persuasive evidence of an arrangement, delivery had occurred, the fee was fixed or determinable, and collection was reasonably assured.
On January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. The adoption of this guidance resulted in no cumulative effect adjustment as of January 1, 2018. Starting January 1, 2018, the Company recognizes revenue on sales to distributors upon shipment and transfer of control (known as “sell-in” revenue recognition), rather than deferring recognition until distributors report that they have sold the products to their customers (known as “sell-through” revenue recognition). The impact of the adoption on revenue and cost of revenue for the year ended December 31, 2018 was an increase of $3,778 and $779, respectively. Deferred revenue and inventories decreased by $3,778 and $779 as of December 31, 2018, respectively. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue guidance, while prior periods were not retrospectively adjusted and continue to be reported in accordance with the Company’s historic revenue recognition accounting.
The following table shows revenue by geography, based on the receiving location of customers:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
China
|
|
$
|
164,715
|
|
|
$
|
113,684
|
|
|
$
|
114,168
|
|
United States
|
|
|
103,402
|
|
|
|
87,545
|
|
|
|
92,620
|
|
Thailand
|
|
|
54,468
|
|
|
|
40,884
|
|
|
|
45,205
|
|
Other
|
|
|
43,050
|
|
|
|
52,377
|
|
|
|
96,208
|
|
|
|
$
|
365,635
|
|
|
$
|
294,490
|
|
|
$
|
348,201
|
|
The Company recognizes revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to receive in exchange for such goods or services.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Product Revenue
The Company’s products are fully functional at the time of shipment and do not require additional production, modification, or customization. The Company recognizes revenue upon transfer of control at a point in time when title transfers either upon shipment to or receipt by the customer, net of accruals for estimated sales returns and allowances. Sales and other taxes the Company collects are excluded from revenue. The fee is based on specific products and quantities to be delivered at specified prices, which is evidenced by a customer purchase order or other evidence of an arrangement. Certain distributors may receive a credit for price discounts associated with the distributors' customers that purchased those products. The Company estimates the extent of these distributor price discounts at each reporting period to reduce accounts receivable and revenue. Although the Company accrues an estimate of distributor price discounts, the Company does not issue these discounts to the distributor until the inventory is sold to the distributors' customers. As of December 31, 2019 and 2018, the estimated price discount was $656 and $1,634, respectively. Payment terms of customers are typically 30 to 60 days after invoice date. The Company’s products are under warranty against defects in material and workmanship generally for a period of one or two years. The Company accrues for estimated warranty costs at the time of sale based on anticipated warranty claims and actual historical warranty claims experience including knowledge of specific product failures that are outside of the Company’s typical experience.
Other Revenue
Occasionally, the Company enters into license and development agreements with some of its customers and recognizes revenue from these agreements upon completion and acceptance by the customer of contract deliverables or as services are provided, depending on the terms of the arrangement. Revenue is deferred for any amounts billed or received prior to transfer of control. The Company believes the milestone method best depicts the efforts expended to transfer services to the customers under most of the Company’s development agreements. Certain contracts may include multiple performance obligations for which the Company allocates revenues to each performance obligation based on relative stand-alone selling price. The Company determines stand-alone selling prices based on observable evidence. When stand-alone selling prices are not directly observable, the Company uses the adjusted market assessment approach or residual approach, if applicable.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less or (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed. The estimated revenue expected to be recognized in 2020 and 2021 related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2019 was $12,338 and $7,790, respectively.
Revenue from non-product sales was approximately 7%, 3% and 3% of total revenue for the years ended December 31, 2019, 2018, and 2017, respectively.
The Company monitors the collectability of accounts receivable primarily through review of the accounts receivable aging. The Company’s policy is to record an allowance for doubtful accounts based on specific collection issues identified, aging of underlying receivables and historical experience of uncollectible balances.
Cost of Revenue
Cost of revenue includes cost of materials, such as wafers processed by third-party foundries, cost associated with packaging and assembly, testing and shipping, cost of personnel, including stock-based compensation, and equipment associated with manufacturing support, logistics and quality assurance, warranty cost, amortization and impairment of developed technology, amortization of step-up values of inventory, write-down of inventories, amortization of production mask costs, overhead and occupancy costs.
Warranty
The Company’s products are under warranty against defects in material and workmanship generally for a period of one or two years. The Company accrues for estimated warranty cost at the time of sale based on anticipated warranty claims and actual historical warranty claims experience including knowledge of specific product failures that are outside of the Company’s typical experience. The warranty obligation is determined based on product failure rates, cost of replacement and failure analysis cost. If actual warranty costs differ significantly from these estimates, adjustments may be required in the future. As of both December 31, 2019 and 2018, the warranty liability was immaterial.
Research and Development Expense
Research and development expense consists of costs incurred in performing research and development activities including salaries, stock-based compensation, employee benefits, occupancy costs, pre-production engineering mask costs, impairment of in-process research and development, overhead costs and prototype wafer, packaging and test costs. Research and development costs are expensed as incurred. The Company enters into development agreements with some of the Company’s customers. Recoveries from nonrecurring engineering services from early stage technology are recorded as an offset to product development expense incurred in support of this effort and serve as a mechanism to partially recover development expenditures. These reimbursements are recognized upon completion and acceptance by the customer of contract deliverables or milestones. The Company recorded approximately $0, $0 and $3,000 as offset to research and development expense for the years ended December 31, 2019, 2018 and 2017, respectively.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Sales and Marketing Expense
Sales and marketing expense consists of salaries, stock-based compensation, employee benefits, travel, trade show costs, amortization of intangibles and others. The Company expenses sales and marketing costs as incurred. Advertising expenses for the years ended December 31, 2019, 2018 and 2017 were not material.
General and Administrative Expense
General and administrative expense consists of salaries, stock-based compensation, employee benefits and expenses for executive management, legal, finance and others. In addition, general and administrative expense includes fees for professional services and occupancy costs. These costs are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company recognizes the deferred income tax effects of a change in tax rates in the period of enactment. The Company must also make judgments in evaluating whether deferred tax assets will be recovered from future taxable income. To the extent that it believes that recovery is not likely, the Company must establish a valuation allowance. The carrying value of the Company’s net deferred tax asset is based on whether it is more likely than not that the Company will generate sufficient future taxable income to realize these deferred tax assets. A valuation allowance is established for deferred tax assets which the Company does not believe meet the “more likely than not” criteria. The Company’s judgments regarding future taxable income may change over time due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If the Company’s assumptions and consequently its estimates change in the future, the valuation allowance the Company has established may be increased or decreased, resulting in a material respective increase or decrease in income tax expense (benefit) and related impact on the Company’s reported net income (loss).
The Company regularly performs a comprehensive review of uncertain tax positions. An uncertain tax position represents an expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return or claim, which has not been reflected in measuring income tax expense for financial reporting purposes. Until these positions are sustained by the taxing authorities, the Company does not recognize the tax benefits resulting from such positions and reports the tax effects as a liability for uncertain tax positions in the consolidated financial statements. The Company recognizes potential interest and penalties on uncertain tax positions within the provision (benefit) for income taxes on the consolidated statement of income (loss).
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Tax Reform Act contains significant changes to U.S. federal corporate income taxation, including a reduction of the corporate tax rate from 35% to 21% effective January 1, 2018, a one-time transition tax on deemed mandatory repatriation of accumulated earnings and profits of foreign subsidiaries in conjunction with the elimination of U.S. tax on dividend distributions from foreign subsidiaries, and a temporary 100% first-year depreciation deduction for certain capital investments. The effect of the tax law changes must be recognized in the period of enactment. As a result of the change in tax rate, the Company's deferred tax assets and liabilities were required to be remeasured to reflect their value at a lower tax rate of 21%. Staff Accounting Bulletin 118 (“SAB 118”) allows for a measurement period of up to one year after the enactment date of the new tax legislation to finalize the recording of the related tax impacts. In accordance with SAB 118, as of December 31, 2017, the Company made a provisional estimate of the remeasurement of the federal deferred tax assets and liabilities to reflect the reduced U.S. statutory corporate tax rate to 21%, the mandatory repatriation income which was fully absorbed by the U.S. net operating loss, the related valuation allowance offset, and valuation allowance release on deferred tax assets for the federal alternative minimum tax (“AMT”) credit that was made refundable by the Tax Reform Act. During 2018, the Company elected to account for global intangible low-taxed income (“GILTI”) as a period cost in the year the tax is incurred and made changes to its provisional estimates previously recorded for the mandatory repatriation upon filing of its 2017 U.S. income tax return. The change in the mandatory repatriation income was fully absorbed by the U.S. net operating loss, which is subject to valuation allowance, and resulted in no current tax liability. This measurement period adjustment had no net tax effect after the offsetting change to the valuation allowance. At December 31, 2018, the Company completed the accounting for all of the enactment-date income tax effects of the Tax Reform Act.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Stock-Based Compensation
Stock-based compensation for stock option and restricted stock units issued to the Company’s employees is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period, on a straight-line basis or graded vesting basis for awards with performance or market-based conditions. The fair value of restricted stock units is based on the fair market value of the Company’s common stock on the date of grant. If the award has a market condition, the Company estimates the fair value using Monte Carlo simulation model and recognizes compensation ratably over the service period.
