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
O2Micro focuses on high performance Power Management ICs with the business strategy of building quality
products based on our patented proprietary technology. We completed a highly productive year in 2019 by introducing
many state-of-art products that were not only active in winning business but became industry de facto standards for
both LCD display backlighting technology as well as portable power tool/appliance devices. One reputable product which
contains our ICs, the SONY 85-inch high-end 8K HDR LCD TV’s with Extended Dynamic Range, comes with multiple arrays
of our precision local dimming control ICs to provide many times the balancing-brightness of our competitors. Another
example of our latest design wins is how we currently facilitate with a world leading floor care cordless vacuum cleaner
company’s long battery operation with uncompromised power up until the battery fully discharges. These new devices
introduced in 2019 highlighted our power management technology bringing consumers an industry revolutionary
experience.
O2Micro foresees that battery-based computing and IoT devices will continue to outgrow most other
station-based devices. Therefore, we placed substantial R&D investments into lithium Ion battery power management,
while at the same time see the cost of battery technology has declined considerably, while quality improved. The other
major focus for our R&D investment is display backlight technology. LED’s have transformed from bulky packaging to
mini and micro LED’s, with much smaller sizes and mounting techniques, along with many new ways to power the arrays
of LEDs with independent control. Our agile local dimming responses to the fast-moving image can achieve a crisp,
blur-free entertainment experience.
Let us talk about the great progress of our Battery Products. Although our battery group’s growth was less than
we expected in Q1 2019 due to the trade war issues at the end of 2018, our battery business did recover to a normal
growth curve in the 2nd quarter of 2019. We also produced many new ICs for battery front-end sensors that are
internally controlled by a reliable state-machine. It not only saves cost but also reduces micro code development time
for customers. For upgrade customers, we successfully delivered our ARM core based highly integrated BMS (Battery
Management System) SoC (System on Chip) to address the needs and ability of wireless communications. We are
pleased to announce some of our first-tier customers have designed in our BMS SoC series products and will be in mass
production soon. We continue to add new names to our existing top tier customers in Japan, Europe, and North America,
and see the upcoming trend of stay-at-home policies facilitating home improvement and outdoor power tool market
demands, which in turn, favors our business.
Let us talk about the great progress of our Battery Products. Although our battery group’s growth was less than
we expected in Q1 2019 due to the trade war issues at the end of 2018, our battery business did recover to a normal
growth curve in the 2nd quarter of 2019. We also produced many new ICs for battery front-end sensors that are
internally controlled by a reliable state-machine. It not only saves cost but also reduces micro code development time
for customers. For upgrade customers, we successfully delivered our ARM core based highly integrated BMS (Battery
Management System) SoC (System on Chip) to address the needs and ability of wireless communications. We are
pleased to announce some of our first-tier customers have designed in our BMS SoC series products and will be in mass
production soon. We continue to add new names to our existing top tier customers in Japan, Europe, and North America,
and see the upcoming trend of stay-at-home policies facilitating home improvement and outdoor power tool market
demands, which in turn, favors our business.
Next, let us update our largest product line, Intelligent Lighting. Like Battery Products, the trade war in the end
of 2018 did unbalance the 1st quarter of 2019 business. We were happy to see the TV business not only resume to a
normal pace but reached a strong back-loading in the 4th quarter. As a result, we grew our Intelligent Lighting business
slightly up on an annual basis. For products, we expanded our territory from Backlight LED driver IC to DC/DC IC areas in
TV to further provide our customers with improved and more complete solutions. With our decades of experience
designing complex local dimming backlight ICs, we received a very warm welcome from top-tier Japanese customers, as
we expanded to several TV makers in China. We see that today’s 8K HDR TVs are similarly positioned to what the 4K TV
was three years ago, and believe 8K HDR will become the mainstream choice of living rooms in the coming years.
Hopefully, most of these TVs will come with our ICs inside as light penetration from backlight LEDs through 8K LCD
screens is much harder than currently seen in 4K screens. Our industrial quality rated backlight ICs continue to facilitate
automotive informatics displays inside the vehicles for some of our world-class automobile customers. We are also
excited about the overall increase of automotive intelligence, which will create many new business opportunities for our
power driver ICs for diverse types of sensors.
