®
®
We Move Big Data Faster
®
April 26, 2016
Dear Inphi Stockholders:
I am pleased to report that we continued our string of accomplishments at Inphi in 2015. We further strengthened our
relationships with our loyal customers, added important new customers to our list, strategically expanded our product line,
grew our team and exceeded our financial targets. Once again, we achieved the highest revenue and operating margin in our
history. We continue to be confident that, given the large and growing opportunities in front of us, we are just getting started.
These opportunities include ongoing exponential growth in the volume and importance of data, continued ramping of smart
devices, continued waves of enterprises shifting infrastructure, storage and critical applications to the cloud, and the continued
evolution of the worldwide cellular infrastructure. All these trends are driving the need for speed within and between data
centers and across long distances and served as tailwinds that accelerated Inphi’s business growth in 2015.
We expect similar trends in the years ahead.
Strong Financial Results
In 2015, we achieved 54% revenue
growth and 68% EPS growth over
2014. While this was due in part to the
October 2014 Cortina acquisition, we
still delivered nearly 50% organic year
over year growth in our core
communications business including
Amplifiers, Drivers as well as 10, 40
and 100G physical interface products
serving the service provider and data
center interconnect markets. In our
memory interconnects business, we
regained market share in 2015, doubling
our quarterly revenue from the first half
to the second half of the year. We
expect continued growth in our DDR4
products looking forward. In Q4 we
achieved 21.8% in non-GAAP
operating profit, an exceptional gross
margin of 71.4% and a record 29% free
cash flow as a percent of revenue. We
also took advantage of low interest rates
and issued more than $200M in
convertible debt, enhancing our
strategic flexibility. These results were
driven by the continued growth of our
customer base in both the service
provider and data center markets.
While we delivered solid results in
2015, the design win funnel and orders
continue to grow at a rapid pace. Our
module and system OEM customers are
gearing up for strong business in
reliable high-speed data delivery
between and within data centers for the
years to come.
An Award Winning Year
For some time, we have been confident
that Inphi has the right team, to deliver
the right products, at the right time for
both cloud and telecom service
providers. Our confidence was
validated in 2015 by five important
awards from our customers:
Specifically, Cisco, FiberHome,
Huawei HiSilicon, NeoPhotonics and
Sumitomo Electric. The good news
continued early in 2016, as we received
an important award from Samsung
Electronics. These awards were across
our optical, networking, memory and
transport segments, and from across the
globe. Our customers recognized Inphi
for excellence in technology, quality,
delivery, performance, and for our
success and value as a long-term
partner. We believe these accolades
provide more evidence that our
investments in growth and innovation
are paying off for our customers and
stockholders.
The Planes, Trains and Trucks are on
Time and on Track
Solid Growth between Data Centers
You will recall that we have often used
the analogy of overnight delivery via
planes, trains and trucks to describe our
product lines.
Starting with planes, or long distance
travel, our optical interconnects are
accelerating the movement of data over
the long distances between data centers.
We have three drivers of growth for
these lines. First, our new metro
products are growing in both system
OEM line cards and module
applications. Second, our linear
amplifiers and drivers continue to take
share. Specifically, customers are
enthusiastically embracing our multi-
100 Gigabit linear drivers. Our linear
driver revenue more than doubled in
2015, much faster than the 50% unit
growth forecast for the market in 2015.
Third, we also saw progress in the ramp
of our new 45Gbaud products, from
which we look for solid contributions in
2016. Finally, in 2015, we delivered
the foundation for ColorZTM, our
fundamental DWDM technology to
realize the vision of
“The Cloud is the NetworkTM.”
If we use the analogy of a Boeing 747
or Airbus 380 for our long-haul
offerings, and regional jets for our
metro offerings, then, ColorZ can be
compared to a fleet of drones that is
delivering a large amount of packages,
across 80km distances, in a cost-
efficient way, using many parallel links.
New Growth within Data Centers
Moving to our trains, or inside the data
centers, our networking interconnects
also thrived in 2015. We are pleased to
report that our customers are
transitioning to the faster 100 Gigabit
speeds and the corresponding ramp of
our 100 Gigabit NRZ Clock Data
Recovery and Gearbox solutions. Based
on our conversations at year-end, we
continue to believe that PAM will
become the standard for 40, 50, 100,
200, and 400G Gigabit for copper,
multi-mode fiber, and single-mode fiber
interconnects in the years to come. As
data centers continue on their growth
trajectories, and physical layer speeds
accelerate from 1 Gbps speeds to 10, 40
and 100 Gbps speeds and beyond, we
believe Inphi will continue to provide
leading-performance and differentiated
solutions for our customers.
Regaining Share in Memory
Last year we told you of our intent to
regain market share with our trucks, our
memory interconnects. We are proud
of the progress we made in 2015 on that
commitment. We began the year with
two memory module customers for the
Intel Haswell server processor and our
business only improved from that
strong start. Not only did we regain
share, but also from that healthy
beginning, we doubled our quarterly
revenue from our memory products
between the first half to the second half
of the year. We are far from finished.
Specifically, we plan to gain more
register share in 2016 and make strides
in the buffer business by 2017.
New Product Introductions
Kicking Off a Promising 2016
We continue to work closely with our
customers to rethink and design for the
data center of tomorrow. As the
emergence of cloud-based services
dramatically increases the need for
multi-terabit per second optical
interconnects, we are focusing our
efforts on providing innovative
solutions that reduce latency, speed the
movement of data over longer
distances, and support the
disaggregation of memory and storage.
The recent debut of ColorZ, our 100G
DWDM solution, is an industry first.
By using silicon photonics and
advanced PAM4 signaling, it delivers
up to 4Tb/s of bandwidth over a single
fiber and up to 100Tb/s between data
centers. These “drones” efficiently
connect multiple data centers within an
80-kilometer range, allowing them to
act as a single data center.
In last year’s letter, I expressed
confidence in the roadmap for our
optical, networking and memory
interconnect lines. I have that same
optimism for this year’s product
launches and for the launches in the
years ahead. We are designing and
providing leading-edge optical,
networking and memory interconnects,
the fundamental building blocks for the
data movement for tomorrow’s cloud.
We are off to a very fast start. Already
this year, we crossed the 1 million
shipments mark for our 100G coherent
TIA and linear driver ICs, introduced
our 45Gbaud long-haul and metro
coherent amplifier and linear driver
families, announced availability of our
second generation, low power PAM4
chipsets for inter- and intra-data center
cloud interconnects and introduced the
world’s lowest power CDR re-timer for
module applications.
Committed to Strong Stockholder
Returns
Our financial results again exceeded
industry averages for growth in
revenue, gross margin, operating
margin and EPS. 2015 was a strong
year in both operations and financials.
This solid performance leads to our
optimism for the road ahead as we look
to grow and deliver strong financial
results and increasing value to our
stockholders in 2016 and beyond.
Non-GAAP
Revenue ($M)
Gross Margin
Operating Margin
EPS
Free Cash Flow ($M)
2013
FY
$103
64.9%
4.7%
$0.12
$2.1
2014
FY
$160
66.0%
15.1%
$0.62
($12.8)
2015
Q1
$60
66.6%
18.8%
$0.23
$8.8
Q2
$61
68.6%
20.0%
$0.24
$10.3
Q3
$62
68.4%
20.3%
$0.25
$14.2
Q4
$64
71.4%
21.8%
$0.32
$18.4
2015
FY
$247
68.8%
20.3%
$1.03
$51.7
Note: For a reconciliation of GAAP to Non GAAP reporting, please see the following page.
I am proud of what our team has accomplished and excited about where we are going. Thank you again for your support.
Ford Tamer
Inphi President and Chief Executive Officer
Inphi Corporation
Reconciliation of GAAP to Non-GAAP Measures
(amounts in thousands except per share data)
GAAP revenue to Non-GAAP revenue
GAAP revenue
Cortina revenue lost due to purchase accounting
Non-GAAP revenue
GAAP gross margin to Non-GAAP gross margin
GAAP gross margin
Adjustments to GAAP gross margin:
Stock-based compensation
Adjustments related to Cortina acquisition
Non-GAAP gross margin
Non-GAAP gross margin as % of non-GAAP revenue
GAAP operating margin to Non-GAAP operating margin
GAAP operating margin
Adjustments to GAAP operating margin:
Stock-based compensation
Adjustments related to Cortina acquisition
Write-off of prototype mask sets
Abandoned office costs
Non-GAAP operating margin
Non-GAAP operating margin as % of non-GAAP revenue
GAAP net loss to Non-GAAP net income
GAAP net loss
Adjustments to GAAP net loss:
Stock-based compensation
Adjustments related to Cortina acquisition
Write-off of prototype mask sets
Abandoned office costs
Accretion and amortization expense on convertible debt
Valuation allowance, delta in interim period tax allocation and
tax effect of the adjustments above from GAAP to non-GAAP
Non-GAAP net income
2013
FY
2014
FY
Q1
Q2
Q3
Q4
2015
2015
FY
$
$
102,664
-
102,664
$
$
156,142
3,865
160,007
$
$
$
$
$
59,160
408
59,568
60,672
-
60,672
62,395
-
62,395
64,389
-
64,389
246,616
408
247,024
$
$
$
$
$
$
65,569
$
85,654
$
29,922
$
37,396
$
38,724
$
42,280
$
148,322
1,086
-
66,655
64.9%
$
1,260
18,619
105,533
66.0%
$
363
9,416
39,701
66.6%
$
381
3,841
41,618
68.6%
$
334
3,593
42,651
68.4%
$
393
3,269
45,942
71.4%
$
$
$
$
1,471
20,119
169,912
68.8%
$
(12,302)
$
(21,365)
$
(5,482)
$
(1,925)
$
(153)
$
2,553
$
(5,007)
16,978
-
-
146
4,822
4.7%
$
22,460
21,016
2,075
-
24,186
15.1%
$
6,420
10,239
-
-
11,177
18.8%
$
7,202
6,836
-
-
12,113
20.0%
$
7,250
5,574
-
-
12,671
20.3%
$
7,421
4,091
-
-
14,065
21.8%
$
28,293
26,740
-
-
50,026
20.3%
$
$
(13,178)
$
(22,608)
$
(9,708)
$
-
$
(1,102)
$
(2,741)
16,978
-
-
146
-
22,460
21,016
2,075
-
-
6,420
10,239
-
-
-
7,202
6,836
-
-
-
7,250
5,574
-
-
-
7,421
4,091
-
-
592
(45)
3,901
$
(1,527)
21,416
$
2,352
9,303
$
(4,181)
9,857
$
(1,311)
10,411
$
3,988
13,351
$
$
(13,551)
-
28,293
26,740
-
-
592
-
848
42,922
$
Shares used in computing non-GAAP diluted earnings per share
31,291,561
34,720,857
40,325,174
41,085,657
41,508,023
42,246,379
41,525,023
Non-GAAP diluted earnings per share
$
0.12
$
0.62
$
0.23
$
0.24
$
0.25
$
0.32
$
1.03
Free Cash Flow
Cash Flow from Operations
Less: Purchases of Property Plant & Equipment
Free Cash Flow
$
$
$
$
$
$
$
18,658
(16,578)
2,080
8,386
(21,171)
(12,785)
12,254
(3,438)
8,816
13,485
(3,200)
10,285
19,764
(5,560)
14,204
$
$
$
$
$
$
$
22,735
(4,359)
18,376
68,238
(16,557)
51,681
Note: For further explanation of Non GAAP reporting and the adjustments shown above, please see our quarterly earnings press releases
on Inphi’s website.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
Form 10-K
(Mark One)
☑
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34942
Inphi Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
77-0557980
(I.R.S. Employer Identification No.)
2953 Bunker Hill Lane, Suite 300, Santa Clara, California 95054
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (408) 217-7300
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, $0.001 par value
Name of Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer ☑
Accelerated filer ☐
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☑
As of June 30, 2015, the aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant was
approximately $860 million, based on the closing price of the common stock as reported on the New York Stock Exchange for that date.
The total number of shares outstanding of the Registrant’s common stock, $0.001 par value per share, as of February 25, 2016 was
39,880,632.
Part III incorporates by reference certain information from the registrant’s definitive proxy statement for the 2016 Annual Meeting of
Stockholders to be filed no later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
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INPHI CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015
TABLE OF CONTENTS
PART I
Item 1.
Business .....................................................................................................................................................
Item 1A. Risk Factors ...............................................................................................................................................
Item 1B. Unresolved Staff Comments ......................................................................................................................
Properties ...................................................................................................................................................
Item 2.
Item 3.
Legal Proceedings .....................................................................................................................................
Item 4. Mine Safety Disclosures ............................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ...................................................................................................................................................
Item 6.
Selected Consolidated Financial Data .......................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ....................
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ....................................................................
Financial Statements and Supplementary Data .........................................................................................
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....................
Item 9A. Controls and Procedures ............................................................................................................................
Item 9B. Other Information ......................................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance ........................................................................
Item 11. Executive Compensation ...........................................................................................................................
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ..
Item 13. Certain Relationships and Related Transactions, and Director Independence ..........................................
Principal Accountant Fees and Services ....................................................................................................
Item 14.
PART IV
Item 15. Exhibits and Financial Statement Schedules .............................................................................................
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PART I
ITEM 1.
BUSINESS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When
used in this report, the terms “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,”
“estimate,” “predict,” “potential,” “plan,” or the negative of these terms, and similar expressions intended to identify forward-looking
statements. These statements include statements regarding our anticipated trends and challenges in our business and the markets in which
we operate, including the market for 40G and 100G high-speed analog semiconductor solutions, our plans for future products and
anticipated features and benefits thereof, expansion of our product offerings and enhancements of existing products, critical accounting
policies and estimates, our expectations regarding our expenses and revenue, sources of revenue, our tax benefits, the benefits of our
products and services, our technological capabilities and expertise, timing of the development of our products, our liquidity position and
sufficiency thereof, including our anticipated cash needs, our operating capital expenditures and requirements and our needs for additional
financing and potential consequences thereof, our anticipated growth and growth strategies, our ability to retain and attract customers,
particularly in light of our dependence on a limited number of customers for a substantial portion of our revenue, our expectations
regarding competition, interest rate sensitivity, adequacy of our disclosure controls, our legal proceedings and warranty claims. These
forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any future results, performance or achievements expressed or implied by
these or any other forward-looking statements. These risks and uncertainties include, but are not limited to, those risks discussed below,
as well as factors affecting our results of operations, our ability to manage our growth, our ability to sustain or increase profitability,
demand for our solutions, the effect of declines in average selling prices for our products, our ability to compete, our ability to rapidly
develop new technology and introduce new products, our ability to safeguard our intellectual property, trends in the semiconductor
industry and fluctuations in general economic conditions, and the risks set forth throughout this Report, including the risks set forth under
Part I, “ Item 1A, Risk Factors”. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based
on current expectations and reflect management's opinions only as of the date hereof. These forward-looking statements speak only as of
the date of this Report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-
looking statements contained herein to reflect any change in our expectations with regard thereto or any changes in events, conditions or
circumstances on which any such statement is based.
All references to “Inphi,” “we,” “us” or “our” mean Inphi Corporation.
Inphi®, iMB™, iKON™ and the Inphi logo are trademarks or service marks owned by Inphi. All other trademarks, service marks
and trade names appearing in this report are the property of their respective owners.
Overview
Our Company
We are a fabless provider of high-speed analog and mixed signal semiconductor solutions for the communications, datacenter and
computing markets. We often refer to our business as covering various data transport segments from “fiber to memory”. Our analog and
mixed signal semiconductor solutions provide high signal integrity at leading-edge data speeds while reducing system power consumption.
Our 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, datacenter and computing infrastructures. Our 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, datacenters and enterprise servers, storage platforms, test and
measurement equipment and military systems. We provide 10G/40G, 100G and beyond 100G high-speed analog semiconductor solutions
for the communications market and high-speed memory interface solutions for the computing market.
On October 3, 2014, we completed the acquisition of Cortina Systems, Inc. including its high-speed interconnect and optical
transport product lines (Cortina) for approximately $52.5 million in cash and approximately 5.3 million shares of our common stock in
accordance with the Agreement and Plan of Merger dated July 30, 2014 as amended by Amendment No. 1 to the Agreement and Plan of
Merger dated September 25, 2014. We acquired Cortina to expand the Company’s market share in high-speed optical and networking
interconnects. The revenue and expenses of Cortina are included in the consolidated statement of income for the year ended December 31,
2015.
1
We leverage our proprietary high-speed analog and mixed signal processing expertise and our deep understanding of system
architectures to address data bottlenecks in current and emerging communications, enterprise network, computing and storage architectures.
We develop these solutions as a result of our competitive strengths, including our system-level simulation capabilities, analog design
expertise, strong relationships with industry leaders, extensive broad process technology experience and high-speed package modeling and
design expertise. We use our core technology and strength in high-speed analog design to enable our customers to deploy next generation
communications and computing systems that operate with high performance at high speed. We believe we are at the forefront of developing
semiconductor solutions that deliver 100G speeds throughout the network infrastructure, including core, metro and the datacenter.
Furthermore, our analog signal processing expertise enables us to improve throughput in computing systems. For example, some of our
computing products enable up to four times the memory capacity on server platforms while using the current generation of memory devices.
We have ongoing, informal collaborative discussions with industry and technology leaders such as Advanced Micro Devices, Inc.
(AMD), ARM Ltd., Ciena Corporation, Cisco Systems, Inc., Huawei Technologies Co., Ltd., Juniper Networks Inc., Intel Corporation,
Micron Technology, Inc., Nokia Corporation (Nokia), Samsung Semiconductor Inc. and SK Hynix Inc. to design architectures and products
that solve bandwidth bottlenecks in existing and next generation communications and computing systems. Although, we generally do not
have any formal collaboration agreements with these entities, we often engage in informal discussions with these entities with respect to
anticipated technological challenges, next generation customer requirements and industry conventions and standards. We help define
industry conventions and standards within the markets we target by collaborating with technology leaders, original equipment
manufacturers, or OEMs, systems manufacturers and standards bodies. Our products are designed into systems sold by OEMs, including
Ciena, Cisco, Dell Inc., EMC Corporation, H3C Technologies, Hewlett-Packard Company, Huawei, International Business Machines
Corporation (IBM), Juniper, Nokia and Oracle Corporation. We believe we are one of a limited number of suppliers to these OEMs for the
type of products we sell, and in some cases we may be the sole supplier for certain applications. We sell both directly to these OEMs and
to other intermediary systems or module manufacturers that, in turn, sell to these OEMs.
Our Business
Our semiconductor solutions leverage our deep understanding of high-speed analog and mixed signal processing and our system
architecture knowledge to address data bottlenecks in current and emerging network and datacenter architectures. We design and develop
our products for the communications and computing markets, which typically have two to three year design cycles, and product life cycles
of five or more years. We believe our leadership position in developing high-speed analog semiconductors is a result of the following core
strengths:
•
•
•
System-Level Simulation Capabilities. We design our high-speed analog semiconductor solutions to be critical components
in complex systems. In order to understand and solve system problems, we work closely with systems vendors to develop
proprietary component, channel and system simulation models. We use these proprietary simulation and validation tools to
accurately predict system performance prior to fabricating the semiconductor or alternately, to identify and optimize critical
semiconductor parameters to satisfy customer system requirements. We use these simulation and validation capabilities to
reduce our customers’ time to market and engineering investments, thus enabling us to establish differentiated design
relationships with our customers.
Analog Design Expertise. We believe that we are a leader in developing broadband analog semiconductors operating at high
frequencies of up to 100 GHz. High-speed analog circuit design is extremely challenging because, as frequencies increase,
semiconductors are increasingly sensitive to temperature, power supply noise, process variation and interaction with
neighboring circuit elements. Development of components that work robustly at high frequencies requires an understanding
of analog circuit design, including electromagnetic theory and practical experience in implementation and testing. Our analog
design expertise has enabled us to design and commercially ship several first in the world technologies including the first
100G linear transimpedance amplifier, or TIA, and the first 200G linear modulator driver that is now being widely deployed
in volume globally in Long Haul and Metro networking infrastructures. We also launched the industry’s first complementary
metal oxide semiconductor, or CMOS, based 100G physical layers or PHYs and clock and data recovery, or CDRs, for
Ethernet and optical transport network applications. These high speed serial PHYs, are designed in a generic CMOS process
to target much lower power compared to silicon germanium or SiGe based products, while reducing the design footprint and
improving manufacturability. We also launched the world's first 40/50/100/400G PAM4 interconnect ICs for cloud
interconnects. The chipset solution included multiple variants of the PAM4 PHY IC based on a highly adaptable and scalable
InphiNityCore TM DSP engine and the OmniConnectTm transmitter for copper and optics media along with a companion linear
TIA for 50G PAM4 interfaces.
Strong Relationships with Industry Leaders. We develop many of our high-speed analog semiconductor solutions for
applications and systems that are driven by industry leaders in the communications, datacenter and computing markets.
Through our established relationships with industry leaders, we have repeatedly demonstrated the ability to address their
technological challenges. As a result, we are designed into several of their current systems and believe we are well-positioned
to develop high-speed analog semiconductor solutions for their emerging architectures. For instance, our high-speed memory
interface designs have been validated for Intel’s Xeon® Core i7® and next generation platforms. We have ongoing, informal
collaborative discussions with communication and networking companies such as Cisco, Ciena, Huawei, and Juniper, among
others to address their next generation 100G and beyond 100G efforts. Specifically, we engage in informal discussions with
these entities with respect to anticipated technological challenges, next generation customer requirements and industry
conventions and standards. As a result of our development efforts with industry leaders, we help define industry conventions
2
and standards within the markets we target by collaborating with technology leaders, OEMs and systems manufacturers, as
well as standards bodies such as the Joint Electronic Device Engineering Councils, or JEDEC, and the Institute of Electrical
and Electronic Engineers, or IEEE, and the Optical Internetworking Forum, or OIF, to establish industry standards.
•
•
Broad Process Technology. We employ process technology experts, device technologists and circuit designers who have
extensive experience in many process technologies including CMOS, SiGe and III-V technologies such as gallium arsenide,
or GaAs, or indium phosphide, or InP. We have developed specific internal models and design kits for each process to support
a uniform design methodology across all of our semiconductor solutions. For example, our products using 40 nanometer
CMOS technology require development of accurate models for sub-circuits such as integrated phase lock loop, or PLLs,
varactors and inductors. As another example, for III-V materials-based processes, in-house model development is a necessity
and we believe also provides a substantial competitive advantage because these processes have complex material and device
interactions. Combined with our fabless manufacturing strategy, our design expertise, proprietary model libraries and uniform
design methodology allow us to use the best possible materials and substrates to design and develop our semiconductor
solutions. We believe that our ability to design high-speed analog semiconductors in a wide range of materials and process
technologies allows us to provide superior performance, power, cost and reliability for a specific set of market requirements.
High-Speed Package Modeling and Design. We have developed deep expertise in high-speed package modeling and design,
since introducing the first high-speed 50 GHz MUX and DEMUX product in 2001. At high frequencies, the interaction
between an analog device, its package and the external environment can significantly affect product performance. Accurately
modeling and developing advanced packaging allows semiconductor solutions to address this challenge. Due to the advanced
nature of this work, there is a limited supply of engineers with experience in high-speed package modeling and design, and
therefore, this required expertise can be difficult to acquire for companies that have not invested in developing such a skill
set. We have developed an infrastructure to simulate electrical, mechanical and thermal properties of devices and packages
that we integrate within our semiconductor design process and implement at our third-party packaging providers. Modeling
is an inherently iterative process, and since our model libraries are used extensively by our circuit designers, the accuracy and
value of these models increases over time. Our current packaging and modeling techniques enable us to deliver
semiconductors that are energy efficient, offer high-speed processing and enable advanced signal integrity, all in a small
footprint.
We believe that our system-level simulation capabilities, our analog design and broad process technology design capabilities as well
as our strengths in packaging enable us to differentiate ourselves by delivering advanced high-speed analog signal processing solutions.
For example, we believe we are the first vendor who has successfully commercialized 100G Ethernet PHYs and CDRs in standard CMOS
process. Within the server market, we have applied our analog signal processing expertise to develop our isolation memory buffer, or
iMBTM technology, which is designed to expand the memory capacity in existing server and computing platforms. Adoption of the iMBTM
allows up to four times the memory capacity to be installed in a server platform, while using the current generation of memory devices.
We believe the key benefits that our solutions provide to our customers are as follows:
•
•
•
High Performance. Our high-speed analog semiconductor solutions are designed to meet the specific technical requirements
of our customers in their respective end-markets. In many cases, our close design relationships and deep engineering expertise
put us in a position where we are one of a limited group of semiconductor vendors that can provide the necessary solution.
For instance, in the broadband communications market, we believe our products achieve the highest signal integrity and attain
superior signal transmission distance at required error-free or low error rates. In the computing and datacenter market, we
believe our products achieve industry leading data transfer rates at the smallest die size.
Low Power and Small Footprint. In each of the end markets that we serve, the power budget of the overall system is a key
consideration for systems designers. Power consumption greatly impacts system operation cost, footprint and cooling
requirements, and is increasingly becoming a point of focus for our customers. We believe that our high speed analog signal
processing solutions enable our customers to implement system architectures that reduce overall system power consumption.
We also believe that, at high frequencies, our high-speed analog semiconductor devices typically consume less power than
competitors’ standard designs, which often incorporate power-consuming digital signal processing to perform data transfer
functions, thereby further reducing overall system power consumption. In addition, in many of our applications, we are able
to design and deliver semiconductors that have a smaller footprint and therefore reduce the overall system size.
Faster Time to Market. Our customers compete in markets that require high-speed, reliable semiconductors that can be
integrated into their systems as soon as new market opportunities develop. To meet our customers’ time-to-market
requirements, we work closely with them early in their design cycles and are actively involved in their development processes.
Over the past ten years, we have developed methodologies and simulation environments that accurately predict the behavior
of complex integrated circuits within various communications systems. In addition, we have developed an extensive internal
library of proven building block circuits such as amplifiers, phase frequency detectors and transmitters that are reused to
shorten design cycles and reduce risk.
3
Products
Our products address bandwidth bottlenecks throughout the network communications and computing infrastructure markets – from
“fiber to memory”, as depicted in the illustration below. For instance, our products find application in devices such as dense wavelength
division multiplexers that enable core and aggregation networks as well as less complex optical interface links within data center
communication infrastructures. In addition, our high-speed memory interface products can be found in servers where they allow CPUs to
better utilize available memory resources.
As of December 31, 2015, we have a wide range product portfolio, including products that have commercially shipped, products for
which we have shipped engineering samples and products under development, that perform a wide range of functions such as amplifying,
encoding, multiplexing, demultiplexing, retiming and buffering data and clock signals at speeds up to 100 Gbps. These products are key
enablers for servers, routers, switches, storage and other equipment that process, store and transport data traffic. We introduced 32 and 15
new products in 2015 and 2014, respectively. The acquisition of Cortina added approximately 130 products in our portfolio which includes
high-speed interconnect and optical transport products. We design and develop our products for the communications and computing
markets, which typically have two to three year design cycles, and product life cycles as long as five years or more.
In 2011, we began to ship in production volume a new “ultra-low voltage” version of our integrated PLL and register buffer, which
is shipping in the form of product number INSSTE32882UV-GS02, or the GS02UV product. Sales of the GS02UV product comprised
15% and 39% of our total revenue in 2014 and 2013, respectively. In 2012, we introduced and began to ship in commercial volume a dual,
differential input linear transimpedance/variable-gain amplifier that we identify as product number IN3250TA-SO2D. Sales of IN3250TA-
SO2D product comprised 14% of our total revenue in both 2015 and 2014. In 2010, we introduced and began to ship in commercial volume
a dual, differential linear transimpedance amplifier which we identify as product number 2850TA-SO1D. Sales of 2850TA-SO1D product
comprised 10% of our total revenue in 2013. There were no other products that generated more than 10% of our total revenue in 2015,
2014 or 2013.
Customers
We sell our products directly to OEMs and indirectly to OEMs through module manufacturers, original design manufacturers or
ODMs and sub-systems providers. We work closely with technology leaders, including microprocessor, memory vendors, communications
equipment and optical module companies, to design architectures and products that help solve bandwidth bottlenecks in and between
systems. These technology leaders often design our products into reference designs, which they provide to their customers and suppliers.
For example, in the server market we work closely with major CPU manufacturers to address the bottleneck between the CPU and the
increasing amount of memory attached to it. These CPU manufacturers then provide their server CPU customers and memory module
partners with a validation report, including validation of our memory interface products. These server OEMs and memory module
companies then design our memory interface products into their production systems. Ultimately, our sales into these servers are to memory
module companies, including Micron, Samsung, SK Hynix and others. In the networking market, we work closely with OEMs to deliver
high performance communication links. These OEMs design our products into their systems and then require their ODM and electronics
manufacturing services suppliers to purchase and use that specific product from us. We also work directly with optical module
manufacturers to design our products into their modules, which they sell to OEMs.