The Company has elected to treat share-based payment awards with graded vesting schedules and time-based service conditions as single awards and recognizes stock-based compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period.
The Company recognizes non-employee stock-based compensation expense based on the estimated fair value of the equity instrument determined using the Black-Scholes option pricing model or fair value of the Company's common stock. Management believes that the fair value of the underlying stock award is more reliably measured than the fair value of the services received. The fair value of each non-employee variable stock award is re-measured each period until a commitment date is reached, which is generally the vesting date. Starting January 1, 2019, the Company adopted the new guidance for equity-classified share-based payment awards issued to nonemployees, and therefore no longer remeasures awards each period until a commitment date is reached. The stock-based compensation expense is measured on the grant date. The Company recognizes compensation cost for awards with performance conditions when achievement of those conditions are probable, rather than upon their achievement.
Earnings per Share
Basic earnings per share is calculated by dividing income allocable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing the net income allocable to common stockholders by the weighted average number of common shares outstanding, adjusted for the effects of potentially dilutive common stock, which are comprised of stock options, restricted stock units, employee share purchase plan and the shares that could be issued upon conversion of the Company’s convertible debt. The capped call options in connection with the issuance of the convertible notes are excluded from the calculation of diluted earnings per share as their impact is always anti-dilutive.
Segment Information
The Company operates in one reportable segment related to the design, development and sale of high-speed analog connectivity components that operate to maintain, amplify and improve signal integrity at high-speeds in a wide variety of applications. The Company’s chief operating decision-maker is its Chief Executive Officer, who reviews financial and operational information on a consolidated basis for the purpose of evaluating relative performance, progress against strategic objectives and making decisions about investing resources.
.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that requires companies that lease assets (lessees) to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. The FASB also issued additional updates to such guidance. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The guidance requires entities to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach or allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted this guidance on January 1, 2019. See note 7 in the notes to consolidated financial statements for further details.
In June 2016, the FASB issued guidance which requires the credit losses related to debt securities classified as available-for sale to be presented as an allowance rather than as a write-down. The guidance also requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment methodology in current GAAP with a methodology that requires consideration of a broader range of information to estimate credit losses. This guidance is effective for the Company beginning after December 15, 2019. The adoption of this guidance is not expected to have a material impact to the Company's consolidated financial statements.
In January 2017, the FASB issued guidance to simplify the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted. The Company adopted this guidance on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
In February 2018, the FASB issued guidance that allows an option to reclassify from accumulated other comprehensive income to retained earnings any stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). The guidance will be effective for fiscal years beginning after December 15, 2018. The Company adopted this guidance on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued guidance to eliminate the separate guidance applicable to share-based payments to nonemployees. Under the new guidance, equity-classified share-based payment awards issued to nonemployees will be measured on the grant date, instead of being remeasured through the performance completion date (generally the vesting date), as required under the current guidance. The guidance also requires recognition of compensation cost for awards with performance conditions when achievement of those conditions are probable, rather than upon their achievement. Further, the guidance eliminates the requirement to reassess the classification of nonemployee awards under the financial instruments literature upon vesting. The guidance is effective for fiscal years beginning after December 15, 2018. The Company adopted this guidance on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements
In August 2018, the FASB issued guidance that eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The new guidance will no longer require disclosure of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will require disclosure of the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance will be effective for fiscal years beginning after December 15, 2019. The adoption of this guidance is not expected to have a material impact to the Company's consolidated financial statements.
In August 2018, the FASB issued guidance requiring a customer in a cloud computing arrangement that is a service contract to follow the internal use software guidance in Accounting Standards Codification (ASC) 350-40 to determine which implementation costs to capitalize as assets. Capitalized implementation costs are expensed over the term of the hosting arrangement beginning when the module or component of the hosting arrangement is ready for its intended use. The guidance will be effective for fiscal years beginning after December 15, 2019. The adoption of this guidance is not expected to have a material impact to the Company's consolidated financial statements.
In November 2018, the FASB issued amendments to guidance on “Collaborative Arrangements” and “Revenue from Contracts with Customers”, that require transactions in collaborative arrangements to be accounted for under “Revenue from Contracts with Customers” if the counterparty is a customer for a good or service (or bundle of goods and services) that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. The guidance will be effective for fiscal years beginning after December 15, 2019. The adoption of this guidance is not expected to have a material impact to the Company's consolidated financial statements.
In December 2019, the FASB issued guidance that simplifies the accounting for income taxes as part of FASB's overall initiative to reduce complexity in accounting standards. Amendments include removal of certain exceptions to the general principles of ASC 740, Income Taxes, and simplification in general other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. The guidance will be effective for fiscal years beginning after December 15, 2020, though early adoption is permitted. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.
2. Investments
The following table summarizes the investments by investment category:
|
|
December 31, 2019
|
|
|
|
Cost
|
|
|
Gross Unrealized Gain
|
|
|
Gross Unrealized Loss
|
|
|
Fair Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
3,752
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
3,759
|
|
Municipal bonds
|
|
|
6,062
|
|
|
|
57
|
|
|
|
—
|
|
|
|
6,119
|
|
Corporate notes/bonds
|
|
|
118,859
|
|
|
|
591
|
|
|
|
(1
|
)
|
|
|
119,449
|
|
Asset-backed securities
|
|
|
4,239
|
|
|
|
29
|
|
|
|
—
|
|
|
|
4,268
|
|
Commercial paper
|
|
|
6,464
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
6,464
|
|
Certificate of deposit
|
|
|
72
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72
|
|
Total investments
|
|
$
|
139,448
|
|
|
$
|
685
|
|
|
$
|
(2
|
)
|
|
$
|
140,131
|
|
|
|
December 31, 2018
|
|
|
|
Cost
|
|
|
Gross Unrealized Gain
|
|
|
Gross Unrealized Loss
|
|
|
Fair Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
6,751
|
|
|
$
|
1
|
|
|
$
|
(19
|
)
|
|
$
|
6,733
|
|
Corporate notes/bonds
|
|
|
146,466
|
|
|
|
14
|
|
|
|
(354
|
)
|
|
|
146,126
|
|
Variable rate demand notes
|
|
|
8,900
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,900
|
|
Asset-backed securities
|
|
|
32,986
|
|
|
|
—
|
|
|
|
(63
|
)
|
|
|
32,923
|
|
Commercial paper
|
|
|
39,707
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
39,701
|
|
Certificate of deposit
|
|
|
956
|
|
|
|
—
|
|
|
|
—
|
|
|
|
956
|
|
Total investments
|
|
$
|
235,766
|
|
|
$
|
15
|
|
|
$
|
(442
|
)
|
|
$
|
235,339
|
|
As of December 31, 2019, the Company had three investments that were in an unrealized loss position. The gross unrealized losses on these investments at December 31, 2019 were primarily due to changes in interest rates and determined to be temporary in nature.
The realized gain related to the Company’s available-for-sale investment, which was reclassified from accumulated other comprehensive income, was included in other income, net in the consolidated statements of income (loss).
Contractual maturities of available-for-sale securities at December 31, 2019 are presented in the following table:
|
|
Cost
|
|
|
Fair Value
|
|
Due in one year or less
|
|
$
|
88,803
|
|
|
$
|
89,049
|
|
Due between one and five years
|
|
|
50,645
|
|
|
|
51,082
|
|
|
|
$
|
139,448
|
|
|
$
|
140,131
|
|
The Company has a marketable equity investment in a company located in Taiwan. The fair value of the investment and unrealized loss as of December 31, 2019 was $1,662 and $332, respectively. The fair value of the investment and unrealized loss as of December 31, 2018 was $1,387 and $607, respectively. This investment is presented within other assets, net on the consolidated balance sheet. During the year ended December 31, 2019, the Company sold a marketable equity investment in a company located in the United States acquired in the same year for $3,424. The gain on sale of $924 was included in other income, net in the consolidated statements of income (loss).