- 2 -
Creating shareholder value is one of our top priorities. We design high performance, analog power
management ICs, with a high entry barrier, to achieve and sustain long-term profitability. O2Micro’s 2019 revenue was
slightly down by 2.8% from the prior year, but up 11.1% compared to 2015, with a reduction of operating expenses by
9%. We continue to look for ways to reduce our expenses and have further streamlined operations while optimizing the
assets of the Company. As of the 4th quarter of 2019, we bought back over 20.2 million ADS shares since 2002 and
have a solid balance sheet with $46.4 million in cash and short-term investments, as well as no debt whatsoever. Our
leading technologies, 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
Chief Executive Officer
- 3 -
O2Micro International Limited and Subsidiaries
Consolidated Financial Statements as of
December 31, 2019 and 2018 and for the Years Ended December 31,
2019, 2018 and 2017, and
Report of Independent Registered Public
Accounting Firm
- 4 -
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, 2019 and 2018, the related consolidated statements of operations and comprehensive (loss)
income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, 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, 2019 and 2018, and the result of its operations and its cash
flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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, 2020, expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases in 2019 due to
the adoption of FASB Accounting Standards Codification (“ASC”) Topic 842, Leases.
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, 2020
We have served as the Company’s auditor since 1998.
- 5 -
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, 2019, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
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, 2019, of the Company and our
report dated April 29, 2020, 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, 2020
- 6 -
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 (note 7)
Total current assets
LONG-TERM INVESTMENTS (notes 3 and 8)
PROPERTY AND EQUIPMENT, NET (notes 9 and 10)
OTHER ASSETS (note 11)
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Notes and accounts payable
Income tax payable
Lease liabilities (note 10)
Accrued expenses and other current liabilities (note 12)
Total current liabilities
LONG-TERM LIABILITIES
Accrued pension liabilities (note 14)
Deferred income tax liabilities (note 13)
Lease liabilities (note 10)
Other liabilities
Total long-term liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (notes 17 and 18)
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, 2019 and 2018
Outstanding – 1,314,798,600 and 1,298,808,750 shares as of
December 31, 2019 and 2018, respectively
Additional paid-in capital
Accumulated deficits
Accumulated other comprehensive income
Treasury stock – 354,238,000 and 370,227,850 shares as of
December 31, 2019 and 2018, respectively
Total shareholders’ equity
December 31
2019
2018
$ 10,696
35
35,693
10,335
8,796
1,295
66,850
$ 32,414
34
6,172
11,388
10,288
2,276
62,572
4,172
10,445
15,551
13,714
2,426
2,578
$ 88,999
$ 89,309
$
$
4,867
611
827
4,839
11,144
214
589
1,932
65
2,800
4,582
413
-
4,181
9,176
321
681
-
85
1,087
13,944
10,263
-
-
33
143,484
(51,773)
4,654
33
143,115
(45,912)
4,674
(21,343)
(22,864)
75,055
79,046
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 88,999
$ 89,309
The accompanying notes are an integral part of the consolidated financial statements.
- 7 -
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
2018
2019
2017
OPERATING REVENUES
$
60,928
$
62,714
$
60,205
COST OF REVENUES
GROSS PROFIT
OPERATING EXPENSES
Research and development (a)
Selling, general and administrative (a)
Litigation income
28,960
30,741
29,426
31,968
31,973
30,779
19,065
19,286
-
19,766
20,332
-
17,989
19,047
(19)
Total operating expenses
38,351
40,098
37,017
LOSS FROM OPERATIONS
NON-OPERATING INCOME
(6,383)
(8,125)
(6,238)
Interest income
Foreign exchange (loss) gain, net
Net gain recognized on long-term investments (note 8)
Gain on sale of real estate (note 9)
Other, net
543
(162)
788
500
846
369
108
9,916
-
961
344
53
-
-
706
Total non-operating income
2,515
11,354
1,103
(LOSS) INCOME BEFORE INCOME TAX
(3,868)
3,229
(5,135)
INCOME TAX EXPENSE (note 13)
1,171
1,141
1,010
NET (LOSS) INCOME
(5,039)
2,088
(6,145)
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX
Foreign currency translation adjustments
Unrealized loss on available-for-sale investments
(note 8)
Unrealized pension gain (loss)
Total other comprehensive (loss) income
(85)
-
65
(20)
(677)
-
14
(663)
COMPREHENSIVE (LOSS) INCOME
$
(5,059)
$
1,425
$
984
(1)
(61)
922
(5,223)
(Continued)
- 8 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(In Thousand US Dollars, Except Per Share Amounts and Share Data)
Years Ended December 31
2018
2019
2017
(LOSS) EARNINGS PER SHARE (note 16)
Basic
Diluted
$
$
-
-
$
$
-
-
$
$
-
-
NUMBER OF SHARES USED IN (LOSS) EARNINGS PER
SHARE CALCULATION:
Basic (in thousands)
Diluted (in thousands)
1,316,032
1,316,032
1,300,795
1,330,822
1,288,977
1,288,977
(a) INCLUDES STOCK-BASED
COMPENSATION CHARGE AS FOLLOWS:
Research and development
Selling, general and administrative
$
$
272
1,190
$
$
241
1,180
$
$
221
1,368
The accompanying notes are an integral part of the consolidated financial statements.
