CONTENTS
CORPORATE INFORMATION
CHAIRMAN’S STATEMENT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL HIGHLIGHTS
1
2
4
6
CORPORATE INFORMATION
Independent Auditor
Deloitte & Touche
Legal counsel
Board of Directors
Morrison & Foerster LLP
Palo Alto office
755 Page Mill Road
Palo Alto, California 94304 USA
Maples and Calder
P.O. Box 309
Ugland House
Grand Cayman KY1-1104
Cayman Islands
Executive Directors
Sterling Du (Chairman, Chief Executive Officer)
Chuan Chiung “Perry” Kuo (Chief Financial Officer)
James Elvin Keim (Head of Marketing and Sales)
Depositary for American
Depositary Receipts
Share Registrar
Corporate Headquarters
Other Addresses
Registered Office
Independent Non-executive Directors
Michael Austin
Teik Seng Tan
Daniel Lenehan
Lawrence Lai-Fu Lin
Vijay Kumar
Ji Liu
The Bank of New York Mellon Corporation
ADR Division
One Wall Street, 29th Floor
New York, New York 10286 USA
Maples Fund Services (Cayman) Limited
P.O. Box 1093
Boundary Hall, Cricket Square
Grand Cayman KY1-1102
Cayman Islands
Grand Pavilion Commercial Centre, West Bay Road
P.O. Box 32331
George Town
Grand Cayman KY1-1209
Cayman Islands
Phone: (345) 945-1110
Fax: (345) 945-1113
3118 Patrick Henry Drive
Santa Clara, CA 95054 USA
Phone: (408) 987-5920
Fax: (408) 987-5929
3rd Floor, 1, Sec 4
Nanjing East Road
Taipei, Taiwan 105
Phone: (886) 2-2545-9095
Fax: (886) 2-2547-1721
Maples Corporate Services Limited
P.O. Box 309
Ugland House,
Grand Cayman KY1-1104
Cayman Islands
- 1 -
CHAIRMAN’S STATEMENT
To Our Shareholders
Our business strategy at O2Micro is to lead through innovation and we are proud to show another year of
annual growth since 2015. Looking forward to 2019, we continue to strive for operational efficiency and our
growth drivers stemming from products for the TV backlighting market and battery management in power tools.
We saw great progress from our Battery Products, which have achieved double-digit growth since 2015
and substantially so in 2018, while simultaneously securing top tier customers in Japan, the EU, and North America.
Our latest battery products offer higher accuracy and response times, as well as utilize adaptive technology to
allow flexibility for different battery cell manufacturers. We continue to anticipate moderate growth in 2019,
which will be driven by the rapid expansion of Li-Ion batteries into additional product areas, despite external cyclic
factors.
In 2018, our largest product line, Intelligent Lighting, achieved new product design wins while continuing
to accelerate in several areas despite global component shortages and market shifts. To address the passive
components shortage in the general market, our ICs integrate multiple MOSFET’s to save external MOSFET’s and
shorten the time to market for customers. Our leading Local Area Backlighting product is capturing a growing
number of design wins and customers in Japan, China and Taiwan for high-end 4K and higher resolution TV
markets, as well as consumer and commercial applications utilizing high resolution monitors in medical devices,
signage, billboards, machinery and gaming computers.
Our new Power Products continue to ramp into production for multiple customers, but the effect of this
growth has been muted by shortages of processors at several key notebook customers. Nevertheless, our new
Smart Phone Products show great optimism and continue to be adopted by higher end smart phone customers.
Design wins for our Smart Phone Products include our new charger ICs, on-the-go charger booster, and accurate
gas gauge. 2018 was an exciting year for Power Products for smart phones, which continued to amass tier 2
customer acceptance, with niche production already underway with several tier 1 customers as well. There is
plenty of room for growth, though, especially as the smart phone market transitions to high end, high battery
power, and high computing power requirements.
Converting innovation into shareholder value is our highest priority and we are building a solid foundation
to achieving sustainable profitability. O2Micro’s 2018 revenue was up 4.2% from the prior year and up 14.4%
compared to 2015 with 5% less operating expense. We continue to look for ways to reduce our expenses and have
further streamlined operations while optimizing operation cycles and monetizing the assets of the Company. As of
the 4th quarter of 2018, we bought back over 19.9 million ADS shares since 2002 and have a solid balance sheet
with $38.6 million in cash and short-term investments, as well as no debt whatsoever. Our leading technology,
supported by our cost-effective business model and proven growth strategies, have positioned O2Micro for great
success in the years to come. Finally, we would like to thank our investors for your continued support and look
forward to reporting our progress in the year ahead.
Sterling Du
Chairman of the Board and
Chief Executive Officer
- 2 -
O2Micro International Limited and Subsidiaries
Consolidated Financial Statements as of
December 31, 2018 and 2017 and for the Three Years Ended
December 31, 2018, 2017 and 2016, and
Report of Independent Registered Public
Accounting Firm
- 3 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of O2Micro International Limited:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of O2Micro International Limited and subsidiaries (the
“Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive
income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018,
and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the
result of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in
conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on the criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated April 29, 2019 expressed an unqualified opinion on the Company’s internal
control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Deloitte & Touche
Taipei, Taiwan
Republic of China
April 29, 2019
We have served as the Company’s auditor since 1998.
- 4 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of O2Micro International Limited:
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of O2Micro International Limited and subsidiaries (the
“Company”) as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on
the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our
report dated April 29, 2019 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) 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 (3) 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/ Deloitte & Touche
Taipei, Taiwan
Republic of China
April 29, 2019
- 5 -
FINANCIAL HIGHLIGHTS
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousand US Dollars, Except Per Share Amounts and Share Data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (notes 3 and 4)
Restricted cash
Short-term investments (notes 3 and 5)
Accounts receivable, net
Inventories (note 6)
Prepaid expenses and other current assets (notes 7 and 16)
Total current assets
LONG-TERM INVESTMENTS (notes 3 and 8)
PROPERTY AND EQUIPMENT, NET (note 9)
OTHER ASSETS (note 10)
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Notes and accounts payable
Income tax payable
Accrued expenses and other current liabilities (note 11)
Total current liabilities
LONG-TERM LIABILITIES
Accrued pension liabilities (note 13)
Deferred income tax liabilities (note 12)
Other liabilities
Total long-term liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (notes 16 and 17)
SHAREHOLDERS’ EQUITY
Preference shares at $0.00002 par value per share;
Authorized – 250,000,000 shares;
Ordinary shares at $0.00002 par value per share;
Authorized – 4,750,000,000 shares;
Issued – 1,669,036,600 shares as of December 31, 2018 and 2017
Outstanding – 1,298,808,750 and 1,284,146,100 shares as of
December 31, 2018 and 2017, respectively
Additional paid-in capital
Accumulated deficits
Accumulated other comprehensive income
Treasury stock – 370,227,850 and 384,890,500 shares as of
December 31, 2018 and 2017, respectively
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
The accompanying notes are an integral part of the consolidated financial statements.
- 5 -
December 31
2018
2017
$ 32,414
34
6,172
11,388
10,288
2,276
62,572
$ 28,520
35
17,601
9,184
9,330
1,245
65,915
10,445
3,112
13,714
13,755
2,578
2,300
$ 89,309
$ 85,082
$
$
4,582
413
4,181
9,176
321
681
85
1,087
2,460
341
4,379
7,180
355
906
86
1,347
10,263
8,527
-
-
33
143,115
(45,912)
4,674
33
142,946
(47,517)
5,337
(22,864)
(24,244)
79,046
76,555
$ 89,309
$ 85,082
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousand US Dollars, Except Per Share Amounts and Share Data)
NET SALES
COST OF SALES
GROSS PROFIT
OPERATING EXPENSES
Research and development (a)
Selling, general and administrative (a)
Litigation income
Years Ended December 31
2017
2018
2016
$
62,714
$
60,205
$
56,561
30,741
29,426
27,317
31,973
30,779
29,244
19,766
20,332
-
17,989
19,047
(19)
15,645
19,481
(23)
Total operating expenses
40,098
37,017
35,103
LOSS FROM OPERATIONS
NON-OPERATING INCOME
(8,125)
(6,238)
(5,859)
Interest income
Foreign exchange gain, net
Net gain recognized on long-term investments (note 8)
Gain on sale of long-term investments (note 8)
Gain on sale of real estate (note 9)
Other, net
369
108
9,916
-
-
961
344
53
-
20
-
686
301
63
-
948
1,725
894
Total non-operating income
11,354
1,103
3,931
INCOME (LOSS) BEFORE INCOME TAX
3,229
(5,135)
(1,928)
INCOME TAX EXPENSE (note 12)
1,141
1,010
1,058
NET INCOME (LOSS)
2,088
(6,145)
(2,986)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
EFFECT OF NIL
Foreign currency translation adjustments
Unrealized (loss)gain on available-for-sale investments
(note 8)
Unrealized pension gain (loss)
Total other comprehensive (loss) income
(677)
-
14
(663)
984
(1)
(61)
922
COMPREHENSIVE INCOME (LOSS)
$
1,425
$
(5,223)
$
(397)
1
(13)
(409)
(3,395)
(Continued)
- 6 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousand US Dollars, Except Per Share Amounts and Share Data)
Years Ended December 31
2017
2018
2016
EARNINGS (LOSS) PER SHARE (note 15)
Basic
Diluted
$
$
-
-
$
$
-
-
$
$
-
-
NUMBER OF SHARES USED IN EARNINGS (LOSS) PER
SHARE CALCULATION:
Basic (in thousands)
Diluted (in thousands)
1,300,795
1,330,822
1,288,977
1,288,977
1,282,141
1,282,141
(a) INCLUDES STOCK-BASED
COMPENSATION CHARGE AS FOLLOWS:
Research and development
Selling, general and administrative
$
$
241
1,180
$
$
221
1,368
$
$
231
1,375
The accompanying notes are an integral part of the consolidated financial statements.