The Company has non-marketable equity investments in privately held companies without readily determinable market values. Prior to January 1, 2018, the Company accounted for non-marketable equity investments at cost less impairment. Realized gains and losses on non-marketable equity investments sold or impaired were recognized in other income, net. On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities, which changed the way the Company accounts for non-marketable equity investments. The Company adjusts the carrying value of non-marketable equity investments to fair value upon observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). All gains and losses on non-marketable equity investments, realized and unrealized, are recognized in other income, net. There was no cumulative effect adjustment upon adoption of this guidance. As of December 31, 2019, non-marketable equity investments had a carrying value of $25,792, of which $8,792 was remeasured to fair value based on observable transaction during the year ended December 31, 2019. As of December 31, 2018, non-marketable equity investments had a carrying value of $16,866, of which $6,066 was remeasured to fair value based on observable transaction during the year ended December 31, 2018. These investments are presented within other assets, net on the consolidated balance sheets. The unrealized gain recorded in other income, net and included as adjustment to the carrying value of non-marketable equity investments held was $1,926 and $3,066 for the years ended December 31, 2019 and 2018, respectively. During the year ended December 31, 2018, the Company recorded an impairment charge of $7,000 related to a certain investment in a private company because the investee was in receivership and the Company was not expected to recover its cost. The impairment charge was included in other income, net in the consolidated statements of income (loss).
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
3. Concentrations
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments in marketable securities and trade accounts receivable. The Company extends differing levels of credit to customers and does not require collateral deposits. As of December 31, 2019 and 2018, the Company has allowance for doubtful accounts of $1,152. As of December 31, 2019 and 2018, the Company has allowance for distributors’ price discounts of $656 and $1,634, respectively.
The following table summarizes the significant customers’ (including distributors) accounts receivable and revenue as a percentage of total accounts receivable and total revenue, respectively:
|
|
December 31,
|
|
Accounts Receivable
|
|
2019
|
|
|
2018
|
|
Customer A
|
|
|
15
|
%
|
|
|
13
|
%
|
Customer B
|
|
|
13
|
|
|
|
13
|
|
Customer C
|
|
|
*
|
|
|
|
*
|
|
Customer D
|
|
|
19
|
|
|
|
*
|
|
Customer E
|
|
|
*
|
|
|
|
*
|
|
|
|
Year Ended December 31,
|
|
Revenue
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Customer A
|
|
|
14
|
%
|
|
|
18
|
%
|
|
|
12
|
%
|
Customer B
|
|
|
*
|
|
|
|
*
|
|
|
|
12
|
|
Customer C
|
|
|
11
|
|
|
|
*
|
|
|
|
*
|
|
Customer D
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer E
|
|
|
*
|
|
|
|
11
|
|
|
|
*
|
|
*
|
Less than 10% of total receivable or total revenue
|
Customer A is a subcontractor of a direct customer that would be a “Customer F” above. In the aggregate, revenue to Customer A and Customer F as a percentage of total revenue was approximately 14%, 18% and 17% for the years ended December 31, 2019, 2018 and 2017, respectively. Customer B is a subcontractor of a direct customer that would be a “Customer G” above. In the aggregate, revenue to Customer B and Customer G as a percentage of total revenue was approximately 11%, 14% and 14% for the years ended December 31, 2019, 2018 and 2017, respectively. In addition, the Company sells directly and indirectly through subcontractors to what would be a “Customer H” above. The Company believes, in the aggregate, revenue to Customer H, including its subcontractors as a percentage of total revenue was approximately 11% and 11% for the years ended December 31, 2018 and 2017, respectively. The Company believes, in the aggregate, revenue to Customer H, including its subcontractors was significant but less than 10% of the total revenue for the year ended December 31, 2019. Customers C and D are subcontractors and Customer E is a distributor, all of whom sell to various end customers.
4. Inventories
Inventories consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
18,593
|
|
|
$
|
12,435
|
|
Work in process
|
|
|
19,081
|
|
|
|
13,602
|
|
Finished goods
|
|
|
17,339
|
|
|
|
7,015
|
|
|
|
$
|
55,013
|
|
|
$
|
33,052
|
|
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
5. Property and Equipment, net
Property and equipment consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Laboratory and production equipment
|
|
$
|
144,866
|
|
|
$
|
121,716
|
|
Office, software and computer equipment
|
|
|
37,241
|
|
|
|
30,190
|
|
Furniture and fixtures
|
|
|
1,617
|
|
|
|
1,558
|
|
Leasehold improvements
|
|
|
8,282
|
|
|
|
7,609
|
|
|
|
|
192,006
|
|
|
|
161,073
|
|
Less accumulated depreciation
|
|
|
(112,443
|
)
|
|
|
(90,333
|
)
|
|
|
$
|
79,563
|
|
|
$
|
70,740
|
|
Depreciation and amortization expense for the years ended December 31, 2019, 2018 and 2017 was $22,399, $20,227 and $20,631, respectively.
As of December 31, 2019 and 2018, computer software costs included in property and equipment were $7,339 and $6,879, respectively. Amortization expense of capitalized computer software costs was $384, $591 and $1,038, for the years ended December 31, 2019, 2018 and 2017, respectively.
Property and equipment not paid as of December 31, 2019 and 2018 was $4,728 and $2,580, respectively.
6. Intangible Assets
The following table presents details of intangible assets:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Developed technology
|
|
$
|
186,800
|
|
|
$
|
123,365
|
|
|
$
|
63,435
|
|
|
$
|
186,800
|
|
|
$
|
86,378
|
|
|
$
|
100,422
|
|
Customer relationships
|
|
|
70,540
|
|
|
|
31,409
|
|
|
|
39,131
|
|
|
|
70,540
|
|
|
|
21,681
|
|
|
|
48,859
|
|
Trade name
|
|
|
2,310
|
|
|
|
1,766
|
|
|
|
544
|
|
|
|
2,310
|
|
|
|
1,350
|
|
|
|
960
|
|
Patents
|
|
|
1,579
|
|
|
|
1,010
|
|
|
|
569
|
|
|
|
1,579
|
|
|
|
881
|
|
|
|
698
|
|
Software
|
|
|
74,022
|
|
|
|
9,411
|
|
|
|
64,611
|
|
|
|
61,406
|
|
|
|
31,898
|
|
|
|
29,508
|
|
|
|
$
|
335,251
|
|
|
$
|
166,961
|
|
|
$
|
168,290
|
|
|
$
|
322,635
|
|
|
$
|
142,188
|
|
|
$
|
180,447
|
|
During the year ended December 31, 2018, the Company reclassified $60,500 of acquired in-process research and development to developed technology as the technology was commercialized.
During the year ended December 31, 2017, the Company abandoned a project related to certain developed technology and in-process research and development from the ClariPhy Communications, Inc. (ClariPhy) acquisition resulting in an impairment charge of $47,014, of which $10,174 was included in the cost of revenue and $36,840 was included in the research and development expenses in the consolidated statements of income (loss). The abandonment of the project was primarily related to the change in product roadmap that occurred during the year ended December 31, 2017.
The following table presents amortization of intangible assets for the years ended December 31, 2019, 2018 and 2017:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cost of revenue
|
|
$
|
36,987
|
|
|
$
|
32,845
|
|
|
$
|
28,502
|
|
Research and development
|
|
|
22,305
|
|
|
|
19,311
|
|
|
|
18,352
|
|
Sales and marketing
|
|
|
9,728
|
|
|
|
9,727
|
|
|
|
9,727
|
|
General and administrative
|
|
|
545
|
|
|
|
609
|
|
|
|
643
|
|
|
|
$
|
69,565
|
|
|
$
|
62,492
|
|
|
$
|
57,224
|
|
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Based on the amount of intangible assets subject to amortization at December 31, 2019, the expected amortization expense for each of the next five fiscal years and thereafter is as follows:
2020
|
|
$
|
56,558
|
|
2021
|
|
|
52,469
|
|
2022
|
|
|
42,656
|
|
2023
|
|
|
15,769
|
|
2024
|
|
|
672
|
|
Thereafter
|
|
|
166
|
|
|
|
$
|
168,290
|
|
The weighted-average amortization periods remaining by intangible asset category were as follows (in years):
Developed technology
|
|
|
3.0
|
|
Customer relationship
|
|
|
4.0
|
|
Trade name
|
|
|
2.0
|
|
Patents
|
|
|
7.6
|
|
Software
|
|
|
2.7
|
|
7. Leases
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), using the modified retrospective method through a cumulative adjustment to the beginning accumulated deficit balance. Prior comparative periods have not been restated under this method. The adoption of this guidance resulted in no cumulative effect adjustment as of January 1, 2019. However, total assets and liabilities increased by $10,670 as a result of the adoption. Based on the new guidance, for leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The Company made this election, along with other available practical expedients. This guidance had a material impact on the consolidated balance sheets as of January 1, 2019, but did not have an impact on the consolidated statements of income (loss) and cash flows. The most significant impact was the recognition of right of use (“ROU”) asset and lease liabilities for operating leases related to facility leases.