(Concluded)
- 9 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousand US Dollars, Except Share Data)
BALANCE, JANUARY 1, 2017
1,669,036,600
$
33
$
142,738 $ (41,372)
$
1
$ 4,544
$
(130)
$ 4,415
$ (25,030)
$
80,784
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
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
BALANCE, DECEMBER 31, 2018
Issuance of:
Shares for exercise of stock options
Shares for Employee Stock Purchase Plan
Shares vested under restricted share units
Acquisition of treasury stock – 17,192,650 shares
Treasury stock reissued for :
Exercise of stock options
Employee Stock Purchase Plan
Restricted share units
Stock-based compensation
Net loss for 2019
Pension gain
Foreign currency translation adjustments
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)
-
-
-
-
1,669,036,600
256,900
4,264,200
28,661,400
-
(256,900)
(4,264,200)
(28,661,400)
-
-
-
-
-
-
1
-
-
-
(1)
-
-
-
-
-
33
-
-
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
-
-
143,115 (45,912)
7
109
(1)
-
(16)
(122)
(1,070)
1,462
-
-
-
-
-
-
-
-
(136)
(686)
-
(5,039)
-
-
BALANCE, DECEMBER 31, 2019
1,669,036,600
$
33
$
143,484 $ (51,773)
$
The accompanying notes are an integral part of the consolidated financial statements.
- 10 -
-
-
-
-
-
-
-
-
-
-
-
(1)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
29
84
-
(708)
-
-
-
1,589
(6,145)
(61)
984
(1)
76,555
10
86
-
(451)
-
-
-
1,421
2,088
14
(677)
-
-
-
-
-
-
-
-
-
-
984
-
-
-
-
-
-
-
-
-
-
(61)
-
-
-
-
-
-
-
-
-
-
-
(61)
984
(1)
-
-
-
(708)
44
151
1,299
-
-
-
-
-
5,528
(191)
5,337
(24,244)
-
-
-
-
-
-
-
-
-
-
(677)
4,851
-
-
-
-
-
-
-
-
-
-
(85)
-
-
-
-
-
-
-
-
-
14
-
-
-
-
-
-
-
-
-
-
14
(677)
-
-
-
(451)
21
206
1,604
-
-
-
-
(177)
4,674
(22,864)
79,046
-
-
-
-
-
-
-
-
-
65
-
-
-
-
-
-
-
-
-
-
65
(85)
-
-
-
(510)
16
258
1,757
-
-
-
-
7
109
-
(510)
-
-
-
1,462
(5,039)
65
(85)
$ 4,766
$
(112)
$ 4,654
$ (21,343)
$
75,055
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand US Dollars)
Years Ended December 31
2018
2019
2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income
Adjustments to reconcile net (loss) income to net cash generated from
(used in) operating activities:
$
(5,039)
$
2,088
$
(6,145)
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 sale of real estate
Loss (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
Operating lease right-of-use assets
Notes and accounts payable
Income tax payable
Accrued expenses and other current liabilities
Operating lease liabilities
Accrued pension liabilities
Other liabilities
1,780
1,462
1,359
(788)
-
(500)
2
(133)
1,053
133
981
(571)
(1,477)
285
198
661
1,494
(42)
3
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
Net cash generated from (used in) operating activities
861
(8,035)
(7,238)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of:
Short-term investments
Property and equipment
Decrease (increase) in other assets
Proceeds from:
Cash received on maturity of short-term investments
Disposal of long-term investments
Return of capital from long-term investments
Sale of real estate
Disposal of property and equipment
(34,649)
(1,672)
6
(11,197)
(1,272)
(12)
4,953
7,061
-
2,169
1
22,540
2,582
-
-
16
(8,505)
(704)
22
12,635
-
1,163
-
145
Net cash (used in) provided by investing activities
(22,131)
12,657
4,756
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisition of treasury stock
Proceeds from:
(510)
(451)
(708)
Exercise of stock options
Issuance of ordinary shares under the Employee Stock Purchase Plan
7
109
10
86
29
84
Net cash used in financing activities
(394)
(355)
(595)
(Continued)
- 11 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand US Dollars)
Years Ended December 31
2018
2019
2017
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE
$
(53)
$
(374)
$
268
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED
CASH
(21,717)
3,893
(2,809)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE
YEAR
32,448
28,555
31,364
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE YEAR
$ 10,731
$ 32,448
$ 28,555
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Cash paid for tax
$
1,171
$
1,218
$
818
The accompanying notes are an integral part of the consolidated financial statements.