(Concluded)
- 7 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousand US Dollars, Except Share Data)
BALANCE, JANUARY 1, 2016
Issuance of:
Shares for exercise of stock options
Shares for Employee Stock Purchase Plan
Shares vested under restricted share units
Acquisition of treasury stock – 20,558,750 shares
Treasury stock reissued for :
Exercise of stock options
Employee Stock Purchase Plan
Restricted share units
Stock-based compensation
Net loss for 2016
Pension loss
Foreign currency translation adjustments
Unrealized gain on available-for-sale investments
Reclassification adjustments for gain on available-for-sale
securities
included in net loss
BALANCE, DECEMBER 31, 2016
Issuance of:
Shares for exercise of stock options
Shares for Employee Stock Purchase Plan
Shares vested under restricted share units
Acquisition of treasury stock – 18,323,150 shares
Treasury stock reissued for :
Exercise of stock options
Employee Stock Purchase Plan
Restricted share units
Stock-based compensation
Net loss for 2017
Pension loss
Foreign currency translation adjustments
Unrealized loss on available-for-sale investments
BALANCE, DECEMBER 31, 2017
Issuance of:
Shares for exercise of stock options
Shares for Employee Stock Purchase Plan
Shares vested under restricted share units
Acquisition of treasury stock – 14,580,800 shares
Treasury stock reissued for :
Exercise of stock options
Employee Stock Purchase Plan
Restricted share units
Stock-based compensation
Net income for 2018
Pension gain
Foreign currency translation adjustments
Ordinary Shares
Shares
Amount
Additional
Paid – in
Capital
Accumulated
Deficits
Accumulated Other Comprehensive Income
Cumulative
Unrealized
Translation
Investment
Adjustment
Gain (Loss)
Unrealized
Pension
Gain (Loss)
Total
Treasury
Stock
Shareholders’
Equity
1,660,786,600
$
33
$
141,886 $ (38,386)
$
-
-
(523)
84,750
2,881,350
18,056,150
-
(84,750)
(2,881,350)
(9,806,150)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2
73
-
-
(5)
(187)
(637)
1,606
-
-
-
-
-
-
-
-
-
-
-
-
(2,986)
-
-
-
1,669,036,600
33
142,738
(41,372)
687,350
2,375,200
20,281,800
-
(687,350)
(2,375,200)
(20,281,800)
-
-
-
-
-
1,669,036,600
346,550
3,307,950
25,588,950
-
(346,550)
(3,307,950)
(25,588,950)
-
-
-
-
-
-
1
-
-
-
(1)
-
-
-
-
-
33
-
-
1
-
-
-
(1)
-
-
-
-
29
84
(1)
-
(44)
(151)
(1,298)
1,589
-
-
-
-
-
-
-
-
-
-
-
-
(6,145)
-
-
-
142,946
(47,517)
10
86
(1)
-
(19)
(88)
(1,240)
1,421
-
-
-
-
-
-
-
(2)
(118)
(363)
-
2,088
-
-
-
-
-
-
-
-
-
-
-
-
-
-
524
1
-
-
-
-
-
-
-
-
-
-
-
(1)
-
-
-
-
-
-
-
-
-
-
-
-
-
$ 4,941
$
(117)
$ 4,824
$
(25,240)
$
83,117
-
-
-
-
-
-
-
-
-
-
(397)
-
-
-
-
-
-
-
-
-
-
-
(13)
-
-
-
-
-
-
-
-
-
-
-
-
(13)
(397)
524
(523)
-
-
-
(619)
5
187
637
-
-
-
-
-
-
4,544
(130)
4,415
(25,030)
-
-
-
-
-
-
-
-
-
-
984
-
-
-
-
-
-
-
-
-
-
(61)
-
-
-
-
-
-
-
-
-
-
-
(61)
984
(1)
-
-
-
(708)
44
151
1,299
-
-
-
-
-
5,528
(191)
5,337
(24,244)
-
-
-
-
-
-
-
-
-
-
(677)
-
-
-
-
-
-
-
-
-
14
-
-
-
-
-
-
-
-
-
-
14
(677)
-
-
-
(451)
21
206
1,604
-
-
-
-
2
73
-
(619)
-
-
-
1,606
(2,986)
(13)
(397)
524
(523)
80,784
29
84
-
(708)
-
-
-
1,589
(6,145)
(61)
984
(1)
76,555
10
86
-
(451)
-
-
-
1,421
2,088
14
(677)
$ 4,851
$
(177)
$ 4,674
$ (22,864)
$
79,046
BALANCE, DECEMBER 31, 2018
1,669,036,600
$
33
$
143,115 $ (45,912)
$
The accompanying notes are an integral part of the consolidated financial statements.
- 8 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand US Dollars)
Years Ended December 31
2017
2018
2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
$
2,088
$
(6,145)
$
(2,986)
Depreciation and amortization
Stock-based compensation
Provisions for obsolete inventories
Net gain recognized on long-term investments
Gain on sale of long-term investments
Gain on disposal of property and equipment, net
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Deferred charges
Notes and accounts payable
Income tax payable
Accrued expenses and other current liabilities
Accrued pension liabilities
Other liabilities
1,641
1,421
1,328
(9,916)
-
(6)
(155)
(2,204)
(2,286)
(1,031)
(983)
2,122
72
(105)
(20)
(1)
1,667
1,589
642
-
(20)
(137)
40
(1,979)
(697)
(139)
(553)
(1,869)
161
186
13
3
1,682
1,606
1,527
-
(948)
(1,726)
(1,231)
(2,008)
(1,140)
(6)
(375)
996
(2,065)
(1,064)
(4)
(56)
Net cash used in operating activities
(8,035)
(7,238)
(7,798)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of:
Short-term investments
Property and equipment
(Increase) decrease in other assets
Proceeds from:
Sale of short-term investments
Disposal of long-term investments
Return of capital from long-term investments
Disposal of property and equipment
(11,197)
(1,272)
(12)
(8,505)
(704)
22
(28,797)
(673)
40
22,540
12,635
18,331
2,582
-
16
5,982
-
1,163
145
17
3,837
Net cash provided by (used in) investing activities
12,657
4,756
(1,263)
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisition of treasury stock
Proceeds from:
(451)
(708)
(619)
Exercise of stock options
Issuance of ordinary shares under the Employee Stock Purchase Plan
10
86
29
84
2
73
Net cash used in financing activities
(355)
(595)
(544)
(Continued)
- 9 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand US Dollars)
Years Ended December 31
2017
2018
2016
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE
$
(374)
$
268
$
(261)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED
CASH
3,893
(2,809)
(9,866)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE
YEAR
28,555
31,364
41,230
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE YEAR
$ 32,448
$ 28,555
$ 31,364
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Cash paid for tax
$
1,218
$
818
$
4,349
The accompanying notes are an integral part of the consolidated financial statements.
(Concluded)
- 10 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States Dollars Unless Otherwise Noted)
1. GENERAL
Business
O2Micro, Inc. was incorporated in the state of California in the United States of America on March 29, 1995.
In March 1997, O2Micro International Limited (the “Company”) was incorporated in the Cayman Islands
and all authorized and outstanding common stock, preferred stock, and stock options of O 2Micro, Inc.
were exchanged for the Company’s ordinary shares, preference shares, and stock options with identical
rights and preferences. O2Micro, Inc. became the Company’s subsidiary after the share exchange. The
Company designs, develops and markets innovative power management components for the computer,
consumer, industrial, automotive and communications markets.
The Company’s ordinary shares (“Shares”) were initially listed on The NASDAQ National Market
(“NASDAQ”) on August 23, 2000, and on the Cayman Islands Stock Exchange on February 1, 2001. At the
Extraordinary General Meeting of Shareholders (“EGM”) held on November 14, 2005, the shareholders
approved a public global offering of the Company’s Shares and the proposed listing of the Company's
Shares on the Main Board of The Stock Exchange of Hong Kong Limited (“SEHK”) and various matters
related to the proposed listing and offering. Following the approval of these matters, the Company
ceased trading its Shares on the NASDAQ, effected a 50-for-1 share split of Shares, created an American
depositary share (“ADS”) program for the ADSs to be quoted on the NASDAQ, and delisted the Shares from
the NASDAQ on November 25, 2005. The Company commenced trading of ADSs on the NASDAQ on
November 28, 2005, and subsequently listed the Shares on the SEHK on March 2, 2006, by way of
introduction. On February 27, 2009, the Company submitted an application for the voluntary withdrawal
of the listing of Shares on the Main Board of SEHK (collectively referred to as “Proposed Withdrawal”) for
reasons of cost and utility. The Company retained its existing primary listing of ADSs on the NASDAQ
following the Proposed Withdrawal and for the foreseeable future. The Proposed Withdrawal was
approved at the EGM held on May 30, 2009, and the listing of the Shares on SEHK was withdrawn on
September 9, 2009.
The Company has incorporated various wholly-owned subsidiaries in the past, including, among others,
O2Micro Electronics, Inc. (“O2Micro-Taiwan”), O2Micro International Japan Ltd. (“O2Micro-Japan”), and
O2Micro (China) Co., Ltd. (“O2Micro-China”). O2Micro-Taiwan is engaged in operations and sales support
services. O2Micro-Japan is engaged in sales support services. O2Micro-China and other subsidiaries are
mostly engaged in research and development services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated on consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Significant accounting estimates reflected in the Company’s consolidated financial statements include
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valuation allowance for deferred income tax assets, allowance for doubtful accounts, impairment of
long-term investments, inventory valuation, useful lives for property and equipment, impairment of
long-lived assets and identified intangible assets, pension and uncertain tax liabilities, and contingencies.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash,
cash equivalents, restricted cash, short-term investments and accounts receivable. Cash is deposited
with high credit quality financial institutions. For cash equivalents, restricted cash and short-term
investments, the Company invests primarily in time deposits at the banks with good credit rating. For
accounts receivable, the Company performs ongoing credit evaluations of its customers’ financial
condition and the Company maintains an allowance for doubtful accounts based upon a review of the
expected collectability of individual accounts.
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, restricted cash, short-term
investments, long-term investments, accounts receivable and notes and accounts payable. The carrying
amounts approximate the fair value due to the short-term maturity of those instruments. Long-term
investments in public company equity securities are measured using the quoted market prices.