4
We work closely with our customers throughout design cycles that often last two to three years and we are able to develop long-
term relationships with them as our technology becomes embedded in their products. As a result, we believe we are well-positioned to not
only be designed into their current systems, but also to continually develop next generation high-speed analog semiconductor solutions for
their future products. During the year ended December 31, 2015, we sold our products to more than 160 customers.
Sales to customers in Asia accounted for 68%, 71% and 71% of our total revenue in 2015, 2014 and 2013, respectively. Because
many of our customers or their OEM manufacturers are located in Asia, we anticipate that a majority of our future revenue will continue
to come from sales to that region. Although a large percentage of our sales are made to customers in Asia, we believe that a significant
number of the systems designed by these customers and incorporating our semiconductor products are then sold to end users outside Asia.
We currently rely, and expect to continue to rely, on a limited number of customers for a significant portion of our revenue. In the
year ended December 31, 2015, we believe that sales to Cisco, directly and indirectly, through subcontractors, accounted for approximately
13% of our total revenue and our 10 largest customers collectively accounted for 59% of our total revenue. In the year ended December
31, 2014, sales to Samsung, including its subcontractors accounted for 18% of our total revenue and our 10 largest customers collectively
accounted for 61% of our total revenue. In the year ended December 31, 2013, sales to Samsung, including its subcontractors and SK
Hynix, including its subcontractor accounted for 20% and 16% of our total revenue, respectively, and our 10 largest customers collectively
accounted for 70% of our total revenue. In addition, sales directly and through distributors to Micron accounted for 11% of our total revenue
in the year ended December 31, 2013. No other single customer directly or indirectly accounted for more than 10% of our total revenue in
2015, 2014 or 2013.
Sales and Marketing
Our design cycle from initial engagement to volume shipment is typically two to three years, with product life cycles in the markets
we serve ranging from two to 10 years or more. For many of our products, early engagement with our customers’ technical staff is necessary
for success. To ensure an adequate level of early engagement, our application and development engineers work closely with our customers
to identify and propose solutions to their systems challenges.
In addition to our direct customers, we work closely with technology leaders such as Intel, ARM and AMD for the computing and
storage markets and Alcatel-Lucent, Ciena, Cisco, Huawei and Juniper for the networking and communications market to anticipate and
solve next generation challenges facing our customers. As part of the sales and product development process, we often design our products
in close collaboration with these industry leaders and help define their architecture. We also participate actively in setting industry standards
with organizations such as IEEE, JEDEC and OIF to have a voice in the definition of future market trends.
We sell our products worldwide through multiple channels, including our direct sales force and a network of sales representatives
and distributors. For the year ended December 31, 2015, 78% of our revenue was generated by our direct sales team and third-party sales
representatives. We operate direct sales offices in Japan, Korea, Taiwan, Singapore, and the United States and employ sales personnel that
cover our direct customers and manage our channel partners. We have twenty seven direct sales professionals including three in Japan,
fourteen in Asia, seven in North America and three in EMEA. We utilize two sales representatives and eight distributors in Asia, two
distributors in Europe, one sales representative and one distributor in Israel, two distributors in Japan and six sales representatives and three
distributors in North America. Our channel network includes more than one hundred sales professionals to support our products and
customers, including ten in Japan, forty two in Asia (other than Japan), forty six in North America and fifteen in Europe, the Middle East
and Africa, or EMEA. All of these sales professionals are sales agents and are employed by our distributors and sales representatives. We
believe these distributors and sales representatives have the requisite technical experience in our target markets and are able to leverage
existing relationships and understanding of our customers’ products to effectively sell our products. Given the breadth of our target markets,
customers and products, we provide our direct and indirect sales teams with regular training and share product information with our
customers and sales team using web-based tools.
Manufacturing
We operate a fabless business model and use third-party foundries and assembly and test manufacturing contractors to manufacture,
assemble and test our semiconductor products. We also inspect and test parts in our Westlake Village, California, facility. This outsourced
manufacturing approach allows us to focus our resources on the design, sale and marketing of our products. In addition, we believe
outsourcing many of our manufacturing and assembly activities provides us the flexibility needed to respond to new market opportunities,
simplifies our operations and significantly reduces our capital requirements.
We subject our third-party manufacturing contractors to qualification requirements in order to meet the high quality and reliability
standards required of our products. We carefully qualify critical partners and processes before applying the technology to our products.
Our engineers work closely with our foundries and other contractors to increase yield, lower manufacturing costs and improve product
quality.
5
•
•
•
Wafer Fabrication. We currently utilize a wide range of semiconductor processes to develop and manufacture our products.
Each of our foundries tends to specialize in a particular semiconductor wafer process technology. We choose the
semiconductor process and foundry that we believe provides the best combination of performance attributes for any particular
product. For most of our products, we utilize a single foundry for semiconductor wafer production. Our principal foundries
are Taiwan Semiconductor Manufacturing Company Ltd., or TSMC, in Taiwan, Sumitomo Electric Device Innovations Inc.,
or SEDI, in Japan, WIN Semiconductors Corp. in Taiwan, and TowerJazz Semiconductor Ltd. in North America.
Package and Assembly. Upon the completion of processing at the foundry, the finished wafers are shipped to our third-party
assemblers for packaging and assembly. Currently, our principal packaging and assembly contractors are Orient
Semiconductor Electronics Ltd., or OSE in Taiwan, STATS ChipPAC Ltd. in Korea, Kyocera Corporation in North America
and Japan, Signetics Corporation in Korea, Amkor Technology in Korea and ASEM Technology in Malaysia.
Test. At the last stage of integrated circuit production, our third-party test service providers test the packaged and assembled
integrated circuits. Currently, OSE in Taiwan, Advanced Semiconductor Engineering or ASE in California, STATS ChipPAC
in Korea, Evans Analytical Group or EAG in North America, Signetics Corporation in Korea, Amkor Technology in Korea,
ASEM Technology in Malaysia and Presto Engineering in North America are our test partners. We also perform testing in
our Westlake Village, California, facility.
We are committed to maintaining the highest level of quality in our products. Our objective is that our products meet all of our
customer requirements, are delivered on-time and function reliably throughout their useful lives. As part of our total quality assurance
program, our quality management system has been certified to ISO 9001:2008 standards. Our manufacturing partners are also ISO 9001
certified.
Research and Development
We focus our research and development efforts on developing products that address bandwidth bottlenecks in networks and
minimize latency in computing environments. We believe that our continued success depends on our ability to both introduce improved
versions of our existing products and to develop new products for the markets that we serve. We devote a portion of our resources to
expanding our core technology including efforts in system-level simulation, high-speed analog design, supporting a broad range of process
technologies and high-speed package modeling and design.
We develop models that are used as an input to a combination of proprietary and commercially available simulation tools. We use
these tools to predict overall system performance based on the performance of our product. After our product is manufactured, we perform
system measurements and refine our model set to improve the model’s accuracy and predictive ability. As a result, our models and
simulation tools have improved over time and we have been able to very accurately predict overall system performance prior to fabricating
a part.
We have assembled a core team of experienced engineers and systems designers in four design centers located in the United States,
Canada, Singapore and United Kingdom. Our technical team typically has, on average, more than 23 years of industry experience with
more than 60% having advanced degrees (Masters and above) and more than 16% having Ph.Ds. These engineers and designers are
involved in advancing our core technologies, as well as applying these core technologies to our product development activities across a
number of areas including telecommunications transport systems, enterprise networking equipment, datacenters and enterprise servers,
storage platforms, test and measurement and military systems. In 2015, 2014 and 2013, our research and development expenses were
$106.4, $70.9 million and $50.5 million, respectively.
Competition
The global semiconductor market in general, and the communications and computing markets in particular, are highly competitive.
We expect competition to increase and intensify as more and larger semiconductor companies enter our markets. Increased competition
could result in price pressure, reduced profitability and loss of market share, any of which could materially and adversely affect our
business, revenue and operating results.
Currently, our competitors range from large, international companies offering a wide range of semiconductor products to smaller
companies specializing in narrow markets. Our primary competitors include Avago Technologies Ltd., Broadcom Corporation, GigOptix
Inc., Integrated Device Technology, Inc., or IDT, M/A-COM Technology Solutions Inc., Maxim Integrated, Maxlinear, Inc., Microsemi
Corporation, Montage Technology Group Limited, Qorvo Inc., PMC-Sierra, Inc., Semtech Corp. and Texas Instruments Incorporated, as
well as other smaller analog signal processing companies. We expect competition in our target markets to increase in the future as existing
competitors improve or expand their product offerings.
Our ability to compete successfully depends on elements both within and outside of our control, including industry and general
economic trends. During past periods of downturns in our industry, competition in the markets in which we operate intensified as our
customers reduced their purchase orders. Many of our competitors are significantly larger, have greater financial, technical, marketing,
distribution, customer support and other resources, are more established than we are, and have significantly better brand recognition and
6
broader product offerings with which to withstand similar adverse economic or market conditions in the future. These developments may
materially and adversely affect our current and future target markets and our ability to compete successfully in those markets.
We compete or plan to compete in different target markets to various degrees on the basis of a number of principal competitive
factors, including:
•
•
•
•
•
•
•
•
•
•
product performance;
power budget;
features and functionality;
customer relationships;
size;
ease of system design;
product roadmap;
reputation and reliability;
customer support; and
price.
We believe we compete favorably with respect to each of these factors. We maintain our competitive position through our ability to
successfully design, develop and market complex high-speed analog solutions for the customers that we serve.
Intellectual Property
We rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, and contractual
protections, to protect our core technology and intellectual property. As of December 31, 2015, we had 570 issued and allowed patents and
other patent applications pending in the United States. The 437 issued and allowed patents in the United States expire in the years beginning
in 2016 through 2035. Many of our issued patents and pending patent applications relate to high-speed circuit and package designs.
We may not receive competitive advantages from any rights granted under our patents, and our patent applications may not result
in the issuance of any patents. In addition, any future patent may be opposed, contested, circumvented, designed around by a third party or
found to be unenforceable or invalidated. Others may develop technologies that are similar or superior to our proprietary technologies,
duplicate our proprietary technologies or design around patents owned or licensed by us.
In addition to our own intellectual property, we also use third-party licensors for certain technologies embedded in our semiconductor
solutions. These are typically non-exclusive contracts provided under paid-up licenses. These licenses are generally perpetual or
automatically renewed for so long as we continue to pay any maintenance fees that may be due. To date, maintenance fees have not
constituted a significant portion of our capital expenditures. We have entered into a number of licensing arrangements pursuant to which
we license third-party technologies. We do not believe our business is dependent to any significant degree on any individual third-party
license.
We generally control access to and use of our confidential information through the use of internal and external controls, including
contractual protections with employees, contractors and customers. We rely in part on United States and international copyright laws to
protect our mask work. All employees and consultants are required to execute confidentiality agreements in connection with their
employment and consulting relationships with us. We also require them to agree to disclose and assign to us all inventions conceived or
made in connection with the employment or consulting relationship.
Despite our efforts to protect our intellectual property, unauthorized parties may still copy or otherwise obtain and use our software,
technology or other information that we regard as proprietary intellectual property. In addition, we intend to expand our international
operations, and effective patent, copyright, trademark and trade secret protection may not be available or may be limited in foreign
countries.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which
has resulted in protracted and expensive litigation for many companies. We have in the past received and, particularly as a public company,
we expect that in the future we may receive, communications from various industry participants alleging our infringement of their patents,
trade secrets or other intellectual property rights. Any lawsuits could subject us to significant liability for damages, invalidate our
proprietary rights and harm our business and our ability to compete. Any litigation, regardless of success or merit, could cause us to incur
substantial expenses, reduce our sales and divert the efforts of our technical and management personnel. In the event we receive an adverse
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result in any litigation, we could be required to pay substantial damages, seek licenses from third parties, which may not be available on
reasonable terms or at all, cease sale of products, expend significant resources to develop alternative technology or discontinue the use of
processes requiring the relevant technology.
Employees
At December 31, 2015, we employed 472 full-time equivalent employees, including 288 in research, product development and
engineering, 62 in sales and marketing, 46 in general and administrative management and 76 in manufacturing engineering and operations.
We consider relations with our employees to be good and have never experienced a work stoppage. None of our employees are either
represented by a labor union or subject to a collective bargaining agreement.
Other
We were incorporated in Delaware in November 2000 as TCom Communications, Inc. and changed our name to Inphi Corporation
in February 2001. Our principal executive offices are located at 2953 Bunker Hill Lane, Suite 300, Santa Clara, California 95054. Our
telephone number at that location is (408) 217-7300. Our website address is www.inphi.com. Information on our website is not part of this
report and should not be relied upon in determining whether to make an investment decision. The inclusion of our website address in this
report does not include or incorporate by reference into this report any information on our website.
We electronically file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, with the SEC. The public may read or
copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with
the SEC. The address of that site is http://www.sec.gov. You may obtain a free copy of our annual reports on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K and amendments to those reports with the SEC on our website.
ITEM 1A.
RISK FACTORS
Risks Related to Our Business
Our revenue and operating results can fluctuate from period to period, which could cause our share price to fluctuate.
Our revenue and operating results have fluctuated in the past and may fluctuate from period to period in the future due to a variety of
factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the
following factors, as well as other factors described elsewhere herein:
●
the receipt, reduction or cancellation of orders by customers;
●
fluctuations in the levels of component inventories held by our customers;
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the gain or loss of significant customers;
● market acceptance of our products and our customers’ products;
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our ability to develop, introduce and market new products and technologies on a timely basis;
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the timing and extent of product development costs;
●
new product announcements and introductions by us or our competitors;
●
incurrence of research and development and related new product expenditures;
●
fluctuations in sales by module manufacturers who incorporate our semiconductor solutions in their products, such as memory
modules;
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cyclical fluctuations in our markets;
●
fluctuations in our manufacturing yields;
●
significant warranty claims, including those not covered by our suppliers;
●
changes in our product mix or customer mix;
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intellectual property disputes; and
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loss of key personnel or the inability to attract qualified engineers.
As a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indications of
our future revenue or operating performance. Fluctuations in our revenue and operating results could cause our share price to decline.
We have an accumulated deficit and have incurred net losses in the past. We may incur net losses in the future.
As of December 31, 2015, we had an accumulated deficit of $102.7 million. We have incurred net losses in the past and may incur
net losses in the future. We generated a net loss of $13.6 million, $22.6 million and $13.2 million for years ended December 31, 2015,
2014, and 2013, respectively.
We depend on a limited number of customers for a substantial portion of our revenue, and the loss of, or a significant reduction
in orders from, one or more of our major customers could negatively impact our revenue and operating results. In addition, if we offer
more favorable prices to attract or retain customers, our average selling prices and gross margins would decline.
For the year ended December 31, 2015, we believe that sales to Cisco, directly and indirectly through subcontractors, accounted for
approximately 13% of our total revenue and our 10 largest customers collectively accounted for 59% of our total revenue. For the year
ended December 31, 2014, sales to Samsung Semiconductor Inc., or Samsung, including its subcontractors, accounted for 18% of our total
revenue, and our 10 largest customers collectively accounted for 61% of our total revenue. For the year ended December 31, 2013, sales
to Samsung, including its subcontractors, and SK Hynix Inc., or SK Hynix, including its subcontractor, accounted for 20% and 16% of our
total revenue, respectively, and our 10 largest customers collectively accounted for 70% of our total revenue. In addition, sales directly and
through distributors to Micron Technology, Inc., or Micron, accounted for 11% of our total revenue in the year ended December 31, 2013.
Some of our customers, including Samsung, SK Hynix and Micron, use our products primarily in high-speed memory devices. We believe
our operating results for the foreseeable future will continue to depend on sales to a relatively small number of customers. In the future,
these customers may decide not to purchase our products at all, may purchase fewer products than they did in the past or may alter their
purchasing patterns.
In addition, our relationships with some customers may deter other potential customers who compete with these customers from
buying our products. To attract new customers or retain existing customers, we may offer these customers favorable prices on our products.
In that event, our average selling prices and gross margins would decline. The loss of a key customer, a reduction in sales to any key
customer or our inability to attract new significant customers could negatively impact our revenue and materially and adversely affect our
results of operations.
We do not have long-term purchase commitments from our customers and if our customers cancel or change their purchase
commitments, our revenue and operating results could suffer.
Substantially all of our sales to date, including sales to Samsung, SK Hynix and Micron, have been made on a purchase order basis.
We do not have any long-term commitments with any of our customers. As a result, our customers may cancel, change or delay product
purchase commitments with little or no notice to us and without penalty. This in turn could cause our revenue to decline and materially and
adversely affect our results of operations.
We may face claims of intellectual property infringement, which could be time-consuming, costly to defend or settle and result in
the loss of significant rights and which could harm our relationships with our customers and distributors.
The semiconductor industry is characterized by companies that hold patents and other intellectual property rights and that vigorously
pursue, protect and enforce intellectual property rights. From time to time, third parties may assert against us and our customers and
distributors their patent and other intellectual property rights to technologies that are important to our business.
Claims that our products, processes or technology infringe third-party intellectual property rights, regardless of their merit or
resolution, could be costly to defend or settle and could divert the efforts and attention of our management and technical personnel. For
example, Netlist, Inc. filed suit against us in the United States District Court, Central District of California, in September 2009, alleging
that our iMB™ and certain other memory module components infringe three of Netlist’s patents.
Infringement claims also could harm our relationships with our customers or distributors and might deter future customers from doing
business with us. We do not know whether we will prevail in these proceedings given the complex technical issues and inherent
uncertainties in intellectual property litigation. If any pending or future proceedings result in an adverse outcome, we could be required to:
●
cease the manufacture, use or sale of the infringing products, processes or technology;
●
pay substantial damages for infringement;
●
expend significant resources to develop non-infringing products, processes or technology, which may not be successful;
9
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●
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license technology from the third-party claiming infringement, which license may not be available on commercially reasonable
terms, or at all;
cross-license our technology to a competitor to resolve an infringement claim, which could weaken our ability to compete with
that competitor; or
pay substantial damages to our customers or end users to discontinue their use of or to replace infringing technology sold to them
with non-infringing technology, if available.
Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.
Winning business is subject to lengthy competitive selection processes that require us to incur significant expenditures prior to
generating any revenue or without any guarantee of any revenue related to this business. Even if we begin a product design, a customer
may decide to cancel or change its product plans, which could cause us to generate no revenue from a product. If we fail to generate
revenue after incurring substantial expenses to develop our products, our business and operating results would suffer.
We are focused on winning more competitive bid processes, known as “design wins,” that enable us to sell our high- speed analog
semiconductor solutions for use in our customers’ products. These selection processes typically are lengthy and can require us to incur
significant design and development expenditures and dedicate scarce engineering resources in pursuit of a single customer opportunity.
We may not win the competitive selection process and may never generate any revenue despite incurring significant design and
development expenditures. Failure to obtain a design win could prevent us from offering an entire generation of a product. This could cause
us to lose revenue and require us to write off obsolete inventory, and could weaken our position in future competitive selection processes.
Even after securing a design win, we may experience delays in generating revenue from our products as a result of the lengthy development
cycle typically required. Our customers generally take a considerable amount of time to evaluate our products. Our design cycle from initial
engagement to volume shipment is typically two to three years.
The delays inherent in these lengthy sales cycles increase the risk that a customer will decide to cancel, curtail, reduce or delay its
product plans or adopt a competing design from one of our competitors, causing us to lose anticipated revenue. In addition, any delay or
cancellation of a customer’s plans could materially and adversely affect our financial results, as we may have incurred significant expense
without generating any revenue. Finally, our customers’ failure to successfully market and sell their products could reduce demand for our
products and materially and adversely affect our business, financial condition and results of operations. If we were unable to generate
revenue after incurring substantial expenses to develop any of our products, our business would suffer.
Our customers require our products and our third-party contractors to undergo a lengthy and expensive qualification process
which does not assure product sales. If we are unsuccessful in or delayed in qualifying any of our products with a customer, our
business and operating results would suffer.
Prior to purchasing our products, our customers require that both our products and our third-party contractors undergo extensive
qualification processes, which involve testing of our products in the customers’ systems, as well as testing for reliability. This qualification
process may continue for several months. However, qualification of a product by a customer does not assure any sales of the product to
that customer. Even after successful qualification and sales of a product to a customer, a subsequent revision in our third party contractors’
manufacturing process or our selection of a new supplier may require a new qualification process with our customers, which may result in
delays and in our holding excess or obsolete inventory. After our products are qualified, it can take several months or more before the
customer commences volume production of components or systems that incorporate our products. Despite these uncertainties, we devote
substantial resources, including design, engineering, sales, marketing and management efforts, to qualifying our products with customers
in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, sales of those products to the
customer may be precluded or delayed, which may impede our growth and cause our business to suffer.
The complexity of our products could result in undetected defects and we may be subject to warranty claims and product liability,
which could result in a decrease in customers and revenue, unexpected expenses and loss of market share. In addition, our product
liability insurance may not adequately cover our costs arising from products defects or otherwise.
Our products are sold as components or as modules for use in larger electronic equipment sold by our customers. A product usually
goes through an intense qualification and testing period performed by our customers before being used in production. We primarily
outsource our product testing to third parties and also perform some testing in our Westlake Village, California, facility. We inspect and
test parts, or have them inspected and tested in order to screen out parts that may be weak or potentially suffer a defect incurred through
the manufacturing process. From time to time, we are subject to warranty or product liability claims that may require us to make significant
expenditures to defend these claims or pay damage awards.
Generally, our agreements seek to limit our liability to the replacement of the part or to the revenue received for the product, but these
limitations on liability may not be effective or sufficient in scope in all cases. If a customer’s equipment fails in use, the customer may
incur significant monetary damages including an equipment recall or associated replacement expenses, as well as lost revenue. The
customer may claim that a defect in our product caused the equipment failure and assert a claim against us to recover monetary damages.
The process of identifying a defective or potentially defective product in systems that have been widely distributed may be lengthy and
require significant resources. We may test the affected product to determine the root cause of the problem and to determine appropriate
10
solutions. We may find an appropriate solution or a temporary fix while a permanent solution is being determined. If we are unable to
determine the root cause, find an appropriate solution or offer a temporary fix, we may delay shipment to customers. As a result, we may
incur significant replacement costs and contract damage claims from our customers as well as harm to our reputation. In certain situations,
circumstances might warrant that we consider incurring the costs or expense related to a recall of one of our products in order to avoid the
potential claims that may be raised should the customer reasonably rely upon our product only to suffer a failure due to a design or
manufacturing process defect. Defects in our products could harm our relationships with our customers and damage our reputation.
Customers may be reluctant to buy our products, which could harm our ability to retain existing customers and attract new customers and
our financial results. In addition, the cost of defending these claims and satisfying any arbitration award or judicial judgment with respect
to these claims could harm our business prospects and financial condition. Although we carry product liability insurance, this insurance
may not adequately cover our costs arising from defects in our products or otherwise.
We rely on our relationships with industry and technology leaders to enhance our product offerings and our inability to continue
to develop or maintain such relationships in the future would harm our ability to remain competitive.
We develop many of our semiconductor products for applications in systems that are driven by industry and technology leaders in the
communications and computing markets. We also work with OEMs, system manufacturers and standards bodies to define industry
conventions and standards within our target markets. We believe these relationships enhance our ability to achieve market acceptance and
widespread adoption of our products. If we are unable to continue to develop or maintain these relationships, our semiconductor solutions
would become less desirable to our customers, our sales would suffer and our competitive position could be harmed.
If we fail to accurately anticipate and respond to market trends or fail to develop and introduce new or enhanced products to
address these trends on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could
be harmed.
We operate in industries characterized by rapidly changing technologies and industry standards as well as technological obsolescence.
We have developed products that may have long product life cycles of 10 years or more, as well as other products in more volatile high
growth or rapidly changing areas, which may have shorter life cycles of only two to three years. We believe that our future success depends
on our ability to develop and introduce new technologies and products that generate new sources of revenue to replace, or build upon,
existing product revenue streams that may be dependent upon limited product life cycles. If we are not able to repeatedly introduce, in
successive years, new products that ship in volume, our revenue will likely not grow and may decline significantly and rapidly. In 2009,
we successfully introduced and began to ship a new product in production which we identify as product number INSSTE32882-GS04, or
the GS04 product, and which consists of an integrated PLL and register buffer. Sales of the GS04 product comprised 18% of our total
revenue in 2010. In 2010, we also began to ship in production volume a “low voltage” version of our integrated PLL and register buffer,
which is shipping in the form of product number INSSTE32882LV-GS02, or the GS02 product. Sales of the GS02 product comprised 38%
and 32% of our total revenue in 2011 and 2010, respectively. In 2011, we began to ship in production volume a new “ultra-low voltage”
version of our integrated PLL and register buffer, which is shipping in the form of product number INSSTE32882UV-GS02, or the
GS02UV product. Sales of the GS02UV product comprised 15%, 39% and 45% of our total revenue in 2014, 2013 and 2012, respectively.
In 2010, we introduced and began to ship in commercial volume a dual, differential linear transimpedance amplifier that we identify as
product number 2850TA-SO1D. Sales of 2850TA-SO1D product comprised 10% and 14% of our total revenue in 2013 and 2012,
respectively. In 2012, we introduced and began to ship in commercial volume a dual, differential input linear transimpedance/variable-gain
amplifier that we identify as product number IN3250TA-SO2D. Sales of IN3250TA-SO2D product comprised 14% of our total revenue in
2015 and 2014, respectively. There were no other products that generated more than 10% of our total revenue in 2015, 2014 or 2013.
The GS02UV, GS02 and GS04 products matured in 2014, 2012 and 2011, respectively and as a result, sales of these products declined
and were supplanted in part by newer parts which we developed. This underscores the importance of the need for us to continually develop
and introduce new products to diversify our revenue base as well as generate new revenue to replace and build upon the success of
previously introduced products which may be rapidly maturing.
To compete successfully, we must design, develop, market and sell new or enhanced products that provide increasingly higher levels
of performance and reliability while meeting the cost expectations of our customers. The introduction of new products by our competitors,
the delay or cancellation of a platform for which any of our semiconductor solutions are designed, the market acceptance of products based
on new or alternative technologies or the emergence of new industry standards could render our existing or future products uncompetitive
from a pricing standpoint, obsolete and otherwise unmarketable. Our failure to anticipate or timely develop new or enhanced products or
technologies in response to technological shifts could result in decreased revenue and our competitors winning design wins. In particular,
we may experience difficulties with product design, manufacturing, marketing or certification that could delay or prevent our development,
introduction or marketing of new or enhanced products. Although we believe our products are fully compliant with applicable industry
standards, proprietary enhancements may not in the future result in full conformance with existing industry standards under all
circumstances. Due to the interdependence of various components in the systems within which our products and the products of our
competitors operate, customers are unlikely to change to another design, once adopted, until the next generation of a technology. As a
result, if we fail to introduce new or enhanced products that meet the needs of our customers or penetrate new markets in a timely fashion,
and our designs do not gain acceptance, we will lose market share and our competitive position, very likely on an extended basis, and
operating results will be adversely affected.
11
If sufficient market demand for 100G solutions does not develop or develops more slowly than expected, or if we fail to accurately
predict market requirements or market demand for 100G solutions, our business, competitive position and operating results would
suffer.
We are currently investing significant resources to develop semiconductor solutions supporting 100G data transmission rates in order
to increase the number of such solutions in our product line. If we fail to accurately predict market requirements or market demand for
100G semiconductor solutions, or if our 100G semiconductor solutions are not successfully developed or competitive in the industry, our
business will suffer. If 100G networks are deployed to a lesser extent or more slowly than we currently anticipate, we may not realize any
benefits from our investment. As a result, our business, competitive position, market share and operating results would suffer.
Our target markets may not grow or develop as we currently expect and are subject to market risks, any of which could materially
harm our business, revenue and operating results.
To date, a substantial portion of our revenue has been attributable to demand for our products in the communications and computing
markets and the growth of these overall markets. These markets have fluctuated in size and growth in recent times. Our operating results
are impacted by various trends in these markets. These trends include the deployment and broader market adoption of next generation
technologies, such as 100G and 100Gbe CMOS CDR and Serdes, in communications and enterprise networks, timing of next generation
network upgrades, the introduction and broader market adoption of next generation server platforms, timing of enterprise upgrades and the
introduction and deployment of high-speed memory interfaces in computing platforms. We are unable to predict the timing or direction of
the development of these markets with any accuracy. In addition, because some of our products are not limited in the systems or geographic
areas in which they may be deployed, we cannot always determine with accuracy how, where or into which applications our products are
being deployed. If our target markets do not grow or develop in ways that we currently expect, demand for our semiconductor products
may decrease and our business and operating results could suffer.
We rely on a limited number of third parties to manufacture, assemble and test our products, and the failure to manage our
relationships with our third-party contractors successfully could adversely affect our ability to market and sell our products and our
reputation. Our revenue and operating results would suffer if these third parties fail to deliver products or components in a timely
manner and at reasonable cost or if manufacturing capacity is reduced or eliminated as we may be unable to obtain alternative
manufacturing capacity.