(Concluded)
- 12 -
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 O2Micro, 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
valuation allowance for deferred income tax assets, allowance for doubtful accounts, impairment of
- 13 -
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.
For the year ended December 31, 2019, operating revenue generated from two customers accounted for
14% and 12%, respectively, of the total; accounts receivable from these two customers accounted for 13%
and 21%, respectively, of the total as of December 31, 2019. For the year ended December 31, 2018,
operating revenue generated from two customers accounted for 13% and 11%, respectively, of the total;
accounts receivable from these two customers accounted for 13% and 20%, respectively, of the total as of
December 31, 2018.
Additionally, for the year ended December 31, 2019, two vendors accounted for 34% and 19% of the
Company’s cost of goods sold, respectively; accounts payable from these two vendors accounted for 23%
and 32%, respectively, of the total as of December 31, 2019. For the year ended December 31, 2018, two
vendors accounted for 33% and 19% of the Company’s cost of goods sold, respectively; accounts payable
from these two vendors accounted for 29% and 25%, respectively, of the total as of December 31, 2018.
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 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
- 14 -
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
losses are deemed
of shareholders’ equity, net of any related tax effect, unless unrealized
other-than-temporary.
income when deemed
other-than-temporary.
losses are recorded as a charge to
Unrealized
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.
Leases
On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 842, “Leases”,
using the modified retrospective transition method applied to contracts that were not complete as of the
adoption date. Consolidated financial results for reporting periods beginning after January 1, 2019 are
presented under ASC Topic 842, while prior period amounts continue to be reported in accordance with
ASC Topic 840, “Leases”.
Under ASC 842, the Company determines if an arrangement is a lease at inception. Operating leases are
included in operating lease right-of-use (“ROU”) assets, current lease liabilities, and noncurrent lease
liabilities in the Company’s consolidated balance sheets. ROU assets are included in the account of
property and equipment, net. ROU assets represent the Company’s right to use an underlying asset for the
lease term and lease liabilities represent the Company’s obligation to make lease payments arising from
the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the
present value of lease payments over the lease term. As most of the Company’s leases do not provide an
implicit rate, the Company uses its incremental borrowing rate based on the rate of interest the Company
would have to pay on a collateralized basis to borrow an amount equal to the lease payments under
similar terms. The Company’s lease terms do not include options to extend or terminate leases unless the
Company is reasonably certain that it will exercise those options. Lease expense for lease payments is
recognized on a straight-line basis over the lease term.
Payments for leases of low-value assets under the Company’s capitalization policy and short-term leases
with a lease term less than 12 months are recognized as expenses on a straight-line basis during the lease
term for which the recognition exemption is applied.
- 15 -
Under ASC 840, operating lease payments are recognized as expenses on a straight-line basis over the
lease term.
For lease arrangements where the Company is the lessor, the Company recognizes lease income from
operating leases on a straight-line basis over the lease term which is consistent under both ASC 842 and
ASC840.
Long-lived Asset Impairment
in
The Company evaluates the recoverability of
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.
long-lived assets whenever events or changes
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 adopted ASC Topic 606 on January 1, 2018, using the modified retrospective transition
method applied only to contracts that were not completed as of the adoption date. The reported results
for 2018 reflect the application of the new accounting guidance, while the reported results for prior period
amounts are not adjusted and continue to be reported in accordance with our historical accounting under
ASC Topic 605, “Revenue Recognition”.
Prior to 2018, revenue from product sales to customers, other than distributors, is recognized at the time
of shipment and when title and right of ownership transfers to customers. The four criteria for revenue
being realized and earned are the existence of evidence of sale, actual shipment, fixed or determinable
selling price, and reasonable assurance of collectability. In certain limited instances, the Company sells its
products through distributors. Since the title and risk have not been transferred upon shipment to
distributors, the Company recognizes revenue on these sales only when these distributors sell the
Company’s products to third parties. Thus, products held by these distributors are included in the
Company’s inventory balance.
Product Sales
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
- 16 -
as the “Delivered Duty Paid” shipping term). Payment for sales to customers is generally due on standard
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.
Licensing revenue
The Company recognizes licensing revenues when the Company satisfies a performance obligation by
transferring a promised service to a customer. An asset is transferred when the customer obtains control
of that asset.
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 revenues 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 incurred at the amount of $882,000,
$922,000, and $779,000 in 2019, 2018, and 2017, respectively; of which, advertising expenses amounted
to $261,000, $287,000, and $158,000 in 2019, 2018 and 2017, respectively.