Long-term investments in private company equity securities are measured at cost with adjustments for
observable changes in price or impairments.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of not more than three months when
purchased to be cash equivalents. Investments with maturities of more than three months are classified
as short-term investments.
Restricted Cash
The Company classifies deposits made for customs and cash pledged to a bank for the issuance of letters
of credit as restricted cash. The deposits are classified as current assets when restricted cash is within a
twelve-month period from the balance sheet date.
Short-term investments
Short-term investment primarily comprises of the time deposits with original maturities between three
months and one year. The carrying amounts approximate the fair value due to the short-term maturity of
these time deposits.
Inventories
Inventories are stated at the lower of standard cost or net realizable value. The cost of inventories
comprises cost of purchasing raw materials and where applicable, those overheads that have been
incurred in bringing the inventories to their present location and condition. Cost is determined on a
currently adjusted standard basis, which approximates actual cost on a first-in, first-out basis. The
Company assesses its inventory for estimated obsolescence or unmarketable inventory based upon
management’s assumptions about future demand and market conditions and writes down inventory as
needed.
Long-term Investments
After the adoption of Accounting Standards Update ("ASU") 2016-01 and ASU 2018-03 on January 1, 2018,
long-term investments in listed companies over which the Company does not exercise significant influence
are recorded at fair value, and any changes in fair value are recognized in net income. Prior to the
adoption of ASU 2016-01 and ASU 2018-03, these investments in listed companies are classified as
available-for-sale securities and are recorded at fair value. Unrealized gains and losses on these
investments are included in accumulated other comprehensive income and loss as a separate component
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of shareholders’ equity, net of any related tax effect, unless unrealized
other-than-temporary.
other-than-temporary.
losses are recorded as a charge to
Unrealized
losses are deemed
income when deemed
Long-term investments, including non-marketable equity investments and interests in venture capital
funds, are measured at cost with adjustments for observable changes in price or impairments because
those investments in equity securities do not have readily determinable fair value. Prior to the adoption
of ASU 2016-01 and ASU 2018-03 in 2018, these securities were accounted for using the cost method of
accounting, measured at cost less other-than-temporary impairment. There were no indicators noted a
need to subsequently account for transition adjustments related to investments in equity securities
without a readily determinable fair value when the Company adopts ASU 2016-01 and ASU 2018-03 in
January 2018.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Major additions and
betterments are capitalized, while maintenance and repairs are expensed as incurred.
Depreciation is computed on a straight-line basis over estimated service lives that range as follows:
buildings - 35 to 50 years, equipment - 3 to 7 years, furniture and fixtures - 3 to 7 years, leasehold
improvements - the shorter of the estimated useful life or the lease term, which is 2 to 5 years, and
transportation equipment - 5 years.
Long-lived Asset Impairment
The Company evaluates the recoverability of long-lived assets whenever events or changes in
circumstances indicate the carrying value may not be recoverable. The carrying value of a long-lived
asset is considered impaired when the anticipated undiscounted cash flows from the asset is separately
identifiable and is less than the carrying value. If impairment occurs, a loss based on the excess of the
carrying value over the fair value of the long-lived asset is recognized. Fair value is determined by
reference to quoted market prices, if available, or discounted cash flows, as appropriate.
Treasury Stock
The Company may retire ordinary shares repurchased under a share repurchase plan. Accordingly, upon
retirement the excess of the purchase price over par value is allocated between additional paid-in capital
and retained earnings based on the average issuance price of the shares repurchased. The Company may
also determine not to retire ordinary shares repurchased for the purpose of reissuing them upon exercise
of stock option, Employee Stock Purchase Plan, and release of restricted stock units (“RSUs”). The reissue
cost of shares repurchased is determined by the moving average method. A repurchase of ADS is
recorded as treasury stock when the Company completes the withdrawal of the underlying ordinary shares
from the ADS program.
Revenue Recognition
The Company generates revenue primarily from product sales, either directly to a customer or through a
distributor. In determining whether a contract exists, the Company evaluates the terms of the
arrangement including rights, obligations and payment term, the relationship with the customer or
distributor and their ability to pay.
At contract inception, the Company assesses the goods and shipping services promised in its contracts
with customers and identifies a single performance obligation that the Company satisfies at a point in time.
The Company recognizes product revenue from direct end customers and distributors and when the
following events have occurred: (a) the Company has transferred physical possession of the products, (b)
the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the
customer bears significant risks and rewards of ownership of the products. In accordance with the shipping
terms specified in the contracts, these criteria are generally met when the products are shipped from the
Company’s vendors (such as the “Ex Works” shipping term) or delivered to the customers’ locations (such
as the “Delivered Duty Paid” shipping term). Payment for sales to customers is generally due on standard
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commercial terms.
The revenue recognized is adjusted based on an analysis of historical data and contractual terms. These
adjustments, which are not material, generally include adjustments for pricing arrangements, product
returns and incentives.
In addition, the Company records allowances for accounts receivable that it estimates may not be collected.
The Company monitors collectability of accounts receivable primarily through review of accounts
receivable aging. When collection is at risk, the Company assesses the impact on amounts recorded for
bad debts and, if necessary, records a charge in the period such evaluation is made.
Freight Costs
Costs of shipping and handling for delivery of the Company’s products that are reimbursed by customers
are included as revenue in the consolidated statements of operations and comprehensive income.
Shipping and handling costs are charged to cost of sales as incurred.
Research and Development
Research and development costs consist of expenditures incurred during the course of planned research
and investigation aimed at the discovery of new knowledge and intellectual property that will be useful in
developing new products or processes, or at significantly enhancing existing products or production
processes as well as expenditures incurred for the design and testing of product alternatives or
construction of prototypes. All expenditures related to research and development activities of the
Company are charged to operating expenses when incurred.
Advertising Expenses
The Company expenses all advertising and promotional costs as
These costs were
approximately $922,000, $779,000, and $734,000 in 2018, 2017, and 2016, respectively. A portion of
these costs was for advertising, which approximately amounted to $287,000, $158,000, and $236,000 in
2018, 2017 and 2016, respectively.
incurred.
Pension Costs
For employees under defined contribution pension plans, pension costs are recorded based on the actual
contributions made to employees’ pension accounts. For employees under defined benefit pension plans,
pension costs are recorded based on the actuarial calculation.
Government Grants
Government grants received by the Company to assist with specific research and development activities
are recognized as non-operating income. If the Company has an obligation to repay any of the funds
provided by government grants regardless of the outcome of the research and development, the Company
estimates that obligation and recognizes the amount as a liability.
Income Tax
The provision for income tax represents income tax paid and payable for the current year plus the changes
in the deferred income tax assets and liabilities during the relevant years. Deferred income tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amount of existing assets and liabilities and their respective tax bases, and
operating loss and tax credit carryforwards. The Company believes that uncertainty exists regarding the
realizability of certain deferred income tax assets and, accordingly, has established a valuation allowance
for those deferred income tax assets to the extent the realizability is not deemed to be more likely than
not. Deferred income tax assets and liabilities are measured using enacted tax rates.
The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions. The first
step is to evaluate the tax position for recognition by determining if the weight of available evidence
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indicates it is more likely than not that the position will be sustained in a dispute with taxing authorities,
including resolution of related appeals or litigation processes, if any. The second step is to measure the
tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate
settlement.
Stock-based Compensation
The Company grants stock options to its employees and certain non-employees and estimates the fair
value of share-based payment awards on the date of grant using an option-pricing model. The value of
the portion of the award that is ultimately expected to vest is recognized as expense ratably over the
requisite service periods. The Company has elected to use the Black-Scholes option pricing model to
determine the fair value of stock options on the date of grant. The Company also grants RSUs to its
employees and the RSUs are measured based on the fair market value of the underlying stock on the date
of grant.
Foreign Currency Transactions
The functional currency is the local currency of the respective entities. Foreign currency transactions are
recorded at the rate of exchange in effect when the transaction occurs. Gains or losses, resulting from
the application of different foreign exchange rates when cash in foreign currency is converted into the
entities’ functional currency, or when foreign currency receivable and payable are settled, are credited or
charged to income in the period of conversion or settlement. At year-end, the balances of foreign
currency monetary assets and liabilities are recorded based on prevailing exchange rates and any resulting
gains or losses are credited or charged to income.
Translation of Foreign Currency Financial Statements
The reporting currency of the Company is the US dollar. Accordingly, the financial statements of the
foreign subsidiaries are translated into US dollars at the following exchange rates: assets and liabilities -
current rate on balance sheet date; shareholders’ equity - historical rate; income and expenses - weighted
average rate during the year. The resulting translation adjustment is recorded as a separate component
of shareholders’ equity.
Comprehensive Income (Loss)
Comprehensive income (loss) represents net income (loss) plus the results of certain changes in
shareholders’ equity during a period from non-owner sources.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standard Board ("FASB") issued a new standard related to revenue
recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of
promised goods or services in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. In addition, the new standard requires disclosure of the
nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
In August 2015, the FASB issued an amendment to defer the effective date. The new standard is effective
for fiscal years beginning after December 15, 2017 and early adoption is permitted for annual reporting
periods beginning after December 15, 2016. In March and April 2016, the FASB issued two accounting
updates to clarify the implementation guidance on principal versus agent considerations, performance
obligations and the licensing. In addition, the FASB issued another accounting update in May 2016 to
address narrow-scope improvements to the guidance on collectability, noncash consideration, and
completed contracts at transition and provides a practical expedient for contract modifications at
transition. The new guidance is required to be applied retrospectively to each prior reporting period
presented or retrospectively with the cumulative effect of initially applying it recognized at the date of
initial application.
The Company adopted the new guidance using the modified retrospective method, as allowed, which
would result in recognizing the cumulative effect of initially applying the new guidance to arrangements
with customers existing as of January 1, 2018 as an adjustment to retained earnings at the date of initial
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application. Under this approach, prior financial information will not be restated. In the scope of work to
implement the recognition and disclosure requirements of the new guidance, the Company included the
following main areas: (i) assessment of changes in the timing of revenue recognition, if any; and (ii)
inclusion of variable consideration in the transaction price. The Company assessed the impact of the
amended standard on existing revenue streams, contracts, transactions, and business practices. Based on
procedures performed, the adoption of this new guidance did not have a material impact on the
Company’s revenue recognition practices, on its consolidated financial position and results of operations.