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, other current liabilities and other long-term liabilities on the consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on the consolidated balance sheets. As of the adoption date and December 31, 2019, the Company does not have material finance leases.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments and initial direct costs incurred, net of lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The Company has operating leases for office facilities. The leases have remaining lease terms of one year to ten years and some may include options to extend the lease for up to five years.
Information related to operating leases for the year ended December 31, 2019 are as follows:
|
|
|
|
Operating lease expense
|
|
$
|
5,094
|
|
Cash paid for leases
|
|
$
|
4,585
|
|
Right of use assets obtained in exchange for lease obligations
|
|
$
|
27,639
|
|
Weighted average remaining lease term and weighted average discount as of December 31, 2019 are as follows:
Weighted average remaining lease term (years)
|
|
|
8.52
|
|
Weighted average discount rate
|
|
|
3.9
|
%
|
Future minimum lease payments under non-cancellable leases as of December 31, 2019 are as follows:
2020
|
|
$
|
4,455
|
|
2021
|
|
|
6,174
|
|
2022
|
|
|
6,351
|
|
2023
|
|
|
6,266
|
|
2024
|
|
|
6,073
|
|
Thereafter
|
|
|
23,630
|
|
Total future minimum lease payments
|
|
|
52,949
|
|
Less: Imputed interest
|
|
|
8,006
|
|
Lease incentive recognized as offset to asset liability
|
|
|
1,324
|
|
Present value of lease obligations
|
|
$
|
43,619
|
|
As of December 31, 2019, the Company has additional operating leases for office facilities that have not yet commenced of $1,098. These operating leases will commence in the second quarter of 2020 with lease terms between three to five years.
As previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and under legacy lease accounting (ASC 840), future minimum lease payments under non-cancelable leases and service agreements as of December 31, 2018 are as follows:
2019
|
|
$
|
4,588
|
|
2020
|
|
|
2,252
|
|
2021
|
|
|
1,883
|
|
2022
|
|
|
1,722
|
|
2023
|
|
|
1,615
|
|
2024 and thereafter
|
|
|
1,698
|
|
Total
|
|
$
|
13,758
|
|
For the years ended December 31, 2018 and 2017, operating lease expense was $5,742 and $6,865, respectively.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
8. Convertible Debt
The carrying value of the Company's long-term debt consists of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Principal
|
|
$
|
517,500
|
|
|
$
|
517,500
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized debt discount
|
|
|
(38,105
|
)
|
|
|
(64,222
|
)
|
Unamortized debt issuance costs
|
|
|
(3,217
|
)
|
|
|
(5,453
|
)
|
Net carrying amount of long-term debt
|
|
|
476,178
|
|
|
|
447,825
|
|
Less current portion of long-term debt
|
|
|
217,467
|
|
|
|
—
|
|
Long-term debt, non-current portion
|
|
$
|
258,711
|
|
|
$
|
447,825
|
|
In December 2015, the Company issued $230,000 of 1.125% convertible senior notes due 2020 (Convertible Notes 2015). The Convertible Notes 2015 will mature December 1, 2020, unless earlier converted or repurchased. Interest on the Convertible Notes 2015 is payable on June 1 and December 1 of each year, beginning on June 1, 2016. The initial conversion rate is 24.8988 shares of common stock per $1 principal amount of Convertible Notes 2015, which represents an initial conversion price of approximately $40.16 per share. The Convertible Notes 2015 will be subject to repurchase at the option of the holders following certain fundamental corporate changes, at a fundamental change in repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. Certain corporate events that occur prior to the stated maturity date can cause the Company to increase the conversion rate for a holder.
Prior to the close of business on the business day immediately preceding June 1, 2020, holders may convert all or any portion of their Convertible Notes 2015 only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on March 31, 2016 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” per $1 principal amount of notes, as determined following a request by a holder of notes in accordance with procedures specified in the indenture governing the Convertible Notes 2015, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after June 1, 2020, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election. The Company's current intent is to settle the principal amount of the Convertible Notes 2015 in cash upon conversion. If the conversion value exceeds the principal amount, the Company would deliver shares of its common stock in respect to the remainder of its conversion obligation in excess of the aggregate principal amount (conversion spread).
The Convertible Notes 2015 are not redeemable at the Company’s option prior to maturity.
The Convertible Notes 2015 are governed by the terms of an indenture (Indenture 2015). The Indenture 2015 does not contain any financial or operating covenants, or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. The Indenture 2015 contains customary terms and covenants in events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving the Company) occurs and is continuing, the trustee under the Indenture 2015 by notice to the Company, or the holders of at least 25% in principal amount of the outstanding Convertible Notes 2015 by notice to the Company and the trustee, may, and the trustee at the request of such holders shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the Convertible Notes 2015 to be due and payable. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving the Company, 100% of the principal of and accrued and unpaid interest, if any, on all of the Convertible Notes 2015 will become due and payable automatically. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately. Notwithstanding the foregoing, the Indenture 2015 provides that, to the extent the Company elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture 2015 consists exclusively of the right to receive additional interest on the Convertible Notes 2015. As of December 31, 2019, none of the conditions allowing holders of the Convertible Notes 2015 to convert had been met.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
In accounting for the issuance of the Convertible Notes 2015, the Company separated the Convertible Notes 2015 into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes 2015 as a whole. The excess of the face amount of the liability component over its carrying amount is amortized to interest expense over the term of the Convertible Notes 2015 using the effective interest method. The gross proceeds of $230,000 were accordingly allocated between long-term debt of $175,974 and stockholders' equity of $54,026. Issuance costs of $6,359, of which $6,007 were paid as of December 31, 2015 and the remainder paid in 2016, were allocated between long-term debt ($4,864) and equity ($1,495).
Interest expense for the Convertible Note 2015 are as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Contractual interest expense
|
|
$
|
2,586
|
|
|
$
|
2,587
|
|
|
$
|
2,588
|
|
Amortization of debt discount
|
|
|
11,645
|
|
|
|
10,833
|
|
|
|
10,079
|
|
Amortization of debt issuance costs
|
|
|
1,050
|
|
|
|
976
|
|
|
|
907
|
|
Total interest expense
|
|
$
|
15,281
|
|
|
$
|
14,396
|
|
|
$
|
13,574
|
|
In connection with the issuance of the Convertible Notes 2015, the Company entered into capped call transactions (Capped Call) in private transactions. Under the Capped Call, the Company purchased capped call options that in aggregate relate to 100% of the total number of shares of the Company's common stock underlying the Convertible Notes 2015, with a strike price approximately equal to the conversion price of the Convertible Notes 2015 and with a cap price equal to $52.06 per share. The capped calls were purchased for $17,802 and recorded as a reduction to additional paid-in-capital in accordance with ASC 815-40, Contracts in Entity’s Own Equity.
The purchased Capped Call allows the Company to receive shares of its common stock and/or cash from counterparties equal to the amounts of common stock and/or cash related to the excess of the market price per share of the common stock, as measured under the terms of the Capped Call over the strike price of the Capped Call during the relevant valuation period. The purchased Capped Call is intended to reduce the potential dilution to common stock upon future conversion of the Convertible Notes 2015 by effectively increasing the initial conversion price to $52.06 as well as to offset potential cash payments the Company is required to make in excess of the principal amount of the Convertible Notes 2015 in applicable events.
The Capped Call is a separate transaction entered into by the Company with the option counterparties, is not part of the terms of the Convertible Notes 2015 and will not change the holders' rights under the Convertible Notes 2015.
In September 2016, the Company issued $287,500 of 0.75% convertible senior notes due 2021 (Convertible Notes 2016 and together with the Convertible Notes 2015, the Convertible Notes). The Convertible Notes 2016 will mature September 1, 2021, unless earlier converted or repurchased. Interest on the Convertible Notes 2016 is payable on March 1 and September 1 of each year, beginning on March 1, 2017. The initial conversion rate is 17.7508 shares of common stock per $1 principal amount of Convertible Notes 2016, which represents an initial conversion price of approximately $56.34 per share. The Convertible Notes 2016 will be subject to repurchase at the option of the holders following certain fundamental corporate changes, at a fundamental change in repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. Certain corporate events that occur prior to the stated maturity date can cause the Company to increase the conversion rate for a holder.
Prior to the close of business on the business day immediately preceding March 1, 2021, holders may convert all or any portion of their Convertible Notes 2016 only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on December 31, 2016 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” per $1 principal amount of notes, as determined following a request by a holder of notes in accordance with procedures specified in the indenture governing the Convertible Notes 2016, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after March 1, 2021, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election. The Company's current intent is to settle the principal amount of the Convertible Notes 2016 in cash upon conversion. If the conversion value exceeds the principal amount, the Company would deliver shares of its common stock in respect to the remainder of its conversion obligation in excess of the aggregate principal amount (conversion spread).
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The Convertible Notes 2016 are not redeemable at the Company’s option prior to maturity.