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
- 17 -
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
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,
if any.
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 non-operating income or loss.
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 (Loss) Income
Comprehensive (loss) income represents net (loss) income plus the results of certain changes in
shareholders’ equity during a period from non-owner sources, and change in unrealized gains (losses) on
available-for-sale equity securities for the year ended December 31, 2017, before the adoption of ASU
2016-01.
Recently adopted accounting pronouncements
On January 1, 2019, the Company adopted ASC Topic 842, “Leases”, using the modified retrospective
transition method applied to contracts that were not complete as of the adoption date. Consolidated
financial results for reporting periods beginning after January 1, 2019 are presented under ASC Topic 842,
while prior period amounts continue to be reported in accordance with ASC Topic 840, “Leases”.
The adoption of the new standard resulted in the recognition of $1,265,000 of lease liabilities with
corresponding lease assets on January 1, 2019. The standard did not materially impact the Company’s
results of operations and had no impact on cash flows.
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,
- 18 -
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 had no impact on the Company’s financial position,
results of operations, cash flow and financial statement disclosures.
Recently issued accounting pronouncements not yet adopted
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
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 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
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 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 and financial statement disclosures.
In December 2019, the FASB issued an amendment which eliminated certain exceptions to the general
principles in Topic 740, Income Taxes, improved and simplified existing guidance. This amendment is
effective for fiscal years beginning after December 15, 2020. 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.
- 19 -
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 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;
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, 2019
Cash and cash equivalents
Money market funds
Short-term investments
$
-
$
169
$
-
$
169
Time deposits with original maturity of
more than 3 months but less than 12 months $ 35,693
$
-
$
-
$ 35,693
Long-term investments
Excelliance MOS Co., Ltd (“EMC”)
Items measured at fair value on a recurring
basis at December 31, 2018
Cash and cash equivalents
Money market funds
Short-term investments
$ 3,180
$
-
$
-
$ 3,180
$
-
$
165
$
-
$
165
Time deposits with original maturity of
more than 3 months but less than 12 months $ 6,172
$
-
$
-
$ 6,172
Long-term investments
EMC
$ 9,417
$
-
$
-
$ 9,417
Items measured at fair value on a
nonrecurring basis at December 31, 2019
Long-term investments
Philip Ventures Enterprise Fund (“PVEF”)
Sigurd Microelectronics (Cayman) Co.,
Ltd. (“Sigurd Cayman”)
Level 1
Level 2
Level 3
Total
Total
Losses
$
-
$
-
$
-
$
- $
(30)
-
- 20 -
-
992
992
-
$
-
$
-
$
992
$
992 $
(30)
Items measured at fair value on a
nonrecurring basis at December 31, 2018
Long-term investments
PVEF
Sigurd Cayman
$
$
-
-
$
-
-
36
992
$
36 $
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 cash and cash equivalents were
determined based on Level 2 inputs at December 31, 2019 and 2018, respectively.
4. CASH AND CASH EQUIVALENTS
Time deposits
Savings and checking accounts
Money market funds
Petty cash
Total
5. SHORT-TERM INVESTMENTS
Time deposits with original maturity of more
than 3 months but less than 12 months
6.
INVENTORIES
Finished goods
Work-in-process
Raw materials
Provisions for obsolete inventories
Total
(In Thousands)
December 31
2019
2018
$ 3,080
7,434
169
13
$ 2,437
29,803
165
9
$ 10,696
$ 32,414
(In Thousands)
December 31
2019
2018
$ 35,693
$ 6,172
(In Thousands)
December 31
2019
2018
$ 5,016
3,143
7,269
(6,632)
$ 5,677
3,105
8,103
(6,597)
$ 8,796
$ 10,288
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.
- 21 -
(In Thousands)
Years Ended December 31
2018
2019
2017
Balance at beginning of year
Charge to cost and expenses
Other deductions
$ 6,597
1,359
(1,324)
$ 5,664
1,328
(395)
$ 5,041
642
(19)
Balance at end of year
$ 6,632
$ 6,597
$ 5,664
7.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses
Payment in advance
Interest receivable
Other receivable
VAT refunds receivable
Prepayment to foundry vendors
Other
Total
8. LONG-TERM INVESTMENTS
Sigurd Cayman
EMC
PVEF
Total
(In Thousands)
December 31
2019
2018
$
$
767
264
131
77
10
-
46
720
300
44
163
85
920
44
$ 1,295
$ 2,276
(In Thousands)
December 31
2019
2018
$
992
3,180
-
$
992
9,417
36
$ 4,172
$ 10,445
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 have 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 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
- 22 -
31, 2019, the Company held 8,557,577 shares, which represented an 18.88% ownership of Sigurd Cayman.