In January 2016, the FASB issued an accounting update regarding the subsequent measurement of equity
investment. The amendment requires all equity investment to be measured at fair value with changes in
the fair value recognized through net income other than those accounted for under equity method of
accounting or those that result in consolidation of the investee. The amendment also simplifies the
impairment assessment of equity investments without readily determinable fair value by requiring
assessment for impairment qualitatively and eliminating the complexity of the other-than-temporary
impairment guidance. For financial reporting, the amendment 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. In addition, for public company,
the amendment eliminates the requirement to disclose the methods 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. This amendment is effective for fiscal years beginning after December 15, 2017
and early application is prohibited. The most significant impact on the Company’s consolidated financial
statements relates to the measurement of equity investments at fair value in its consolidated statements
of income. The Company has elected to use the measurement alternative defined as cost, less
impairments, adjusted by observable price changes. The Company adopted the amendment beginning on
January 1, 2018. See Notes 3 and 8 for further discussions.
In February 2016, the FASB issued a new standard regarding leases (Topic 842). The new standard requires
an entity to recognize assets and liabilities arising from a lease for both financing and operating leases
other than that the entity elects the short-term lease recognition and measurement exemption.
Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing and
uncertainty of cash flows arising from leases. In January 2018, the FASB issued an amendment permits an
entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements
that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for
as leases under Topic 840, the current standard regarding leases. The guidance is effective for fiscal years
beginning after December 15, 2018, and early adoption is permitted. The Company adopted the new lease
guidance on January 1, 2019 and the Company recorded ROU assets and lease liabilities of approximately
$1.2 million, which represent the present value of the remaining minimum rental payments for its
outstanding leases as of January 1, 2019. The adoption of this guidance did not have a material impact
on its consolidated statements of operations as the Company meets the requirements to account for these
leases as operating leases and will continue to recognize lease expenses on a straight-line basis over the
lease terms.
In March 2016, the FASB issued an accounting update to simplify several aspects of the accounting for
share-based payment award transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. The amendment is effective
for fiscal years beginning after December 15, 2016, and earlier adoption is permitted. The adoption of this
amendment did not have a material impact on the Company’s financial position, results of operations,
cash flow and financial statement disclosures.
In June 2016, the FASB issued an accounting update to amend the guidance on the impairment of financial
instruments that are not measured at fair value through profit and loss. The amendment introduces a
current expected credit loss ("CECL") model based on expected losses rather than incurred losses to
estimate credit losses on financial instruments measured at amortized cost and requires a broader range
of reasonable and supportable information to estimate expected credit loss. In addition, under the
amendment, an entity recognizes an allowance for expected credit losses on financial instruments
measured at amortized cost and available-for-sale debt securities rather than the current methodology of
delaying recognition of credit losses until it is probable a loss has been incurred. The amendment is
effective for fiscal years beginning after December 15, 2019, and earlier adoption is permitted as of the
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fiscal years beginning after December 15, 2018. The adoption of the amendments is not expected to have
a material impact on the Company’s financial position, results of operations, cash flow and financial
statement disclosures. .
In August 2016, the FASB issued an accounting update to clarify the following eight cash flow
classification issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon
debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to
the effective interest rate of the borrowing, (3) contingent consideration payments made after the
acquisition date of a business combination, (4) proceeds received from the settlement of insurance claims,
(5) proceeds received from the settlement of corporate-owned life insurance policies, including
bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial
interests in securitization transactions, and (8) separately identifiable cash flows and application of the
predominance principle. The amendment is an improvement to reduce the current and potential future
diversity in practice. The amendment is effective for fiscal years beginning after December 15, 2017, and
earlier adoption is permitted. In addition, the amendment should be applied using a retrospective
transition method to each period presented. The adoption of the amendments did not have a material
impact on the Company’s statement of cash flows.
In November 2016, the FASB issued an accounting update related to the classification and presentation of
changes in restricted cash on the statement of cash flows. The amendment requires restricted cash or
restricted cash equivalents should be included with cash and cash equivalent when reconciling the
beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The
amendment is effective for fiscal years beginning after December 15, 2017, and early adoption is
permitted.
The Company adopted the standard on January 1, 2018 and applied the guidance
retrospectively to all periods presented. The adoption of the amendments did not have a material
impact on the Company’s statement of cash flows.
In March 2017, the FASB issued an accounting update to improve the presentation of net periodic pension
cost and net periodic postretirement benefit cost. The amendment requires that an entity disaggregates
the service cost component from the other components of net benefit cost and present the service cost
component with other current compensation costs for related employees in the income statement. The
amendment also requires an entity presents the other components elsewhere in the income statement
and outside of income from operation if such subtotal is presented and allow only the service cost
component of net benefit cost to be eligible for capitalization. The amendment is effective for fiscal years
beginning after December 15, 2017 and early adoption is permitted. The amendment should be applied
retrospectively for the presentation of the service cost component and the other components of net
periodic pension cost and net periodic postretirement benefit cost in the income statement and
prospectively, on and after the effective date, for the capitalization of the service cost component of net
periodic pension cost and net periodic postretirement benefit in assets. The amendment allows for a
practical expedient that permits an entity to use the amounts disclosed in its pension and other
postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the
retrospective presentation requirements. The Company intends not to apply the practical expedient for
apply the retrospective presentation requirements. The adoption of this amendment did not have a
material impact on the Company’s financial position, results of operations, cash flow and financial
statement disclosures.
In May 2017, the FASB issued an accounting update to provide clarity and reduce both (1) diversity in
practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation - Stock
Compensation, to a change in the terms or conditions of a share-based payment award. Under the
amendment, modification accounting is required to be applied unless all of the following are the same
immediately before and after the change: (1) the award’s fair value (or calculated value or intrinsic value, if
those measurement methods are used); (2) the award’s vesting conditions; and (3) the award’s
classification as an equity or liability instrument. The amendment is effective for fiscal years beginning
after December 15, 2017 and early adoption is permitted. The amendment should be applied
prospectively to an award modified on or after the adoption date. The adoption of this amendment did
not have a material impact on the Company’s financial position, results of operations, cash flow and
financial statement disclosures.
In February 2018, the FASB issued an accounting update allows a reclassification from accumulated other
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comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs
Act. Consequently, the amendment eliminates the stranded tax effects resulting from the Tax Cuts and
Jobs Act and will improve the usefulness of information reported to financial statement users. However,
because the amendment only relates to the reclassification of the income tax effects of the Tax Cuts and
Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included
in income from continuing operations is not affected. The amendment is effective for fiscal years beginning
after December 15, 2018 and early adoption is permitted. The amendment should be applied either in the
period of adoption or retrospectively to each period (or periods) in which the effect of the change in the
U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of this
amendment is not expected to have a material impact on the Company’s financial position, results of
operations and financial statement disclosures.
In February 2018, the FASB issued an accounting update to clarify certain aspects of the guidance issued in
ASU 2016-01. (1) An entity measuring an equity security using the measurement alternative may change
its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement,
through an irrevocable election that would apply to that security and all identical or similar investments of
the same issuer. Once an entity makes this election, the entity should measure all future purchases of
identical or similar investments of the same issuer using a fair value method in accordance with Topic 820.
(2) Adjustments made under the measurement alternative are intended to reflect the fair value of the
security as of the date that the observable transaction for a similar security took place. (3) Remeasuring
the entire value of forward contracts and purchased options is required when observable transactions
occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability,
the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was
elected under either Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives, or 825-10,
Financial Instruments—Overall. (5) Financial liabilities for which the fair value option is elected, the
amount of change in fair value that relates to the instrument specific credit risk should first be measured in
the currency of denomination when presented separately from the total change in fair value of the
financial liability. Then, both components of the change in the fair value of the liability should be
remeasured into the functional currency of the reporting entity using end-of-period spot rates. (6) The
prospective transition approach for equity securities without a readily determinable fair value in the
amendments in Update 2016-01 is meant only for instances in which the measurement alternative is
applied. The amendments are effective for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years beginning after June 15, 2018. All entities may early adopt these
amendments for fiscal years beginning after December 15, 2017, including interim periods within those
fiscal years, as long as they have adopted Update 2016-01. The adoption of this amendment did not have a
material impact on the Company’s financial position, results of operations, cash flow and financial
statement disclosures
In June 2018, the FASB issued an accounting update to simplify the accounting for nonemployee
share-based payments by clarifying and improving the areas of the overall measurement objective,
measurement date, and awards with performance conditions. This amendment is effective for fiscal years
beginning after December 15, 2018. Early adoption is permitted, but no earlier than an entity’s adoption
date of Topic 606. The adoption of this amendment is not expected to have a material impact on the
Company’s financial position, results of operations, cash flow and financial statement disclosures
In August 2018, the FASB issued an accounting update to amend fair value measurement disclosure
requirements to eliminate, add and modify certain disclosures to improve the effectiveness of such
disclosure in the notes to financial statements by facilitating clear communication of the information
required by GAAP that is most important to users of each entity’s financial statements. The amendments
removed the disclosure requirements for transfers between Levels 1 and 2 of the fair value hierarchy, the
policy for timing of transfers between levels of the fair value hierarchy and the valuation processes for
Level 3 fair value measurements. Additionally, the amendments modified the disclosure requirements for
investments in certain entities that calculate net asset value and measurement uncertainty. Finally, the
amendments added disclosure requirements for the changes in unrealized gains and losses included in
other comprehensive income for recurring Level 3 fair value measurements and the range and weighted
average of significant unobservable inputs used to develop Level 3 measurements. The amendments on
changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs
used to develop Level 3 fair value measurements and the narrative description of measurement
uncertainty should be applied prospectively for only the most recent interim or annual period presented in
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the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods
presented upon their effective date. This amendment is effective for annual periods beginning after
December 15, 2019. Early adoption is permitted. The adoption of this amendment is not expected to have
a material impact on the Company’s financial position, results of operations, cash flow and financial
statement disclosures.
In August 2018, the FASB issued an accounting update to modify the disclosure requirements by removing,
modifying and clarifying disclosures related to defined benefit plans. This amendment modified the
disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.