The Convertible Notes 2016 are governed by the terms of an indenture (Indenture 2016). The Indenture 2016 does not contain any financial or operating covenants, or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. The Indenture 2016 contains customary terms and covenants in events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving the Company) occurs and is continuing, the trustee under the Indenture 2016 by notice to the Company, or the holders of at least 25% in principal amount of the outstanding Convertible Notes 2016 by notice to the Company and the trustee under the Indenture 2016, may, and the trustee at the request of such holders shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the Convertible Notes 2016 to be due and payable. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving the Company, 100% of the principal of and accrued and unpaid interest, if any, on all of the Convertible Notes 2016 will become due and payable automatically. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately. Notwithstanding the foregoing, the Indenture 2016 provides that, to the extent the Company elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture 2016 consists exclusively of the right to receive additional interest on the Convertible Notes 2016. As of December 31, 2019, none of the conditions allowing holders of the Convertible Notes 2016 to convert had been met.
In accounting for the issuance of the Convertible Notes 2016, the Company separated the Convertible Notes 2016 into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes 2016 as a whole. The excess of the face amount of the liability component over its carrying amount is amortized to interest expense over the term of the Convertible Notes 2016 using the effective interest method. The gross proceeds of $287,500 were accordingly allocated between long-term debt of $216,775 and stockholders' equity of $70,725. Issuance costs of $7,689, were allocated between long-term debt ($5,798) and equity ($1,891).
Interest expense for the Convertible Notes 2016 are as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Contractual interest expense
|
|
$
|
2,152
|
|
|
$
|
2,156
|
|
|
$
|
2,154
|
|
Amortization of debt discount
|
|
|
14,472
|
|
|
|
13,481
|
|
|
|
12,559
|
|
Amortization of debt issuance costs
|
|
|
1,186
|
|
|
|
1,104
|
|
|
|
1,029
|
|
Total interest expense
|
|
$
|
17,810
|
|
|
$
|
16,741
|
|
|
$
|
15,742
|
|
In connection with the issuance of the Convertible Notes 2016, the Company entered into capped call transactions (Capped Call 2016) in private transactions. Under the Capped Call 2016, the Company purchased capped call options that in aggregate relate to 100% of the total number of shares of the Company's common stock underlying the Convertible Notes 2016, with a strike price approximately equal to the conversion price of the Convertible Notes 2016 and with a cap price equal to approximately $73.03 per share. The capped calls were purchased for $22,540 and recorded as a reduction to additional paid-in-capital in accordance with ASC 815-40, Contracts in Entity’s Own Equity.
The purchased Capped Call 2016 allows the Company to receive shares of its common stock and/or cash from counterparties equal to the amounts of common stock and/or cash related to the excess of the market price per share of the common stock, as measured under the terms of the Capped Call 2016 over the strike price of the Capped Call 2016 during the relevant valuation period. The purchased Capped Call 2016 is intended to reduce the potential dilution to common stock upon future conversion of the Convertible Notes 2016 by effectively increasing the initial conversion price to approximately $73.03 as well as to offset potential cash payments the Company is required to make in excess of the principal amount of the Convertible Notes 2016 in applicable events.
The Capped Call 2016 is a separate transaction entered into by the Company with the option counterparties, is not part of the terms of the Convertible Notes 2016 and will not change the holders' rights under the Convertible Notes 2016.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
9. Other Liabilities
Other current liabilities consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Software license intangible asset liability
|
|
$
|
25,810
|
|
|
$
|
21,945
|
|
Operating lease liability
|
|
|
2,545
|
|
|
|
—
|
|
Others
|
|
|
5,176
|
|
|
|
2,374
|
|
|
|
$
|
33,531
|
|
|
$
|
24,319
|
|
Other long-term liabilities consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred rent
|
|
$
|
26
|
|
|
$
|
1,100
|
|
Income tax payable
|
|
|
692
|
|
|
|
706
|
|
Software license intangible asset liability
|
|
|
36,144
|
|
|
|
7,961
|
|
Operating lease liability
|
|
|
41,074
|
|
|
|
—
|
|
Others
|
|
|
981
|
|
|
|
1,144
|
|
|
|
$
|
78,917
|
|
|
$
|
10,911
|
|
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
10. Income Taxes
Loss before income taxes consists of the following:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
(60,313
|
)
|
|
$
|
(71,978
|
)
|
|
$
|
(77,649
|
)
|
Foreign
|
|
|
(12,202
|
)
|
|
|
(31,984
|
)
|
|
|
(18,431
|
)
|
Total
|
|
$
|
(72,515
|
)
|
|
$
|
(103,962
|
)
|
|
$
|
(96,080
|
)
|
Income tax provision (benefit) consisted of the following:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
96
|
|
U.S. State
|
|
|
(11
|
)
|
|
|
42
|
|
|
|
51
|
|
Foreign
|
|
|
70
|
|
|
|
375
|
|
|
|
1,105
|
|
|
|
|
59
|
|
|
|
417
|
|
|
|
1,252
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
—
|
|
|
|
(6,734
|
)
|
|
|
(11,312
|
)
|
U.S. State
|
|
|
—
|
|
|
|
—
|
|
|
|
(613
|
)
|
Foreign
|
|
|
337
|
|
|
|
(1,894
|
)
|
|
|
(10,503
|
)
|
|
|
|
337
|
|
|
|
(8,628
|
)
|
|
|
(22,428
|
)
|
Total
|
|
$
|
396
|
|
|
$
|
(8,211
|
)
|
|
$
|
(21,176
|
)
|
Provision (benefit) for income taxes differed from the amounts computed by applying the U.S. federal income tax rate of 21% in 2019, 21% in 2018 and 34% in 2017 to loss before income taxes as a result of the following:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Benefit at statutory rate
|
|
$
|
(15,228
|
)
|
|
$
|
(21,832
|
)
|
|
$
|
(32,562
|
)
|
State income taxes
|
|
|
(587
|
)
|
|
|
594
|
|
|
|
(585
|
)
|
Research and development credits
|
|
|
(16,933
|
)
|
|
|
(13,283
|
)
|
|
|
(12,983
|
)
|
Change in valuation allowance
|
|
|
31,917
|
|
|
|
13,757
|
|
|
|
40,028
|
|
Impact of foreign operations
|
|
|
(1,045
|
)
|
|
|
5,925
|
|
|
|
(1,951
|
)
|
Unrecognized tax benefits
|
|
|
6,725
|
|
|
|
5,340
|
|
|
|
3,596
|
|
Stock-based compensation
|
|
|
(4,731
|
)
|
|
|
(381
|
)
|
|
|
(10,248
|
)
|
Prior year return to provision adjustment
|
|
|
(1,167
|
)
|
|
|
1,422
|
|
|
|
1,105
|
|
Section 162(m)
|
|
|
1,046
|
|
|
|
—
|
|
|
|
—
|
|
Effect of U. S. tax law change
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,602
|
)
|
Impairment of intangibles
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,328
|
)
|
Other
|
|
|
399
|
|
|
|
247
|
|
|
|
(646
|
)
|
|
|
$
|
396
|
|
|
$
|
(8,211
|
)
|
|
$
|
(21,176
|
)
|
Significant components of the Company’s net deferred taxes consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
48,481
|
|
|
$
|
39,888
|
|
Research and development credits
|
|
|
84,268
|
|
|
|
69,320
|
|
Stock-based compensation
|
|
|
8,884
|
|
|
|
9,055
|
|
Accrued expenses and allowances
|
|
|
1,897
|
|
|
|
2,334
|
|
Amortization and depreciation
|
|
|
—
|
|
|
|
1,408
|
|
Operating lease liability
|
|
|
7,345
|
|
|
|
—
|
|
Other temporary differences
|
|
|
6,884
|
|
|
|
6,411
|
|
Foreign tax credit
|
|
|
2,338
|
|
|
|
2,338
|
|
Valuation allowance
|
|
|
(123,989
|
)
|
|
|
(92,315
|
)
|
Total deferred tax assets
|
|
|
36,108
|
|
|
|
38,439
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Acquired intangible assets
|
|
|
(16,092
|
)
|
|
|
(22,593
|
)
|
Convertible debt
|
|
|
(6,444
|
)
|
|
|
(11,596
|
)
|
Amortization and depreciation
|
|
|
(2,123
|
)
|
|
|
—
|
|
Right of use asset
|
|
|
(6,806
|
)
|
|
|
—
|
|
Other deferred tax liabilities
|
|
|
(1,482
|
)
|
|
|
(603
|
)
|
Total deferred tax liabilities
|
|
|
(32,947
|
)
|
|
|
(34,792
|
)
|
Deferred tax assets, net
|
|
$
|
3,161
|
|
|
$
|
3,647
|
|
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
On December 22, 2017, the Tax Reform Act was signed into law. The Tax Reform Act contains significant changes to U.S. federal corporate income taxation, including a reduction of the corporate tax rate from 35% to 21% effective January 1, 2018, a one-time transition tax on deemed mandatory repatriation of accumulated earnings and profits of foreign subsidiaries in conjunction with the elimination of U.S. tax on dividend distributions from foreign subsidiaries, and a temporary 100% first-year depreciation deduction for certain capital investments. In 2017, the Company recorded provisional amounts based on reasonable estimates for certain enactment-date effects of the Tax Reform Act in accordance with the guidance in SAB 118. In 2017, the Company recorded a net tax benefit related to the enactment-date effects of the Tax Reform Act that included the remeasurement of the federal deferred tax assets and liabilities, the tax effect of the one-time mandatory repatriation income, and related valuation allowance adjustments.