We operate an outsourced manufacturing business model. As a result, we rely on third-party foundry wafer fabrication and assembly
and test capacity. We also perform testing in our Westlake Village, California, facility. We generally use a single foundry for the production
of each of our various semiconductors. Currently, our principal foundries are Global Unichip, SEDI, TSMC, TowerJazz Semiconductor
Ltd., and WIN Semiconductors. We also use third-party contract manufacturers for a significant majority of our assembly and test
operations, including Kyocera, OSE, ASE, Presto, EAG, AIC and STATS ChipPAC.
Relying on third-party manufacturing, assembly and testing presents significant risks to us, including the following:
●
failure by us, our customers or their end customers to qualify a selected supplier;
●
capacity shortages during periods of high demand;
●
reduced control over delivery schedules and quality;
●
shortages of materials;
● misappropriation of our intellectual property;
●
limited warranties on wafers or products supplied to us; and
●
potential increases in prices.
The ability and willingness of our third-party contractors to perform is largely outside our control. If one or more of our contract
manufacturers or other outsourcers fails to perform its obligations in a timely manner or at satisfactory quality levels, our ability to bring
products to market and our reputation could suffer. For example, if that manufacturing capacity is reduced or eliminated at one or more
facilities, including as a response to the recent worldwide decline in the semiconductor industry, or any of those facilities are unable to
keep pace with the growth of our business, we could have difficulties fulfilling our customer orders and our revenue could decline. In
addition, if these third parties fail to deliver quality products and components on time and at reasonable prices, we could have difficulties
fulfilling our customer orders, our revenue could decline and our business, financial condition and results of operations would be adversely
affected.
Additionally, as many of our fabrication and assembly and test contractors are located in the Pacific Rim region, principally in Taiwan,
our manufacturing capacity may be similarly reduced or eliminated due to natural disasters, political unrest, war, labor strikes, work
stoppages or public health crises, such as outbreaks of H1N1 flu. This could cause significant delays in shipments of our products until we
12
are able to shift our manufacturing, assembly or test from the affected contractor to another third-party vendor. There can be no assurance
that alternative capacity could be obtained on favorable terms, if at all.
Our costs may increase substantially if the wafer foundries that supply our products do not achieve satisfactory product yields or
quality.
The wafer fabrication process is an extremely complicated process where the slightest changes in the design, specifications or materials
can result in material decreases in manufacturing yields or even the suspension of production. From time to time, our third-party wafer
foundries have experienced, and are likely to experience, manufacturing defects and reduced manufacturing yields related to errors or
problems in their manufacturing processes or the interrelationship of their processes with our designs. In some cases, our third-party wafer
foundries may not be able to detect these defects early in the fabrication process or determine the cause of such defects in a timely manner.
We may incur substantial research and development expense for prototype or development stage products as we qualify the products for
production.
Generally, in pricing our semiconductors, we assume that manufacturing yields will continue to increase, even as the complexity of
our semiconductors increases. Once our semiconductors are initially qualified with our third-party wafer foundries, minimum acceptable
yields are established. We are responsible for the costs of the wafers if the actual yield is above the minimum. If actual yields are below
the minimum we are not required to purchase the wafers. The minimum acceptable yields for our new products are generally lower at first
and increase as we achieve full production. Unacceptably low product yields or other product manufacturing problems could substantially
increase the overall production time and costs and adversely impact our operating results on sales of our products. Product yield losses will
increase our costs and reduce our gross margin. In addition to significantly harming our operating results and cash flow, poor yields may
delay shipment of our products and harm our relationships with existing and potential customers.
We do not have any long-term supply contracts with our contract manufacturers or suppliers, and any disruption in our supply of
products or materials could have a material adverse effect on our business, revenue and operating results.
We currently do not have long-term supply contracts with any of our third-party contract manufacturers. We make substantially all of
our purchases on a purchase order basis, and our contract manufacturers are not required to supply us products for any specific period or
in any specific quantity. We expect that it would take approximately nine to 12 months to transition from our current foundry or assembly
services to new providers. Such a transition would likely require a qualification process by our customers or their end customers. We
generally place orders for products with some of our suppliers several months prior to the anticipated delivery date, with order volumes
based on our forecasts of demand from our customers. Accordingly, if we inaccurately forecast demand for our products, we may be unable
to obtain adequate and cost-effective foundry or assembly capacity from our third-party contractors to meet our customers’ delivery
requirements, or we may accumulate excess inventories. On occasion, we have been unable to adequately respond to unexpected increases
in customer purchase orders and therefore, were unable to benefit from this incremental demand. None of our third-party contract
manufacturers have provided any assurance to us that adequate capacity will be available to us within the time required to meet additional
demand for our products.
Our foundry vendors and assembly and test vendors may allocate capacity to the production of other companies’ products while
reducing deliveries to us on short notice. In particular, other customers that are larger and better financed than us or that have long-term
agreements with our foundry vendor or assembly and test vendors may cause our foundry vendor or assembly and test vendors to reallocate
capacity to those customers, decreasing the capacity available to us. We do not have long-term supply contracts with our third-party contract
manufacturers and if we enter into costly arrangements with suppliers that include nonrefundable deposits or loans in exchange for capacity
commitments, commitments to purchase specified quantities over extended periods or investment in a foundry, our operating results could
be harmed. We may not be able to make any such arrangement in a timely fashion or at all, and any arrangements may be costly, reduce
our financial flexibility, and not be on terms favorable to us. Moreover, if we are able to secure foundry capacity, we may be obligated to
use all of that capacity or incur penalties. These penalties may be expensive and could harm our financial results. To date, we have not
entered into such arrangements with our suppliers. If we need another foundry or assembly and test subcontractor because of increased
demand, or if we are unable to obtain timely and adequate deliveries from our providers, we might not be able to cost effectively and
quickly retain other vendors to satisfy our requirements.
Many of our customers depend on us as the sole source for a number of our products. If we are unable to deliver these products
as the sole supplier or as one of a limited number of suppliers, our relationships with these customers and our business would suffer.
A number of our customers do not have alternative sources for our semiconductor solutions and depend on us as the sole supplier or
as one of a limited number of suppliers for these products. Since we outsource our manufacturing to third- party contractors, our ability to
deliver our products is substantially dependent on the ability and willingness of our third- party contractors to perform, which is largely
outside our control. A failure to deliver our products in sufficient quantities or at all to our customers that depend on us as a sole supplier
or as one of a limited number of suppliers may be detrimental to their business and, as a result, our relationship with the customer would
be negatively impacted. If we are unable to maintain our relationships with these customers after such failure, our business and financial
results may be harmed.
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If we are unable to attract, train and retain qualified personnel, particularly our design and technical personnel, we may not be
able to execute our business strategy effectively.
Our future success depends on our ability to attract and retain qualified personnel, including our management, sales and marketing,
and finance, and particularly our design and technical personnel. We do not know whether we will be able to retain all of these personnel
as we continue to pursue our business strategy. Historically, we have encountered difficulties in hiring qualified engineers because there is
a limited pool of engineers with the expertise required in our field. Competition for these personnel is intense in the semiconductor industry.
As the source of our technological and product innovations, our design and technical personnel represent a significant asset. The loss of
the services of one or more of our key employees, especially our key design and technical personnel, or our inability to attract and retain
qualified design and technical personnel, could harm our business, financial condition and results of operations.
We may not be able to effectively manage our growth, and we may need to incur significant expenditures to address the additional
operational and control requirements of our growth, either of which could harm our business and operating results.
To effectively manage our growth, we must continue to expand our operational, engineering and financial systems, procedures and
controls and to improve our accounting and other internal management systems. This may require substantial managerial and financial
resources, and our efforts in this regard may not be successful. Our current systems, procedures and controls may not be adequate to support
our future operations. If we fail to adequately manage our growth, or to improve our operational, financial and management information
systems, or fail to effectively motivate or manage our new and future employees, the quality of our products and the management of our
operations could suffer, which could adversely affect our operating results.
We face intense competition and expect competition to increase in the future. If we fail to compete effectively, it could have an
adverse effect on our revenue, revenue growth rate, if any, and market share.
The global semiconductor market in general, and the communications and computing markets in particular, are highly competitive.
We compete or plan to compete in different target markets to various degrees on the basis of a number of principal competitive factors,
including product performance, power budget, features and functionality, customer relationships, size, ease of system design, product
roadmap, reputation and reliability, customer support and price. We expect competition to increase and intensify as more and larger
semiconductor companies enter our markets. Increased competition could result in price pressure, reduced profitability and loss of market
share, any of which could materially and adversely affect our business, revenue and operating results.
Currently, our competitors range from large, international companies offering a wide range of semiconductor products to smaller
companies specializing in narrow markets. Our primary competitors include Avago Technologies Ltd., Broadcom Corporation, GigOptix,
Inc., Integrated Device Technology, Inc., M/A-COM Technology Solutions Inc., Maxlinear, Inc., Microsemi Corporation, Montage
Technology Group Limited, PMC-Sierra, Inc., Qorvo, Inc., Semtech Corp. and Texas Instruments Incorporated as well as other analog
signal processing companies. We expect competition in the markets in which we participate to increase in the future as existing competitors
improve or expand their product offerings.
Our ability to compete successfully depends on elements both within and outside of our control, including industry and general
economic trends. During past periods of downturns in our industry, competition in the markets in which we operate intensified as our
customers reduced their purchase orders. Many of our competitors have substantially greater financial and other resources with which to
withstand similar adverse economic or market conditions in the future. These developments may materially and adversely affect our current
and future target markets and our ability to compete successfully in those markets.
We use a significant amount of intellectual property in our business. Monitoring unauthorized use of our intellectual property can
be difficult and costly and if we are unable to protect our intellectual property, our business could be adversely affected.
Our success depends in part upon our ability to protect our intellectual property. To accomplish this, we rely on a combination of
intellectual property rights, including patents, copyrights, trademarks and trade secrets in the United States and in selected foreign countries
where we believe filing for such protection is appropriate. Effective protection of our intellectual property rights may be unavailable,
limited or not applied for in some countries. Some of our products and technologies are not covered by any patent or patent application, as
we do not believe patent protection of these products and technologies is critical to our business strategy at this time. A failure to timely
seek patent protection on products or technologies generally precludes us from seeking future patent protection on these products or
technologies. We cannot guarantee that:
●
any of our present or future patents or patent claims will not lapse or be invalidated, circumvented, challenged or abandoned;
●
our intellectual property rights will provide competitive advantages to us;
●
our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be
limited by our agreements with third parties;
●
any of our pending or future patent applications will be issued or have the coverage originally sought;
14
●
●
our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may
be weak;
any of the trademarks, copyrights, trade secrets or other intellectual property rights that we presently employ in our business will
not lapse or be invalidated, circumvented, challenged or abandoned; or
● we will not lose the ability to assert our intellectual property rights against or to license our technology to others and collect
royalties or other payments.
In addition, our competitors or others may design around our protected patents or technologies. Effective intellectual property
protection may be unavailable or more limited in one or more relevant jurisdictions relative to those protections available in the United
States, or may not be applied for in one or more relevant jurisdictions. If we pursue litigation to assert our intellectual property rights, an
adverse decision in any of these legal actions could limit our ability to assert our intellectual property rights, limit the value of our
technology or otherwise negatively impact our business, financial condition and results of operations.
Monitoring unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual property may
have occurred or may occur in the future. Although we have taken steps to minimize the risk of this occurring, any such failure to identify
unauthorized use and otherwise adequately protect our intellectual property would adversely affect our business. Moreover, if we are
required to commence litigation, whether as a plaintiff or defendant, not only would this be time-consuming, but we would also be forced
to incur significant costs and divert our attention and efforts of our employees, which could, in turn, result in lower revenue and higher
expenses.
We also rely on contractual protections with our customers, suppliers, distributors, employees and consultants, and we implement
security measures designed to protect our trade secrets. We cannot be sure that these contractual protections and security measures will not
be breached, that we will have adequate remedies for any such breach or that our suppliers, employees or consultants will not assert rights
to intellectual property arising out of such contracts.
In addition, we have a number of third-party patent and intellectual property license agreements. Some of these license agreements
require us to make one-time payments or ongoing royalty payments. We cannot guarantee that the third- party patents and technology we
license will not be licensed to our competitors or others in the semiconductor industry. In the future, we may need to obtain additional
licenses, renew existing license agreements or otherwise replace existing technology. We are unable to predict whether these license
agreements can be obtained or renewed or the technology can be replaced on acceptable terms, or at all.
Average selling prices of our products generally decrease over time, which could negatively impact our revenue and gross margins.
Our operating results may be impacted by a decline in the average selling prices of our semiconductors. If competition increases in
our target markets, we may need to reduce the average unit price of our products in anticipation of competitive pricing pressures, new
product introductions by us or our competitors and for other reasons. If we are unable to offset any reductions in our average selling prices
by increasing our sales volumes or introducing new products with higher margins, our revenue and gross margins will suffer. To maintain
our revenue and gross margins, we must develop and introduce new products and product enhancements on a timely basis and continually
reduce our costs as well as our customers’ costs. Failure to do so would cause our revenue and gross margins to decline.
We are subject to order and shipment uncertainties, and differences between our estimates of customer demand and product mix
and our actual results could negatively affect our inventory levels, sales and operating results.
Our revenue is generated on the basis of purchase orders with our customers rather than long-term purchase commitments. In addition,
our customers can cancel purchase orders or defer the shipments of our products under certain circumstances. Our products are
manufactured using semiconductor foundries according to our estimates of customer demand, which requires us to make separate demand
forecast assumptions for every customer, each of which may introduce significant variability into our aggregate estimates. It is difficult for
us to forecast the demand for our products, in part because of the complex supply chain between us and the end-user markets that incorporate
our products. Due to our lengthy product development cycle, it is critical for us to anticipate changes in demand for our various product
features and the applications they serve to allow sufficient time for product development and design. We have limited visibility into future
customer demand and the product mix that our customers will require, which could adversely affect our revenue forecasts and operating
margins. Moreover, because some of our target markets are relatively new, many of our customers have difficulty accurately forecasting
their product requirements and estimating the timing of their new product introductions, which ultimately affects their demand for our
products. Our failure to accurately forecast demand can lead to product shortages that can impede production by our customers and harm
our customer relationships. Conversely, our failure to forecast declining demand or shifts in product mix can result in excess or obsolete
inventory. For example, some of our customers may cancel purchase orders or delay the shipment of their products that incorporate our
products as a result of component shortages they may experience due to the earthquakes and tsunami in Japan, or likewise with respect to
the flooding in Thailand, which may result in excess or obsolete inventory and impact our sales and operating results. In addition, the rapid
pace of innovation in our industry could also render significant portions of our inventory obsolete. Excess or obsolete inventory levels
could result in unexpected expenses or increases in our reserves that could adversely affect our business, operating results and financial
condition. In contrast, if we were to underestimate customer demand or if sufficient manufacturing capacity were unavailable, we could
forego revenue opportunities, potentially lose market share and damage our customer relationships. In addition, any significant future
15
cancellations or deferrals of product orders or the return of previously sold products due to manufacturing defects could materially and
adversely impact our profit margins, increase our write-offs due to product obsolescence and restrict our ability to fund our operations.
We rely on third-party sales representatives and distributors to assist in selling our products. If we fail to retain or find additional
sales representatives and distributors, or if any of these parties fail to perform as expected, it could reduce our future sales.
In 2015, we derived 78% of our total revenue from sales by our direct sales team and third-party sales representatives and
approximately 22% of our sales were made through third-party distributors. In 2014 and 2013, we derived 84% of our total revenue from
sales by our direct sales team and third-party sales representatives. In addition, in 2014 and 2013, approximately 16% of our sales were
made through third- party distributors, respectively. Two of our distributors, which sell solely to Micron, accounted for 11% our total
revenue in 2013. We are unable to predict the extent to which these third-party sales representatives and distributors will be successful in
marketing and selling our products. Moreover, many of these third-party sales representatives and distributors also market and sell
competing products, which may affect the extent to which they promote our products. Even where our relationships are formalized in
contracts, our third-party sales representatives and distributors often have the right to terminate their relationships with us at any time. Our
future performance will also depend, in part, on our ability to attract additional third- party sales representatives and distributors who will
be able to market and support our products effectively, especially in markets in which we have not previously sold our products. If we
cannot retain our current distributors or find additional or replacement third-party sales representatives and distributors, our business,
financial condition and results of operations could be harmed. Additionally, if we terminate our relationship with a distributor, we may be
obligated to repurchase unsold products. We record a reserve for estimated returns and price credits. If actual returns and credits exceed
our estimates, our operating results could be harmed.
The facilities of our third-party contractors and distributors are located in regions that are subject to earthquakes and other natural
disasters.
The facilities of our third-party contractors and distributors are subject to risk of catastrophic loss due to fire, flood or other natural or
man-made disasters. A number of our facilities and those of our contract manufacturers are located in areas with above average seismic
activity and also subject to typhoons and other Pacific storms. Several foundries that manufacture our wafers are located in Taiwan, Japan
and California, and a majority of our third-party contractors who assemble and test our products are located in Asia. In addition, our
headquarters are located in California. The risk of an earthquake in the Pacific Rim region or California is significant due to the proximity
of major earthquake fault lines. Any catastrophic loss to any of these facilities would likely disrupt our operations, delay production,
shipments and revenue and result in significant expenses to repair or replace the facility. In particular, any catastrophic loss at our California
locations would materially and adversely affect our business.
We rely on third-party technologies for the development of our products and our inability to use such technologies in the future
would harm our ability to remain competitive.
We rely on third parties for technologies that are integrated into our products, such as wafer fabrication and assembly and test
technologies used by our contract manufacturers, as well as licensed architecture technologies. If we are unable to continue to use or license
these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a
timely manner or at all, and our ability to remain competitive would be harmed. In addition, if we are unable to successfully license
technology from third parties to develop future products, we may not be able to develop such products in a timely manner or at all.
Our business would be adversely affected by the departure of existing members of our senior management team and other key
personnel.
Our success depends, in large part, on the continued contributions of our senior management team, in particular, the services of certain
key personnel, including Dr. Loi Nguyen, one of our founders and our Senior Vice President of Optical Interconnect. Changes in our
management team could negatively affect our operations and our relationships with our customers, employees and market leaders. In
addition, we have not entered into non-compete agreements with members of our senior management team. The loss of any member of our
senior management team or key personnel could harm our ability to implement our business strategy and respond to the rapidly changing
market conditions in which we operate.
We may acquire other businesses, form joint ventures or make investments in other companies or technologies that disrupt our
business, be difficult to integrate, impair our operating results, dilute our stockholders’ ownership, increase our debt, divert
management resources or cause us to incur significant expense.
As part of our business strategy, we have pursued and may continue to pursue in the future acquisitions of businesses and assets, as
well as technology licensing arrangements that we believe will complement our business, semiconductor solutions or technologies. We
also may pursue strategic alliances that leverage our core technology and industry experience to expand our product offerings or
distribution, or make investments in other companies. Any acquisition involves a number of risks, many of which could harm our business,
including:
●
difficulty in integrating the operations, technologies, products, existing contracts, accounting and personnel of the target company
or business;
16
●
realizing the anticipated benefits of any acquisition;
●
difficulty in transitioning and supporting customers, if any, of the target company;
●
diversion of financial and management resources from existing operations;
●
●
the risk that the price we pay or other resources that we devote may exceed the value we realize, or the value we could have
realized if we had allocated the purchase price or other resources to another opportunity;
potential loss of key employees, customers and strategic alliances from either our current business or the target company’s
business;
●
assumption of unanticipated problems or latent liabilities, such as problems with the quality of the acquired products;
●
inability to generate sufficient revenue to offset acquisition costs;
●
dilutive effect on our stock as a result of any equity-based acquisitions;
●
inability to successfully complete transactions with a suitable acquisition candidate; and
●
in the event of international acquisitions, risks associated with accounting and business practices that are different from applicable
U.S. practices and requirements.
Acquisitions also frequently result in the recording of goodwill and other intangible assets that are subject to potential impairments,
which could harm our financial results. As a result, if we fail to properly evaluate acquisitions or investments, it may impair our ability to
achieve the anticipated benefits of any such acquisitions or investments, and we may incur costs in excess of what we anticipate. The failure
to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our
business and financial results.
To finance any acquisitions or investments, we may choose to issue shares of our common stock or convertible debt as consideration,
which could dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire
other companies for stock. In addition, newly-issued securities may have rights, preferences or privileges senior to those of existing
stockholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include
negative covenants or other restrictions on our business that could impair our operating flexibility, and would also require us to incur
interest expense. Additional funds may not be available on terms that are favorable to us, or at all.
Our portfolio of marketable securities is significant and subject to market, interest and credit risk that may reduce its value.
We maintain a significant portfolio of marketable securities. Changes in the value of this portfolio could adversely affect our earnings.
In particular, the value of our investments may decline due to increases in interest rates, downgrades of money market funds, U.S.
Treasuries, municipal bonds, corporate bonds, certificates of deposit and asset backed securities included in our portfolio, instability in the
global financial markets that reduces the liquidity of securities included in our portfolio, declines in the value of collateral underlying the
asset-backed securities included in our portfolio and other factors. Each of these events may cause us to record charges to reduce the
carrying value of our investment portfolio or sell investments for less than our acquisition cost. Although we attempt to mitigate these risks
by investing in high quality securities and continuously monitoring our portfolio’s overall risk profile, the value of our investments may
nevertheless decline.
Tax benefits that we receive may be terminated or reduced in the future, which would increase our costs.
We continue to expand our international presence to take advantage of the opportunity to recruit additional engineering design talent,
as well as to more closely align our operations geographically with our customers and suppliers in Asia. In certain international jurisdictions,
we have also entered into agreements with local governments to provide us with, among other things, favorable local tax rates if certain
minimum criteria are met. These agreements may require us to meet several requirements as to investment, headcount and activities to
retain this status. We currently believe that we will be able to meet all the terms and conditions specified in these agreements. However, if
adverse changes in the economy or changes in technology affect international demand for our products in an unforeseen manner or if we
fail to otherwise meet the conditions of the local agreements, we may be subject to additional taxes, which in turn would increase our costs.
Changes in our effective tax rate may harm our results of operations. A number of factors may increase our future effective tax rates,
including:
●
the jurisdictions in which profits are determined to be earned and taxed;
●
the resolution of issues arising from tax audits with various tax authorities;
17
●
changes in the measurement of our deferred tax assets and liabilities and in deferred tax valuation allowances;
●
changes in the value of assets or services transferred or provided from one jurisdiction to another;
●
adjustments to income taxes upon finalization of various tax returns;
●
increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and
impairments of goodwill in connection with acquisitions;
●
changes in available tax credits;
●
changes in tax laws or the interpretation of such tax laws, and changes in U.S. generally accepted accounting principles; and
●
a decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes.
We are subject to regulatory compliance requirements, including Section 404 of the Sarbanes-Oxley Act of 2002, which are costly
to comply with, and our failure to comply with these requirements could harm our business and operating results.
As a public company, we incur significant legal, accounting and other expenses related to compliance with laws such as Section 404
of the Sarbanes-Oxley Act of 2002. Compliance with Section 404 requires that our management report on, and our independent registered
public accounting firm attest to, the effectiveness of our internal control over financial reporting in our annual reports on Form 10-K.
Section 404 compliance has in the past diverted, and may continue to divert, internal resources, and require a significant amount of time
and effort. If we fail to comply with Section 404, or if in the future our Chief Executive Officer, Chief Financial Officer or independent
registered public accounting firm determines that our internal control over financial reporting is not effective, we could be subject to
sanctions or investigations by The New York Stock Exchange, or NYSE, the Securities and Exchange Commission, or the SEC, or other
regulatory authorities.
Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the market price of our stock.
Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results
of operations and harm our reputation.
The conditional conversion feature of our convertible senior notes, if triggered, may adversely affect our financial condition and
operating results.
In the event the conditional conversion feature of our convertible senior notes is triggered, holders of notes will be entitled to convert
the notes at any time during specified periods at their option. If one or more holders elect to convert their notes, unless we elect to satisfy
our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional
share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely
affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules
to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability, which would result in a
material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the notes, could have a material effect
on our reported financial results.
Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20, an
entity must separately account for the liability and equity components of the convertible debt instruments (such as the notes) that may be
settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20
on the accounting for the notes is that the equity component is required to be included in the additional paid-in capital section of
stockholders’ equity on our consolidated balance sheet, and the value of the equity component would be treated as debt discount for
purposes of accounting for the debt component of the notes. As a result, we are required to record a greater amount of non-cash interest
expense in current periods presented as a result of the amortization of the discounted carrying value of the notes to their face amount over
the term of the notes. We will report lower net income in our financial results because ASC 470-20 will require interest to include both the
current period’s amortization of the debt discount and the instrument’s non-convertible interest rate, which could adversely affect our
reported or future financial results, the trading price of our common stock and the trading price of the notes.
In addition, under certain circumstances, convertible debt instruments (such as the notes) that may be settled entirely or partly in cash
are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the notes
are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the notes exceeds their
principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number
of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot
be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the
treasury stock method in accounting for the shares issuable upon conversion of the notes, then our diluted earnings per share would be
adversely affected.
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We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive pressures
and to obtain sufficient funds to satisfy our future growth, business needs and development plans.
We have substantial existing indebtedness. In December 2015, we issued $230.0 million aggregate principal amount of convertible
senior notes. The degree to which we are leveraged could have negative consequences, including, but not limited to, the following:
• we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding
to changing business and economic conditions;
•
•
our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or
other purposes may be limited;
a substantial portion of our cash flows from operations in the future may be required for the payment of the principal amount of
our existing indebtedness when it becomes due; and
• we may elect to make cash payments upon any conversion of the convertible notes, which would reduce our cash on hand.
Our ability to meet our payment obligations under our convertible notes depends on our ability to generate significant cash flow in
the future. This, to some extent, is subject to general economic, financial, competitive, legislative, and regulatory factors as well as other
factors that are beyond our control. There can be no assurance that our business will generate cash flow from operations, or that additional
capital will be available to us, in an amount sufficient to enable us to meet our debt payment obligations and to fund other liquidity needs.
If we are unable to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell
assets, reduce or delay capital investments, or seek to raise additional capital. If we were unable to implement one or more of these
alternatives, we may be unable to meet our debt payment obligations, which could have a material adverse effect on our business, results
of operations, or financial condition.
Risks Related to the Cortina Acquisition
We may not realize the anticipated benefits of our acquisition of Cortina, which in turn could harm our business and operating
results.
We may not achieve all of the anticipated benefits of our acquisition of Cortina’s high-speed interconnect and optical transport
business due to a number of factors including: unanticipated costs or liabilities associated with the acquisition, incurrence of acquisition-
related costs, harm to our relationships with existing customers as a result of the acquisition, harm to our brands and reputation, the loss of
key Cortina employees, and the use of resources that are needed in other parts of our business. Finally, the acquisition could result in
significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities.
For example, during the year ended December 31, 2015, we abandoned a project related to in-process research and development and
recorded an impairment charge of $1.8 million. We may incur additional charges, expenses and costs in the future, which may in turn have
a material adverse effect on our results of operations.
Our business, particularly the high-speed interconnect and optical transport business, is dependent on capital expenditures by
service providers, and any downturn that they experience could negatively impact our business.
Our business, particularly the high-speed interconnect and optical transport business we acquired in connection with our acquisition
of Cortina, depends on continued capital expenditures by service providers and is subject to the cyclicality of such expenditures. Our
communications semiconductor products are sold primarily to network equipment vendors that in turn sell their equipment to service
providers. If the demand for our customers’ products declines or fails to increase, as a result of lower capital expenditures by service
providers or any other factors, demand for our products will be similarly affected. The global economic downturn caused a significant
reduction in capital spending on communications network equipment. While we are beginning to see improvement, there are no guarantees
that this growth will continue, which could result in market volatility or another downturn. If there is another downturn, our business,
operating results and financial condition may be materially harmed.
Cortina’s high-speed interconnect and optical transport business has historically relied on a small number of key customers for a
substantial portion of its revenue, and the loss of one or more of these key customers or the diminished demand for these products from
one or more such key customers could negatively affect our ability to realize the anticipated benefits of our acquisition of Cortina.
A small number of customers have historically accounted for a substantial portion of Cortina’s revenues from its high-speed
interconnect and optical transport business in any particular period. We anticipate that our relationships with these key customers will
continue to be important to this business, and we expect that this customer concentration will increase in the future. We have no long-term
volume purchase commitments from our key customers. These customers may decide not to purchase our products at all, may purchase
fewer products than they did in the past or may otherwise alter their purchasing patterns. Reductions, delays and cancellation of orders
from our key customers or the loss of one or more key customers would significantly reduce our revenue and profits.
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The failure of our distributors to perform as expected could materially reduce our future revenue or negatively impact our reported
financial results.