No impairment losses were incurred related to investment in Sigurd Cayman in 2019.
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. In March 2019, the liquidator of PVEF declared a final
distribution and the fund would be dissolved at the expiration of 3 months from the date of the final
meeting held in April 2019. As a result, the Company recorded an impairment charge of $30,000 which is
the difference between carrying cost and the liquidation value.
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. The gain of $10,156,000 and $818,000 on net fair value changes including a portion of disposal
were recorded for the year ended December 31, 2018 and December 31, 2019, respectively. As of
December 31, 2019, the Company held 797,854 shares at the cost of $420,000, which represented a 2.26%
ownership of EMC.
9. PROPERTY AND EQUIPMENT, NET
Cost
Land
Buildings
Equipment
Furniture and fixtures
Leasehold improvements
Transportation equipment
Property leased to others
ROU assets
Accumulated depreciation
Buildings
Equipment
Furniture and fixtures
Leasehold improvements
Transportation equipment
Property leased to others
ROU assets
(In Thousands)
December 31
2019
2018
$ 2,510
6,066
19,350
705
2,541
655
4,242
3,699
39,768
$ 2,510
6,066
19,186
751
2,182
664
4,141
-
35,500
2,088
17,387
633
2,117
565
530
957
24,277
1,947
18,014
735
2,064
537
415
-
23,712
Property and equipment pending for inspection
60
1,926
Total
$ 15,551
$ 13,714
- 23 -
Depreciation expense recognized during the years ended December 31, 2019, 2018, and 2017, was
approximately $1,023,000, $993,000, and $1,016,000, 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. In the
third quarter of 2019, the Company sold the remaining two building units which were classified as
property and equipment pending for inspection to a third party and a net gain of $500,000 was recorded
for the year ended December 31, 2019.
10. LEASES
The Company adopted ASU 2016-02 (ASC Topic 842, “Leases”) effective January 1, 2019 using the
modified retrospective approach and the effective date as the date of initial application. In addition, the
Company elected the package of practical expedients permitted under the transition guidance within the
new standard, which allows the carry forward of the Company’s historical assessments of (1) whether
contracts are or contain leases and (2) lease classification. As permitted by ASU 2016-02, payments for
leases of low-value assets under the Company’s capitalization policy and short-term leases with a lease
term less than 12 months are recognized as expenses on a straight-line basis during the lease term for
which the recognition exemption is applied. The comparative prior period information has not been
restated and continues to be reported under the accounting standards in effect for those periods.
The Company’s leases have remaining lease terms of less than one year to eight years. The Company’s
lease terms do not include options to extend or terminate leases because the Company was not
reasonably certain that it would exercise those options. Lease expense for minimum lease payments is
recognized on a straight-line basis over the lease term. The Company’s lease agreements do not contain
any variable lease payments, material residual value guarantees or material restrictive covenants.
The table below presents the lease-related assets and liabilities recorded on the consolidated balance
sheet as of December 31, 2019:
(In Thousands)
Classification on Consolidated Balance Sheet
December 31, 2019
Assets
Operating lease assets
Property and equipment, net
Liabilities
Current - operating
Noncurrent - operating
Current lease liabilities
Noncurrent lease liabilities
Total lease liabilities
Weighted-average remaining lease term - operating leases
Weighted-average discount rate - operating leases (1)
$ 2,742
$
827
1,932
$ 2,759
6.00 years
2.14%
(1) Discount rates used for existing leases were established at January 1, 2019, which was the date of the
Company’s initial adoption of ASU 2016-02. As most of the Company’s leases do not provide an
implicit rate, the Company uses its incremental borrowing rate based on the rate of interest the
Company would have to pay on a collateralized basis to borrow an amount equal to the lease
payments under similar terms.
- 24 -
Supplemental information related to the Company’s operating leases for the year ended December 31,
2019 is as follows:
Cash paid for operating leases
(In Thousands)
$ 1,648
Operating lease costs were $1,766,000 during the year ended December 31, 2019. Short-term lease costs
during the year ended December 31, 2019 were immaterial.