During 2018, the Company finalized the calculation of the deemed mandatory repatriation income upon filing its 2017 U.S. income tax return. The change in the mandatory repatriation income was fully absorbed by the U.S. net operating loss, which is subject to valuation allowance, and resulted in no current tax liability. These measurement period adjustments had no net tax effect after the offsetting change to the valuation allowance.
The Tax Reform Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. In January 2018, the FASB released guidance on the accounting for tax on the GILTI inclusion. Entities can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or account for GILTI as a period cost in the year the tax is incurred. The Company has elected to account for GILTI as a period cost in the year the tax is incurred. For the year ended December 31, 2019, the Company computed no GILTI inclusion as a result of current year aggregate loss of the Company’s foreign subsidiaries.
Valuation Allowance
The Company records a valuation allowance to reduce deferred tax assets to the amount the Company believes is more likely than not to be realized. The determination of recording or releasing tax valuation allowances is made, in part, pursuant to an assessment performed by management regarding the likelihood that the Company will generate sufficient future taxable income against which benefits of the deferred tax assets may or may not be realized. This assessment requires management to exercise significant judgment and make estimates with respect to the Company’s ability to generate revenue, gross profits, operating income and taxable income in future periods. Amongst other factors, management must make assumptions regarding overall current and projected business and semiconductor industry conditions, operating efficiencies, the Company’s ability to timely develop, introduce and consistently manufacture new products to customers’ specifications, acceptance of new products, customer concentrations, technological change and the competitive environment which may impact the Company’s ability to generate taxable income and, in turn, realize the value of the deferred tax assets.
At December 31, 2019, 2018 and 2017, the Company has a full valuation allowance recorded against the deferred tax assets of Canada, United Kingdom, and the U.S., with the exception of the federal refundable AMT credit. The Company has a partial valuation allowance against the deferred tax assets of Taiwan.
The valuation allowance increased $31,674, $13,777 and $39,907 in the years ended December 31, 2019, 2018 and 2017, respectively.
The net increase of $31,674 in the valuation allowance for the year ended December 31, 2019 is comprised of $31,917 increase charged to income tax provision and $243 decrease charged to other comprehensive income. The net increase of $13,777 in the valuation allowance for the year ended December 31, 2018 is comprised of $20 increase charged to other comprehensive income and $13,757 charged to income tax provision. The net increase of $39,907 in the valuation allowance for the year ended December 31, 2017 is comprised of $134 increase charged to other comprehensive income, $158 decrease charged to goodwill, and $39,931 increase charged to income tax provision. The valuation allowance charged to income tax provision included an income tax benefit from the partial release of the federal and state valuation allowance.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
General Income Tax Disclosures
The Company has net operating loss (“NOL”) carryforwards for federal and state income tax purposes of approximately $261,621 and $96,559, respectively at December 31, 2019, that will begin to expire in 2022 for federal income tax purposes and in 2026 for state income tax purposes. The Company’s federal NOL carryforward of $59,407 that was generated in 2018 and 2019 does not expire. At December 31, 2019, the Company has NOL carryforwards of $2,597 for its Taiwan subsidiary which begin to expire in 2020, and NOL carryforwards of $8,409 for the United Kingdom subsidiary, which do not expire. A full valuation allowance has been provided on U.S. NOL and United Kingdom NOL, and a partial valuation allowance has been provided on Taiwan NOL.
At December 31, 2019, the Company has federal and state research and development (“R&D”) tax credit carryforwards of $57,078 and $58,288, respectively. The federal tax credits will begin to expire in 2024. Some state tax credits will begin to expire in 2021 and some do not expire. At December 31, 2019, the Company has Canadian tax credits and research expenditure tax credit carryforwards for its Canadian subsidiary of $6,999 and $3,750, respectively. The tax credits will begin to expire in 2027, and the research expenditure claim carryforwards do not expire. A full valuation allowance has been provided on R&D tax credit and research expenditure claim carryforwards.
Pursuant to Internal Revenue Code of 1986, as amended (the “Code”) sections 382 and 383, use of the Company’s NOL and R&D credits generated prior to June 2004 are subject to an annual limitation due to a cumulative ownership percentage change that occurred in that period. The Company has had two changes in ownership, one in December 2000 and the second in June 2004, that resulted in an annual limitation on NOL and R&D credit utilization. The NOL and R&D credit carryover of Cortina, are also subject to annual limitation under the Code sections 382 and 383. The acquisition of Cortina caused an ownership change that resulted in an annual limitation, as well as Cortina’s legacy annual limitation amount from ownership changes prior to acquisition. The NOL and R&D credit carryforward which will expire unused due to annual limitations is not recognized for financial statement purposes and is not reflected in the above carryover amounts.
The Company’s NOL carryforwards include Cortina’s federal and state pre-acquisition NOL of $49,152 and $3,919, respectively. These NOL carryforwards will begin to expire in 2024 for federal and 2026 for state. The Company’s NOL carryforwards also include ClariPhy’s federal and state pre-acquisition NOL of $46,601 and $68,104, respectively. These NOL carryforwards will begin to expire in 2032 for federal and 2028 for state. The Company’s R&D credit carryforwards included Cortina’s federal and state pre-acquisition credits of $6,033 and $7,912, respectively. The federal R&D credit carryforward will begin to expire in 2027. While some state tax credits will begin to expire in 2021, most do not expire. The utilization of Cortina and ClariPhy’s pre-acquisition tax attributes is subject to certain annual limitations under the Code sections 382 and 383. No benefit for Cortina’s tax attributes was recorded upon the close of the acquisition, as the benefit from these tax attributes did not meet the "more-likely-than-not" standard.
The Company operates under tax holiday in Singapore. The Singapore tax holiday allows for a reduced income tax rate of 5% effective through April 2020, and the Company is currently pursuing a renewal of the reduced tax rate to apply subsequent to the current holiday period. The Singapore statutory rate is 17%. The tax holiday is conditional upon meeting certain employment, activities and investment thresholds. As of December 31, 2019, the Company believes it has met all of the required thresholds. The Company qualified for a tax incentive program in Argentina that reduced the income tax rate to 12%, starting January 1, 2018 through December 31, 2019, with a return to the full statutory rate of 30% in 2020. As a result of these reduced tax rates, foreign tax expense increased (decreased) by ($1,729), ($2,093) and $7,412 for the years ended December 31, 2019, 2018 and 2017, respectively. The effect of the tax holidays on diluted earnings per share was ($0.04), ($0.05) and $0.18 for the years ended December 31, 2019, 2018 and 2017, respectively.
The following table summarizes the changes in gross unrecognized tax benefits:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Balance as of January 1
|
|
$
|
53,943
|
|
|
$
|
47,606
|
|
|
$
|
56,503
|
|
Increases based on tax positions related to the current year
|
|
|
7,926
|
|
|
|
5,747
|
|
|
|
4,656
|
|
Increases (decreases) based on tax positions of prior year
|
|
|
(518
|
)
|
|
|
708
|
|
|
|
(13,452
|
)
|
Statute of limitation expirations
|
|
|
(51
|
)
|
|
|
(118
|
)
|
|
|
(101
|
)
|
Balance as of December 31
|
|
$
|
61,300
|
|
|
$
|
53,943
|
|
|
$
|
47,606
|
|
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
As of December 31, 2019, the Company had approximately $5,478 of unrecognized tax benefits that if recognized would affect the effective income tax rate. The Company believes that before the end of next year, it is reasonably possible that the gross unrecognized tax benefit may decrease by approximately $58 due to statute of limitation expiration in foreign jurisdictions.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company recorded $16, $17 and $16 in interest expense in the years ended December 31, 2019, 2018 and 2017, respectively. The Company had $56, $65, and $113 of interest expense and penalties accrued as of December 31, 2019, 2018 and 2017, respectively.
The Company files income tax returns in the U.S. federal jurisdiction, various states and certain foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for tax years ended on or before December 31, 2011 or to California state income tax examinations for tax years ended on or before December 31, 2010. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward.