Cortina’s high-speed interconnect and optical transport business has historically relied on a number of distributors, in particular Arrow
Electronics, Inc. and Dragon Technology Distribution (HK) Limited, to help generate customer demand, provide technical support and
other value-added services to its customers, fill customer orders and stock its products. These distributors do not sell those products
exclusively, and to the extent they choose to emphasize a competitor’s products over our products, our results of operations could be
harmed. Our contracts with these distributors may be terminated by either party with notice. Our distributors are located all over the world,
and are of various sizes and financial conditions. Lower sales, lower earnings, debt downgrades, the inability to access capital markets and
higher interest rates could potentially affect our distributors’ operations. Further, our distributors have contractual rights to return unsold
inventory to us, and, if this were to happen, we could incur significant cost in finding alternative sales channels for these products or
through write-offs. Any adverse condition experienced by our distributors could negatively impact their level of support for our products
or the rate at which they make payments to us and, consequently, could harm our results of operations. We rely on accurate and timely
sales reports from our distributors in order for our financial results to represent the actual sales that our distributors make for us in any
given period. Any inaccuracies or delays in these reports could negatively affect our ability to produce accurate and timely financial reports
and to recognize revenue. We also rely on distributors for sales forecasts, and any inaccuracies in such forecasts could impair the accuracy
of our projections and planned operations.
Risks Related to Our Industry
We may be unable to make the substantial and productive research and development investments, which are required to remain
competitive in our business.
The semiconductor industry requires substantial investment in research and development in order to develop and bring to market new
and enhanced technologies and products. Many of our products originated with our research and development efforts and have provided
us with a significant competitive advantage. Our research and development expense was $106.4 million in 2015, $70.9 million in 2014 and
$50.5 million in 2013. We are committed to investing in new product development in order to remain competitive in our target markets.
We do not know whether we will have sufficient resources to maintain the level of investment in research and development required to
remain competitive. In addition, we cannot be sure that the technologies which are the focus of our research and development expenditures
will become commercially successful.
Our business, financial condition and results of operations could be adversely affected by worldwide economic conditions, as well
as political and economic conditions in the countries in which we conduct business.
Our business and operating results are impacted by worldwide economic conditions. Uncertainty about current global economic
conditions may cause businesses to continue to postpone spending in response to tighter credit, unemployment or negative financial news.
This in turn could have a material negative effect on the demand for our semiconductor products or the products into which our
semiconductors are incorporated. Multiple factors relating to our international operations and to particular countries in which we operate
could negatively impact our business, financial condition and results of operations. These factors include:
●
changes in political, regulatory, legal or economic conditions;
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restrictive governmental actions, such as restrictions on the transfer or repatriation of funds and foreign investments and trade
protection measures, including export duties and quotas and customs duties and tariffs;
●
disruptions of capital and trading markets;
●
changes in import or export requirements;
●
transportation delays;
●
civil disturbances or political instability;
●
geopolitical turmoil, including terrorism, war or political or military coups;
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public health emergencies;
●
differing employment practices and labor standards;
●
limitations on our ability under local laws to protect our intellectual property;
●
local business and cultural factors that differ from our customary standards and practices;
●
nationalization and expropriation;
20
●
changes in tax or intellectual property laws;
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currency fluctuations relating to our international operating activities; and
●
difficulty in obtaining distribution and support.
A significant portion of our products are manufactured, assembled and tested outside the United States. Any conflict or uncertainty in
these countries, including due to natural disasters, public health concerns, political unrest or safety concerns, could harm our business,
financial condition and results of operations. In addition, if the government of any country in which our products are manufactured or sold
sets technical standards for products manufactured in or imported into their country that are not widely shared, it may lead some of our
customers to suspend imports of their products into that country, require manufacturers in that country to manufacture products with
different technical standards and disrupt cross-border manufacturing relationships which, in each case, could harm our business.
Changes in current or future laws or regulations or the imposition of new laws or regulations, including new or changed tax
regulations, environmental laws and export control laws, or new interpretations thereof, by federal or state agencies or foreign
governments could impair our ability to compete in international markets.
Changes in current laws or regulations applicable to us or the imposition of new laws and regulations in the United States or other
jurisdictions in which we do business, such as China, Japan, Korea, Singapore and Taiwan, could materially and adversely affect our
business, financial condition and results of operations. For example, we have entered into agreements with local governments to provide
us with, among other things, favorable local tax rates if certain minimum criteria are met, as discussed in our risk factor entitled “Tax
benefits that we received may be terminated or reduced in the future, which would increase our costs.” These agreements may require us
to meet several requirements as to investment, headcount and activities to retain this status. If we fail to otherwise meet the conditions of
the local agreements, we may be subject to additional taxes, which in turn would increase our costs. In addition, potential future U.S. tax
legislation could impact the tax benefits we effectively realize under these agreements.
Due to environmental concerns, the use of lead and other hazardous substances in electronic components and systems is receiving
increased attention. In response, the European Union passed the Restriction on Hazardous Substances, or RoHS, Directive, legislation that
limits the use of lead and other hazardous substances in electrical equipment. The RoHS Directive became effective July 1, 2006. We
believe that our current product designs and material supply chains are in compliance with the RoHS Directive. If our product designs or
material supply chains are deemed not to be in compliance with the RoHS Directive, we and our third party manufacturers may need to
redesign products with components meeting the requirements of the RoHS Directive and we may incur additional expense as well as loss
of market share and damage to our reputation.
We are also subject to export control laws, regulations and requirements that limit which products we sell and where and to whom we
sell our products. In some cases, it is possible that export licenses would be required from U.S. government agencies for some of our
products in accordance with the Export Administration Regulations and the International Traffic in Arms Regulations. We may not be
successful in obtaining the necessary export licenses in all instances. Any limitation on our ability to export or sell our products imposed
by these laws would adversely affect our business, financial condition and results of operations. In addition, changes in our products or
changes in export and import laws and implementing regulations may create delays in the introduction of new products in international
markets, prevent our customers from deploying our products internationally or, in some cases, prevent the export or import of our products
to certain countries altogether. While we are not aware of any other current or proposed export or import regulations which would materially
restrict our ability to sell our products in countries such as China, Japan, Korea, Singapore or Taiwan, any change in export or import
regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons
or technologies targeted by these regulations, could result in decreased use of our products by, or in our decreased ability to export or sell
our products to, existing or potential customers with international operations. In such event, our business and results of operations could
be adversely affected. In addition, we are subject to economic and trade sanctions programs that are administered by the U.S. Treasury
Department’s Office of Foreign Assets Control, or OFAC, that prohibit or restrict transactions to or from or dealings with specified
countries, their governments, and in certain circumstances, with individuals and entities that are specially-designated nationals of those
countries, narcotics traffickers and terrorists or terrorist organizations. Violations of these trade control laws and sanctions regulations are
punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts,
and revocations or restrictions of licenses, as well as criminal fines and imprisonment.
We are also subject to risks associated with compliance with applicable anti-corruption laws, including the Foreign Corrupt Practices
Act, or FCPA, which generally prohibits companies and their employees and intermediaries from making payments to foreign officials for
the purpose of obtaining or keeping business, securing an advantage, or directing business to another, and requires public companies to
maintain accurate books and records and a system of internal accounting controls. Under the FCPA, companies may be held liable for
actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. If we or our intermediaries
fail to comply with the requirements of the FCPA or similar laws, governmental authorities in the United States and elsewhere could seek
to impose civil and criminal fines and penalties which could have a material adverse effect on our business, results of operations and
financial condition.
Our product or manufacturing standards could also be impacted by new or revised environmental rules and regulations or other social
initiatives. For instance, the SEC adopted new disclosure requirements in 2012 relating to the sourcing of certain minerals from the
Democratic Republic of Congo and certain other adjoining countries. Those new rules, which required reporting starting in 2014, could
21
adversely affect our costs, the availability of minerals used in our products and our relationships with customers and suppliers. Also, since
our supply chain is complex, we may face reputational challenges with our customers, stockholders, and other stakeholders if we are unable
to sufficiently verify the origins for any conflict minerals used in the products that we sell.
We are subject to the cyclical nature of the semiconductor industry, which has suffered and may suffer from future recessionary
downturns.
The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product
obsolescence and price erosion, evolving standards and wide fluctuations in product supply and demand. The industry experienced a
significant downturn during the current global recession. These downturns have been characterized by diminished product demand,
production overcapacity, high inventory levels and accelerated erosion of average selling prices. The most recent downturn and any future
downturns could negatively impact our business and operating results. Furthermore, any upturn in the semiconductor industry could result
in increased competition for access to third-party foundry and assembly capacity. We are dependent on the availability of this capacity to
manufacture and assemble our integrated circuits. None of our third-party foundry or assembly contractors has provided assurances that
adequate capacity will be available to us in the future.
Our products must conform to industry standards in order to be accepted by end users in our markets.
Our products comprise only a part of larger electronic systems. All components of these systems must uniformly comply with industry
standards in order to operate efficiently together. These industry standards are often developed and promoted by larger companies who are
industry leaders and provide other components of the systems in which our products are incorporated. In driving industry standards, these
larger companies are able to develop and foster product ecosystems within which our products can be used. We work with a number of
these larger companies in helping develop industry standards with which our products are compatible. If larger companies do not support
the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected,
which would harm our business.
Some industry standards may not be widely adopted or implemented uniformly, and competing standards may still emerge that may
be preferred by our customers. Products for communications and computing applications are based on industry standards that are
continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving
industry standards. The emergence of new industry standards could render our products incompatible with products developed by other
suppliers or make it difficult for our products to meet the requirements of certain OEMs. As a result, we could be required to invest
significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our
products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve
crucial design wins. We may not be successful in developing or using new technologies or in developing new products or product
enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense.
Industry consolidation may lead to increased competition and may harm our operating results.
There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies
attempt to improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving
industry or are unable to continue operations. Companies that are strategic alliance partners in some areas of our business may acquire or
form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger
competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results
and could have a material adverse effect on our business, operating results and financial condition.
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Risks Related to Our Common Stock
The trading price and volume of our common stock is subject to price volatility. This volatility may affect the price at which our
common stock is sold.
The trading price of our common stock has experienced wide fluctuations. For example since our initial public offering through
December 31, 2015, the closing price of our common stock has ranged from $7.20 to $32.32. Volatility in the market price of our common
stock may occur in the future in response to many risk factors listed or incorporated by reference in this offering memorandum and others
beyond our control, including but not limited to:
●
actual or anticipated fluctuations in our financial condition and operating results;
●
changes in the economic performance or market valuations of other companies that provide high-speed analog semiconductor
solutions;
●
loss of a significant amount of existing business;
●
actual or anticipated changes in our growth rate relative to our competitors;
●
actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rates;
●
issuance of new or updated research or reports by securities analysts;
●
our announcement of actual results for a fiscal period that are higher or lower than projected results or our announcement of
revenue or earnings guidance that is higher or lower than expected;
●
regulatory developments in our target markets affecting us, our customers or our competitors;
●
fluctuations in the valuation of companies perceived by investors to be comparable to us;
●
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
●
sales or expected sales of additional common stock or equity or equity-linked securities;
●
terrorist attacks or natural disasters or other such events impacting countries where we or our customers have operations; and
●
general economic and market conditions.
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating
performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market
conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of shares of our
common stock to decline. In the past, companies that have experienced volatility in the market price of their stock have been subject to
securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in
substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. Each of
these factors, among others, could harm the value of our common stock.
Due to the nature of our compensation program, our executive officers can sell shares of our common stock, often pursuant to trading
plans established under Rule 10b5-1 of the Exchange Act, and certain of our executive officers currently have 10b5-1 trading plans in
place. As a result, sales of common stock by our executive officers may not be indicative of their respective opinions of our performance
at the time of sale or of our potential future performance. Nonetheless, the market price of our common stock may be affected by sales of
shares by our executive officers.
If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations
regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish
about us or our business. If one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or
more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial
markets, which in turn could cause our stock price or trading volume to decline.
23
We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders and our
failure to raise capital when needed could prevent us from executing our growth strategy.
We believe that our existing cash and cash equivalents, investments in marketable securities, and cash flows from our operating
activities, will be sufficient to meet our anticipated cash needs for at least the next 12 to 18 months. We operate in an industry, however,
that makes our prospects difficult to evaluate. It is possible that we may not generate sufficient cash flow from operations or otherwise
have the capital resources to meet our future capital needs. If this occurs, we may need additional financing to execute on our current or
future business strategies, including to:
●
invest in our research and development efforts by hiring additional technical and other personnel;
●
expand our operating infrastructure;
●
acquire complementary businesses, products, services or technologies; or
●
otherwise pursue our strategic plans and respond to competitive pressures.
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders
could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing
stockholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include
negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to incur
interest expense. There is no assurance that additional financing will be available on terms favorable to us, or at all. If adequate funds are
not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, take advantage of unanticipated
opportunities, develop or enhance our products, or otherwise respond to competitive pressures could be significantly limited.
Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover
attempts that stockholders may consider favorable, which could also reduce the market price of our common stock.
Provisions in our restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing
a change of control or changes in our management. These provisions include the following:
●
the right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors;
●
●
the classification of our board of directors so that only a portion of our directors are elected each year, with each director serving
a three-year term;
the requirement for advance notice for nominations for election to our board of directors or for proposing matters that can be
acted upon at a stockholders’ meeting;
●
the ability of our board of directors to alter our bylaws without obtaining stockholder approval;
●
●
the ability of our board of directors to issue, without stockholder approval, up to 10,000,000 shares of preferred stock with rights
set by our board of directors, which rights could be senior to those of common stock;
the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or
repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of
directors and the ability of stockholders to take action by written consent;
●
the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written consent; and
●
designating the state and federal courts located within the State of Delaware as the exclusive forums for derivative actions, claims
of breach of fiduciary duty by any director, officer or other employee, claims arising pursuant to any provisions of the Delaware
General Corporation Law and claims governed by the internal affairs doctrine.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General
Corporation Law. These provisions may prohibit or restrict large stockholders, in particular those owning 15% or more of our outstanding
voting stock, from merging or combining with us. These provisions in our restated certificate of incorporation and amended and restated
bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to
pay for shares of our common stock in the future and result in the market price of our common stock being lower than they would without
these provisions.
24
We do not currently intend to pay dividends on our common stock and, consequently, the ability to achieve a return on an
investment in our stock will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable
future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, the success of an investment in shares of
our common stock will depend upon any future appreciation in their value. There is no guarantee that our common stock will appreciate in
value.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We lease 57,914 square feet of office space in Santa Clara, California which currently serves as our principal executive office, which
will expire on August 17, 2019. We also lease 40,522 square feet of office space in Westlake Village, California under a lease that will
expire on December 31, 2017. Our Singapore subsidiary currently leases 6,374 square feet of office space in Singapore under a lease that
expires on April 30, 2017. Our United Kingdom subsidiary currently leases office space in Northamptonshire, England under a lease that
expires on March 30, 2016. We also occupy space in Folsom, California, consisting of 7,532 square feet under a lease that expires on
November 30, 2020, and space in Raleigh, North Carolina, consisting of 15,440 square feet under a lease that expires on March 31, 2017.
Our Canada subsidiary currently leases 13,951 square feet in Ottawa, Canada under a lease that expires on October 31, 2016. We believe
that current facilities, are sufficient to meet our needs for the foreseeable future. For additional information regarding our obligations under
property leases, see Note 16 of Notes to Consolidated Financial Statements, included in Part II, “Item 8, Financial Statements and
Supplementary Data”.
ITEM 3.
LEGAL PROCEEDINGS –
We are currently a party to the following 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, or the Court, asserting
that we infringe U.S. Patent No. 7,532,537. Netlist filed an amended complaint on December 22, 2009, further asserting that we infringe
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 our iMB™
and certain other memory module components infringe the patents-in-suit. We answered the amended complaint on February 11, 2010 and
asserted that we do not infringe the patents-in-suit and that the patents-in-suit are invalid. In 2010, we 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.
As to the proceeding at the USPTO, reexamination has been ordered for all of the patents that were alleged to infringe, and at
present, the USPTO has determined that none of the originally filed claims are valid, with certain amended claims being determined
patentable. It is expected that a Reexamination Certificate will issue for U.S. Patent No. 7,532,537 based upon amended claims, and the
parties continue to assert their respective positions with respect to the reexamination proceedings for U.S. Patent Nos. 7,619,912 and
7,636,274.
While we intend to defend the foregoing USPTO proceedings and lawsuit vigorously, the USPTO proceedings and litigation,
whether or not determined in our favor or settled, could be costly and time-consuming and could divert management’s attention and
resources, which could adversely affect our business.
Based on the nature of USPTO proceedings and litigation, we are 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, our business, financial condition, results of operations or
cash flows could be materially and adversely affected.
25
Other Litigation Matters
In March 2015, we settled a patent dispute involving Cortina and Vitesse Semiconductor Corporation (Vitesse). The patent dispute
involved a certain patent family owned by Vitesse associated with error correction. We paid Vitesse $750,000 to resolve the dispute. Based
on the Agreement and Plan of Merger dated July 30, 2014, as amended by Amendment No. 1 to the Agreement and Plan of Merger dated
September 25, 2014, we were indemnified for this settlement arising from this claim, up to an amount of $750,000.
We are not currently a party to any other material litigation. The semiconductor industry is characterized by frequent claims and
litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. We may from time
to time become involved in litigation relating to claims arising from our ordinary course of business. These claims, even if not meritorious,
could result in the expenditure of significant financial and managerial resources.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
26
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market for Registrant’s Common Equity
Our common stock is traded on the New York Stock Exchange under the symbol “IPHI”. The following table sets forth the range
of high and low sales prices for our common stock in each quarter:
2015
Fourth Quarter ............................................................................................................... $
Third Quarter ................................................................................................................
Second Quarter .............................................................................................................
First Quarter ..................................................................................................................
Low
High
22.83 $
20.30
17.27
17.05
2014
Fourth Quarter ............................................................................................................... $
Third Quarter ................................................................................................................
Second Quarter .............................................................................................................
First Quarter ..................................................................................................................
Low
High
12.41 $
12.57
13.49
10.87
32.32
25.99
27.11
21.33
19.14
17.17
16.35
16.56
As of February 25, 2016, we had approximately 60 holders of record of our common stock. This number does not include the number
of persons whose shares are in nominee or in “street name” accounts through brokers.
We have never declared or paid any cash dividends on shares of our capital stock. We expect to retain all of our earnings to finance
the expansion and development of our business and we do not currently intend to pay any cash dividends on our capital stock in the
foreseeable future. Our board of directors will determine future dividends, if any.
Director and Executive Officers have currently and may from time to time in the future, establish pre-set trading plans in accordance
with Rule 10b5-1 promulgated under the Securities Exchange Act of 1934.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding the securities authorized for issuance under our equity compensation plans can be found under Part III, “Item 12,
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.
Share Performance Graph
The following information is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission
or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange
Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.
Set forth below is a line graph showing the cumulative total stockholder return (change in stock price plus reinvested dividends)
assuming the investment of $100 on November 11, 2010 (the day of our initial public offering) in each of our common stock, the S&P 500
Index and PHLX Semiconductor Index for the period commencing on November 11, 2010 and ending on December 31, 2015. The
comparisons in the table are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of future
performance of our common stock.
27
28
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read together with Part II, “Item 7., Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere
in this report. The selected balance sheet data as of December 31, 2015 and 2014, and the selected statements of operations data for each
of the years ended December 31, 2015, 2014, and 2013 have been derived from our audited financial statements included elsewhere in this
report. The selected balance sheet data as of December 31, 2013, 2012 and 2011 and the selected statements of operations data for the years
ended December 31, 2012 and 2011 have been derived from our audited financial statements not included in this report. Historical results
are not necessarily indicative of the results to be expected in the future.
2015
2014
2013
2012
2011
(in thousands, except share and per share data)
Year Ended December 31,
Consolidated Statement of Operations
Data:
Revenue(1) .................................................. $
Cost of revenue(1) (2) ...................................
Gross profit ................................................
246,616 $
98,294
148,322
156,142 $
70,488
85,654
102,664 $
37,095
65,569
91,206 $
32,684
58,522
Operating expense:
Research and development(1) (2) ..
Sales and marketing(1) (2).............
General and administrative(1) (2) .
Total operating expense ..
Income (loss) from operations ...................
Interest expense ..........................
Other income ..............................
Income (loss) before income taxes .............
Provision (benefit) for income taxes(3) .......
Net income (loss) ....................................... $
Earnings per share:
106,444
26,563
20,322
153,329
(5,007)
(783)
221
(5,569)
7,982
(13,551) $
70,863
20,003
16,153
107,019
(21,365)
—
495
(20,870)
1,738
(22,608) $
Basic............................................... $
Diluted ........................................... $
(0.35) $
(0.35) $
(0.69) $
(0.69) $
Weighted-average shares used in
computing earnings per share:
50,516
15,741
11,614
77,871
(12,302)
—
876
(11,426)
1,752
(13,178) $
(0.45) $
(0.45) $
40,102
14,052
12,300
66,454
(7,932)
—
914
(7,018)
13,673
(20,691) $
(0.73) $
(0.73) $
79,297
28,687
50,610
28,565
12,700
9,141
50,406
204
—
509
713
(1,218)
1,931
0.07
0.07
Basic...............................................
Diluted ...........................................
38,580,330
38,580,330
32,707,868
32,707,868
29,493,005
29,493,005
28,378,680
28,378,680
26,799,237
29,367,423
(1) On October 3, 2014, we completed the acquisition of Cortina, including its high-speed interconnect and optical transport product
lines for approximately $52.5 million in cash and approximately 5.3 million shares of our common stock in accordance with the
Agreement and Plan of Merger dated July 30, 2014 as amended by Amendment No. 1 to the Agreement and Plan of Merger dated
September 25, 2014. The results of operations of Cortina and estimated fair value of assets acquired and liabilities assumed were
included in our consolidated financial statements from the acquisition date. This acquisition resulted in a significant change in
our statement of operations in 2015 and 2014 which includes:
(i) Charge to cost of goods sold resulting from the step-up inventory acquired from Cortina; and
(ii) Charge to cost of goods sold and operating expenses from amortization of acquired intangibles
Footnotes continued on the following page.
29
2015
2014
As of December 31,
2013
(in thousands)
2012
2011
283,044 $
43,616
344,897
505,046
171,701
42,675
290,670
30,366 $
38,908
108,623
278,459
—
39,285
239,174
31,667 $
90,890
129,013
182,342
—
22,949
159,393
30,161 $
91,107
131,310
170,074
—
17,109
152,965
29,696
89,283
129,395
172,628
—
14,224
158,404
Consolidated Balance Sheet Data:
Cash and cash equivalents ............................ $
Investments in marketable securities ............
Working capital ............................................
Total assets ...................................................
Long-term convertible debt ..........................
Other liabilities ............................................
Total stockholders’ equity ............................
Footnotes continued from the prior page.
(2) Stock-based compensation expense is included in our results of operations as follows:
2015
2014
As of December 31,
2013
(in thousands)
2012
2011
Operating expenses:
Cost of revenue ........................................... $
Research and development ..........................
Sales and marketing ....................................
General and administrative .........................
1,471 $
16,904
4,445
5,473
1,260 $
12,420
4,079
4,701
1,086 $
8,586
3,204
4,102
726 $
5,833
2,660
3,240
315
3,214
2,054
1,609
(3) The provision for income taxes for the year ended December 31, 2012 included the establishment of valuation allowance against
deferred tax assets.
30
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and this report contain forward-
looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the terms “may,”
“might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,”
“plan,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements include
statements regarding our anticipated trends and challenges in our business and the markets in which we operate, including the market for
40G and 100G high-speed analog semiconductor solutions, our plans for future products and anticipated features and benefits thereof,
expansion of our product offerings and enhancements of existing products, critical accounting policies and estimates, our expectations
regarding our expenses and revenue, sources of revenue, our tax benefits, the benefits of our products and services, our technological
capabilities and expertise, timing of the development of our products, our liquidity position and sufficiency thereof, including our
anticipated cash needs, our operating capital expenditures and requirements and our needs for additional financing and potential
consequences thereof, our anticipated growth and growth strategies, our ability to retain and attract customers, particularly in light of our
dependence on a limited number of customers for a substantial portion of our revenue, our expectations regarding competition, interest
rate sensitivity, adequacy of our disclosure controls, our legal proceedings and warranty claims. These forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or implied by these or any other forward-looking statements.
These risks and uncertainties include, but are not limited to, those risks discussed below, as well as factors affecting our results of
operations, our ability to manage our growth, our ability to sustain or increase profitability, demand for our solutions, the effect of declines
in average selling prices for our products, our ability to compete, our ability to rapidly develop new technology and introduce new products,
our ability to safeguard our intellectual property, trends in the semiconductor industry and fluctuations in general economic conditions,
and the risks set forth throughout this Report, including the risks set forth under Part I, “ Item 1A, Risk Factors”. Readers are cautioned
not to place undue reliance on these forward-looking statements, which are based on current expectations and reflect management's
opinions only as of the date hereof. These forward-looking statements speak only as of the date of this Report. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is
based.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes
that are included elsewhere in this Annual Report on Form 10-K.
Overview
We are a fabless provider of high-speed analog and mixed signal semiconductor solutions for the communications, datacenter and
computing markets. We often refer to our business as covering various data transport segments from “fiber to memory”. Our analog and
mixed signal semiconductor solutions provide high signal integrity at leading-edge data speeds while reducing system power consumption.
Our 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, datacenter and computing infrastructures. Our 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, datacenter and enterprise servers, storage platforms, test and
measurement equipment and military systems. We provide 40G and 100G high-speed analog semiconductor solutions for the
communications market and high-speed memory interface solutions for the computing market. We have a wide range product portfolio
with many products sold in communication and datacenter markets as of December 31, 2015. We have ongoing, informal collaborative
discussions with industry and technology leaders such as AMD, Cisco, ARM Ltd., Ciena, Cisco, Dell Incorporated, Huawei, Intel, Juniper,
Micron, Nokia, Neophotonics, Samsung, SK Hynix and other data center companies to design architectures and products that solve
bandwidth bottlenecks in existing and next generation communications and computing systems. Although we do not have any formal
agreements with these entities, we engage in informal discussions with these entities with respect to anticipated technological challenges,
next generation customer requirements and industry conventions and standards. We help define industry conventions and standards within
the markets we target by collaborating with technology leaders, OEMs, systems manufacturers and standards bodies.
31
The recent history of our product development and sales and marketing efforts is as follows:
•
•
•
•
•
•
In 2009, due to the launch of Intel’s Nehalem-based platform servers, we began volume shipments of our single chip high-
speed PLLs and register solution to be used primarily in conjunction with DDR3 modules. We also shipped engineering
samples of the first generation of our isolation memory buffer, or iMB™, for the computing market. We also began
development of our second generation iMB™ product, the architecture for which has been adopted by the Joint Electronic
Device Engineering Council, or JEDEC, and development of our low power CMOS SerDes product for next generation 100G
Ethernet in enterprise networks.
In 2010, we began to ship in production volume a “low voltage” version of our integrated PLL and register buffer. We also
shipped engineering samples of the second generation iMB™ product. We also introduced and began to ship in commercial
volume the industry’s first transimpedance ampliform for 100G reconfigurable colorless networks, which we identify as
product number 2850TA-SO1D.
In 2011, we began to ship in production volume a new “ultra-low voltage” version of our integrated PLL and register buffer
and the second generation of iMB™. We also shipped engineering samples of our iPHY 100 Gbe CMOS CDR and SerDes
Gearbox products.
In 2012, we started shipping samples of the IN3250TA, our second-generation transimpedance amplifier, or TIA, for 100G
reconfigurable colorless networks. We also introduced the industry’s first quad linear driver designed for linear transmitters
to enable next-generation 100G/400G coherent systems to address the need for higher speed, higher performance networking
infrastructure. We also began shipping in production volume our lowest power integrated phase lock loop and register buffer,
which is shipping in the form of product number INSSTE32882XV. We also announce the availability of the world’s first
production ready 100G CMOS PHY/SerDes Gearbox products for next-generation data center, enterprise and service provider
line cards.
In 2013, we introduced the second generation 100G CMOS SerDes gearbox integrated circuit, or GB IC, for data center,
enterprise and service provider line cards. The new GB IC with Tri-rate™ foundation is designed to enable seamless support
of 10G, 40G and 100G Ethernet and optical transport network on a single line card. We also began shipping an improved
version of iMB™ which delivers up to 35% improvement in LRDIMM bandwidth for 768GB memory capacities and 40%
improvement in memory bandwidth for servers up to 512GB memory capacities. We also introduced the next generation high
speed memory interface product, DDR4 register for the computing market. We also began shipping the industry’s first quad
linear driver designed for linear transmitters to enable next-generation 100G/400G coherent systems to address the need for
higher speed, higher performance networking infrastructure.