Certain disclosure requirements have been removed while the following disclosure requirements have
been added: the weighted-average interest crediting rates for cash balance plans and other plans with
promised interest crediting rates and an explanation of the reasons for significant gains and losses related
to changes in the benefit obligation for the period. The amendment also clarified the disclosure
requirements in paragraph 715-20-50-3, which stated that the following information for defined benefit
pension plans should be disclosed: The projected benefit obligation (“PBO”) and fair value of plan assets
for plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value
of plan assets for plans with ABOs in excess of plan assets. The amendment is effective for fiscal years
ending after December 15, 2020. Early adoption is permitted. The amendments should be applied on a
retrospective basis to all periods presented. The adoption of this amendment is not expected to have a
material impact on the Company’s financial position, results of operations, cash flow and financial
statement disclosures.
In August 2018, the FASB issued an accounting update to align the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting
arrangements that include an internal-use software license). The amendment also requires the entity to
present capitalized implementation costs and the related amortization in the same line item in the balance
sheet, income statement, and statement of cash flows presentation of capitalized implementation costs
and the related amortization should align with the presentation of the hosting (service) element of the
arrangement. The amendment is effective for fiscal years beginning after December 15, 2019. Early
adoption is permitted. The amendment should be applied either retrospectively or prospectively to all
implementation costs incurred after the date of adoption. The adoption of this amendment is not
expected to have a material impact on the Company’s financial position, results of operations, cash flow
and financial statement disclosures
In November 2018, the FASB issued an accounting update to clarify that certain transactions between
participants in a collaborative arrangement should be accounted for under ASC Topic 606 when the
counterparty is a customer. In addition, this amendment precludes an entity from presenting consideration
from a transaction in a collaborative arrangement as revenue from contracts with customers if the
counterparty is not a customer for that transaction. This amendment is effective for fiscal years beginning
after December 15, 2019. Early adoption is permitted. This amendment is required to be applied
retrospectively to the date when ASC Topic 606 initially adopted. The adoption of this amendment is not
expected to have a material impact on the Company’s financial position, results of operations, cash flow
and financial statement disclosures.
3.
FAIR VALUE MEASUREMENTS
The Company measures its cash equivalents and marketable securities at fair value. Fair value is an exit
price, representing the amount that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in pricing an asset or
liability. The Company measures its cash equivalents and marketable securities at fair value. The
Company also determines the fair value of long-term investments and long-lived assets whenever events
or changes in circumstances indicate the carrying value may not be recoverable. A three-tier fair value
hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation
methodologies in measuring fair value:
Level 1 – Observable inputs such as quoted prices for identical instruments in active markets;
- 19 -
Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or
indirectly;
Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting
entity to develop its own assumptions.
Assets and liabilities measured at fair value on recurring and nonrecurring bases were as follows:
Fair Value Measurements at the End of
the Reporting Period
Level 2
Level 1
Level 3
(In Thousands)
Total
Items measured at fair value on a recurring
basis at December 31, 2018
Cash and cash equivalents
Money market funds
Long-term investments
$
-
$
165
$
-
$
165
Excelliance MOS Co., Ltd (“EMC”)
$ 9,417
$
-
$
-
$ 9,417
Items measured at fair value on a recurring
basis at December 31, 2017
Cash and cash equivalents
Money market funds
Items measured at fair value on a
nonrecurring basis at December 31, 2018
(nil at December 31, 2017)
Long-term investments
Philip Ventures Enterprise Fund (“PVEF”)
Sigurd Microelectronics (Cayman) Co.,
Ltd. (“Sigurd Cayman”)
$
-
$
163
$
-
$
163
Level 1
Level 2
Level 3
Total
Total
Losses
$
-
$
-
$
36
$
36 $
-
-
-
992
992
(240)
$
-
$
-
$ 1,028
$ 1,028 $
(240)
The fair value estimates in the money market funds are based on observable market information rather
than market quotes. Accordingly, the estimates of fair value for short-term investments were determined
based on Level 2 inputs at December 31, 2018 and 2017, respectively.
Formatted: Indent: Left: 0", Hanging: 2.5 ch,
Position: Horizontal: Left, Relative to: Column,
Vertical: 0", Relative to: Paragraph, Horizontal:
0.13", Wrap Around
- 20 -
4. CASH AND CASH EQUIVALENTS
Time deposits
Savings and checking accounts
Money market funds
Petty cash
Total
5. SHORT-TERM INVESTMENTS
(In Thousands)
December 31
2018
2017
$ 2,437
29,803
165
9
$ 1,913
26,436
163
8
$ 32,414
$ 28,520
(In Thousands)
December 31, 2018
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Fair
Value
Cost
Time deposits
$ 6,172
$
-
$
-
$ 6,172
December 31, 2017
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Fair
Value
Cost
Time deposits
$ 17,601
$
-
$
-
$ 17,601
Short-term investments by contractual maturity were as follows:
(In Thousands)
December 31, 2018
Fair
Value
Cost
$ 6,172
$ 6,172
(In Thousands)
December 31, 2017
Fair
Value
Cost
$ 17,601
$ 17,601
Time deposits
Due within one year
Time deposits
Due within one year
- 21 -
6.
INVENTORIES
Finished goods
Work-in-process
Raw materials
Provisions for obsolete inventories
Total
(In Thousands)
December 31
2018
2017
$ 5,677
3,105
8,103
(6,597)
$ 4,415
2,501
8,078
(5,664)
$ 10,288
$ 9,330
The Company periodically evaluates inventory and establishes provisions for obsolescence, excess
quantities, slow-moving goods, and for other impairment of value. The following table shows the
movement of provisions for obsolete inventories.
(In Thousands)
Years Ended December 31
2017
2018
2016
Balance at beginning of year
Charge to cost and expenses
Other deductions
$ 5,664
1,328
(395)
$ 5,041
642
(19)
$ 3,664
1,527
(150)
Balance at end of year
$ 6,597
$ 5,664
$ 5,041
7.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepayment to foundry vendors
Prepaid expenses
Payment in advance
Other receivable
VAT refunds receivable
Interest receivable
Other
Total
8. LONG-TERM INVESTMENTS
Sigurd Cayman
PVEF
EMC
Total
- 22 -
(In Thousands)
December 31
2018
2017
$
$
920
720
300
163
85
44
44
16
563
321
171
27
89
58
$ 2,276
$ 1,245
(In Thousands)
December 31
2018
2017
$
992
36
9,417
$ 1,232
36
1,844
$ 10,445
$ 3,112
The following table shows the movement of gross unrealized gains and losses of the Company’s
available-for-sale securities.
(In Thousands)
Years Ended December 31
2017
2018
2016
Balance at beginning of year
Other comprehensive income before
reclassification adjustment
Reclassification adjustment
Balance at end of year
$
$
-
-
-
-
$
$
-
-
-
-
$
-
523
(523)
$
-
In July 2008, the Company invested in preferred shares of Sigurd Cayman for $5,700,000 to become a
strategic partner of Sigurd Microelectronics Corporation (“Sigurd”). Upon completion of the transaction,
the Company obtained a 19.54% ownership of Sigurd Cayman. Prior to 2018, the Company accounts for
the investment under the cost method as the Company does not exercise significant influence over
operating and financial policies of Sigurd Cayman and management of Sigurd holds the controlling
interests. In April 2010, the Company participated in another round of preferred shares issued by Sigurd
Cayman amounting to $1,500,000. In September 2015, Sigurd Cayman announced the liquidation of its
wholly owned subsidiary, Sigurd Microelectronics (Wuxi) Co., Ltd. (“Sigurd Wuxi”), whose sales and
operations account for the majority business of Sigurd Cayman. In view of Sigurd Cayman’s recurring
financial losses and its decision to cease operations of Sigurd Wuxi, the Company determined that the
decline in fair value of the investment in Sigurd Cayman was other-than-temporary and recognized an
impairment charge of $4,835,000 in 2015. In December 2017, Sigurd Cayman completed a share buyback
program. Accordingly, a portion of Company’s shares in Sigurd Cayman were returned in exchange for
cash of $1,133,000. Under ASU No. 2016-01, the Company utilizes the measurement alternative to
account for equity investments in privately-held companies without readily determinable fair values, and
the Company revalued and recorded an impairment adjustment of $240,000 at December 31, 2018. As
of December 31, 2018, the Company held 8,557,577 shares, which represented an 18.88% ownership of
Sigurd Cayman.
In November 2005, the Company invested in PVEF, a fund management company in Singapore, with an
investment amount of $585,000 (SG$1,000,000) for 20 units in the placement at SG$50,000 per unit. The
Company further invested $357,000 (SG$500,000) in June 2010 to obtain 30 units. A portion of the
shares were redeemed by PVEF in November 2012, and May 2015 at a cost of $445,000 and $330,000,
respectively, and the carrying cost of the Company is reduced to $167,000 accordingly. In December
2015, in view of the fund’s liquidation and continuous lower net asset value than the cost, the Company
determined that the decline in fair value of the investment in PVEF was other-than- temporary and
recognized an impairment charge of $118,000. A portion of the shares were further redeemed by PVEF,
gains of 20,000 and 12,000 were recognized for 2017 and 2016, respectively. Accordingly, the carrying cost
of the investment was reduced to $36,000 as of December 31, 2017. The Company held a 5% interest in
the fund as of December 31, 2018. No further impairment was recognized given the qualitative
assessment made by the Company in 2018.
The Company invested $1,960,000 (NT$62,900,000) in EMC’s 3,468,000 ordinary shares in June 2010. EMC
is a fabless power device design company in Taiwan, specialized in power semiconductor process
development, and the design of high efficiency power device and system. In December 2012, the
Company sold 200,000 shares in the amount of $138,000. In January 2018, EMC successfully listed on
Taipei Exchange. The Company recognized gains on its quoted market price to record the changes in fair
value. A total gain of $10,156,000 net fair value changes including a portion of disposal were recorded
for the year ended December 31, 2018. As of December 31, 2018, the Company held 2,754,854 shares at
the cost of $1,459,000, which represented a 7.80% ownership of EMC.