The Company does not provide for U.S. income taxes on undistributed earnings of its controlled foreign corporations as the Company intends to reinvest these earnings indefinitely outside the United States. At December 31, 2019, foreign subsidiaries had cumulative undistributed earnings of $31,008 that, if repatriated, is expected to result in immaterial U.S. taxes.
The Company is currently under examination by the Inland Revenue Authority of Singapore (“IRAS”) for the years 2010, 2011 and 2012. The IRAS made an adjustment to the timing of deducting certain intercompany payments, the effect of which has been reflected in the provision and did not result in a material impact to the consolidated financial statements. As of the report date, the examination is ongoing.
The Company is currently under examination by the U.S. Internal Revenue Service for year 2016. The Company believes it has adequate reserve for its uncertain tax positions, however, there is no assurance that the taxing authorities will not propose adjustments that are different from the Company’s expected outcome and such adjustments may impact the provision for income taxes. The Internal Revenue Service examination is on-going as of the report date.
11. Earnings Per Share
The following securities were not included in the computation of diluted earnings per share as inclusion would have been anti-dilutive:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Common stock options
|
|
|
1,032,485
|
|
|
|
1,208,643
|
|
|
|
1,456,610
|
|
Unvested restricted stock unit
|
|
|
2,772,991
|
|
|
|
2,871,135
|
|
|
|
2,935,500
|
|
Convertible debt
|
|
|
10,830,038
|
|
|
|
10,830,038
|
|
|
|
10,830,038
|
|
|
|
|
14,635,514
|
|
|
|
14,909,816
|
|
|
|
15,222,148
|
|
12. Stock-Based Compensation
In June 2010, the Board of Directors (the “Board”) approved the Company’s 2010 Stock Incentive Plan (the “2010 Plan”), which became effective in November 2010. The 2010 Plan provides for the grants of restricted stock, stock appreciation rights and stock unit awards to employees, non-employee directors, advisors and consultants. The Compensation Committee administers the 2010 Plan, including the determination of the recipient of an award, the number of shares subject to each award, whether an option is to be classified as an incentive stock option or nonstatutory option, and the terms and conditions of each award, including the exercise and purchase prices and the vesting or duration of the award. Options granted under the 2010 Plan are exercisable only upon vesting. At December 31, 2019, 4,909,665 shares of common stock have been reserved for future grants under the 2010 Plan.
Stock Option Awards
The Company did not grant any stock options during the years ended December 31, 2019, 2018 and 2017.
The following table summarizes information regarding options outstanding:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price Per Share
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2018
|
|
|
1,159,121
|
|
|
$
|
12.94
|
|
|
|
2.62
|
|
|
$
|
22,267
|
|
Exercised
|
|
|
(253,980
|
)
|
|
$
|
10.30
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
905,141
|
|
|
$
|
13.68
|
|
|
|
1.81
|
|
|
$
|
54,616
|
|
Vested and Exercisable as of December 31, 2019
|
|
|
905,141
|
|
|
$
|
13.68
|
|
|
|
1.81
|
|
|
$
|
54,616
|
|
The intrinsic value of options outstanding, exercisable and vested and expected to vest is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the respective balance sheet dates.
The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was $12,008, $4,553 and $11,312, respectively. The intrinsic value of exercised options is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date. Cash received from the exercise of stock options was $2,616, $719 and $2,214, respectively, for the years ended December 31, 2019, 2018 and 2017.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Restricted Stock Units and Awards
The Company granted restricted stock units (“RSUs”) to members of the Board and its employees. Most of the Company’s outstanding RSUs vest over four years with vesting contingent upon continuous service. The Company estimates the fair value of RSUs using the market price of the common stock on the date of the grant. The fair value of these awards is amortized on a straight-line basis over the vesting period.
The following table summarizes information regarding outstanding restricted stock units:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
Per Share
|
|
Outstanding at December 31, 2018
|
|
|
4,051,685
|
|
|
$
|
34.68
|
|
Granted
|
|
|
1,965,231
|
|
|
$
|
47.85
|
|
Vested
|
|
|
(1,811,511
|
)
|
|
$
|
34.19
|
|
Canceled
|
|
|
(383,080
|
)
|
|
$
|
37.71
|
|
Outstanding at December 31, 2019
|
|
|
3,822,325
|
|
|
$
|
41.38
|
|
Expected to vest in the future as of December 31, 2019
|
|
|
3,742,887
|
|
|
|
|
|
The RSUs include performance-based stock units subject to achievement of pre-established revenue and earnings per share goals on non-GAAP basis. Once the goals are met, the performance-based stock units are subject to four years of vesting from the original grant date, contingent upon continuous service. The total performance-based units that vested for the year ended December 31, 2019 was 55,759. As of December 31, 2019, the total performance-based units outstanding was 72,053.
Market Value Stock Units
In January 2018, the compensation committee of the Board approved long-term market value stock unit (MVSU) awards to certain executive officers and employees, subject to certain market and service conditions in the maximum total amount of 702,000 units. Recipients may earn between 0% to 225% of the target number of shares based on the Company’s achievement of total shareholder return (TSR) in comparison to the TSR of companies in the S&P 500 Index over a period of approximately three years in length ending in the first calendar quarter of 2021 after reporting of fiscal year 2020 results. If the Company’s absolute TSR is negative for the performance period, then the maximum number of shares that may be earned is the target number of shares. The fair value of the MVSU awards was estimated using a Monte Carlo simulation model and compensation is being recognized ratably over the service period. The expected volatility of the Company’s common stock was estimated based on the historical average volatility rate over the three-year period. The dividend yield assumption was based on historical and anticipated dividend payouts. The risk-free interest rate assumption was based on observed interest rates consistent with three-year measurement period. The total amount of compensation to recognize over the service period, and the assumptions used to value the grants are as follows:
Total target shares
|
|
|
312,000
|
|
Fair value per share
|
|
$
|
55.81
|
|
Total amount to be recognized over the service period
|
|
$
|
17,413
|
|
Risk free interest rate
|
|
|
2.29
|
%
|
Expected volatility
|
|
|
47.52
|
%
|
Dividend yield
|
|
|
—
|
|
Employee Stock Purchase Plan
In December 2011, the Company adopted the Employee Stock Purchase Plan (“ESPP”). Participants purchase the Company's stock using payroll deductions, which may not exceed 15% of their total cash compensation. Pursuant to the terms of the ESPP, the "look-back" period for the stock purchase price is six months. Offering and purchase periods will begin on February 10 and August 10 of each year. Participants will be granted the right to purchase common stock at a price per share that is 85% of the lesser of the fair market value of the Company's common shares at the beginning or the end of each six-month period.
The ESPP imposes certain limitations upon an employee’s right to acquire common stock, including the following: (i) no employee shall be granted a right to participate if such employee immediately after the election to purchase common stock, would own stock possessing 5% or more to the total combined voting power or value of all classes of stock of the Company, and (ii) no employee may be granted rights to purchase more than $25 fair value of common stock for each calendar year. The maximum aggregate number of shares of common stock available for purchase under the ESPP is 2,750,000. Total common stock issued under the ESPP during the years ended December 31, 2019, 2018 and 2017 was 208,721, 283,493, and 171,099, respectively.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The fair value of award under the employee stock purchase plan is estimated at the start of offering period using the Black-Scholes option pricing model with the following average assumptions for the years ended December 31, 2019, 2018 and 2017:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Risk-free interest rate
|
|
|
2.26
|
%
|
|
|
2.01
|
%
|
|
|
0.94
|
%
|
Expected life (in years)
|
|
|
0.49
|
|
|
|
0.50
|
|
|
|
0.50
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
43
|
%
|
|
|
46
|
%
|
|
|
42
|
%
|
Estimated fair value
|
|
$
|
13.35
|
|
|
$
|
8.35
|
|
|
$
|
11.03
|
|
Stock-Based Compensation Expense
Stock-based compensation expense is included in the Company’s results of operations as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cost of revenue
|
|
$
|
6,208
|
|
|
$
|
2,527
|
|
|
$
|
2,045
|
|
Research and development
|
|
|
42,265
|
|
|
|
37,397
|
|
|
|
28,846
|
|
Sales and marketing
|
|
|
15,561
|
|
|
|
13,470
|
|
|
|
8,340
|
|
General and administrative
|
|
|
12,821
|
|
|
|
10,490
|
|
|
|
5,602
|
|
|
|
$
|
76,855
|
|
|
$
|
63,884
|
|
|
$
|
44,833
|
|
As of December 31, 2019, total unrecognized compensation cost related to unvested stock options and awards prior to the consideration of expected forfeitures, was approximately $125,015, which is expected to be recognized over a weighted-average period of 2.50 years.