In 2014, we completed the acquisition of Cortina Systems Inc. which expands our market share of the high-speed optical and
networking interconnects. This added more than 130 products in our portfolio which includes high-speed interconnect and
optical transport products. We also started sampling the IN3252TA, the industry’s first 32 Gbps dual high gain linear/variable-
gain amplifier. The IN3252TA is designed specifically to address the demanding requirements for 100G coherent transmission
for the Metro market. We also announced the availability of a new iKON™ family of 100G Clock and Data Recovery Retimer
integrated circuits (IC) targeted at next-generation 2-Terabit line cards. The first product in this series, the IN112525-LC
100G CMOS CDR Retimer IC, is designed to accelerate deployment for higher density 100G in service center and data center
networks. We also announced the availability of IN3216DZ, the first single chip quad channel linear Mach Zehnder driver in
bare die form to address the network needs for 100G coherent systems in small form factors for the metro market. Specifically
designed to be co-packaged with MZ modulators, the IN3216DZ will reduce size and cost of 100G coherent systems to enable
higher density metro solutions. We also started sampling 45GBaud Linear Coherent Product Family, the industry’s first linear
ICs enabling 400G coherent solutions for next-generation metro to long haul applications. The initial product offerings
includes IN4514SZ, a high-performance octal linear differential to single-ended Mach-Zehnder Modulator Driver and
IN4550TA, a quad linear TIA/VGA Amplifier.
32
•
In 2015, we started sampling a new product in our 45GBaud Linear Coherent Product Family, IN4518SZ. The IN4518SZ is
a quad linear differential to single-ended Mach-Zehnder Modulator Driver, pin-compatible with the linear driver IN3214SZ,
for 200G coherent Optical interconnect applications. The IN4518SZ extends the reach of 200G coherent for long haul
applications and enables one set of hardware to serve multiple segments in the long haul and metro markets. We also
announced the availability of the industry’s first, highly integrated, lowest power 4-level Pulse Amplitude Modulation
(PAM4) chipset solutions for intra-data center and inter-data center cloud interconnects. It’s a family of PAM4 PHY ICs for
40G (IN014020-XL), 50G (IN015050-SF), 100G (IN015025-CA), 400G (IN015025-CD) and a companion linear TIA
(IN2860TA) that will enable platform solutions for multi-rate PAM4 interconnects. We also started sampling the second
generation DDR4 registering clock driver and data buffer and IN3217SZ, a quad linear differential to single-ended Mach-
Zehnder Modulator Driver in a Surface Mount Technology (SMT) package. The new SMT quad linear driver extends the
product portfolio by utilizing cost effective packaging for higher volume 100G/200G coherent long haul and metro optical
interconnect applications.
Our products are designed into systems sold by OEMs, including Ciena, Cisco, Dell, EMC, H3C, HP, IBM, Juniper, Nokia and
Oracle. We believe we are one of a limited number of suppliers to these OEMs for the types of products we sell, and in some cases we may
be the sole supplier for certain applications. We sell both directly to these OEMs and to module manufacturers, original design
manufacturers, or ODMs, and subsystems providers that, in turn, sell to these OEMs. During the year ended December 31, 2015, we sold
our products to more than 160 customers. A significant portion of our revenue has been generated by a limited number of customers. We
believe that sales to Cisco, directly and indirectly through subcontractors, accounted for approximately 13% of our total revenue for the
year ended December 31, 2015. Sales to Samsung, including its subcontractors, accounted for 18% and 20% of our total revenue for the
years ended December 31, 2014 and 2013, respectively. Sales directly and through distributors to Micron accounted for 11% of our total
revenue for the year ended December 31, 2013. In addition, sales to SK Hynix, including its subcontractor, accounted for 16% of our total
revenue for the year ended December 31, 2013. Substantially all of our sales to date, including our sales to Samsung, Micron and SK
Hynix, are made on a purchase order basis. Since the beginning of 2006, we have shipped more than 200 million high-speed analog
semiconductors. Our total revenue increased to $246.6 million and $156.1 million for the years ended December 31, 2015 and 2014. The
increase in revenue was partially due to the acquisition of Cortina Systems as of October 3, 2014. As of December 31, 2015, our
accumulated deficit was $102.7 million.
Sales to customers in Asia accounted for 68%, 71% and 71% of our total revenue in 2015, 2014 and 2013, respectively. Because
many of our customers or their OEM manufacturers are located in Asia, we anticipate that a majority of our future revenue will continue
to come from sales to that region. Although a large percentage of our sales are made to customers in Asia, we believe that a significant
number of the systems designed by these customers are then sold to end users outside Asia.
In April 2010, we received approval from the government of Singapore to set up an international headquarters from which to conduct
our international operations. Because of its geographic alignment with suppliers and customers, we established our operations in Singapore
to become a new international headquarters office for receiving and fulfilling orders for product shipped to locations outside the United
States. Singapore has a strong university system and an established group of technology-based companies from which to recruit new
engineers. We intend to build a team of engineering capability in Singapore both for development as well as testing associated with
manufacturing. International operations in Singapore commenced on May 1, 2010 and during 2010, we transitioned our international
operations from the United States to our Singapore subsidiary.
Demand for new features changes rapidly. It is difficult for us to forecast the demand for our products, in part because of the complex
supply chain between us and the end-user markets that incorporate our products. Due to our lengthy product development cycle, it is critical
for us to anticipate changes in demand for our various product features and the applications they serve to allow sufficient time for product
development and design. Our failure to accurately forecast demand can lead to product shortages that can impede production by our
customers and harm our customer relationships. Conversely, our failure to forecast declining demand or shifts in product mix can result in
excess or obsolete inventory.
Although revenue generated by each design win and the timing of the recognition of that revenue can vary significantly, we consider
ongoing design wins to be a key factor in our future success. We consider a design win to occur when an OEM or contract manufacturer
notifies us that it has selected our products to be incorporated into a product or system under development. The design win process is
typically lengthy, and as a result, our sales cycles will vary based on the market served, whether the design win is with an existing or new
customer and whether our product is under consideration for inclusion in a first or subsequent generation product. In addition, our
customers’ products that incorporate our semiconductors can be complex and can require a substantial amount of time to define, design
and produce in volume. As a result, we can incur significant design and development expenditures in circumstances where we do not
ultimately recognize, or experience delays in recognizing revenue. Our customers generally order our products on a purchase order basis.
We do not have any long-term purchase commitments (in excess of one year) from any of our customers. Once our product is incorporated
into a customer’s design, however, we believe that our product is likely to continue to be purchased for that design throughout that product’s
life cycle because of the time and expense associated with redesigning the product or substituting an alternative semiconductor. Our design
cycle from initial engagement to volume shipment is typically two to three years. Product life cycles in the markets we serve typically
range from two to 10 years or more and vary by application.
33
Summary of Consolidated Financial Results
As discussed in more detail below, for the year ended December 31, 2015, compared to the year ended December 31, 2014, we
delivered the following financial performance. The financial results for the years ended December 31, 2015 and 2014, include the results
of operations of Cortina from the acquisition date and the effect of purchase price accounting.
● Total revenues increased by $90.5 million, or 58%, to $246.6 million.
● Gross profit as a percentage of revenue increased from 55% to 60%.
● Total operating expenses increased by $46.3 million, or 43%, to $153.3 million.
● Loss from operations decreased by $16.4 million, to loss of $5.0 million.
● Provision for income taxes increased by $6.2 million.
● Diluted loss per share decreased by $0.34, to ($0.35).
The increase in our revenue for the year ended December 31, 2015 was a result of inclusion of revenue from the October 4, 2014
acquisition of Cortina, as well as increase in consumption of our dual linear TIAs, quad linear driver products and iPHY products.
The increase in gross margin was due to increase in sale of high margin products as discussed above, lower amortization of inventory
fair value step-up related to the acquired Cortina inventories for the year ended December 31 2015 as compared to year ended December
31, 2014, offset by increase in amortization of acquired intangibles..
Total operating expenses increased due primarily to an increase in headcount from the Cortina acquisition and stock-based
compensation. Our expenses primarily consist of personnel costs, which include compensation, benefits, payroll related taxes and stock-
based compensation. From December 31, 2014 to December 31, 2015, we hired 25 new employees, primarily in the engineering
department. In addition, the acquisition of Cortina added 137 employees. We expect expenses to continue to increase in absolute dollars
as we continue to invest resources to develop more products, to support the growth of our business. Our diluted loss per share decreased
primarily due to increase in revenue, partially offset by increase in operating expenses and provision for income taxes.
In December 2015, we issued $230 million aggregate principal amount of 1.125% Convertible Senior Notes due 2020. The net
proceeds from this offering were approximately $223.6 million, after deducting initial purchasers’ discount and commissions and debt
offering expenses. The net proceeds were partially used to purchase the capped call options of $17.8 million. We intend to use the remainder
of the net proceeds for general corporate purposes including financing potential acquisitions and other strategic transactions. However, we
currently have no commitments with respect to any such acquisitions or other strategic transactions.
Critical Accounting Policies and Significant Management Estimates
Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles, or GAAP.
In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about
future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We
base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be
relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions,
estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However,
because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates,
and such differences could be material.
Our significant accounting policies are discussed in note 1 of the notes to our consolidated financial statements. We believe that the
following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they
require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are
inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with our audit committee.
Revenue Recognition
Our products are fully functional at the time of shipment and do not require production, modification or customization. We recognize
revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and
collection is reasonably assured. Our fee is considered fixed or determinable at the execution of an agreement, based on specific products
and quantities to be delivered at specified prices, which is evidenced by a customer purchase order or other persuasive evidence of an
arrangement. Our agreements with non-distributor customers do not include rights of return or acceptance provisions. Product revenue is
recognized upon shipment of product to customers, net of accruals for estimated sales returns and allowances, which to date, have not been
significant.
34
Approximately 22% of our sales were made through third-party distributors in 2015. Sales to distributors are included in deferred
revenue and we include the related costs in inventory until sales and delivery to the end customers occurs. Distributor arrangements, allow
for limited price protection and rights of stock rotation on product unsold by the distributors. The price protection rights allow distributors
the right to a credit in the event of declines in the price of our product that they hold prior to the sale to a specific end customer. In the
event that we reduce the selling price of products held by distributors, deferred revenue related to distributors with price protection rights
is reduced upon notification to the customer of the price change. Additionally, distributors may receive a credit for the price discounts
associated with the distributors' customers that purchased those products. We estimate the extent of these distributor price discounts at each
reporting period to reduce accounts receivable and deferred revenue, but we do not issue these discounts to the distributor until the inventory
is sold to the distributors' customers. Revenue recognition on product sales through distributors is highly dependent on receiving pertinent
and accurate data from our distributors in a timely fashion. Distributors provide us periodic data prior to the release of our consolidated
financial statements regarding the product, price, quantity and end customer when products are resold, as well as the quantities of our
products they still have in stock.
We recognize revenue from the sales and licensing of certain intellectual properties when the following fundamental criteria are
met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the sales price is fixed or determinable, and
(iv) collection of resulting receivables is reasonably assured.
Occasionally, we enter into development agreements with some of our customers and recognize 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 completion of milestones or delivery of services.
We monitor collectability of accounts receivable primarily through review of the accounts receivable aging. Our policy is to record
an allowance for doubtful accounts based on specific collection issues we have identified, aging of underlying receivables and historical
experience of uncollectible balances. As of December 31, 2015 and 2014, our allowance for doubtful accounts was $165,000.
We have not made any material changes in the accounting methodology we use to record the allowance for doubtful accounts during
the past three years. If actual results are not consistent with the assumptions and estimates used, for example, if the financial condition of
the customer deteriorated, we may be required to record additional expense that could materially negatively impact our operating results.
To date, however, substantially all of our receivables have been collected within following quarter.
Inventory Valuation
We value our inventory, which includes materials, labor and overhead, at the lower of cost or market. Cost is computed using
standard cost, which approximates actual cost, on a first-in, first-out basis. We periodically write-down our inventory to the lower of cost
or market based on our estimates that consider historical usage and future demand. These factors are impacted by market and economic
conditions, technology changes, new product introductions and changes in strategic direction. The calculation of our inventory valuation
requires management to make assumptions and to apply judgment regarding forecasted customer demand and technological obsolescence
that may turn out to be inaccurate. Inventory valuation reserves were $4,608,000 and $1,949,000 as of December 31, 2015 and 2014,
respectively. Inventory valuation reserves, once established, are not reversed until the related inventory has been sold or scrapped.
We have not made any material changes in the accounting methodology we use to record inventory reserves during the past three
years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that we
use to calculate our inventory reserve. However, if estimates regarding customer demand are inaccurate or changes in technology affect
demand for certain products in an unforeseen manner, we may be exposed to losses or gains that could be material.
Product Warranty
Our products are under warranty against defects in material and workmanship generally for a period of one or two years. We accrue
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 our typical experience. The warranty obligation is determined based
on product failure rates, cost of replacement and failure analysis cost. We monitor product returns for warranty-related matters and monitor
both a specific and general accrual for the related warranty expense based on specific circumstances and general historical experience. Our
warranty obligation requires management to make assumptions regarding failure rates and failure analysis costs. If actual warranty costs
differ significantly from these estimates, adjustments may be required in the future, which would adversely affect our gross margins and
operating results. The warranty liability as of December 31, 2015 and 2014 was $110,000.
35
On November 3, 2014, we received a claim notification from an insurance company asserting a claim of approximately $4,000,000
for field installation repair and replacement costs incurred by a customer in 2011. We believe that we had fulfilled our contractual obligation
to provide warranty repair and replacement, but referred the matter to our insurance carrier at the request of the insurance company. As of
December 31, 2015, we believe the liability under this claim is not probable. Nevertheless, resolutions of third-party claims are inherently
uncertain and as such, an unfavorable outcome could ultimately impact our business, cash flow and results of operations.
Business combinations
We use the acquisition method of accounting for business combinations and recognize assets acquired and liabilities assumed
measured at their fair values on the date acquired. This requires us to recognize separately from goodwill the assets acquired and the
liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration
transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates
and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration,
where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may
be up to one year from the acquisition date, we adjust the assets acquired and liabilities assumed with the corresponding offset to goodwill.
Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever
comes first, any subsequent adjustments are recognized in our consolidated statements of operations.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the
acquisition date, including our estimates for intangible assets, contractual obligations assumed and pre-acquisition contingencies, where
applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are
based, in part, on historical experience and information obtained from the management of the acquired companies and are inherently
uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include, but are not limited to: future expected
cash flows from product sales, customer contracts and acquired technologies, expected costs to develop in-process research and
development into commercially viable products, estimated cash flows from the projects when completed, and discount rates. Unanticipated
events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Goodwill and Purchased Intangible Assets
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the
acquired net tangible and intangible assets. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact
the amount and timing of future amortization. The value of our intangible assets, including goodwill, could be impacted by future adverse
changes such as: (a) any future declines in our operating results, (b) a decline in the valuation of technology company stocks, including the
valuation of our common stock, (c) a further significant slowdown in the worldwide economy or the semiconductor industry, (d) any failure
to meet the performance projections included in our forecasts of future operating results or (e) the abandonment of any of our acquired in-
process research and development projects. We evaluate goodwill and purchased intangible assets deemed to have indefinite lives, on an
annual basis in the fourth quarter or more frequently if we believe indicators of impairment exist. Significant management judgment is
required in performing periodic impairment tests. The testing for a potential impairment of goodwill involves a two-step process. The first
step involves comparing the estimated fair values of our reporting unit with the book values, including goodwill. If the estimated fair value
exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the
reporting unit is less than book value, then the carrying amount of the goodwill is compared with its implied fair value. The estimate of
implied fair value of goodwill may require valuations of certain internally generated and unrecognized intangible assets such as our
technology, customer relationships, patents and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to the excess. If our actual results, or the plans and estimates used in future
impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional
impairment charges. The acquisition of Cortina on October 3, 2014 increased our goodwill and identifiable intangible assets by $3,279,000
and $82,410,000, respectively. See note 2 to the notes to our consolidated financial statements. There was no evidence of impairment based
on the annual impairment testing for the year ended December 31, 2015.
Stock-Based Compensation
We account for stock-based compensation in accordance with authoritative guidance which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees and directors based on the grant date fair
values of the awards. The fair value of stock option awards is estimated using the Black-Scholes option pricing model. The fair value of
restricted stock units is based on the fair market value of our common stock on the date of grant. The value of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. We elected to
treat share-based payment awards with graded vesting schedules and time-based service conditions as a single award and recognize stock-
based compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. Stock-based
compensation expenses are classified in the consolidated statement of operations based on the department to which the related employee
reports.
36
We account for stock options issued to non-employees in accordance with the guidance for equity-based payments to non-
employees. Stock option awards to non-employees are accounted for at fair value using the Black-Scholes option pricing model. Our
management believes that the fair value of stock options is more reliably measured than the fair value of the services received. The fair
value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase in value, if any,
is recognized as expense during the period the related services are rendered.
The Black-Scholes option pricing model requires management to make assumptions and to apply judgment in determining the fair
value of our awards. The most significant assumptions and judgments include estimating the fair value of underlying stock, expected
volatility and expected term. In addition, the recognition of stock-based compensation expense is impacted by estimated forfeiture rates.
We estimated the expected volatility from the historical volatilities of several unrelated public companies within the semiconductor
industry because our common stock has limited trading history. When selecting the public companies used in the volatility calculation, we
selected companies in the semiconductor industry with comparable characteristics to us, including stage of development, lines of business,
market capitalization, revenue and financial leverage. The weighted average expected life of options was calculated using the simplified
method. This decision was based on the lack of relevant historical data due to our limited experience and the lack of active market for our
common stock. The risk-free interest rate is based on the U.S. Treasury yields in effect at the time of grant for periods corresponding to the
expected term of the options. The expected dividend rate is zero based on the fact that we have not historically paid dividends and have no
intention to pay cash dividends in the foreseeable future. The forfeiture rate is established based on the historical average period of time
that options were outstanding and adjusted for expected changes in future exercise patterns.
We do not believe there is a reasonable likelihood that there will be material changes in the estimates and assumptions we use to
determine stock-based compensation expense. In the future, if we determine that other option valuation models are more reasonable, the
stock-based compensation expense that we record in the future may differ significantly from what we have recorded using the Black-
Scholes option pricing model.
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 and where the differences are expected to
reverse. We record a valuation allowance to reduce deferred tax assets to the amount that we believe is more likely than not to be realized.
In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred
tax liabilities, historical levels of income, projections of future income, expectations and risk associated with estimates of future taxable
income and ongoing prudent and practical tax planning strategies. To the extent that we believe it is more likely than not that some portion
of our deferred tax assets will not be realized, we would increase the valuation allowance against deferred tax assets. The determination of
recording or releasing a tax valuation allowance is made, in part, pursuant to an assessment performed by management regarding the
likelihood that we will generate sufficient future taxable income against which the benefits of our deferred tax assets may or may not be
realized. This assessment requires management to exercise significant judgment and make estimates with respect to our ability to generate
revenue, gross profits, operating income and taxable income in future periods. Among other factors, management must make assumptions
regarding current and projected overall business and semiconductor industry conditions, operating efficiencies, our ability to timely
develop, introduce and consistently manufacture new products to meet our customers’ needs and specifications, our ability to adapt to
technological changes and the competitive environment, which may impact our ability to generate taxable income and, in turn, realize the
value of our deferred tax assets. Although, we believe that the judgment we used is reasonable, actual results can differ due to a change in
market conditions, changes in tax laws and other factors.
We have valuation allowance against deferred tax assets for the years ended December 31, 2015, 2014 and 2013. The decision to
establish the valuation allowance in 2012 was due to negative evidence that includes our cumulative losses in U.S., Singapore and Taiwan
after considering permanent tax differences and the passage of new California tax law requiring use of single sales factor which reduces
the amount of California taxable income starting 2013.
In accordance with FASBs guidance on Accounting for Uncertainty in Income Taxes, we perform a comprehensive review of
uncertain tax positions regularly. The guidance prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken, or expected to be taken, in a tax return. We determine the tax liability for uncertain
tax positions based on a two-step process. The first step is to determine whether it is more likely than not based on technical merits that
each income tax position would be sustained upon examination. The second step is to measure the tax benefit as the largest amount that
has a greater than 50% likelihood of being realized upon ultimate settlement with a tax authority that has full knowledge of all relevant
information. The assessment of each tax position requires significant judgment and estimates. We believe our tax return positions are fully
supported, but tax authorities could challenge certain positions, which may not be fully sustained. All tax positions are periodically analyzed
and adjusted as a result of events, such as the resolution of tax audits, issuance of new regulations or new case law, negotiations with tax
authorities, and expiration of statutes of limitations.
37
Results of Operations and Key Operating Metrics
The following describes the line items in the statements of operations, which we consider to be our key operating metrics.
Revenue. We generate revenue from sales of our semiconductor products to end customers. A portion of our products is sold
indirectly to customers through distributors.
We design and develop high-speed analog semiconductor solutions for the communications and computing markets. Our revenue is
driven by various trends in these markets. These trends include the deployment and broader market adoption of next generation 100G
technologies in communications and enterprise networks, the timing of next generation network and enterprise server upgrades in different
geographic locations worldwide, the introduction and broader market adoption of next generation server platforms such as Intel’s Haswell-
based platform, and the deployment of high-speed memory interfaces in server and computing platforms.
Our revenue is also impacted by changes in the number and average selling prices of our semiconductor products. Our products are
typically characterized by a life cycle that begins with higher average selling prices and lower volumes, followed by broader market
adoption, higher volumes, and average selling prices that are lower than initial levels.
We operate in industries characterized by rapidly changing technologies and industry standards as well as technological
obsolescence. Our revenue growth is dependent on our ability to continually develop and introduce new products to meet the changing
technology and performance requirements of our customers, diversify our revenue base and generate new revenue to replace, or build upon,
the success of previously introduced products which may be rapidly maturing. As a result, our revenue is impacted to a more significant
extent by product life cycles for a variety of products and to a much lesser extent, if any, by any single product. In 2011, we began to ship
in production volume a new “ultra-low voltage” version of our integrated PLL and register buffer, which is shipping in the form of product
number INSSTE32882UV-GS02, or the GS02UV product. Sales of the GS02UV product comprised 15%, 39% and 45% of our total
revenue in 2014, 2013 and 2012, respectively. In 2010, we introduced and began to ship in commercial volume a dual, differential linear
TIA, which we identify as product number 2850TA-SO1D. Sales of 2850TA-SO1D product comprised 10% and 14% of our total revenue
in 2013 and 2012, respectively. In 2012, we introduced and began to ship in commercial volume a dual, differential input linear
transimpedance/variable-gain amplifier that we identify as product number IN3250TA-SO2D. Sales of IN3250TA-SO2D product
comprised 14% of our total revenue in 2015 and 2014. In 2016, we expect that revenue from sales of IN3250TA-SO2D will be significant.
The following table is based on the geographic location to which our product is initially shipped. In most cases this will differ from
the ultimate location of the end user of a product containing our technology. For sales to our distributors, their geographic location may be
different from the geographic locations of the ultimate end customer. Sales by geography for the periods indicated were:
China ......................................................................................... $
United States .............................................................................
Thailand ....................................................................................
Korea ........................................................................................
Other .........................................................................................
$
2015
Year Ended December 31,
2014
2013
82,789 $
41,185
25,123
9,510
88,009
246,616 $
(in thousands)
54,312 $
22,918
7,924
10,123
60,865
156,142 $
23,039
22,389
1,143
21,818
34,275
102,664
In 2013, we were shipping products to a customer in Korea. However, in 2014, this customer requested to ship majority of the
products to their facility in China, which resulted in a significant shift in revenue between China and Korea. In addition, the increase in
shipments to China was due to revenue generated from Cortina during the fourth quarter of 2014 and year ended December 31, 2015.
Cost of revenue. Cost of revenue includes cost of materials such as wafers processed by third-party foundries, costs associated with
packaging and assembly, test and shipping, cost of personnel, including stock-based compensation, as well as equipment associated with
manufacturing support, logistics and quality assurance, warranty costs, write down of inventories, amortization of production mask costs,
amortization of developed technology, amortization of step-up values of inventory, overhead and other indirect costs, such as allocated
occupancy and information technology, or IT, costs.
As some semiconductor products mature and unit volumes increase, their average selling prices may decline. These declines are
often paired with improvements in manufacturing yields and lower wafer, assembly and test costs, which offset some of the margin
reduction that results from lower prices. However, our gross profit, period over period, may fluctuate as a result of changes in average
selling prices due to new product introductions or existing product transitions into larger scale commercial volumes, manufacturing costs
as well as our product mix.
38
Research and development. Research and development expense includes personnel-related expenses, including salaries, stock-
based compensation and employee benefits. It also includes pre-production engineering mask costs, software license expenses, prototype
wafer, packaging and test costs, design and development costs, testing and evaluation costs, third-party fees paid to consultants,
depreciation expense, allocated facilities costs and other indirect costs. All research and development costs are expensed as incurred. We
enter into development agreements with some of our customers. Recoveries from nonrecurring engineering services related to 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. We expect research and development expense to increase in absolute dollars as we continue to invest resources
to develop more products and enhance our existing product portfolio.
Sales and marketing. Sales and marketing expense consists primarily of salaries, stock-based compensation, employee benefits,
travel, promotions, trade shows, marketing and customer support, commission payments to employees, depreciation expense and other
indirect costs. We expect sales and marketing expense to increase in absolute dollars to support the growth of our business and promote
our products to current and potential customers.
General and administrative. General and administrative expense consists primarily of salaries, stock-based compensation, employee
benefits and expenses for executive management, legal, and finance. In addition, general and administrative expenses include fees for
professional services and other indirect costs. We expect general and administrative expense to increase in absolute dollars due to the
general growth of our business and the costs associated with becoming a public company for, among other things, SEC reporting and
compliance, director fees, insurance, transfer agent fees and similar expenses.
Provision (benefit) for income taxes. For the year ended December 31, 2013, we recorded provision for income taxes of $1.8
million, which reflects an effective tax rate of 15%. The effective tax rate of 15% differs from the statutory rate of 34% primarily due to
the an increase in valuation allowance, foreign income taxes provided at lower rates, geographic mix in profitability, unrecognized tax
benefits and recognition of research and development credits. For the year ended December 31, 2014, we recorded provision for income
taxes of $1.7 million, which reflects an effective tax rate of 8%. The effective tax rate of 8% differs from the statutory rate of 34% primarily
due to increase in valuation allowance, foreign income taxes provided at lower rates, geographic mix in profitability, unrecognized tax
benefits, transaction cost adjustment and recognition of research and development credits. For the year ended December 31, 2015, we
recorded provision for income taxes of $8.0 million, which reflects an effective tax rate of (143%). The effective tax rate of (143%) differs
from the statutory rate of 34% primarily due to change in valuation allowance, foreign income taxes provided at lower rates, geographic
mix in profitability, unrecognized tax benefits, stock-based compensation adjustments, taxation of Subpart F income, and recognition of
research and development credits.
The following table sets forth a summary of our statement of operations for the periods indicated:
Total revenue ............................................................................ $
Cost of revenue .........................................................................
Gross profit ...............................................................................
Operating expense:
Research and development ............................................
Sales and marketing ......................................................
General and administrative............................................
Total operating expenses ...........................................................
Loss from operations .................................................................
Interest expense .........................................................................
Other income ............................................................................
Loss before income taxes ..........................................................
Provision for income taxes ........................................................
Net loss ......................................................................... $
2015
Year Ended December 31,
2014
(in thousands)
2013
246,616 $
98,294
148,322
106,444
26,563
20,322
153,329
(5,007)
(783)
221
(5,569)
7,982
(13,551) $
156,142 $
70,488
85,654
70,863
20,003
16,153
107,019
(21,365)
—
495
(20,870)
1,738
(22,608) $
102,664
37,095
65,569
50,516
15,741
11,614
77,871
(12,302)
—
876
(11,426)
1,752
(13,178)
39
The following table sets forth a summary of our statement of operations as a percentage of each line item to the revenue:
2015
Year Ended December 31,
2014
2013
Total revenue ............................................................................
Cost of revenue .........................................................................
Gross profit ...............................................................................
Operating expense:
Research and development ............................................
Sales and marketing ......................................................
General and administrative............................................
Total operating expenses ...........................................................
Loss from operations .................................................................
Interest expense .........................................................................
Other income.............................................................................
Loss before income taxes ..........................................................
Provision for income taxes ........................................................
Net loss .........................................................................
100%
40
60
43
11
8
62
(2)
—
—
(2)
3
(5)%
100%
45
55
45
13
10
68
(13)
—
—
(13)
1
(14)%
100%
36
64
49
16
11
76
(12)
—
1
(11)
2
(13)%
Comparison of the Years Ended December 31, 2015, 2014 and 2013
Revenue
Year Ended December 31,
2013
2014
2015
Total revenue .................................... $ 246,616 $ 156,142 $ 102,664 $
58% $
53,478
52%
Change
2015
2014
Amount
%
Amount
%
(dollars in thousands)
90,474
Total revenue for the year ended December 31, 2015 increased by $90.5 million due to a year over year increase in average selling
price of 46% and an increase in the number of units sold of 8%. The increases in average selling price and number of units sold was due to
product mix, mainly from sales of our higher priced products including dual linear TIA, quad linear driver products, iPHY products, and
high-speed interconnect and optical transport products from the Cortina acquisition.