The Company invested in ordinary shares of X-FAB Silicon Foundries SE (“X-FAB”) in July 2002. X-FAB
(formerly known as X-FAB Semiconductor Foundries AG) is a European-American foundry group that
specializes in analog/mixed-signal application. As of December 31, 2015, the Company held 530,000 shares
- 23 -
at the cost of $4,968,000 (4,982,000 EURO), which represented a 1.60% ownership of X-FAB. In April 2016,
the Company sold the entire X-FAB’s ordinary shares to a third party company and a gain of $413,000 was
recorded for the year ended December 31, 2016.
The Company invested in the preference shares of GEM Services, Inc. (“GEM”) in August 2002. GEM is a
multinational semiconductor assembly and test company. In April 2016, GEM was successfully listed on
the Taiwan Stock Exchange and as such investment was classified as available-for-sale. In the third quarter
of 2016, the Company sold the entire GEM’s shares in the stock exchange market and a gain of $523,000
was recorded for the year ended December 31, 2016.
9. PROPERTY AND EQUIPMENT, NET
Cost
Land
Buildings
Equipment
Furniture and fixtures
Leasehold improvements
Transportation equipment
Property leased to others
Accumulated depreciation
Buildings
Equipment
Furniture and fixtures
Leasehold improvements
Transportation equipment
Property leased to others
(In Thousands)
December 31
2018
2017
$ 2,510
6,066
19,186
751
2,182
664
4,141
35,500
1,947
18,014
735
2,064
537
415
23,712
$ 2,510
6,066
19,999
800
2,247
622
4,274
36,518
1,807
19,261
769
1,898
544
323
24,602
Property and equipment pending for inspection
1,926
1,839
1,839
1,839
Total
$ 13,714
$ 13,755
Depreciation expense recognized during the years ended December 31, 2018, 2017, and 2016, was
approximately $993,000, $1,016,000, and $1,103,000, respectively.
In August 2009, the Company sold its land, located in Hsinchu, Taiwan, with a carrying value of
approximately $8,918,000 to a real estate developer in exchange for a portion of the real estate after it is
developed, which includes a portion of an office building and a portion of a parking lot. The Company
consummated this transaction to acquire office building space and parking lot space for the purpose of
future operations and business growth. Considering the Company’s current operating scale and capital
requirements, the Company leased out three units to a third party in December 2014. The Company has
also sold 5 building units to third parties during the years ended December 31, 2015 and 2014. There
were no transactions made in relation to building for the year ended December 31, 2018 and 2017.
In the third quarter of 2016, the Company disposed one of the three units of the Company’s office building
in China, and a net gain of $1,725,000 was recorded for the year ended December 31, 2016. There were no
transactions made in relation to buildings in China for the years ended December 31, 2018 and 2017.
- 24 -
10. OTHER ASSETS
Deferred charges
Land use rights
Refundable deposits
Deferred income tax assets – noncurrent
Total
(In Thousands)
December 31
2018
2017
$ 1,408
687
433
50
$ 1,053
706
421
120
$ 2,578
$ 2,300
Deferred charges are advanced payments for consulting, maintenance, and engineering license contracts
and are amortized over the terms of the contracts from 2 to 5 years. Amortization expense of the
deferred charges for the years ended December 31, 2018, 2017, and 2016, was approximately $629,000,
$633,000, and $560,000, respectively.
Land use rights are recorded at cost less accumulated amortization. Amortization is provided on a
straight-line basis over the term of the land use rights agreement which is 49.7 years. Amortization
expense of the land use rights for the years ended December 31, 2018, 2017, and 2016, was approximately
$19,000, $18,000, and $19,000, respectively.
11. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Salaries, bonus and benefits
Engineering related expenses
Legal and audit fees
Shipping expenses
Withholding tax payable
Value-added tax payable
Promotional expenses
Payable for acquisition of equipment
Other accrued expenses
Total
12. INCOME TAX
(In Thousands)
December 31
2018
2017
$ 2,451
572
332
102
96
77
50
3
498
$ 2,768
386
310
101
108
46
41
96
523
$ 4,181
$ 4,379
The Company is not subject to income or other taxes in the Cayman Islands. However, subsidiaries are
subject to taxes of the jurisdiction where they are located.
Income (loss) before income taxes consisted of:
(In Thousands)
Years Ended December 31
2017
2018
2016
Cayman Islands
Foreign
$
277
2,952
$ (7,371)
2,236
$ (4,156)
2,228
- 25 -
Total
$ 3,229
$ (5,135)
$ (1,928)
Income tax expense consisted of:
(In Thousands)
Years Ended December 31
2017
2018
2016
Current
Deferred
Total
$ 1,296
(155)
$
970
40
$ 2,289
(1,231)
$ 1,141
$ 1,010
$ 1,058
The Company and its subsidiaries file separate income tax returns. The applicable statutory income tax
rate in the Cayman Islands was zero for the Company for the years being reported. The reconciliation
between the provision for income taxes at the statutory rate and the provision for income taxes at the
effective tax rate is as follows:
(In Thousands)
Years Ended December 31
2017
2018
2016
Tax expense at statutory rate
Increase (decrease) in tax resulting from:
Differences between Cayman and foreign tax rates
Changes in deferred income tax assets and liabilities
Adjustments to prior years’ taxes
Changes in valuation allowances for deferred income tax
assets
Withholding taxes on repatriation of subsidiary profits
Alternative Minimum Tax on EMC stock sales
Other
$
-
$
-
$
-
401
(247)
60
92
521
105
209
414
(546)
12
449
(1,249)
33
586
298
-
246
18
1,669
-
138
Total
$ 1,141
$ 1,010
$ 1,058
The deferred income tax assets and liabilities as of December 31, 2018 and 2017 consisted of the following:
Deferred income tax assets
Research and development credits
Net operating loss carryforwards
Depreciation and amortization
Accrued vacation and other expenses
Valuation allowance
Total net deferred income tax assets
Deferred income tax liabilities
Withholding taxes on repatriation of subsidiary profits
- 26 -
(In Thousands)
December 31
2018
2017
$ 6,756
44
149
29
6,978
(6,928)
$ 6,637
82
169
68
6,956
(6,836)
$
50
$
120
$
681
$
906
The valuation allowance shown in the table above relates to net operating losses, credit carryforwards and
temporary differences for which the Company believes that realization is not more than likely. The
valuation allowance increased by $92,000, $586,000, and $18,000 for the years ended December 31, 2018,
2017, and 2016, respectively. The changes in the valuation allowance in 2018, 2017, and 2016, were
primary due to the fluctuations in R&D credits from O2Micro Inc. that could not be utilized.
As of December 31, 2018, O2Micro, Inc. had U.S. federal and state research and development credit
carryforwards of approximately $5,355,000 and $7,123,000, respectively. The U.S. federal research and
development credit will expire from 2022 through 2038 if not utilized, while the state research and
development credit will never expire. Utilization of the research and development credits may be subject
to significant annual limitation due to the ownership change limitations provided by the U.S. Internal
Revenue Code of 1986 and similar provisions in the State of California’s tax regulations. The annual
limitation may result in the expiration of federal research and development credits before utilization.
As of December 31, 2018, the Company’s subsidiary had U.S. net operating loss carryforwards for federal
and state tax purpose of $50,000 and $449,000, respectively, which will expire, if not utilized beginning in
2035 and 2028.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Tax Act") was enacted into law and the
new legislation contains certain key tax provisions that affected the Company. The Tax Act affects the
Company by (i) reducing the U.S. tax rate from 35% to 21% effective January 1, 2018, and (ii) impacting the
values of the deferred assets and liabilities.
Pursuant to U.S. GAAP, changes in tax rates and tax laws are accounted for in the period of enactment, and
the resulting effects are included as components of the income tax provision related to continuing
operations within the same period. Therefore, the following changes in the tax laws have been accounted
for in 2017. The Company’s deferred tax assets and liabilities and offsetting valuation allowance have been
remeasured at the new enacted tax rate as of December 31, 2017. The amount of U.S. net operating losses
that the Company has is available and the Company’s ability to utilize them to reduce future taxable
income is not impacted by the Tax Act.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting
Implications of the Tax Cuts and Jobs Act (“SAB 118”) which allows companies to record provisional
amounts during a measurement period not to extend beyond one year of the enactment date. Since the
Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation
was yet to be issued, the Company’s accounting of the transition tax and deferred tax re-measurements
were incomplete as of December 31, 2017. The Company filed its 2017 Federal corporate income tax
return in the first quarter of 2018. The final analysis and impact of the Act is reflected in the tax provision
and related tax disclosures for the year ended December 31, 2018. There was a no material change in
estimate which would have been reflected within the measurement period in accordance with SAB 118.
To better position itself for the future growth phase, the Company considered the repatriation of the
earnings from subsidiaries in Taiwan and China beginning in the second quarter of 2015. As a result,
deferred tax liabilities from withholding tax for the unremitted earnings in Taiwanese and Chinese
subsidiaries have been recorded for $681,000 and $906,000 as of December 31, 2018 and 2017,
respectively.
The Company files income tax returns in various foreign jurisdictions. The Company is generally no
longer subject to income tax examinations by tax authorities for years prior to 2013 because of the statute
of limitations.
- 27 -
13. RETIREMENT AND PENSION PLANS
The Company has a savings plan that qualifies under Section 401(k) of the US Internal Revenue Code.
Participating employees may defer up to the US Internal Revenue Service statutory limit amounts of pretax
salary. The Company may make voluntary contributions to the savings plan but has made no
contributions since the inception of the savings plan in 1997.
The Company also participates in mandatory pension funds and social insurance schemes, if applicable, for
employees in jurisdictions in which other subsidiaries or offices are located to comply with local statutes
and practices. For the years ended December 31, 2018, 2017, and 2016, pension costs charged to
income in relation to the contributions to these schemes were $1,236,000, $1,053,000, and $984,000,
respectively. The Company adopted a defined benefit pension plan and established an employee pension
fund committee for certain employees of O2Micro-Taiwan who are subject to the Taiwan Labor Standards
Law (“Labor Law”) to comply with local requirements. This benefit pension plan provides benefits based
on years of service and average salary computed based on the final six months of employment. The
Labor Law requires the Company to contribute between 2% to 15% of employee salaries to a government
specified plan, which the Company currently makes monthly contributions equal to 2% of employee
salaries. Contributions are required to be deposited in the name of the employee pension fund
committee with the Bank of Taiwan.