13. Employee Benefit Plan
The Company has established a 401(k) tax-deferred savings plan (the “Plan”) which permits participants to make contributions by salary deduction pursuant to Section 401(k) of the Code. The Company may, at its discretion, make matching contributions to the Plan. Furthermore, the Company is responsible for administrative costs of the Plan. The Company accrued $1,976, $1,800 and $1,137 in contributions to the Plan for the years ended December 31, 2019, 2018 and 2017, respectively.
14. Fair Value Measurements
The guidance on fair value measurements requires fair value measurements to be classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The Company measures its investments in marketable securities at fair value using the market approach which uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company has cash equivalents which consist of money market funds valued using the amortized cost method, in accordance with Rule 2a-7 under the 1940 Act which approximates fair value.
The convertible notes are carried on the consolidated balance sheets at their original issuance value including accreted interest, net of unamortized debt discount and issuance costs. The Convertible Notes are not marked to fair value at the end of each reporting period. As of December 31, 2019 and 2018, the fair value of Convertible Notes was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy. The fair value of the Convertible Notes as of December 31, 2019 and 2018 was $845,296 and $512,428, respectively.
The following table presents information about assets required to be carried at fair value on a recurring basis:
December 31, 2019
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
190,598
|
|
|
$
|
67,494
|
|
|
$
|
123,104
|
|
Commercial paper
|
|
|
9,465
|
|
|
|
—
|
|
|
|
9,465
|
|
Municipal bonds
|
|
|
1,250
|
|
|
|
—
|
|
|
|
1,250
|
|
Investments in marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
3,759
|
|
|
|
3,759
|
|
|
|
—
|
|
Municipal bonds
|
|
|
6,119
|
|
|
|
—
|
|
|
|
6,119
|
|
Corporate notes/bonds
|
|
|
119,449
|
|
|
|
—
|
|
|
|
119,449
|
|
Asset-backed securities
|
|
|
4,268
|
|
|
|
—
|
|
|
|
4,268
|
|
Commercial paper
|
|
|
6,464
|
|
|
|
—
|
|
|
|
6,464
|
|
Certificate of deposit
|
|
|
72
|
|
|
|
72
|
|
|
|
—
|
|
|
|
$
|
341,444
|
|
|
$
|
71,325
|
|
|
$
|
270,119
|
|
December 31, 2018
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
740
|
|
|
$
|
38
|
|
|
$
|
702
|
|
Commercial paper
|
|
|
96,759
|
|
|
|
—
|
|
|
|
96,759
|
|
Investments in marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
6,733
|
|
|
|
—
|
|
|
|
6,733
|
|
Corporate notes/bonds
|
|
|
146,126
|
|
|
|
—
|
|
|
|
146,126
|
|
Variable rate demand notes
|
|
|
8,900
|
|
|
|
—
|
|
|
|
8,900
|
|
Asset-backed securities
|
|
|
32,923
|
|
|
|
—
|
|
|
|
32,923
|
|
Commercial paper
|
|
|
39,701
|
|
|
|
—
|
|
|
|
39,701
|
|
Certificate of deposit
|
|
|
956
|
|
|
|
956
|
|
|
|
—
|
|
|
|
$
|
332,838
|
|
|
$
|
994
|
|
|
$
|
331,844
|
|
As discussed in Note 2, the Company has a marketable equity investment. The marketable equity investment is classified as Level 1 in the fair value hierarchy. As discussed in Note 2, the Company has non-marketable equity investments which are classified within Level 3 in the fair value hierarchy.
15. Segment and Geographic Information
The Company operates in one reportable segment. Revenue by region is classified based on the locations to which the product is transported, which may differ from the customer’s principal offices.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The following table sets forth the Company’s revenue by geographic region:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
China
|
|
$
|
164,715
|
|
|
$
|
113,684
|
|
|
$
|
114,168
|
|
United States
|
|
|
103,402
|
|
|
|
87,545
|
|
|
|
92,620
|
|
Thailand
|
|
|
54,468
|
|
|
|
40,884
|
|
|
|
45,205
|
|
Other
|
|
|
43,050
|
|
|
|
52,377
|
|
|
|
96,208
|
|
|
|
$
|
365,635
|
|
|
$
|
294,490
|
|
|
$
|
348,201
|
|
As of December 31, 2019, $33,826 of long-lived tangible assets are located outside the United States of which $27,750 are located in Taiwan. As of December 31, 2018, $32,631 of long-lived tangible assets are located outside the United States of which $28,428 are located in Taiwan.
16. Commitments and Contingencies
Leases
The Company has noncancelable service agreements, including software licenses, colocation and cloud services used in research and development activities expiring in various years through 2024.
Future minimum lease payments under noncancelable operating leases having initial terms in excess of one year are as follows:
|
|
December 31, 2019
|
|
2020
|
|
$
|
1,508
|
|
2021
|
|
|
1,110
|
|
2022
|
|
|
515
|
|
2023
|
|
|
264
|
|
2024
|
|
|
195
|
|
|
|
$
|
3,592
|
|
Noncancelable Purchase Obligations
The Company depends upon third party subcontractors to manufacture wafers. The Company’s subcontractor relationships typically allow for the cancellation of outstanding purchase orders, but require payment of all expenses incurred through the date of cancellation. As of December 31, 2019, the total value of open purchase orders for wafers was approximately $14,977. As of December 31, 2019, the Company has a commitment to pay mask costs of $542.
Legal Proceedings
Netlist, Inc. v. Inphi Corporation, Case No. 09-cv-6900 (C.D. Cal.)
On September 22, 2009, Netlist filed suit in the United States District Court, Central District of California (the “Court”), asserting that the Company infringes U.S. Patent No. 7,532,537. Netlist filed an amended complaint on December 22, 2009, further asserting that the Company infringes U.S. Patent Nos. 7,619,912 and 7,636,274, collectively with U.S. Patent No. 7,532,537, the patents-in-suit, and seeking both unspecified monetary damages to be determined and an injunction to prevent further infringement. These infringement claims allege that the iMB™ and certain other memory module components infringe the patents in-suit. The Company answered the amended complaint on February 11, 2010 and asserted that the Company does not infringe the patents-in-suit and that the patents-in-suit are invalid. In 2010, the Company filed inter partes requests for reexamination with the United States Patent and Trademark Office (the “USPTO”), asserting that the patents-in-suit are invalid. As a result of the proceedings at the USPTO, the Court has stayed the litigation, with the parties advising the Court on status every 120 days.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
As to the proceeding at the USPTO, reexamination has been ordered for all of the patents that Netlist alleged to infringe. At present, the USPTO has determined that almost all of the originally filed claims are not valid, and determined certain amended claims to be patentable. The Reexamination Certificate for U.S. Patent No. 7,532,537 was issued on August 2, 2016 based on amended claims. The Reexamination Certificate for U.S. Patent No. 7,636,274 was issued on November 5, 2018, indicating that all claims, 1 through 97, were cancelled. The parties continue to assert their respective positions with respect to the reexamination proceeding for U.S. Patent No. 7,619,912.
While the Company intends to defend the foregoing USPTO proceedings and lawsuit vigorously, the USPTO proceedings and litigation, whether or not determined in the Company’s favor or settled, could be costly and time-consuming and could divert management’s attention and resources, which could adversely affect the Company’s business.
Due to the nature of USPTO proceedings and litigation, the Company is currently unable to predict the final outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company’s business, financial condition, results of operations or cash flows could be materially and adversely affected.
Claims Against eSilicon Corporation
In connection with the Company's acquisition of eSilicon Corporation (“eSilicon”) as discussed in Note 17, eSilicon and the Company have received written communications from certain former stockholders of eSilicon demanding to inspect eSilicon’s books and records and indicating that such stockholders will be seeking appraisal of shares they held in eSilicon. Certain of these former eSilicon stockholders also have stated that they may assert claims against eSilicon’s directors and senior officers for alleged breaches of fiduciary duty and other violations in connection with the merger between eSilicon and a subsidiary of the Company. The Company is unaware of any petition for appraisal and/or lawsuit being filed by any former eSilicon stockholder. The Company believes that the claims in such written communications are without merit, and plan to vigorously defend against lawsuits arising out of or relating to the merger agreement and/or the merger that may be filed in the future.
Indemnifications
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third-parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnifications. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2019 and December 31, 2018.
17. Subsequent Events
In January 2020, the Company completed its acquisition of eSilicon for approximately $215,000 in cash, subject to certain adjustments including cash, debt and transaction expenses. A portion of the consideration has been placed in an escrow fund for up to 12 months (or up to 36 months in certain circumstances) following the closing for the satisfaction of certain indemnification obligations.
In February 2020, the compensation committee of the Board of Directors approved long-term grants to employees of 1,247,109 equity awards consisting of RSUs and MVSUs.
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
18. Supplementary Financial Information (Unaudited)