Total revenue for the year ended December 31, 2014 increased by $53.5 million due to a year over year increase in average selling
price of 63%, partially offset by a decrease in the number of units sold of 7%. The increase in average selling price was due to product
mix, mainly from sales of our higher priced products including dual linear TIA, quad linear driver products, iMB™, high-speed interconnect
and optical transport products. For the year ended December 31, 2014, the number of units sold decreased by 7% mainly from decrease in
consumption of our other high speed memory interface products. We believe the reduction in the unit consumption of high speed memory
is the natural result of migration to higher capacity DiMM cards at economic prices made possible in part by the availability of higher
capacity DRAM at economic prices. In effect, a requirement for the same or more memory capacity can now be placed on a single card,
thereby naturally absorbing the same or more aggregate memory requirement into a smaller number of cards.
Cost of Revenue and Gross Profit
Cost of revenue ................ $
Gross profit ......................
Gross profit as a
percentage of revenue ....
Year Ended December 31,
2014
2013
2015
98,294 $
148,322
70,488 $
85,654
Amount
(dollars in thousands)
27,806
62,668
37,095 $
65,569
%
Amount
%
39% $
73%
33,393
20,085
90%
31%
Change
2015
2014
60%
55%
64%
—
5%
—
(9%)
40
Cost of revenue and gross profit for the year ended December 31, 2015 increased by $27.8 million and $62.7 million, respectively,
compared to the prior year primarily due to increase in revenue from sales our dual linear TIA, quad linear driver products, iPHY products
and high-speed interconnect and optical transport products which generated higher margin, amortization of inventory step-up related to the
acquired Cortina inventories and amortization of acquired intangibles. Gross profit as a percentage of revenue increased due to sale of high
margin products as discussed above and lower amortization of inventory fair value step-up related to the acquired Cortina inventories of
$4.0 million, offset by increase of amortization of acquired intangibles by $8.6 million.
Cost of revenue and gross profit for the year ended December 31, 2014 increased by $33.4 million and $20.1 million, respectively,
compared to the prior year primarily due to increase in revenue from sales our dual linear TIA, quad linear driver products, iMB™, high-
speed interconnect and optical transport products which generated higher margin. Gross profit as a percentage of revenue decreased due to
the amortization of inventory fair value step-up related to the acquired Cortina inventories sold during the fourth quarter of 2014 and
amortization of the acquired intangibles.
Research and Development
Year Ended December 31,
2014
2015
Change
2015
2014
2013
Amount
(dollars in thousands)
%
Amount
%
Research and
development ........... $
106,444 $
70,863 $
50,516 $
35,581
50% $
20,347
40%
Research and development expense for the year ended December 31, 2015 increased by $35.6 million due to the increase in research
and development headcount from new employees hired in 2015 and as a result of the acquisition of Cortina, which resulted in a $18.5
million and $4.5 million increase in personnel costs and stock-based compensation expense, respectively. CAD software tool license
expense increased by $4.5 million, primarily due to an increase in headcount and engineering activities. In addition, external test services,
pre-production engineering mask costs and laboratory supplies increased by $1.4 million. We abandoned the project related to in-process
research and development costs which resulted in an impairment charge of $1.8 million. Depreciation and allocated expenses increased by
$5.4 million, primarily, due to an increase in equipment and research and development activities. The increases were partially offset by
decrease in third-party consultants by $0.9 million due to increase in employees. The increase in research and development expense was
primarily driven by acquisition of Cortina and our strategy to continue to expand our product offerings and enhance our existing products.
Research and development expense for the year ended December 31, 2014 increased by $20.3 million due to the increase in research
and development headcount from new employees hired in 2014 and as a result of the acquisition of Cortina, which resulted in a $12.9
million and $3.8 million increase in personnel costs and stock-based compensation expense, respectively. Consulting fees and CAD
software tool license expense increased by $2.2 million and $2.0 million, respectively, primarily due to an increase in headcount and
engineering activities. In addition, external test services and pre-production engineering mask costs increased by $2.0 million. Depreciation
and allocated expenses increased by $5.2 million, primarily, due to an increase in equipment and research and development activities. The
increases were partially offset by higher reimbursement from customers related to research and development contracts of $9.3 million due
to new development contracts entered with the customers in 2014. The increase in research and development expense was primarily driven
by acquisition of Cortina and our strategy to continue to expand our product offerings and enhance our existing products.
Sales and Marketing
Year Ended December 31,
2014 2013
2015
Change
2015
2014
Amount %
Amount
%
Sales and marketing ................................ $ 26,563 $ 20,003 $ 15,741 $
6,560
33% $
4,262
27%
(dollars in thousands)
Sales and marketing expense for the year ended December 31, 2015 increased by $6.6 million, primarily due to an increase in
personnel costs, including stock-based compensation expense of $3.8 million, to support increasing sales activities from new developed
products and from the Cortina acquisition. Commission expense increased by $1.7 million due to higher compensation and higher revenue.
In addition, amortization of intangible related to Cortina acquisition increased by $0.6 million.
41
Sales and marketing expense for the year ended December 31, 2014 increased by $4.3 million, primarily due to an increase in
personnel costs, including stock-based compensation expense of $3.2 million, to support increasing sales activities from new developed
products and from the Cortina acquisition.
General and Administrative
Year Ended December 31,
2015
2014
2015
2014
2013 Amount %
Amount %
(dollars in thousands)
Change
General and administrative .................... $
20,322 $
16,153 $ 11,614 $
4,169
26% $
4,539
39%
General and administrative expenses for the year ended December 31, 2015 increased primarily due to personnel costs and stock-
based compensation expense increased by $2.1 million due to new hires from Cortina and stock grants awarded. Amortization of intangibles
and accounting and consultant fees increased by $0.3 million and $0.5 million due to the Cortina acquisition. In addition, we incurred a
loss of $0.5 million from the disposal of certain property and equipment from the Cortina acquisition.
General and administrative expenses for the year ended December 31, 2014 increased primarily due to increase in outside legal fees
of $1.8 million in connection with the acquisition of Cortina. In addition, personnel costs and stock-based compensation expense increased
by $1.6 million due to new hires from Cortina and stock grants awarded in 2014.
Provision for Income Taxes
Year Ended December 31,
2014
2013
2015
Change
2015
2014
Amount %
Amount %
Provision for income taxes ...................... $
7,982 $
1,738 $
1,752 $
6,244
359% $
(14 )
—
(dollars in thousands)
For the year ended December 31, 2015, we recorded provision for income taxes of $8.0 million, which reflects an effective tax rate
of (143%). The effective tax rate of (143%) differs from the statutory rate of 34% primarily due to change in valuation allowance, foreign
income taxes provided at lower rates, geographic mix in profitability, unrecognized tax benefits, stock-based compensation adjustments,
taxation of Subpart F income and recognition of research and development credits.
For the year ended December 31, 2014, we recorded a provision for income taxes of $1.7 million, which reflects an effective tax rate
of 8%. The effective tax rate of 8% differs from the statutory rate of 34% primarily due to the change in valuation allowance, foreign
income taxes provided at lower rates, geographic mix in profitability, unrecognized tax benefits, transaction costs adjustments and
recognition of research and development credits.
For the year ended December 31, 2013, we recorded a provision for income taxes of $1.8 million, which reflects an effective tax rate
of 15%. The effective tax rate of 15% differs from the statutory rate of 34% primarily due to the change in valuation allowance, foreign
income taxes provided at lower rates, geographic mix in profitability, unrecognized tax benefits and recognition of research and
development credits.
We operate under tax holiday in Singapore, which is effective through May 2020. The tax holiday is conditional upon our meeting
certain employment, activities and investment thresholds. As of December 31, 2015, we believe we met all the thresholds. There was no
impact of the Singapore tax holiday on our Singapore taxes in 2015, 2014 and 2013. The benefit of tax holidays has no material impact on
diluted earnings per share.
Liquidity and Capital Resources
As of December 31, 2015, we had cash and cash equivalents and investments in marketable securities of $326.7 million. Our primary
uses of cash are to fund operating expenses, purchase inventory and acquire property and equipment. Cash used to fund operating expenses
is impacted by the timing of when we pay these expenses, as reflected in the changes in our outstanding accounts payable and accrued
expenses. Our primary sources of cash are cash receipts on accounts receivable from our revenue. In 2015, we issued convertible debt,
which resulted in an increase in cash and cash equivalents. Aside from the growth in amounts billed to our customers, net cash collections
of accounts receivable are impacted by the efficiency of our cash collections process, which can vary from period to period, depending on
the timing of shipments and payment cycles of our major customers.
42
The following table summarizes our cash flows for the periods indicated:
2015
Years Ended December 31,
2014
(in thousands)
2013
Net cash provided by operating activities ................................. $
Net cash used in investing activities .........................................
Net cash provided by financing activities .................................
Net increase (decrease) in cash and cash equivalents ................ $
68,238 $
(23,871 )
208,311
252,678 $
8,386 $
(11,744)
2,057
(1,301) $
18,658
(20,098)
2,946
1,506
Net Cash Provided by Operating Activities
Net cash provided by operating activities in 2015 primarily reflected depreciation and amortization of $26.9 million, stock-based
compensation of $28.3 million, loss on disposal and abandonment of property and equipment of $1.9 million, impairment of in-process
research and development of $1.8 million, amortization of deferred tax charge of $0.9 million, amortization of premiums on marketable
securities of $0.5 million, accretion of convertible debt of $0.6 million, decreases in accounts receivable by $6.5 million, inventories of
$8.8 million, prepaid expenses and other assets of $2.2 million, change in income tax payable/receivable by $6.4 million, increase in
accrued expenses by $3.4 million offset by net loss of $13.6 million, excess tax benefit related to stock-based compensation of $4.3 million
and decrease in other liabilities of $1.4 million. Our accounts receivable decreased due to collections from customers. Our inventories
decreased due to shipments to customers and amortization of fair value step-up on Cortina inventories. Our prepaid expenses and other
current assets decreased due to settlement of a non-trade receivable. Our accrued expenses increased due to accrual of employee related
expenses. Other liabilities decreased due to deposits received from customers used in 2015 and decrease in deferred rent on building leases.
Net cash provided by operating activities in 2014 primarily reflected depreciation and amortization of $10.9 million, stock-based
compensation of $22.5 million, abandonment of assets of $1.2 million, amortization of intangibles of $3.2 million, amortization of deferred
tax charge of $0.9 million, amortization of premiums on marketable securities of $0.8 million, decrease in inventories of $10.1 million and
increase in deferred revenue of $5.4 million offset by net loss of $22.6 million, increase in accounts receivable by $8.7 million, increase in
prepaid expenses by $3.3 million, decrease in accounts payable and accrued expenses by $10.3 million and decrease in other liabilities of
$1.7 million. Our inventories, net of acquired inventories from Cortina acquisition decreased due to shipments to customers. Our deferred
revenue increased due to acquisition of Cortina and distributors increased their inventory level for shipment to customers in the first quarter
of 2015. Accounts receivable increased due to higher shipments made in the last month of the quarter, including Cortina’s products. Our
prepaid expenses and other assets increased as a result of new subscriptions with vendors and related prepayments. Our accounts payable
and accrued expenses, net of assumed liabilities from Cortina acquisition, decreased due to payment to vendors and employees. Other
liabilities decreased due to amortization of advance payment received from a customer in 2013.
Net cash provided by operating activities in 2013 primarily reflected depreciation and amortization of $7.5 million, stock-based
compensation of $17.0 million, impairment charge of $0.5 million, amortization of deferred tax charge of $0.9 million, amortization of
premiums on marketable securities of $1.0 million, change in income tax receivable/payable by $3.0 million, increase in accounts payable
and accrued expenses of $2.0 million, increase in deferred revenue of $0.6 million and other liabilities of $1.3 million offset by net loss of
$13.2 million and increase in inventories of $1.9 million. Our accounts payable and accrued expenses increased as a result of increased
production volume and employee related expenses. Our deferred revenue increased as distributors increased their inventory level for
shipment to customers in the first quarter of 2014. Other liabilities increased due to advance payment received from a customer, which will
be used in 2014. Our inventories increased a result of growing production for expected delivery to customers in the first quarter of 2014.
Net Cash Used in Investing Activities
In 2015, net cash used in investing activities consisted of cash used to purchase investment in marketable securities of $21.9 million,
purchases of property and equipment of $16.6 million, mainly for laboratory, production and computer equipment and software and
purchase of minority interest in an early stage private company for $2.0 million offset by sales and maturities of marketable securities of
$16.5 million.
In 2014, net cash used in investing activities consisted of cash used to purchase investment in marketable securities of $38.6 million,
acquisition of Cortina of $35.3 million, net of cash acquired, purchases of property and equipment of $21.2 million, mainly for laboratory,
production and computer equipment and leasehold improvements for our offices, purchase of minority interest in an early stage private
company for $5.0 million and purchase of patents for $1.6 million offset by sales and maturities of marketable securities of $89.9 million.
43
In 2013, net cash used in investing activities consisted of cash used to purchase investment in marketable securities of $43.1 million,
purchases of property and equipment of $16.6 million, mainly for laboratory and production equipment and leasehold improvements for
our offices in California, purchase of minority interest in an early stage private company for $2.6 million offset by sales and maturities of
marketable securities of $42.2 million.
Net Cash Provided by Financing Activities
Net cash provided by financing activities in 2015, consisted primarily of net proceeds from issuance of convertible debt of $224
million, proceeds from the exercise of stock options and employee stock purchase plan of $10.7 million and excess tax benefit related to
stock-based compensation of $4.3 million. This was offset, in part, by the purchase of capped call options related to convertible debt issued
of $17.8 million and minimum tax withholding paid on behalf of employees for net share settlement of $12.9 million.
Net cash provided by financing activities in 2014, consisted primarily of proceeds from the exercise of stock options and employee
stock purchase plan of $7.0 million. This was offset, in part, by the minimum tax withholding paid on behalf of employees for net share
settlement of $5.0 million.
Net cash provided by financing activities in 2013, consisted primarily of proceeds from the exercise of stock options and employee
stock purchase plan of $5.1 million. This was offset, in part, by the minimum tax withholding paid on behalf of employees for net share
settlement of $2.2 million.
Operating and Capital Expenditure Requirements
Our principal source of liquidity as of December 31, 2015 consisted of $326.7 million of cash, cash equivalents and investments in
marketable securities. Based on our current operating plan, we believe that our existing cash and cash equivalents and investments in
marketable securities from operations will be sufficient to finance our operational cash needs through at least the next 12 months. In the
future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities and grow our
end customer base which will result in higher needs for working capital. Our ability to generate cash from operations is also subject to
substantial risks described in Part I, “Item 1A., Risk Factors.” If any of these risks occur, we may be unable to generate or sustain positive
cash flow from operating activities. We would then be required to use existing cash and cash equivalents to support our working capital
and other cash requirements. If additional funds are required to support our working capital requirements, acquisitions or other purposes,
we may seek to raise funds through debt financing or from other sources. If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities
may have rights, preferences or privileges senior to those of existing stockholders. If we raise additional funds by obtaining loans from
third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could
impair our operating flexibility, and would also require us to incur interest expense. We can provide no assurance that additional financing
will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us.
Contractual Obligations, Commitments and Contingencies
The following table summarizes our outstanding contractual obligations as of December 31, 2015:
Payments due by period
Less
Than
1 Year
Total
1-3
Years
(in thousands)
3-5
Years
More
Than
5 Years
Convertible debt ............................................................ $
Operating lease obligations ...........................................
230,000
23,093
—
14,660
— $
6,551
230,000
1,882
—
—
As of December 31, 2015, we recorded a liability for our uncertain tax position of $7.0 million. We are unable to reasonably estimate
the timing of payments in individual years due to uncertainties in the timing of the effective settlement of tax positions.
We depend upon third party subcontractors to manufacture our wafers. Our 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, 2015, the total value of open purchase orders for wafers was approximately $5.3 million.
44
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, such as the use of structured finance, special
purpose entities or variable interest entities.
Recent Authoritative Accounting Guidance
See Note 1 of the notes to our consolidated financial statements for information regarding recently issued accounting
pronouncements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
We had cash and cash equivalents and investments in marketable securities of $326.7 and $69.3 million at December 31, 2015 and
December 31, 2014, respectively, which was held for working capital purposes. Our exposure to market interest-rate risk relates primarily
to our investment portfolio. We do not use derivative financial instruments to hedge the market risks of our investments. We manage our
total portfolio to encompass a diversified pool of investment-grade securities to preserve principal and maintain liquidity. We place our
investments with high-quality issuers, money market funds and debt securities. Our investment portfolio as of December 31, 2015 consisted
of money market funds, U.S. Treasuries, municipal bonds, corporate bonds, government agency bonds and asset backed securities.
Investments in both fixed rate and floating rate instruments carry a degree of interest rate risk. Fixed rate securities may have their market
value adversely impacted due to an increase in interest rates, while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the
decline in fair value of our publicly traded debt investments is judged to be other-than-temporary. We may suffer losses in principal if we
are forced to sell securities that have declined in market value due to changes in interest rates. However, because any debt securities we
hold are classified as available-for-sale, no gains or losses are realized in the income statement due to changes in interest rates unless such
securities are sold prior to maturity or unless declines in value are determined to be other-than-temporary. These securities are reported at
fair value with the related unrealized gains and losses, net of applicable taxes, included in accumulated other comprehensive income (loss),
reported in a separate component of stockholders' equity. Although, we currently expect that our ability to access or liquidate these
investments as needed to support our business activities will continue, we cannot ensure that this will not change. We believe that, if market
interest rates were to change immediately and uniformly by 10% from levels at December 31, 2015, the impact on the fair value of these
securities or our cash flows or income would not be material.
In a declining interest rate environment, as short-term investments mature, reinvestment occurs at less favorable market rates. Given
the short-term nature of certain investments, the current interest rate environment may negatively impact our investment income.
As of December 31, 2015, we had outstanding debt of $230 million in the form of Convertible Notes. The fair value of our Convertible
Notes is subject to interest rate risk, market risk and other factors due to the convertible feature. The fair value of the Convertible Notes
will generally increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of the Convertible Notes will
generally increase as our common stock price increases and will generally decrease as our common stock price declines in value. The
interest and market value changes affect the fair value of our Convertible Notes but do not impact our financial position, cash flows or
results of operations due to the fixed nature of the debt obligation.
Our cash and cash equivalents and investment in marketable securities at December 31, 2015 consisted of $297.4 million held
domestically, with the remaining balance of $29.3 million held by foreign subsidiaries. There may be adverse tax effects upon repatriation
of these funds to the United States. We do not plan to repatriate cash balances from foreign subsidiaries to fund our operations in the United
States.
Foreign Currency Risk
To date, our international customer and vendor agreements have been denominated almost exclusively in United States dollars.
Accordingly, we have limited exposure to foreign currency exchange rates and currently enter into immaterial foreign currency hedging
transactions.
45
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm ..............................................................................................................
Consolidated Balance Sheets ............................................................................................................................................................
Consolidated Statements of Operations ............................................................................................................................................
Consolidated Statements of Comprehensive Income (Loss) .............................................................................................................
Consolidated Statements of Stockholders’ Equity ............................................................................................................................
Consolidated Statements of Cash Flows ...........................................................................................................................................
Notes to Consolidated Financial Statements .....................................................................................................................................
47
48
49
50
51
52
53
46
To the Board of Directors and Stockholders of Inphi Corporation:
Report of Independent Registered Public Accounting Firm
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income
(loss), stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Inphi Corporation and its
subsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, CA
February 29, 2016
47
Inphi Corporation
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents ...................................................................................................... $
Investments in marketable securities ......................................................................................
Accounts receivable, net ........................................................................................................
Inventories .............................................................................................................................
Deferred tax assets .................................................................................................................
Income tax receivable ............................................................................................................
Prepaid expenses and other current assets ..............................................................................
Total current assets .....................................................................................................
Property and equipment, net ..........................................................................................................
Goodwill ........................................................................................................................................
Identifiable intangible assets, net ...................................................................................................
Deferred tax charge ........................................................................................................................
Other assets, net .............................................................................................................................
Total assets ..................................................................................................... $
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable ................................................................................................................... $
Deferred revenue ....................................................................................................................
Accrued employee expenses ..................................................................................................
Other accrued expenses ..........................................................................................................
Other current liabilities ..........................................................................................................
Total current liabilities ...............................................................................................
Convertible debt .............................................................................................................................
Other long-term liabilities ..............................................................................................................
Total liabilities ...........................................................................................................
Commitments and contingencies (Note 16)
Stockholders’ equity:
December 31,
2015
2014
283,044 $
43,616
30,418
17,828
—
327
3,642
378,875
36,280
9,154
66,289
2,322
12,126
505,046 $
8,389 $
6,667
13,719
4,185
1,018
33,978
171,701
8,697
214,376
30,366
38,908
36,914
26,650
678
204
6,779
140,499
35,498
9,154
80,773
3,261
9,274
278,459
7,884
7,110
9,492
4,952
2,438
31,876
—
7,409
39,285
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued ...........
Common stock, $0.001 par value; 500,000,000 shares authorized; 39,389,280 and
37,310,963 issued and outstanding at December 31, 2015 and 2014, respectively ........
Additional paid-in capital ...................................................................................................
Accumulated deficit ...........................................................................................................
Accumulated other comprehensive income ........................................................................
Total stockholders’ equity ..........................................................................................
Total liabilities and stockholders’ equity ....................................................................................... $
—
—
39
392,616
(102,741 )
756
290,670
505,046 $
37
327,475
(89,190)
852
239,174
278,459
The accompanying notes are an integral part of these consolidated financial statements.
48
Inphi Corporation
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
2015
Year Ended December 31,
2014
2013
Revenue ........................................................................................................ $
Cost of revenue .............................................................................................
Gross profit ...................................................................................................
Operating expenses:
Research and development ............................................................................
Sales and marketing ......................................................................................
General and administrative ...........................................................................
Total operating expenses ...................................................................
Loss from operations .....................................................................................
Interest expense .............................................................................................
Other income.................................................................................................
Loss before income taxes ..............................................................................
Provision for income taxes ............................................................................
Net loss ................................................................................................. $
Earnings per share:
Basic ..................................................................................................... $
Diluted .................................................................................................. $
246,616 $
98,294
148,322
106,444
26,563
20,322
153,329
(5,007)
(783)
221
(5,569)
7,982
(13,551) $
(0.35) $
(0.35) $
156,142 $
70,488
85,654
70,863
20,003
16,153
107,019
(21,365 )
—
495
(20,870 )
1,738
(22,608 ) $
(0.69 ) $
(0.69 ) $
102,664
37,095
65,569
50,516
15,741
11,614
77,871
(12,302)
—
876
(11,426)
1,752
(13,178)
(0.45)
(0.45)
Weighted-average shares used in computing earnings per share:
Basic .....................................................................................................
Diluted ..................................................................................................
38,580,330
38,580,330
32,707,868
32,707,868
29,493,005
29,493,005
The accompanying notes are an integral part of these consolidated financial statements.
49
Inphi Corporation
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Year Ended December 31,
2014
2013
2015
Net loss ......................................................................................................... $
(13,551) $
(22,608 ) $
(13,178)
Other comprehensive income (loss):
Available for sale investments:
Change in unrealized gain, net of $0, $45 and $(80) tax expense
(benefit) in 2015, 2014 and 2013, respectively .................................
Realized gain reclassified into earnings, net of tax ..............................
Comprehensive loss ...................................................................................... $
(87)
(9)
(13,647) $
11
(97 )
(22,694 ) $
(88)
(45)
(13,311)
The accompanying notes are an integral part of these consolidated financial statements.
50
Inphi Corporation
Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
Common Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
205,269 $
(53,404) $
1,071 $
152,965
Shares
Amount
29 $
Balance at December 31, 2012 ..... 28,730,046 $
Issuance of common stock from
exercise of stock options and
warrant ......................................
854,379
1
2,904
—
—
2,905
Issuance of common stock from
restricted stock unit grant, net of
shares withheld for tax ..............
Issuance of common stock from
380,940
—
(2,180 )
employee stock purchase plan ...
279,074
—
Income tax benefit adjustment
from stock option exercises .......
—
—
Stock-based compensation
expense ......................................
—
—
Net loss ........................................
Other comprehensive loss, net .....
—
Balance at December 31, 2013 ..... 30,244,439 $
Issuance of common stock from
—
—
—
30 $
2,221
(185 )
16,978
—
—
225,007 $
—
—
—
—
(13,178)
—
(66,582) $
—
—
—
—
—
(133)
938 $
(2,180)
2,221
(185)
16,978
(13,178)
(133)
159,393
exercise of stock options ...........
788,196
1
4,297
—
—
4,298
Issuance of common stock from
restricted stock unit grants, net
of shares withheld for tax ..........
Issuance of common stock from
738,862
1
(4,965 )
employee stock purchase plan ...
264,886
—
2,668
Income tax benefit from stock
option exercises .........................
—
—
55
Stock-based compensation
expense ......................................
—
—
22,460
—
—
—
—
Issuance of stock from Cortina
acquisition ................................. 5,274,580
—
Net loss ........................................
Other comprehensive income, net
—
Balance at December 31, 2014 ..... 37,310,963 $
Issuance of common stock from
5
—
—
37 $
77,953
—
—
327,475 $
—
(22,608)
—
(89,190) $
exercise of stock options ...........
722,913
1
6,144
—
Issuance of common stock from
restricted stock unit grants, net
of shares withheld for tax .......... 1,028,650
Issuance of common stock from
1
(12,914 )
employee stock purchase plan ...
326,764
—
Income tax benefit from stock
option exercises .........................
—
—
4,583
4,305
Stock-based compensation
expense ......................................
Conversion feature of convertible
debt, net of issuance costs .........
Purchase of capped calls ..............
Net loss ........................................
Other comprehensive income, net
—
—
28,293
—
—
—
—
—
—
—
—
52,532
(17,802 )
—
—
—
—
(13,551)
—
—
—
—
—
—
—
—
—
—
—
(86)
852 $
—
—
—
—
—
—
—
—
(96)
(4,964)
2,668
55
22,460
77,958
(22,608)
(86)
239,174
6,145
(12,913)
4,583
4,305
28,293
52,532
(17,802)
(13,551)
(96)
Balance at December 31, 2015 ..... 39,389,290 $
39 $
392,616 $
(102,741) $
756 $
290,670
The accompanying notes are an integral part of these consolidated financial statements.
51
Inphi Corporation
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net loss .......................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ...........................................................
Stock-based compensation .................................................................
Loss on disposal and abandonment of property and equipment .........
Impairment of in-process research and development .........................
Deferred income taxes ........................................................................
Amortization of deferred tax charge ..................................................
Excess tax benefit related to stock-based compensation ....................
Accretion of convertible debt ............................................................
Amortization of premiums on marketable securities ..........................
Other noncash items ...........................................................................
Changes in assets and liabilities:
Accounts receivable ...............................................................
Inventories ..............................................................................
Prepaid expenses and other assets ..........................................
Income tax payable/receivable ...............................................
Accounts payable ...................................................................
Accrued expenses ...................................................................
Deferred revenue ....................................................................
Other liabilities .......................................................................
Net cash provided by operating activities ...................
Cash flows from investing activities
Purchases of property and equipment ............................................................
Proceeds from sale of property and equipment ..............................................
Purchases of marketable securities .................................................................
Sales and maturities of marketable securities .................................................
Purchase of patents ........................................................................................
Acquisition of Cortina, net of cash acquired ..................................................
Purchase of cost-method investment in private company ..............................
Net cash used in investing activities ...........................
Cash flows from financing activities
Proceeds from exercise of stock options ........................................................
Excess tax benefit related to stock-based compensation ................................
Proceeds from employee stock purchase plan ................................................
Proceeds from issuance of convertible debt, net of issuance costs .................
Purchase of capped call options .....................................................................
Minimum tax withholding paid on behalf of employees for net share
settlement ..................................................................................................
Net cash provided by financing activities ...................
Net increase (decrease) in cash and cash equivalents .....................................
Cash and cash equivalents at beginning of year .............................................