The government is responsible for the administration of all the defined benefit plans for the companies in
Taiwan under the Labor Standards Law. The government also sets investment policies and strategies,
determines investment allocation and selects investment managers. As of December 31, 2018 and 2017,
the asset allocation was primarily in cash, equity securities and debt securities. Furthermore, under the
Labor Standards Law, the rate of return on assets shall not be less than the average interest rate on a
two-year time deposit published by the local banks and the government is responsible for any shortfall in
the event that the rate of return is less than the required rate of return. However, information on how
investment allocation decisions are made, inputs and valuation techniques used to measure the fair value
of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in
plan assets for the period and significant concentrations of risk within plan assets is not fully made
available to the companies by the government. Therefore, the Company is unable to provide the required
fair value disclosures related to pension plan assets.
The percentage of major category of plan assets as of December 31, 2018 and 2017 were as follows:
Cash
Debt securities
Equity securities
December 31
2018
2017
14%
28%
51%
20%
30%
43%
Changes in projected benefit obligation and plan assets for the years ended December 31, 2018, 2017 and
2016 were as follows:
(In Thousands)
Years Ended December 31
2017
2018
2016
Projected benefit obligation, beginning of the year
Service cost
Interest cost
Benefits paid
Actuarial loss
Effect of changes in foreign exchange rate
$
$ 1,026
4
10
-
10
(32)
$
877
3
14
-
58
74
838
3
13
-
8
15
Projected benefit obligation, end of the year
$ 1,018
$ 1,026
$
877
- 28 -
Fair value of plan assets, beginning of the year
Employer contributions
Actual return on plan assets
Effect of changes in foreign exchange rate
$
$
671
20
27
(21)
$
596
19
6
50
566
16
4
10
Fair value of plan assets, end of the year
$
697
$
671
$
596
The component of net periodic benefit cost was as follows:
(In Thousands)
Years Ended December 31
2017
2018
2016
Service cost
Interest cost
Expected return on plan assets
Amortization of net pension loss
$
$
4
10
(10)
6
$
3
14
(11)
3
3
13
(10)
1
Net periodic benefit cost
$
10
$
9
$
7
The funded status of the plan was as follows:
Accumulated benefit obligation
Project benefit obligation
Plan assets at fair value
Funded status of the plan
(In Thousands)
December 31
2018
2017
$
(852)
$
(846)
(1,018)
697
(1,026)
671
$
(321)
$
(355)
The actuarial assumptions to determine the benefit obligations were as follows:
Discount rate
Rate of compensation increases
December 31
2018
2017
0.8%
2.0%
1.0%
2.0%
The actuarial assumptions to determine the net periodic benefit cost were as follows:
Years Ended December 31
2017
2018
2016
Discount rate
Rate of compensation increases
Expected long-term rate of return on plan assets
1.0%
2.0%
1.5%
1.0%
2.0%
1.5%
1.5%
2.0%
1.8%
The expected long-term rate of return shown for the plan assets was weighted to reflect a two-year
deposit interest rate of local banking institutions.
- 29 -
Estimated future benefit payments are as follows:
Year
2019
2020
2021
2022
2023 and thereafter
14. STOCK-BASED COMPENSATION
Employee Stock Purchase Plan
(In Thousands)
$
16
39
21
156
382
In October 1999, the Board adopted the 1999 Employee Stock Purchase Plan (“1999 Purchase Plan”),
which was approved by the shareholders prior to the consummation of its initial public offering in August
2000. A total of 50,000,000 ordinary shares were reserved for issuance under the 1999 Purchase Plan,
plus annual increases on January 1 of each year, commencing in 2001, up to 40,000,000 shares as
approved by the Board. In June 2008, an additional 20,000,000 shares were reserved for issuance as also
approved by the Board. The 1999 Purchase Plan was subject to adjustment in the event of a stock split,
stock dividend or other similar changes in ordinary shares or capital structure.
The 1999 Purchase Plan permitted eligible employees to purchase ordinary shares through payroll
deductions, which may range from 1% to 10% of an employee’s regular base pay. Beginning November 1,
2005, the 1999 Purchase Plan was implemented through consecutive offer periods of 3 months’ duration
commencing on the first day of February, May, August and November. Under the 1999 Purchase Plan,
ordinary shares may be purchased at a price equal to the lesser of 90% of the fair market value of the
Company’s ordinary shares on the date of grant of the option to purchase (which is the first day of the
offer period) or 90% of the fair market value of the Company’s ordinary shares on the applicable exercise
date (which is the last day of the offer period). Employees may have elected to discontinue their
participation in the purchase plan at any time; however, all of the employee’s payroll deductions
previously credited to the employee’s account will be applied to the exercise of the employee’s option on
the next exercise date. Participation ends automatically on termination of employment with the
Company. If not terminated earlier, the 1999 Purchase Plan had a term of 10 years.
As approved by the EGM held on May 30, 2009, the Company adopted the 2009 Employee Stock Purchase
Plan (“2009 Purchase Plan”) along with the Company delisting from SEHK in September 2009. The 2009
Purchase Plan succeeded the 1999 Purchas Plan, and the terms and provisions of 2009 Purchase Plan are
generally the same as the 1999 Purchase Plan. The 2009 Purchase Plan has a term of 10 years, if not
terminated earlier. A total of 25,000,000 ordinary shares were reserved for issuance under the 2009
Purchase Plan starting November 2009. As approved by the Annual General Meeting of Shareholders
(“AGM”) held in June 2012 and June 2016, additional 15,000,000 and 25,000,000 ordinary shares were
reserved for issuance under the 2009 Purchase Plan, respectively. From 2016 to 2018, 8,564,500 ordinary
shares had been purchased under the 2009 Purchase Plan.
Stock Option Plans
The Board adopted the 2005 Share Option Plan (“2005 SOP”), which was effective on March 2, 2006, the
date the Company completed the listing on the SEHK. The adoption of the 2005 SOP also resulted in the
Board terminating the 1997 Stock Plan and 1999 Stock Incentive Plan. The Company began issuing stock
options solely under the 2005 SOP for up to 100,000,000 ordinary shares. As approved by the EGM held
on May 30, 2009, the number of shares available for issue was increased from 100,000,000 to 175,000,000
shares. The references to Hong Kong and Hong Kong related rules and regulations were also removed
along with the completion of the Company’s delisting from the SEHK in 2009. As approved by the AGM
held on June 22, 2012, additional 50,000,000 ordinary shares were reserved for issuance under the 2005
- 30 -
SOP. Under the terms of the 2005 SOP, stock options are generally granted at fair market value of the
Company’s ordinary shares. The stock options have a contractual term of 8 years from the date of grant
and vest over a requisite service period of 4 years. As of December 31, 2018, the number of stock
options outstanding and exercisable was 115,327,350 and 111,592,100, respectively, under the 2005 SOP.
In 2015, the Board adopted the 2015 Stock Incentive Plan (“2015 SIP”), which was approved by the
Shareholders in July 2015, and replaced the 2005 SOP after it expired on March 2, 2016. The 2015 SIP
succeeded the 2005 SOP and the 2005 Share Incentive Plan (“2005 SIP”). The 2015 SIP provides for the
granting to employees of incentive stock options, restricted shares, cash dividend equivalent rights, RSUs
or stock appreciation rights or similar right (collectively referred to as “Awards”) to the employees,
directors and consultants of the Company. The maximum aggregate number of new shares reserved for
issuance pursuant to all Awards under the 2015 SIP is 100,000,000 ordinary shares, plus the remaining
balance rolled into the 2015 SIP from the 2005 SOP and 2005 SIP, respectively. The maximum number of
and kind of Awards granted under the 2015 SIP shall not each exceed 125,000,000 ordinary shares. The
Awards granted are generally vested over a requisite service period of 4 years. As of December 31, 2018,
the number of stock options outstanding and exercisable was 60,266,600 and 33,900,800, respectively,
under the 2015 SIP.
A summary of the Company’s stock option activity under the plans as of December 31, 2018, and changes
during the year then ended is presented as follows:
Number of
Options Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contract Life
Aggregate
Intrinsic
Value
Outstanding Options, January 1, 2018
Granted
Exercised
Forfeited or expired
185,500,550
$ 0.0714
10,915,000 $ 0.0302
$ 0.0280
$ 0.1086
(346,550)
(20,475,050)
Outstanding Options, December 31, 2018
175,593,950
$ 0.0646
3.84
$ 22,000
Vested and Expected to Vest Options at
December 31, 2018
172,238,777
$ 0.0652
3.79
$ 21,000
Exercisable Options at December 31, 2018 145,492,900
$ 0.0706
3.43
$ 16,000
The total intrinsic value of options exercised during the years ended December 31, 2018, 2017, and 2016
was $1,800, $5,000, and $1,000, respectively.
The following table summarizes information about outstanding and vested stock options:
Options Outstanding
Weighted
Average Weighted
Average
Exercise
Price
Remaining
Contractual
Life
Number
Outstanding
Options Exercisable
Number
Exercisable
and Vested
Weighted
Average
Exercise
Price
50,133,550
22,499,250
36,109,100
35,697,550
31,154,500
5.59
5.56
3.03
3.81
0.78
$ 0.0305 30,157,100
$ 0.0420 13,895,550
$ 0.0580 35,564,400
$ 0.0782 34,721,350
$ 0.1276 31,154,500
$ 0.0306
$ 0.0425
$ 0.0581
$ 0.0782
$ 0.1276
Range of Exercise Prices
$0.0270 - $0.0314
$0.0338 - $0.0472
$0.0506 - $0.0640
$0.0644 - $0.0800
$0.0834 - $0.1636
Balance, December 31, 2018
175,593,950
3.84
$ 0.0646 145,492,900
$ 0.0706
- 31 -
The Company calculated the fair value of each option grant on the date of grant using the Black-Scholes
option pricing model that use the assumptions in the following table. Risk-free interest rate is based on
the US Treasury yield curve in effect at the time of grant. The Company uses the simplified method to
estimate the expected life because the options are considered as plain vanilla share-based payment
awards. Expected volatilities are based on historical volatility of stock prices for a period equal to the
options’ expected term. The dividend yield is zero as the Company has never declared or paid dividends
on the ordinary shares or other securities and does not anticipate paying dividends in the foreseeable
future.