The table below reconciles the undiscounted cash flows for each of the first five years and total of the
remaining years to the operating lease liabilities recorded on the consolidated balance sheet as of
December 31, 2019:
Year
2020
2021
2022
2023
2024
Total minimum lease payments
Less: amount of lease payments representing interest
Present value of future minimum lease payments
Less: current obligation under leases
Long-term lease obligations
(In Thousands)
Operating Leases
$ 1,227
421
327
330
806
3,111
(352)
2,759
(827)
$ 1,932
The Company has elected the transition option under ASU 2016-02 and continued to apply the prior
accounting standard for leases, including the disclosure requirements, in the comparative periods. Future
minimum lease payments due under those non-cancelable lease agreements as of December 31, 2018
were as follows:
Year
2019
2020
2021
Total minimum lease payments
(In Thousands)
Operating Leases
$ 1,304
471
66
$ 1,841
Rent expense for the years ended December 31, 2018 and 2017 were $1,711,000 and $1,601,000,
respectively, recognized on a straight-line basis for the Company’s office leases which were accounted for
as operating leases. The Company’s office lease provides for periodic rental increases based on the
general inflation rate.
- 25 -
11. OTHER ASSETS
Deferred charges
Land use rights
Refundable deposits
Deferred income tax assets – noncurrent
Total
(In Thousands)
December 31
2019
2018
$ 1,240
668
427
91
$ 1,408
687
433
50
$ 2,426
$ 2,578
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, 2019, 2018, and 2017, was approximately $738,000,
$629,000, and $633,000, 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, 2019, 2018, and 2017, was approximately
$19,000, $19,000, and $18,000, respectively.
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Salaries, bonus and benefits
Engineering related expenses
Legal and audit fees
Shipping expenses
Value-added tax payable
Withholding tax payable
Promotional expenses
Payable for acquisition of equipment
Other accrued expenses
Total
13. INCOME TAX
(In Thousands)
December 31
2019
2018
$ 3,020
688
231
116
100
67
47
-
570
$ 2,451
572
332
102
77
96
50
3
498
$ 4,839
$ 4,181
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.
(Loss) income before income taxes consisted of:
(In Thousands)
Years Ended December 31
2018
2019
2017
Cayman Islands
Foreign
Total
$ (6,355)
2,487
$
277
2,952
$ (7,371)
2,236
$ (3,868)
$ 3,229
$ (5,135)
- 26 -
Income tax expense consisted of:
(In Thousands)
Years Ended December 31
2018
2019
2017
Current
Deferred
Total
$ 1,304
(133)
$ 1,296
(155)
$
970
40
$ 1,171
$ 1,141
$ 1,010
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
2018
2019
2017
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
$
-
$
-
$
-
344
(224)
34
91
351
345
230
401
(247)
60
92
521
105
209
414
(546)
12
586
298
-
246
Total
$ 1,171
$ 1,141
$ 1,010
The deferred income tax assets and liabilities as of December 31, 2019 and 2018 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
Unrealized foreign exchanges
- 27 -
(In Thousands)
December 31
2019
2018
$ 6,850
28
150
82
7,110
(7,019)
$ 6,756
44
149
29
6,978
(6,928)
$
91
$
50
$
$
586
3
589
$
$
681
-
681
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 $91,000, $92,000, and $586,000 for the years ended December 31, 2019,
2018, and 2017, respectively. The changes in the valuation allowance in 2019, 2018, and 2017, were
primary due to the fluctuations in R&D credits from O2Micro Inc. that could not be utilized.
As of December 31, 2019, O2Micro, Inc. had U.S. federal and state research and development credit
carryforwards of approximately $5,424,000 and $7,254,000, respectively. The U.S. federal research and
development credit will expire from 2022 through 2039 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, 2019, the Company’s subsidiary had U.S. net operating loss carryforwards for
California tax purpose of $402,000, which will expire, if not utilized beginning in 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 no material change in
estimate which would have been reflected within the measurement period in accordance with SAB 118.
In 2018, the Income Tax Act in Taiwan was amended and, starting from January 1, 2019, surcharge of
profit-seeking enterprise income tax on undistributed earnings tax offset against dividend withholding for
non-Taiwan resident was not available.
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 $586,000 and $681,000 as of December 31, 2019 and 2018,
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 2014 because of the statute
of limitations.