Cash and cash equivalents at end of year ....................................................... $
Supplemental Cash Flow Information
Year Ended December 31,
2014
2015
2013
(13,551) $
(22,608 ) $
(13,178 )
26,884
28,293
1,958
1,750
(142)
939
(4,305)
592
554
(9)
6,496
8,822
2,200
6,441
(209)
3,413
(443)
(1,445)
68,238
(16,557)
75
(21,906)
16,517
—
—
(2,000)
(23,871)
6,145
4,305
4,583
223,993
(17,802)
(12,913)
208,311
252,678
30,366
283,044 $
14,114
22,460
1,195
—
487
938
(55 )
—
800
2
(8,686 )
10,119
(3,255 )
(576 )
(1,302 )
(9,006 )
5,424
(1,665 )
8,386
(21,171 )
—
(38,557 )
89,872
(1,580 )
(35,308 )
(5,000 )
(11,744 )
4,298
55
2,668
—
—
(4,964 )
2,057
(1,301 )
31,667
30,366 $
77,958 $
715 $
7,508
16,978
516
—
(163 )
938
—
—
983
(46 )
644
(1,873 )
(578 )
3,045
379
1,645
603
1,257
18,658
(16,578 )
—
(43,125 )
42,226
—
—
(2,621 )
(20,098 )
2,905
—
2,221
—
—
(2,180 )
2,946
1,506
30,161
31,667
—
59
Acquisition of Cortina Systems, Inc. in exchange for common stock $
Income taxes paid ............................................................................... $
— $
723 $
The accompanying notes are an integral part of these consolidated financial statements.
52
Inphi Corporation
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, datacenter and computing 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, datacenter and computing 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, datacenter and enterprise servers,
storage platforms, test and measurement equipment and military systems.
On October 3, 2014, the Company completed the acquisition of Cortina Systems, Inc. including its high-speed interconnect and
optical transport product lines (Cortina) for approximately $52,509 in cash and approximately 5.3 million shares of the Company’s common
stock in accordance with the Agreement and Plan of Merger dated July 30, 2014 as amended by Amendment No. 1 to the Agreement and
Plan of Merger dated September 25, 2014. The revenue and expenses of Cortina are included in the consolidated statement of income for
the years ended December 31, 2014 and 2015.
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 history of losses and accumulated deficit, dependence on 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 enhance 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 Inphi, Cortina and subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Business Combinations
The Company accounts for acquisitions of business using the purchase method of accounting, which requires the Company to
recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. While the Company
uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as
contingent consideration, where applicable, the estimates are inherently uncertain and subject to refinement. As a result, during the
measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired
and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination
of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated
statements of operations.
Accounting for business combinations requires management to make significant estimates and assumptions, especially at the
acquisition date including the Company’s estimates for intangible assets, contractual obligations assumed and pre-acquisition contingencies
where applicable. Although, the Company believes the assumptions and estimates made in the past have been reasonable and appropriate,
they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently
uncertain. Critical estimates in valuing certain of the intangible assets the Company acquired include future expected cash flows from
product sales, customer contracts and acquired technologies, expected costs to develop in-process research and development (IPR&D) into
commercially viable products and estimated cash flows from the projects when completed and discount rates. Unanticipated events and
circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
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.
53
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
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 valuation of 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 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.
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 Operations as part of “Other income (expense)”. Foreign currency gain (loss)
in 2015, 2014 and 2013 were ($524), ($136) and $16, 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, accrued expenses and other current liabilities, approximate fair value due to the short-term nature of these financial
instruments.
Investments in Marketable Securities
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 and declines in value judged to be other-than-temporary on available-for-sale securities are
included in Other (expense) income, net. The cost basis for realized gains and losses on available-for-sale securities is determined on a
specific identification basis. 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.
Inventories
Inventories are stated at the lower of cost or market. 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 comparison between inventory on hand and estimated future sales 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 that the net realizable value is less than cost due to physical deterioration, obsolescence, changes in price level or other
causes. Inventory valuation reserves were $4,608, and $1,949, as of December 31, 2015 and 2014, respectively.
54
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
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 lease terms. Repairs and maintenance are charged to expense as incurred. Useful
lives by asset category are as follows:
Asset Category
Office equipment ....................................................................................................................
Software ..................................................................................................................................
Leasehold improvements ........................................................................................................ Shorter of lease term or estimated useful life
Production equipment .............................................................................................................
Computer equipment ...............................................................................................................
Lab equipment ........................................................................................................................
Furniture and fixtures ..............................................................................................................
Years
3
3
2
5
5
7
Equipment Under Capital Leases
The Company leases certain of its equipment under capital lease agreements. The assets and liabilities under capital leases are initially
recorded at the fair value of the assets under lease. The capital lease obligation outstanding at December 31, 2014 was $142, paid in 2015.
Intangible Assets
Intangible assets represent rights acquired for developed technology, customer relationships, trade mark, patents and IPR&D in
connection with the acquisition of Cortina. Intangible assets with finite useful lives are amortized over periods ranging from five 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 assets.
Goodwill
Goodwill is recorded when the 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.
55
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The performance of the test involves a two-step process. The first step requires comparing the fair value of the reporting unit to its
net book value, including goodwill. As the Company has only one reporting unit, the fair value of the reporting unit is determined by taking
the market capitalization of the Company as determined through quoted market prices and adjusted for control premiums and other relevant
factors. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process
is only performed if a potential impairment exists, and it involves determining the difference between the fair value of the reporting unit's
net assets other than goodwill and the fair value of the reporting unit. If the difference is less than the net book value of goodwill, impairment
exists and is recorded. In the event that the Company determines that the value of goodwill has become impaired, the Company will record
an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made. The Company has not
been required to perform this second step of the process because the fair value of the reporting unit has significantly exceeded its book
value at every measurement date. The guidance also provides the option to first assess qualitative factors to determine whether the existence
of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its
carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair
value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. There was no
impairment of goodwill in 2015, 2014 and 2013.
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.
Revenue Recognition
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 when there is persuasive evidence of an arrangement, delivery has occurred, the fee is
fixed or determinable, and collection is reasonably assured. The Company’s sales arrangements do not include multiple elements.
Product revenue is recognized upon shipment of product to customers, net of accruals for estimated sales returns and allowances,
which to date, have not been significant. However, some of the Company’s sales are made through distributors under arrangements that
allow for price protection or rights of return on product unsold by the distributors. Product revenue on sales made through distributors with
rights of return or price protection is deferred until the distributors sell the product to end customers. Sales to distributors are included in
deferred revenue and the Company includes the related costs in inventory until sale to the end customers occurs. Price protection rights
allow distributors the right to a credit in the event of declines in the price of the Company’s product that they hold prior to the sale to an
end customer. In the event that the Company reduces the selling price of products held by distributors, deferred revenue related to
distributors with price protection rights is reduced upon notification to the customer of the price change. Additionally, certain distributors
may receive a credit for the 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 deferred revenue, but
does not issue these discounts to the distributor until the inventory is sold to the distributors' customers. The Company’s sales to direct
customers are made primarily pursuant to standard purchase orders for delivery of products. The Company generally allows customers to
cancel or change purchase orders within limited notice periods prior to the scheduled shipment.
The Company recognizes revenue from the sales and licensing of its intellectual property when the following fundamental criteria
are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the sales price is fixed or determinable, and
(iv) collection of resulting receivables is reasonably assured.
Occasionally, the Company enters into 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 completion of milestones or delivery of services.
Revenue from non-product sales was less than 2% of total revenue for the year ended December 31, 2015.
Cost of Revenue
Cost of revenue includes cost of materials, such as wafers processed by third-party foundries, cost associated with packaging and
assembly, test and shipping, cost of personnel, including stock-based compensation, and equipment associated with manufacturing support,
logistics and quality assurance, warranty cost, amortization of developed technology, amortization of step-up values of inventory, write
down of inventories, amortization of production mask costs, overhead and an allocated portion of occupancy costs.
56
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
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, 2015 and 2014, the warranty
liability was $110.
The following table sets forth changes in warranty accrual included in other accrued expenses in the Company’s consolidated balance
sheets:
2015
Year Ended December 31,
2014
2013
Beginning balance ........................................................................................ $
Warranty liabilities assumed in acquisition ..................................................
Settlements ...................................................................................................
$
110 $
—
—
110 $
40 $
79
(9)
110 $
40
—
—
40
On November 3, 2014, the Company received a claim notification from an insurance company asserting a claim of approximately
$4,000 for field installation repair and replacement costs incurred by a customer in 2011. The Company believes that it had fulfilled its
contractual obligation to provide warranty repair and replacement, but has referred the matter to its insurance carrier at the request of the
insurance company. As of December 31, 2015, the Company believes that the liability under this claim is not probable. Nevertheless,
resolutions of third-party claims are inherently uncertain and as such, an unfavorable outcome could ultimately impact the Company’s
business, cash flow and results of operations.
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, 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 $10,750, $10,250 and $1,000 as offset to research and development expense for the
years ended December 31, 2015, 2014 and 2013, respectively.
Sales and Marketing Expense
Sales and marketing expense consists of salaries, stock-based compensation, employee benefits, travel and trade show costs. The
Company expenses sales and marketing costs as incurred. Advertising expenses for the years ended December 31, 2015, 2014 and 2013
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 and finance. 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 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).
57
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
In accordance with FASBs guidance on Accounting for Uncertainty in Income Taxes, the Company performs a comprehensive
review of uncertain tax positions regularly. In this regard, 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 provision (benefit) for income taxes
on the consolidated statement of operations.
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. 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. The Company uses the Black-Scholes option-pricing model for valuing stock option awards granted to employees and directors at
the grant date. Determining the fair value of stock option awards at the grant date requires the input of various assumptions, including fair
value of the underlying common stock, expected future share price volatility, expected term, risk-free interest rate and dividend rate.
Changes in these assumptions can materially affect the fair value of the options. The Company based its estimate of expected volatility on
the estimated volatility of similar entities whose share prices are publicly available. The risk-free interest rate is based on the U.S. Treasury
yields in effect at the time of grant for periods corresponding to the expected life of the options. The weighted average expected life of
options was calculated using the simplified method. This decision was based on the lack of relevant historical data due to the Company’s
limited experience. The expected dividend yield is zero because the Company has not historically paid dividends and has no present
intention to pay dividends. The Company establishes the estimated forfeiture rates based on historical experience. The value of the portion
of the award that is ultimately expected to vest is recognized as expense over the requisite service period which is equal to the vesting
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 expenses based on the estimated fair value of the equity
instrument determined using the Black-Scholes option-pricing model. Management believes that the fair value of the stock options 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.
Earnings per Share
Basic earnings per share is calculated by dividing income allocable to common stockholders (after the reduction for any preferred
stock dividends assuming current income for the period had been distributed) by the weighted average number of shares of common stock
outstanding, net of shares subject to repurchase by the Company, 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 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 operating results on an aggregate basis and manages the Company’s
operations as a single operating segment.
58
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on “Revenue from Contracts with Customers.”
The new revenue recognition guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The
guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. The new guidance was initially effective for the Company on January 1, 2017. The new guidance permits the use of
either the retrospective or cumulative effect transition method. The Company is evaluating the effect that the new revenue recognition
guidance will have on the consolidated financial statements and related disclosures. The Company has not yet selected a transition method
nor determined the effect of the standard on the ongoing financial reporting. In July 2015, the FASB voted to defer the effective date of
the new revenue recognition standard by one year. The guidance may be adopted as early as January 1, 2017, the effective date of the
original guidance.
In November 2014, the FASB, issued guidance to determine whether and at what threshold an acquired business or not-for-profit
organization can apply pushdown accounting. This guidance provides an option to apply pushdown accounting in the separate financial
statements of an acquired entity upon the occurrence of an event in which an acquirer obtains control of the acquired entity. The guidance
is effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-
in-control events or to its most recent change-in-control event. However, if the financial statements for the period in which the most recent
change-in-control event occurred already have been issued or made available to be issued, the application of this guidance would be a
change in accounting principle. The adoption of this guidance did not impact the consolidated financial statements.
In April 2015, the FASB issued guidance that requires an entity to present debt issuance costs on the balance sheet as a direct
deduction from the related debt liability as opposed to an asset. Amortization of the costs will continue to be reported as interest expense.
The update is effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted for financial statements
that have not been previously issued, and the new guidance would be applied retrospectively to all prior periods presented. The Company
has early adopted the standard in the year ended December 31, 2015. There was no impact to prior period consolidated financial statements.
In July 2015, the FASB issued guidance applying to inventory measured using any other method other than last-in, last-out method.
Under this guidance inventory is measured at the lower of cost and net realizable value. The net realizable value is the estimated selling
price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is
applied prospectively and is effective for the Company beginning January 1, 2017. Early adoption is permitted. The adoption of this
standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In September 2015, the FASB issued guidance that requires an acquirer in a business combination to recognize adjustments to
provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are
determined. The guidance also requires disclosure of the effect on earnings of changes in depreciation, amortization or other income effects,
if any, as a result of the adjustment to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
This guidance is effective for the Company beginning January 1, 2016. The adoption of this standard is not expected to have a material
impact on the Company’s consolidated financial statements and related disclosures.
In November 2015, FASB, issued guidance that simplifies the presentation of deferred tax assets and liabilities in a classified balance
sheet. This guidance eliminates the current requirement to present deferred tax liabilities and assets as current and non-current in a classified
balance sheet. Instead, all deferred tax assets and liabilities will be required to be classified as non-current. The Company early adopted
this guidance prospectively for the year ended December 31, 2015.
In January 2016, the FASB issued guidance that requires equity investments (except those accounted for under the equity method of
accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net
income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus
impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar
investment of the same issuer. The guidance simplifies the impairment assessment of equity investments without readily determinable fair
values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an
entity is required to measure the investment at fair value. The guidance eliminates the requirement for public business entities to disclose
the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured
at amortized cost on the balance sheet, and requires public business entities to use the exit price notion when measuring the fair value of
financial instruments for disclosure purposes. The guidance also requires an entity to present separately in other comprehensive income
the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity
has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Separate presentation of
financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables)
on the balance sheet or the accompanying notes to the financial statements is required under this guidance. The guidance further clarifies
that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in
combination with the entity’s other deferred tax assets. The guidance is applied by means of a cumulative-effect adjustment to the balance
59
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
sheet as of the beginning of the fiscal year of adoption and is effective for the Company in its first quarter of fiscal 2018. Early adoption is
permitted only if certain criteria is met. The Company is currently evaluating the impact of this new guidance on its consolidated financial
statements and related disclosures.
In February 2016, the 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 the leases with lease terms of more than 12 months. This guidance is effective
for the Company beginning January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this new
guidance on its consolidated financial statements and related disclosures.
2. Acquisition
On October 3, 2014, the Company completed the acquisition of Cortina Systems, Inc. including its high-speed interconnect and
optical transport product lines for approximately $52,509 in cash and approximately 5.3 million shares. The Company did not acquire as
part of the merger, Cortina Systems, Inc.’s access and digital Home business, which Cortina Systems, Inc. divested prior to the closing of
the acquisition. The Company acquired Cortina to expand the Company’s market share of the high-speed optical and networking
interconnects. Cash of $16,500 was placed in an escrow fund for up to 12 months following the closing for the satisfaction of certain
potential indemnification claims. The escrow fund was released in October 2015. The consolidated financial statements include the results
of operations of Cortina as of the acquisition date.
The fair value of consideration transferred is shown in the table below:
Cash ........................................................................................................................................................................... $
Common stock ...........................................................................................................................................................
$
52,509
77,958
130,467
The acquisition has been accounted for using the purchase method of accounting which requires, among other things, that assets
acquired and liabilities assumed be recognized at their fair values as of the acquisition date.
The following table summarizes the purchase price allocation as of the acquisition date:
Cash ........................................................................................................................................................................... $
Receivables ................................................................................................................................................................
Inventories .................................................................................................................................................................
Other current assets ....................................................................................................................................................
Property and equipment .............................................................................................................................................
Identifiable intangible assets ......................................................................................................................................
In-process research and development ........................................................................................................................
Other noncurrent assets ..............................................................................................................................................
Accounts payable, accrued expenses and other current liabilities ..............................................................................
Deferred tax liabilities, noncurrent .............................................................................................................................
Other liabilities ..........................................................................................................................................................
Total identifiable net assets ........................................................................................................................................
Goodwill ....................................................................................................................................................................
Net assets acquired ..................................................................................................................................................... $
17,201
15,155
30,002
1,685
4,751
80,660
1,750
366
(22,545)
(725)
(1,112)
127,188
3,279
130,467
As of the acquisition date, the fair value of receivables, other assets, accounts payable and accrued expenses approximated the book
value acquired.
60
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The following table summarizes the estimated fair value of intangible assets and their estimated useful lives as of the date of
acquisition:
Developed technology ....................................................................................................... $
Customer relationships .......................................................................................................
Trade name ........................................................................................................................
In-process research and development ................................................................................
$
71,570
8,170
920
1,750
82,410
Estimated
Fair Value
Estimated
Useful Life
(Years)
5 - 8
10
5
—
Developed technology was valued using the multi-period excess earnings method under the income approach. This method involves
discounting the direct cash flow expected to be generated by the technologies over their remaining lives, net of returns on contributory
assets. The estimated useful life was determined based on the technology cycle related to each product family and its expected contribution
to forecast revenue. Customer relationships were valued using the incremental cash flow approach which involved discounting
management’s estimate of the incremental revenues afforded by having the existing customer relationships in place as of the acquisition
date, net of operating expense, taxes and returns on contributory assets. The estimated useful life was determined based on the estimated
customer product or program ramp-up period required to develop the similar existing customer revenue base. Trade name was valued based
on application of relief-from-royalty approach under the income approach. This method is based on the application of a royalty rate to
forecasted revenue. The estimated useful life was determined based on the expected life of the trade names, the history of the trade names
and the cash flows anticipated over the forecasted periods. In-process research and development was valued using the multi-period excess
earnings method under the income approach, with the additional inclusion of estimated costs required to complete the projects.
The Company capitalized $1,750 of IPR&D costs related to the Cortina acquisition. In the year ended December 31, 2015, the
Company abandoned the project related to in-process research and development and recorded an impairment charge of $1,750 included in
the research and development expenses in the consolidated statements of income.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and is attributable to the workforce
of Cortina. Goodwill is not amortized and is not deductible for tax purposes. During the year ended December 31, 2015, the Company
recorded a measurement period adjustment of $251. The adjustment has been recorded retrospectively to reflect measurement period
adjustments to the provisional acquisition accounting values as of the acquisition date. The changes in provisional values resulted in a
retrospective decrease of $251 in goodwill and income tax payable.
The Company incurred acquisition costs of $1,091 which are included in general and administrative expense in the consolidated
statement of income for the year ended December 31, 2014.
Cortina contributed revenue of $21,018 and pre-tax loss of $10,018 to the Company for the period from October 3, 2014 to December
31, 2014.
Pro Forma Information
The following unaudited pro forma financial information presents a summary of the Company’s consolidated results of operations
for the year ended December 31, 2014 and the year ended December 31, 2013, assuming the Cortina acquisition had been completed as of
January 1, 2013. The pro forma information includes adjustments to amortization and depreciation for intangible assets and property and
equipment acquired, amortization of the purchase accounting effect on inventory acquired from Cortina, and interest income for reduction
in short-term investments to fund the acquisition.
61
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Pro Forma
Year Ended
December 31,
2014
(unaudited)
Pro Forma
Year Ended
December 31,
2013
(unaudited)
Revenue ................................................................................................................................ $
Net loss ................................................................................................................................. $
Earnings per share – basic ..................................................................................................... $
Earnings per share – diluted .................................................................................................. $
224,116 $
(8,500) $
(0.23) $
(0.23) $
191,966
(28,427)
(0.82)
(0.82)
The unaudited pro forma consolidated results were prepared using the acquisition method of accounting and are based on the
historical financial information of the Company and Cortina, reflecting the results of operations for the year ended December 31, 2014 and
2013. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of operations
actually would have been had the Company completed the acquisition as of the beginning of the period presented. In addition, the unaudited
pro forma consolidated results do not purport to project the future results of operations of the combined company nor do they reflect the
expected realization of any cost savings associated with the acquisition.
3. Investments
The following table summarizes the investments by investment category:
Available-for-sale securities:
US treasury securities ........................................................ $
Municipal bonds ................................................................
Corporate notes/bonds .......................................................
Government agency bonds ................................................
Asset backed securities .....................................................
Total investments .................................................................. $
Cost
2,998 $
20,042
14,700
4,011
1,926
43,677 $
December 31, 2015
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Fair
Value
— $
13
1
—
—
14 $
(5) $
(19)
(44)
(4)
(3)
(75) $
2,993
20,036
14,657
4,007
1,923
43,616
December 31, 2014
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Fair
Value
Cost
Available-for-sale securities:
US treasury securities ........................................................ $
Municipal bonds ................................................................
Corporate notes/bonds .......................................................
Asset backed securities .....................................................
Total investments .................................................................. $
2,056 $
19,686
16,381
750
38,873 $
1 $
43
32
—
76 $
— $
(17)
(21)
(3)
(41) $
2,057
19,712
16,392
747
38,908
As of December 31, 2015, the Company had 41 investments that were in an unrealized loss position. The gross unrealized losses
on these investments at December 31, 2015 were primarily due to changes in interest rates and determined to be temporary in nature. The
Company reviews the investments to identify and evaluate investments that have an indication of possible other-than-temporary
impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair
value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated recovery in market value.
62
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The realized gain related to the Company’s available-for-sale investment, which was reclassified from other comprehensive income,
was included in other income in the consolidated statements of income.
The contractual maturities of available-for-sale securities at December 31, 2015 are presented in the following table:
Due in one year or less .................................................................................................. $
Due between one and five years ....................................................................................
$
24,637 $
19,040
43,677 $
24,631
18,985
43,616
Cost
Fair Value
In 2015 and 2014, the Company used cash to purchase a minority interests in early stage private companies for $2,000 and $5,000,
respectively. The Company’s ownership in these entities are less than 10% and the Company does not have the ability to exercise significant
influence over operating and financial policies of the entities, therefore, the investments are accounted for under the cost method and
included in other assets in the Company’s consolidated balance sheets. As of December 31, 2015 and 2014, the total cost method
investments was $9,621 and $7,621, respectively. No impairments were recorded for these cost method investments for the years ended
December 31, 2015 and 2014.
4. Concentrations
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and trade
accounts receivable. The Company extends differing levels of credit to customers and does not require collateral deposits. As of
December 31, 2015 and 2014, the Company has allowance for doubtful accounts of $165. As of December 31, 2015 and 2014, the Company
has allowance for distributors’ price discount of $2,241 and $2,206, respectively.
The following table summarizes the significant customers’ and distributors’ accounts receivable and revenue as a percentage of total
accounts receivable and total revenue, respectively:
Accounts Receivable
Customer A ...........................................................................................................................
Customer B ...........................................................................................................................
Customer C ...........................................................................................................................
December 31,
2015
2014
*
*
13%
Revenue
Customer A .........................................................................
Customer B .........................................................................
Customer C .........................................................................
Year Ended December 31,
2015
2014
2013
*
*
*
13%
*
*
*
*
18%
12%
15
*
*
Less than 10% of total receivable or total revenue
Certain other customers are distributors that sell the Company’s products exclusively to what would be a “Customer D” above if the
Company was able to include the sales made to those distributors. In the aggregate, revenue to such end customer, including revenue made
through distributors as a percentage of total revenue was 11% for the year ended December 31, 2013. Certain other customers are
subcontractors of customers A and B above. In the aggregate, revenue to Customer A, including its subcontractors as a percentage of total
revenue was 18% and 20% for the years ended December 31, 2014 and 2013, respectively. In the aggregate, revenue to Customer B,
including its subcontractor as a percentage of total revenue was 16% for the year ended December 31, 2013, respectively. In addition, the
Company sells direct and indirectly through subcontractors to what would be a “Customer E” above. The Company believes in the
aggregate, revenue to Customer E, including its subcontractors as a percentage of total revenue was approximately 13% for the year ended
December 31, 2015.
63
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
5. Inventories
Inventories consist of the following:
Raw materials ....................................................................................................................... $
Work in process ....................................................................................................................
Finished goods ......................................................................................................................
$
4,291 $
2,620
10,917
17,828 $
5,803
2,409
18,438
26,650
Finished goods include amounts held by distributors of $2,153 and $2,798 as of December 31, 2015 and 2014, respectively.
December 31,
2015
2014
6. Property and Equipment, net
Property and equipment consist of the following:
Laboratory and production equipment ................................................................................. $
Office, software and computer equipment ...........................................................................
Furniture and fixtures ...........................................................................................................
Leasehold improvements .....................................................................................................
Less accumulated depreciation ............................................................................................
$
December 31,
2015
2014
59,220 $
18,562
1,264
5,866
84,912
(48,632)
36,280 $
48,522
15,855
1,762
5,212
71,351
(35,853)
35,498
Depreciation and amortization expense for the years ended December 31, 2015, 2014 and 2013 was $14,150, $10,897 and $7,508,
respectively.
As of December 31, 2015 and 2014, computer software costs included in property and equipment were $5,929 and $4,582,
respectively. Amortization expense of capitalized computer software costs was $1,011, $614 and $283 for the years ended December 31,
2015, 2014 and 2013, respectively.
Property and equipment not paid as of December 31, 2015 and 2014 were $1,949 and $1,540, respectively.
7. Goodwill and Identifiable Intangible Assets
The following table presents details of identifiable intangible assets:
December 31, 2015
Accumulated
Amortization
Gross
Net
Gross
December 31, 2014
Accumulated
Amortization
Developed technology ........................ $
Customer relationships ........................
Trade name .........................................
Patents .................................................
In-process research and development .
$
71,570 $
8,170
920
1,579
—
82,239 $
14,356 $
1,018
230
346
—
15,950 $
57,214 $
7,152
690
1,233
—
66,289 $
71,570 $
8,170
920
1,579
1,750
83,989 $
2,857 $
201
46
112
—
3,216 $
Net
68,713
7,969
874
1,467
1,750
80,773
64
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The following table presents amortization of intangible assets for the years ended December 31, 2015:
Year Ended December 31,
2014
2015
Cost of goods sold ................................................................................................................ $
Sales and marketing .............................................................................................................
General and administrative ..................................................................................................
$
11,499 $
817
418
12,734 $
2,857
201
158
3,216
In the year ended December 31, 2015, the Company abandoned the project related to in-process research and development and
recorded an impairment charge of $1,750 included in the research and development expenses in the consolidated statements of income.
Based on the amount of intangible assets subject to amortization at December 31, 2015, the expected amortization expense for each
of the next five fiscal years and thereafter is as follows:
2016 ............................................................................................................................................................................. $
2017 .............................................................................................................................................................................
2018 .............................................................................................................................................................................
2019 .............................................................................................................................................................................
2020 .............................................................................................................................................................................
Thereafter .....................................................................................................................................................................
$
The weighted-average amortization periods remaining by intangible asset category were as follows (in years):
Developed technology .................................................................................................................................................
Customer relationship ..................................................................................................................................................
Others ...........................................................................................................................................................................
12,707
12,682
12,648
11,078
6,394
10,780
66,289
5.33
8.75
9.97
During the year ended December 31, 2014, goodwill increased initially by $3,530 as a result of Cortina acquisition. As discussed in
note 2 above, in the year ended December 31, 2015, the Company recorded a measurement period adjustment of $251. This resulted in a
retrospective decrease of $251 in goodwill and income tax payable. No other changes were recorded in goodwill in the year ended
December 31, 2015.
8. Convertible Debt
In December 2015, the Company issued $230,000 of 1.125% convertible senior notes due 2020(Convertible Notes). The Convertible
Notes will mature December 1, 2020, unless earlier converted or repurchased. Interest on the Convertible Notes 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, which represents an initial conversion price of approximately $40.16 per share. The Convertible Notes will
be subject to repurchase at the option of the holders following certain fundamental corporate changes, at a fundamental change 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 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, 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 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).
65
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The Convertible Notes are not redeemable at the Company’s option prior to maturity.
The Convertible Note are governed by the terms of indenture (Indenture). The Indenture do 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 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 by notice to
the Company, or the holders of at least 25% in principal amount of the outstanding Convertible Notes 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 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 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 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 consists exclusively
of the right to receive additional interest on the Convertible Notes. As of December 31, 2015, none of the conditions allowing holders of
the Notes to convert had been met.
In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes 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 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
using the effective interest method. The gross proceeds of $230,000 were accordingly allocated between long-term debt for $175,974 and
stockholders' equity for $54,026. Issuance costs of $6,359, of which $6,007 were paid as of December 31, 2015, were allocated between
long-term debt ($4,864) and equity ($1,495). The total interest expense recognized for the year ended December 31, 2015 was $783, which
consists of $192 of contractual interest expense, $543 of amortization of debt discount and $48 of amortization of debt issuance costs. The
issuance costs allocated to long-term debt is presented in the balance sheet as offset against long-term debt as of December 31, 2015.
In connection with the issuance of the Convertible Notes, 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, with a strike price equal to the conversion price of the
Convertible Notes 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 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 in applicable events.
The Capped Call is a separate transaction entered into by the Company with the option counterparties, are not part of the terms of
the Convertible Notes and will not change the holders' rights under the Convertible Notes.
66
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
9. Other Long-term Liabilities
Other long-term liabilities consist of the following:
Deferred rent ......................................................................................................................... $
Income tax payable ...............................................................................................................