Stock Options
Years Ended December 31
2017
2018
2016
Employee Stock Purchase Plan
Years Ended December 31
2017
2018
2016
Risk-free interest rate
Expected life
Volatility
Dividend
2.51%-2.85%
5
Years
39%-42%
-
1.84%-1.93%
5
Years
37%-38%
-
1.14%-1.33% 1.48%-2.32% 0.51%-1.18% 0.22%-0.35%
5
Years
34%
-
0.25-0.26
Years
29%-59%
-
0.25-0.26
Years
40%-79%
-
0.25-0.26
Years
34%-48%
-
The weighted-average grant-date fair value of options granted during the years ended December 31, 2018,
2017, and 2016 was $0.0114, $0.0168, and $0.0097, respectively. The weighted-average fair value of
options granted under the 2009 Purchase Plan during the years ended December 31, 2018, 2017, and 2016
was $0.0062, $0.0092, and $0.0054, respectively.
Share Incentive Plan
The Board adopted the 2005 SIP, which was effective on March 2, 2006, the date the Company completed
the SEHK listing. The 2005 SIP provides for the grant of restricted shares, RSU, share appreciation rights
and dividend equivalent rights up to 75,000,000 ordinary shares. As approved by the EGM held on May
30, 2009, the number of shares available for issue was increased from 75,000,000 to 125,000,000 shares.
The references to Hong Kong and Hong Kong related rules and regulations were also removed along with
the completion of the Company’s delisting from the SEHK. As approved by the AGM held on June 22,
2012, an additional 62,500,000 ordinary shares were reserved for issuance under the 2005 SIP. These
awards under 2005 SIP may be granted to employees, directors and consultants of the Company. The
granted RSUs are generally vested over a requisite service period of 4 years. In 2015, the Board adopted
the 2015 SIP, which was approved by the Shareholders in July 2015, and replaced the 2005 SIP after it
expired on March 2, 2016. Please refer to above discussions for 2015 SIP.
A summary of the status of the Company’s RSUs as of December 31, 2018, and changes during the year
ended December 31, 2018, is presented as follows:
Weighted
Average
Number of
Outstanding Grant-Date
Fair Value
RSUs
Nonvested at January 1, 2018
Granted
Vested
Forfeited and expired
Nonvested at December 31, 2018
$ 0.0429
72,117,700
$ 0.0291
38,308,750
(25,588,950) $ 0.0467
(4,073,700) $ 0.0407
80,763,800
$ 0.0353
As of December 31, 2018, there was $1,956,000 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the plans including stock options and
RSUs. The cost is expected to be recognized over a weighted-average period of 2.28 years. The total fair
- 32 -
value of RSUs vested during the years ended December 31, 2018, 2017, and 2016 was $1,196,000,
$998,000, and $1,169,000, respectively.
Cash received from option exercise under all share-based payment arrangements for the years ended
December 31, 2018, 2017, and 2016, was $96,000, $113,000, and $75,000, respectively.
Ordinary Shares Reserved
As of December 31, 2018, ordinary shares reserved for future issuance were as follows:
Outstanding stock options
Outstanding RSUs
Shares reserved for future Awards grants
Shares reserved for Employee Stock Purchase Plan
Total
175,593,950
80,763,800
164,925,000
20,261,000
441,543,750
Shares issued for the exercise of stock options, Employee Stock Purchase Plan and shares vested under
restricted stock units are mainly from the treasury shares.
15. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number
of ordinary shares outstanding during the period. Diluted earnings (loss) per share is calculated by
dividing net income (loss) by the weighted average number of ordinary and dilutive ordinary equivalent
shares outstanding during the period, using the treasury stock method for options.
A reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share
calculations was as follows:
Years Ended December 31
2017
2018
2016
Net income (loss) (in thousands)
$ 2,088
$ (6,145)
$ (2,986)
Weighted average shares outstanding (in thousands) – basic
1,300,795
1,288,977
1,282,141
Effect of dilutive securities:
Options and RSUs (in thousands)
30,027
-
-
Weighted average shares outstanding (in thousands) – diluted
1,330,822
1,288,977
1,282,141
Earnings (loss) per share – basic
Basic
Diluted
$
$
-
-
$
$
-
-
$
$
-
-
Certain outstanding options and RSUs were excluded from the computation of diluted EPS since their
effect would have been anti-dilutive. The anti-dilutive stock options excluded and their associated exercise
prices per share were 160,388,575 shares at $0.0270 to $0.1636 as of December 31, 2018, 185,500,550
shares at $0.0274 to $0.1636 as of December 31, 2017, and 207,837,900 shares at $0.0274 to $0.1636 as
of December 31, 2016. The anti-dilutive RSUs excluded were 6,214,513, 72,117,700 shares, and
57,937,850 shares as of December 31, 2018, 2017, and 2016, respectively.
- 33 -
16. COMMITMENTS
Lease Commitments
The Company leases office space and certain equipment under non-cancelable operating lease
agreements that expire at various dates through December 2021. For the years ended December 31,
2018, 2017, and 2016, leasing costs charged to income in relation to these agreements were $1,711,000,
$1,601,000, and $1,899,000, respectively. The Company’s office lease provides for periodic rental
increases based on the general inflation rate.
As of December 31, 2018, future minimum lease payments under all non-cancelable operating lease
agreements were as follows:
Year
2019
2020
2021
Total minimum lease payments
(In Thousands)
Operating Leases
$ 1,304
471
66
$ 1,841
Purchase obligations and commitments include payments due under various types of license, maintenance
and support agreements with contractual terms from one to three years. As of December 31, 2018, those
purchase commitments were as follows:
Year
2019
2020
2021
Total
(In Thousands)
$ 488
268
151
$ 907
Prepayment for foundry capacity
In order to accommodate the anticipated product demand, the Company has entered into an agreement
with a foundry provider to guarantee a specified portion of production capacity that shall be purchased
within a year from September 2018. Under the agreement, the Company is required to make a payment
in advance to undertake the purchase of this specified capacity, such payment is non-refundable but
entitles the Company to fully offset the actual purchase payable once the arranged conditions are met.
The prepayment is amounted to $898,000 and was included in the balance of prepayment to foundry
vendors as of December 31, 2018. The Company believes that the guaranteed purchase will be fulfilled.
17. CONTINGENCIES
The Company, as a normal course of business, is a party to litigation matters, legal proceedings, and claims.
These actions may be in various jurisdictions and may involve patent protection and/or infringement.
While the results of such litigations and claims cannot be predicted with certainty, the final outcome of
such matters is not expected to have a material adverse effect on its consolidated financial position or
results of operations. No assurance can be given, however, that these matters will be resolved without the
Company becoming obligated to make payments or to pay other costs to the opposing parties, with the
potential for having an adverse effect on the Company’s financial position or its results of operations. No
provision for any litigation has been provided as of December 31, 2018 and 2017.
- 34 -
18. FINANCIAL INSTRUMENTS
Information on the Company’s financial instruments was as follows:
(In Thousands)
December 31
2018
2017
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$ 32,414
34
6,172
10,445
$ 32,414
34
6,172
10,445
$ 28,520
35
17,601
3,112
$ 28,520
35
17,601
3,112
Assets
Cash and cash equivalents
Restricted cash
Short-term investments
Long-term investments
The carrying amounts of cash and cash equivalents, restricted cash and short-term investments reported in
the consolidated balance sheets approximate their estimated fair values.
Long-term investments in equity securities are reported at fair value for the year ended December 31,
2018. The Company utilizes the measurement alternative for equity investments in privately-held
companies without readily determinable fair values and revalues these investments at cost less
impairment, plus or minus observable price changes (in orderly transactions) of an identical or similar
investment of the same issuer. Prior to the adoption of ASU 2016-01 in 2018, these securities were
accounted for using the cost method of accounting, and were measured at cost less other-than-temporary
impairment.
19. SEGMENT INFORMATION
The Company does not identify or allocate assets by operating segment, nor does the chief operating
decision maker (“CODM”) evaluate operating segments using discrete as set information. The Company
does not have inter-segment revenue, and, accordingly, there is none to be reported. The Company does
not allocate gains and losses from interest and other income, or income taxes to operating segments.
The accounting policies for segment reporting are the same as for the Company as a whole.
Net sales to unaffiliated customers by geographic region are based on the customer’s ship-to location and
were as follows:
China
Taiwan
Japan
Malaysia
Korea
Singapore
Other
Total
(In Thousands)
Years Ended December 31
2017
2016
2018
$
$
55,303
1,987
1,485
1,396
1,201
959
383
$
51,962
2,305
3,148
94
1,435
905
356
46,784
3,009
2,535
7
2,257
1,539
430
$
62,714
$
60,205
$
56,561
- 35 -
Net sales to unaffiliated customers by product category were as follows:
Integrated Circuits
Mixed-signal
Analog
Digital
Licensed intellectual property
(In Thousands)
Years Ended December 31
2017
2016
2018
$
$
39,603
23,063
48
-
$
40,334
19,801
50
20
40,866
15,623
65
7
Total
$
62,714
$
60,205
$
56,561
For the year ended December 31, 2018, two customers accounted for 10% or more of net sales. For the
years ended December 31, 2017 and 2016, only one customer accounted for 10% or more of net sales. The
percentage of net sales to these customers was as follows:
Customer A
Customer B
Years Ended December 31
2017
2016
2018
13%
11%
15%
9%
8%
10%
Long-lived assets consisted of property and equipment and were as follows based on the physical location
of the assets at the end of each year:
(In Thousands)
Taiwan
U.S.A.
China
Other
Total
2018
December 31
2017
2016
$
6,037 $
4,029
3,620
28
6,145 $
4,015
3,565
30
5,607
4,176
3,920
33
$
13,714
$
13,755
$
13,736
- 36 -