Deferred tax liabilities ...........................................................................................................
$
1,728 $
6,969
—
8,697 $
1,930
4,687
792
7,409
December 31,
2015
2014
10. Income Taxes
Loss before income taxes consists of the following:
United States ................................................................................................ $
Foreign .........................................................................................................
Total ............................................................................................................. $
329 $
(5,898)
(5,569) $
(2,684) $
(18,186)
(20,870) $
(2,507)
(8,919)
(11,426)
2015
Year Ended December 31,
2014
2013
Income tax provision consisted of the following:
Current:
U.S. Federal .................................................................................................. $
U.S. State ......................................................................................................
Foreign ..........................................................................................................
Deferred:
U.S. Federal ..................................................................................................
U.S. State ......................................................................................................
Foreign ..........................................................................................................
Total .............................................................................................................. $
2015
Year Ended December 31,
2014
2013
7,304 $
218
603
8,125
(114)
(15)
(14)
(143)
7,982 $
350 $
55
846
1,251
895
—
(408)
487
1,738 $
1,816
1
98
1,915
(135)
—
(28)
(163)
1,752
67
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate of 34% in 2015, 2014 and
2013 to loss before income taxes as a result of the following:
2015
Year Ended December 31,
2014
2013
Benefit at statutory rate .................................................................................. $
State income taxes..........................................................................................
Research and development credits .................................................................
Change in valuation allowance ......................................................................
Foreign earnings, taxed at different rates .......................................................
Unrecognized tax benefits ..............................................................................
Stock-based compensation .............................................................................
Tax exempt income ........................................................................................
Prior year return to provision adjustment .......................................................
Cortina acquisition transaction cost ...............................................................
Withholding tax .............................................................................................
Other ..............................................................................................................
$
(1,893) $
50
(10,213)
13,669
3,175
3,829
150
(60)
(412)
—
(350)
37
7,982 $
(7,096 ) $
1,651
(7,384 )
5,271
6,381
1,713
166
(83 )
292
444
350
33
1,738 $
(3,886 )
303
(5,850 )
6,781
2,888
1,708
142
(157 )
(257 )
—
—
80
1,752
Significant components of the Company’s net deferred taxes consist of the following:
Deferred tax assets
Net operating loss carry forwards ................................................................................................. $
Research and development credits ................................................................................................
Stock-based compensation ............................................................................................................
Accrued expenses and allowances ................................................................................................
Amortization and depreciation ......................................................................................................
Other temporary differences .........................................................................................................
Valuation allowance ......................................................................................................................
Total deferred tax assets ................................................................................................................
Deferred tax liabilities
Subpart F income on foreign subsidiaries earnings .......................................................................
Acquired intangible assets ............................................................................................................
Convertible debt ............................................................................................................................
Other deferred tax liabilities..........................................................................................................
Total deferred tax liabilities ..........................................................................................................
Deferred tax assets (liabilities), net ............................................................................................ $
December 31,
2015
2014
8,940 $
36,619
8,214
2,724
765
3,424
(33,567 )
27,119
(3,578 )
(5,186 )
(18,136 )
(169 )
(27,069 )
50 $
8,314
30,637
6,966
2,117
1,052
3,461
(39,682 )
12,865
(5,981 )
(6,157 )
—
(820 )
(12,958 )
(93 )
At December 31, 2015 and 2014, the Company has recorded a deferred tax charge of $2,323 and $3,261, respectively, which
represents the tax on the intercompany transfer of intangible assets in connection with the Company’s international reorganization during
2010. The deferred tax charge is being amortized over the estimated useful life of 8 years to income tax expense.
Valuation Allowance
The Company records a valuation allowance to reduce deferred tax assets to the amount that 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. The Company
uses the tax law ordering approach of intraperiod allocation to allocate the benefit of windfall tax benefits based on provisions in the tax
law that identify the sequence in which those amounts are utilized for tax purposes. Additionally, when determining whether uncertain tax
positions are a source of income for valuation allowance purposes, the Company applies the tax law ordering approach to determine how
these liabilities will ultimately be satisfied.
68
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
At December 31, 2013, full valuation allowance was recorded on the U.S., Singapore, and Taiwan deferred tax assets. At December
31, 2015 and 2014, the Company has full valuation allowance recorded against the U.S., Singapore, Canada and Taiwan deferred tax assets.
The valuation allowance increased (decreased) ($6,115), $17,234 and $6,768 in the years ended December 31, 2015, 2014 and 2013,
respectively.
The net decrease of $6,115 in the valuation allowance for the year ended December 31, 2015 is comprised of $18,383 decrease
charged to additional paid-in capital, $2,168 decrease charged to other comprehensive income, offset by $767 increase charged to goodwill,
and $13,669 increase charged to income tax provision. The increase of $17,234 in the valuation allowance for the year ended December
31, 2014 is comprised of $1,165 increase charged to goodwill and $16,069 increase charged to income tax provision. The increase of
$6,768 in the valuation allowance for the year ended December 31, 2013 was substantially charged to income tax provision.
General Income Tax Disclosures
The Company has net operating loss (“NOL”) carryforwards for federal and state income tax purposes of approximately $69,011
and $17,868, respectively at December 31, 2015, that will begin to expire in 2022 for federal income tax purposes and in 2016 for state
income tax purposes. The Company has additional federal and state NOL carryover as of December 31, 2015 of $34,132 and $12,417,
respectively, arising from an excess stock option deduction that were not recognized in the financial statements. These excess stock option
compensation benefits will be credited to additional paid-in capital when it reduces current taxable income. At December 31, 2015, the
Company has NOL carryforwards of $3,177 for its Taiwan subsidiary which begin to expire in 2019, and capital allowance carryover of
$33,143 for the Singapore subsidiary, which does not expire. A full valuation allowance has been provided on U.S. NOL, Singapore capital
allowance carryforwards and Taiwan NOL.
At December 31, 2015, the Company has federal and state research and development (“R&D”) tax credit carryforwards of $25,836
and $28,783, respectively. The federal tax credits will begin to expire in 2024, unless previously utilized. Some state tax credits will begin
to expire in 2022 and some do not expire. A full valuation allowance has been provided on R&D tax credit carryforwards.
Pursuant to Internal Revenue 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 Internal Revenue 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 limitation 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 $14,924, respectively.
These NOL carryforwards will begin to expire in 2024 for federal and 2016 for state. The Company’s R&D credit carryforwards included
Cortina’s federal and state pre-acquisition credits of $6,033 and $7,977, respectively. The federal R&D credit carryforward will begin to
expire in 2027. While some state tax credits will begin to expire in 2022, most do not expire. In addition, Cortina has $2,859 capital loss
carryover which expires in 2018. The utilization of Cortina’s pre-acquisition tax attributes is subject to certain annual limitations under
Internal Revenue Code sections 382 and 383. No benefit for these 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, which is effective through May 2020. The tax holiday is conditional upon
meeting certain employment, activities and investment thresholds. As of December 31, 2015, the Company believes it met all the required
thresholds. The Singapore tax holiday did not impact the Company’s Singapore taxes for the years 2015, 2014 and 2013, due to losses and
valuation allowance.
69
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The following table summarizes the changes in gross unrecognized tax benefits:
2015
Year Ended December 31,
2014
2013
Balance as of January 1 ................................................................................ $
Increases based on tax positions related to the current year .........................
Increase (decreases) based on tax positions of prior year .............................
Gross increases for acquired unrecognized tax benefits ...............................
Statute of limitation expirations ...................................................................
Balance as of December 31 .......................................................................... $
44,081 $
4,459
(1,923)
—
(164)
46,453 $
8,031 $
3,102
(61)
33,935
(926)
44,081 $
6,155
1,918
(42)
—
—
8,031
As of December 31, 2015, the Company had approximately $6,683 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 $1,968 due to resolution of the state audit.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. The
Company recorded $44 and $14 interest in the years ended December 31, 2015 and 2014, respectively, and no interest or penalties in the
year ended December 31, 2013. The Company had $163, $151, and $14 of interest and penalties accrued as of December 31, 2015, 2014
and 2013, 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, 2015, certain foreign subsidiaries had
cumulative undistributed earnings while others had accumulated deficit. The cumulative undistributed earnings as of December 31, 2015
was $4,061 that, if repatriated, is not expected to result in additional tax liability as these earnings would be absorbed by the NOL and
research credit carryover. No U.S. deferred tax asset was recorded for the accumulated deficit as it was not apparent as of December 31,
2015, that such deferred tax asset would reverse in the foreseeable future.
In October 2012, the Company received notification from the California Franchise Tax Board that the 2009 and 2010 California tax
returns will be examined. 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 California Franchise Tax Board examination is on-going as of report date.
In June 2013, the Singapore subsidiary received notification from the Inland Revenue Authority of Singapore that the 2010 tax
return will be reviewed. The review is on-going as of report date.
70
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
11. Earnings Per Share
The following shows the computation of basic and diluted earnings per share:
Numerator
Net loss ........................................................................................... $
Denominator
Weighted average common stock ...................................................
Less weighted average unvested common stock subject to
repurchase and unvested restricted stock award ..........................
Weighted average common stock—basic and diluted .....................
Earnings per share
Basic ....................................................................................... $
Diluted .................................................................................... $
2015
Year Ended December 31,
2014
2013
(13,551) $
(22,608) $
(13,178)
38,580,330
32,707,868
29,495,856
—
38,580,330
—
32,707,868
(2,851)
29,493,005
(0.35) $
(0.35) $
(0.69) $
(0.69) $
(0.45)
(0.45)
The following securities were not included in the computation of diluted earnings per share as inclusion would have been anti-
dilutive:
Common stock options ....................................................................
Warrant to purchase redeemable convertible preferred stock ..........
Unvested restricted stock award and restricted stock unit ................
Convertible debt ...............................................................................
2015
Year Ended December 31,
2014
2013
2,563,230
—
4,672,806
376,576
7,612,612
3,350,112
—
3,705,415
—
7,055,527
4,373,642
1,696
3,030,202
—
7,405,540
12. Stock-Based Compensation
In June 2010, the Board of Directors 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 Board of Directors 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, 2015, 2,014,712 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, 2015 and 2014.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions for the year ended December 31, 2013:
Risk-free interest rate .............................................................................................................................................
Expected life (in years) ..........................................................................................................................................
Dividend yield ........................................................................................................................................................
Expected volatility .................................................................................................................................................
1.41 %
6.25
—
50 %
71
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The following table summarizes information regarding options outstanding:
Outstanding at December 31, 2014 ..............................................
Granted ...........................................................................................
Exercised .........................................................................................
Canceled .........................................................................................
Outstanding at December 31, 2015 ..............................................
Exercisable at December 31, 2015 ...............................................
Vested and expected to vest in the future as of
Weighted
Average
Exercise
Price Per
Share
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
10.16
—
8.50
17.37
10.61
10.58
6.12 $
25,302
5.29 $
5.19 $
37,036
34,813
Number of
Shares
3,005,594 $
—
(722,913)
(26,285)
2,256,396 $
2,177,319 $
December 31, 2015 ......................................................................
2,255,573 $
10.61
5.29 $
37,022
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 weighted average grant date fair value per share of stock options granted to employees during the year ended December 31,
2013 was $4.82.
The total intrinsic value of options exercised during the years ended December 31, 2015, 2014 and 2013 was $10,696, $7,800 and
$7,313, 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 $6,145, $4,298 and
$2,905, respectively, for the years ended December 31, 2015, 2014 and 2013.
Restricted Stock Units and Awards
The Company granted restricted stock units (RSUs) to members of the Board of Directors and employees. Most of the Company’s
outstanding restricted stock units vest over four years with vesting contingent upon continuous service. The Company estimates the fair
value of restricted stock units 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:
Outstanding at December 31, 2014 ...................................................................................
Granted ................................................................................................................................
Vested ..................................................................................................................................
Canceled ..............................................................................................................................
Outstanding at December 31, 2015 ...................................................................................
Expected to vest in the future as of December 31, 2015 ..................................................
Weighted
Average
Grant Date
Fair Value
Per Share
12.85
20.49
13.35
14.53
15.37
Number of
Shares
4,789,622 $
1,671,104
(1,636,193 )
(223,664 )
4,600,869 $
4,499,822
The RSUs includes performance-based stock units subject to achievement of pre-established revenue goal and earnings per share 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. For the year ended December 31, 2015, the total performance-based units granted was 218,642.
72
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The Company granted restricted stock awards (RSAs) to certain members of the Board of Directors. The Company estimates the fair
value of the RSAs using the market price of the common stock on the date of the grant. As of December 31, 2012, the Company had 12,849
unvested RSAs outstanding, of which 9,998 RSAs vested during the year ended December 31, 2013, resulting to 2,851 unvested RSAs
outstanding as of December 31, 2013. All remaining unvested RSAs of $2,851 vested during the year ended December 31, 2014.
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 1,750,000. Total common stock issued under the ESPP during the years ended
December 31, 2015, 2014 and 2013 was 326,764, 264,886 and 279,074, respectively.
The fair value of 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, 2015, 2014 and 2013:
Risk-free interest rate .........................................................
Expected life (in years) ......................................................
Dividend yield ....................................................................
Expected volatility .............................................................
Estimated fair value ........................................................... $
0.14 %
0.50
—
42 %
5.77
0.07%
0.50
—
40%
$
3.55
2015
Year Ended December 31,
2014
2013
Stock-Based Compensation Expense
Stock-based compensation expense is included in the Company’s results of operations as follows:
Cost of revenue .................................................................. $
Research and development .................................................
Sales and marketing ...........................................................
General and administrative ................................................
$
1,471 $
16,904
4,445
5,473
28,293 $
1,260 $
12,420
4,079
4,701
22,460 $
2015
Year Ended December 31,
2014
2013
0.10%
0.49
—
45%
2.86
1,086
8,586
3,204
4,102
16,978
As of December 31, 2015, total unrecognized compensation cost related to unvested stock options and awards prior to the
consideration of expected forfeitures, was approximately $54,353, which is expected to be recognized over a weighted-average period of
2.62 years.
73
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
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 Internal Revenue Code of 1986, as amended. 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
$1,131 contribution to the Plan for the year ended December 31, 2015. The Company did not make any contributions to the Plan since its
inception to December 31, 2014.
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).
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 following table presents information about assets and liabilities required to be carried at fair value on a recurring basis:
December 31, 2015
Assets
Cash equivalents:
Total
Level 1
Level 2
Money market funds ............................................................................ $
102,008 $
— $
102,008
Investment in marketable securities:
US treasury securities ...........................................................................
Municipal bonds ...................................................................................
Corporate notes/bonds ..........................................................................
Government agency bonds ...................................................................
Asset backed securities ........................................................................
$
2,993
20,036
14,657
4,007
1,923
145,624 $
2,993
—
—
—
—
2,993 $
—
20,036
14,657
4,007
1,923
142,631
Liabilities
Convertible Notes .................................................................................... $
221,950 $
— $
221,950
74
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
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 cost. The Convertible Notes are not marked to fair value at the end of each reporting period. As
of December 31, 2015, 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.
December 31, 2014
Assets
Cash equivalents:
Total
Level 1
Level 2
Money market funds ............................................................. $
Investment in marketable securities:
US treasury securities ............................................................
Municipal bonds ....................................................................
Corporate notes/bonds ...........................................................
Asset backed securities .........................................................
$
1,457 $
2,057
19,712
16,392
747
40,365 $
— $
2,057
—
—
—
2,057 $
1,457
—
19,712
16,392
747
38,308
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.
The following table sets forth the Company’s revenue by geographic region:
China ......................................................................................... $
United States .............................................................................
Thailand ....................................................................................
Korea ........................................................................................
Other .........................................................................................
$
2015
Year Ended December 31,
2014
2013
82,789 $
41,185
25,123
9,510
88,009
246,616 $
54,312 $
22,918
7,924
10,123
60,865
156,142 $
23,039
22,389
1,143
21,818
34,275
102,664
As of December 31, 2015, $7,271 of long-lived tangible assets are located outside the United States of which $5,756 are located in
Taiwan. As of December 31, 2014, $6,153 of long-lived tangible assets are located outside the United States of which $3,463 are located
in Taiwan.
16. Commitments and Contingencies
Leases
The Company leases its facility under noncancelable lease agreements expiring in various years through 2020. The Company also
licenses certain software used in its research and development activities under a term license subscription and maintenance arrangement.
Future minimum lease payments under noncancelable operating leases having initial terms in excess of one year are as follows:
2016 ....................................................................................................................................................................... $
2017 .......................................................................................................................................................................
2018 .......................................................................................................................................................................
2019 .......................................................................................................................................................................
2020 .......................................................................................................................................................................
$
December 31, 2015
14,660
4,443
2,108
1,618
264
23,093
For the years ended December 31, 2015, 2014 and 2013, lease operating expense was $11,869, $8,193 and $5,990, respectively.
75
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
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, 2015, the total value of open purchase orders for wafers was approximately $5,325.
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, or 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.
As to the proceeding at the USPTO, reexamination has been ordered for all of the patents that were alleged to infringe, and at
present, the USPTO has determined that none of the originally filed claims are valid, with certain amended claims being determined
patentable. It is expected that a Reexamination Certificate will issue for U.S. Patent No. 7,532,537 based upon amended claims, and the
parties continue to assert their respective positions with respect to the reexamination proceedings for U.S. Patent Nos. 7,619,912 and
7,636,274.
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.
Based on 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.
In March 2015, the Company settled a patent dispute involving Cortina and Vitesse Semiconductor Corporation (Vitesse). The
patent dispute involved a certain patent family owned by Vitesse associated with error correction. The Company paid Vitesse $750 to
resolve the dispute. Based on the Agreement and Plan of Merger dated July 30, 2014, as amended by Amendment No. 1 to the Agreement
and Plan of Merger dated September 25, 2014, the Company was indemnified for this settlement arising from this claim, up to an amount
of $750.
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, 2015 and December 31, 2014.
76
Supplementary Financial Information (Unaudited)
Quarterly Results of Operations
Mar. 31,
2015
Year Ended December 31, 2015
Jun. 30,
2015
Sept. 30,
2015
(in thousands, except per share amounts)
Dec. 31,
2015
Total revenue ..................................................... $
Gross profit ........................................................
Net income (loss) ...............................................
Basic earnings per share .....................................
Diluted earnings per share ..................................
59,160 $
29,922
(9,708)
(0.26)
(0.26)
60,672 $
37,396
—
—
—
62,395 $
38,724
(1,102)
(0.03)
(0.03)
64,389
42,280
(2,741)
(0.07)
(0.07)
Mar. 31,
2014
Year Ended December 31, 2014
Jun. 30,
2014
Sept. 30,
2014
(in thousands, except per share amounts)
Dec. 31,
2014(1)
Total revenue ..................................................... $
Gross profit ........................................................
Net income (loss) ...............................................
Basic earnings per share .....................................
Diluted earnings per share ..................................
31,189 $
20,126
(995)
(0.03)
(0.03)
33,922 $
21,626
2,634
0.08
0.08
36,278 $
23,275
(6,857)
(0.22)
(0.22)
54,753
20,627
(17,390)
(0.47)
(0.47)
(1) On October 3, 2014, we completed the acquisition of Cortina, including its high-speed interconnect and optical transport product lines.
The results of operations of Cortina and estimated fair value of assets acquired and liabilities assumed were included in our financial
statements from the acquisition date. This acquisition resulted in a significant change in our statement of operations in 2014 which
includes increase cost of goods sold resulting from the step-up inventory acquired from Cortina and amortization of acquired
intangibles.
77
ITEM 9 —
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A— CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in
Rules 13a-15 (e) and 15d – 15(e) under the Securities Exchange Act 1934, or the Exchange Act (as amended), that are designed to provide
reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and
that such information is accumulated and communicated to our management, including our Chief Executive Officer (principal executive
officer) and Chief Financial Officer (principal financial officer), as appropriate, to allow for timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and
procedures are met. Our disclosure controls and procedures have been designed to provide reasonable, not absolute assurance. Additionally,
in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-
benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in
part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable
assurance level.
(b) Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or procedures may deteriorate. Our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of
December 31, 2015. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission, or COSO, in Internal Control — Integrated Framework (2013). Based on the assessment using those criteria,
our management concluded that as of December 31, 2015, our internal control over financial reporting was effective. The effectiveness of
our internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which is included in Part II “Item 8, Financial Statements and Supplementary
Data”.
(c) Changes in Internal Control over Financial Reporting. There has been no change in our “internal control over financial reporting”
as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recent fiscal quarter that materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B — OTHER INFORMATION
None.
PART III
ITEM 10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from the information under the captions “Election of Directors,”
“Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2016 Annual Meeting of Stockholders
to be held on May 26, 2016, or Proxy Statement.
ITEM 11 — EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the information under the captions “Election of Director,”
“Compensation of Directors,” “Compensation Discussion and Analysis,” “Corporate Governance,” “Compensation Committee Report”
and “Executive Compensation” contained in the Proxy Statement.
78
ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the information under the captions “Security Ownership of
Certain Beneficial Owners and Management” and “Executive Compensation” contained in the Proxy Statement.
ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from the information under the captions “Election of Directors,”
“Corporate Governance” and “Certain Relationships and Related Person Transactions” contained in the Proxy Statement.
ITEM 14 — PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the information under the captions “Audit Committee
Report” and “Ratification of the Appointment of Independent Registered Public Accounting Firm — Principal Accountant Fees and
Services” contained in the Proxy Statement.
PART IV
ITEM 15 — EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements. See “Index to Consolidated Financial Statements” under Part II, “Item 8, Financial Statements
and Supplementary Data”.
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements of Inphi Corporation under Part II, “Item 8,
Financial Statements and Supplementary Data”.
(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are not applicable or not required or because
the information is included elsewhere in the Consolidated Financial Statements or the Notes thereto.
(3) Exhibits
See Item 15(b) below. Each management contract or compensatory plan or arrangement required to be filed has
been identified.
(b) Exhibits
The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this report.
(c) Financial Statements and Schedules
Reference is made to Item 15(a)(2) above.
79
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
INPHI CORPORATION
By: /s/ Ford Tamer
Ford Tamer
Chief Executive Officer
(Principal Executive Officer)
Date: February 29, 2016
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ford
Tamer and John Edmunds, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him or her in
any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-
fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Name
/s/ Ford Tamer
Ford Tamer
/s/ John Edmunds
John Edmunds
/s/ Diosdado P. Banatao
Diosdado P. Banatao
/s/ Nicholas Brathwaite
Nicholas Brathwaite
/s/ Chenming C. Hu
Chenming C. Hu
/s/ David Liddle
David Liddle
/s/ Bruce McWilliams
Bruce McWilliams
/s/ Elissa Murphy
Elissa Murphy
/s/ Sam S. Srinivasan
Sam S. Srinivasan
Chief Executive Officer
(Principal Executive Officer), President and Director
Title
Date
February 29, 2016
Chief Financial Officer and Chief Accounting Officer
Principal Financial and Accounting Officer)
February 29, 2016
Chairman of the Board
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
Director
Director
Director
Director
Director
Lead Director
80
EXHIBIT INDEX
Description
Exhibit
Number
2.1
Agreement and Plan of Merger dated July 30, 2014 by and among the Company, Cortina, Catalina Acquisition Corporation,
a Delaware corporation and wholly owned subsidiary of the Company, and the Stockholder’s Agent (incorporated by
reference to exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on August 1, 2014).
2.2
3(i)
Agreement and Plan of Merger dated July 30, 2014 by and among the Company, Cortina, Catalina Acquisition Corporation,
a Delaware corporation and wholly owned subsidiary of the Company, and the Stockholder’s Agent, as amended by
Amendment No. 1 thereto dated September 25, 2014 (incorporated by reference to exhibit 2.1 of the Registrant’s Current
Report on Form 8-K filed with the SEC on October 6, 2014).
Restated Certificate of Incorporation of the Registrant (incorporated by reference to exhibit 3(i) of the Registrant’s annual
report on Form 10-K filed with the SEC on March 7, 2011).
3(ii)
Amended and Restated Bylaws of the Registrant (incorporated by reference to exhibit 3.1 of the Registrant’s current report
4.1
4.2
4.3
10.1+
10.2+
10.3+
on Form 8-K filed with the SEC on October 20, 2015).
Specimen Common Stock Certificate (incorporated by reference to exhibit 4.1 filed with Registration Statement on Form S-
1 (File No. 333-167564), as amended).
Amended and Restated Investors' Rights Agreement dated as of August 12, 2010 (incorporated by reference to exhibit 4.2
of the Registrant’s annual report on Form 10-K filed with the SEC on March 7, 2011).
Indenture dated as of December 8, 2015, between Registrant and Wells Fargo Bank, National Association, as trustee
(including form of Note) (incorporated by reference to exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with
the SEC on December 8, 2015).
Inphi Corporation 2000 Stock Option/Stock Issuance Plan (as amended on June 2, 2010) and related form stock option plan
agreements (incorporated by reference to exhibit 10.1 filed with Registration Statement on Form S-1 (File No. 333-167564),
as amended).
Inphi Corporation 2010 Stock Incentive Plan and related form agreements (incorporated by reference to exhibit 10.2 of the
Registrant’s annual report on Form 10-K filed with the SEC on March 7, 2011).
Form of Indemnification Agreement between the Registrant and its officers and directors (incorporated by reference to
exhibit 10.3 filed with Registration Statement on Form S-1 (File No. 333-167564), as amended).
10.4+
Offer letter dated December 10, 2007 between John Edmunds and the Registrant, as amended (incorporated by reference to
10.5+
exhibit 10.6 to filed with Registration Statement on Form S-1 (File No. 333-167564), as amended).
Change of Control and Severance Agreement dated June 8, 2010, by and between John Edmunds and the Registrant
(incorporated by reference to exhibit 10.7 filed with Registration Statement on Form S-1 (File No. 333-167564), as
amended).
10.6+
Offer letter dated October 3, 2007 between Ron Torten and the Registrant, as amended (incorporated by reference to exhibit
10.8 filed with Registration Statement on Form S-1 (File No. 333-167564), as amended).
10.7+
Offer letter dated February 1, 2012 between Ford Tamer and the Registrant (incorporated by reference to exhibit 10.2 of the
10.8+
10.9+
10.10
10.11
10.12
Registrant’s Current Report on Form 8-K filed with the SEC on February 3, 2012).
Change of Control and Severance Agreement dated February 1, 2012 by and between Ford Tamer and the Registrant
(incorporated by reference to exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on February
3, 2012).
Change of Control and Severance Agreement dated September 4, 2012, by and between Charlie Roach and the Registrant
(incorporated by reference to exhibit 10.4 of the Registrant’s Quarterly Report on Form 1O-Q for the three months ended
September 30, 2012).
Lease Agreement dated June 4, 2010, by and between the Registrant and LBA Realty Fund III—Company VII, LLC
(incorporated by reference to exhibit 10.12 filed with Registration Statement on Form S-1 (File No. 333-167564), as
amended).
Lease Agreement dated September 20, 2012, by and between the Registrant and Bayland Corporation (incorporated by
reference to exhibit 10.2 of the Registrant’s Quarterly Report on Form 1O-Q for the three months ended September 30,
2012).
Second Amendment to Lease Agreement dated September 30, 2012, by and between the Registrant and LBA Realty Fund
III—Company VII, LLC (incorporated by reference to exhibit 10.3 of the Registrant’s Quarterly Report on Form 1O-Q for
the three months ended September 30, 2012).
81
10.13+
Amended and Restated Employee Stock Purchase Plan (incorporated by reference to exhibit 10.1 of the Registrant’s
10.14
10.15
10.16
10.17
21.1
Quarterly Report on Form 1O-Q for the three months ended June 30, 2015).
Base Capped Call Confirmation dated December 2, 2015, by and between Registrant and Morgan Stanley & Co. LLC
(incorporated by reference to exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December
8, 2015).
Base Capped Call Confirmation dated December 2, 2015, by and between Registrant and JPMorgan Chase Bank, National
Association, London Branch (incorporated by reference to exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed
with the SEC on December 8, 2015).
Additional Capped Call Confirmation dated December 4, 2015, by and between Registrant and Morgan Stanley & Co. LLC
(incorporated by reference to exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on December
8, 2015).
Additional Capped Call Confirmation dated December 4, 2015, between Registrant and JPMorgan Chase Bank, National
Association, London Branch (incorporated by reference to exhibit 10.4 of the Registrant’s Current Report on Form 8-K filed
with the SEC on December 8, 2015).
List of Subsidiaries (incorporated by reference to the exhibit of the same number filed with Registration Statement on Form
S-1 (File No. 333-167564), as amended).
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
Power of Attorney (see page 80 of this report).
Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
23.1
24.1
31.1
31.2
32.1(1)
32.2(1)
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
+
Indicates management contract or compensatory plan.
(1) The material contained in Exhibit 32.1 and Exhibit 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference
into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the
date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant
specifically incorporates it by reference.
82
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