- 28 -
14. 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, 2019, 2018, and 2017, pension costs charged to
income in relation to the contributions to these schemes were $1,148,000, $1,236,000, and $1,053,000,
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, 2019 and 2018,
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, 2019 and 2018 were as follows:
Cash
Debt securities
Equity securities
December 31
2019
2018
17%
29%
45%
14%
28%
51%
Changes in projected benefit obligation and plan assets for the years ended December 31, 2019, 2018 and
2017 were as follows:
(In Thousands)
Years Ended December 31
2018
2019
2017
Projected benefit obligation, beginning of the year
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Settlement
Effect of changes in foreign exchange rate
$
$ 1,018
3
7
-
(34)
(38)
23
$ 1,026
4
10
-
10
-
(32)
877
3
14
-
58
-
74
Projected benefit obligation, end of the year
$
979
$ 1,018
$ 1,026
- 29 -
Fair value of plan assets, beginning of the year
Employer contributions
Actual return on plan assets
Effect of changes in foreign exchange rate
$
$
$
697
19
31
18
671
20
27
(21)
596
19
6
50
Fair value of plan assets, end of the year
$
765
$
697
$
671
The component of net periodic benefit cost was as follows:
(In Thousands)
Years Ended December 31
2018
2019
2017
Service cost
Interest cost
Expected return on plan assets
Amortization of net pension loss
Curtailment or settlement loss
$
$
$
3
7
(12)
6
5
4
10
(10)
6
-
3
14
(11)
3
-
Net periodic benefit cost
$
9
$
10
$
9
The funded status of the plan was as follows:
(In Thousands)
December 31
2019
2018
Accumulated benefit obligation
$
(837)
$
(852)
Project benefit obligation
Plan assets at fair value
Funded status of the plan
(979)
765
(1,018)
697
$
(214)
$
(321)
The actuarial assumptions to determine the benefit obligations were as follows:
Discount rate
Rate of compensation increases
December 31
2019
2018
0.7%
2.0%
0.8%
2.0%
The actuarial assumptions to determine the net periodic benefit cost were as follows:
Years Ended December 31
2018
2019
2017
Discount rate
Rate of compensation increases
Expected long-term rate of return on plan assets
0.8%
2.0%
1.8%
1.0%
2.0%
1.5%
1.0%
2.0%
1.5%
The expected long-term rate of return shown for the plan assets was deliberated based on the ten-year
average return on plan assets of Trust Department of Bank of Taiwan and the average two-year deposit
interest rate of local banking institutions.
- 30 -
Estimated future benefit payments are as follows:
Year
2020
2021
2022
2023
2024 and thereafter
15. STOCK-BASED COMPENSATION
Employee Stock Purchase Plan
(In Thousands)
$
44
18
163
31
280
In May 2009, the Board adopted the 2009 Employee Stock Purchase Plan (“2009 Purchase Plan”) The 2009
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. The 2009 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 2009 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. 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 2017 to 2019, 9,947,350 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
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. As approved by the AGM held on June 22, 2012,
additional 50,000,000 ordinary shares were reserved for issuance under the 2005 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, 2019, the number of stock options outstanding and
exercisable was 99,600,000 and 99,451,350, 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, 2019,
the number of stock options outstanding and exercisable was 68,117,500 and 49,966,000, respectively,
under the 2015 SIP.
- 31 -
A summary of the Company’s stock option activity under the plans as of December 31, 2019, 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, 2019
Granted
Exercised
Forfeited or expired
175,593,950
$ 0.0646
10,685,000 $ 0.0317
$ 0.0282
$ 0.1261
(256,900)
(18,304,550)
Outstanding Options, December 31, 2019
167,717,500
$ 0.0558
3.36
$ 256,404
Vested and Expected to Vest Options at
December 31, 2019
164,417,952
$ 0.0563
3.29
$ 244,948
Exercisable Options at December 31, 2019 149,417,350
$ 0.0586
3.03
$ 198,563
The total intrinsic value of options exercised during the years ended December 31, 2019, 2018, and 2017
was $800, $1,800, and $5,000, 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
48,666,200
30,536,650
35,137,550
35,697,550
17,679,550
4.58
5.37
2.04
2.82
0.23
$ 0.0306 41,682,600
$ 0.0385 19,220,100
$ 0.0579 35,137,550
$ 0.0782 35,697,550
$ 0.1060 17,679,550
$ 0.0306
$ 0.0405
$ 0.0579
$ 0.0782
$ 0.1060
Range of Exercise Prices
$0.0265 - $0.0314
$0.0318 - $0.0472
$0.0506 - $0.0640
$0.0644 - $0.0800
$0.0872 - $0.1122
Balance, December 31, 2019
167,717,500
3.36
$ 0.0558 149,417,350
$ 0.0586
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
2018
2019
2017
Employee Stock Purchase Plan
Years Ended December 31
2018
2019
2017
Risk-free interest rate
Expected life
1.39%-2.43%
5
Years
2.51%-2.85%
5
Years
1.84%-1.93% 1.52%-2.43% 1.48%-2.32% 0.51%-1.18%
5
Years
0.25-0.26
Years
0.25-0.26
Years
0.25-0.26
Years
- 32 -
Volatility
Dividend
42%
-
39%-42%
-
37%-38%
-
44%-58%
-
29%-59%
-
40%-79%
-
The weighted-average grant-date fair value of options granted during the years ended December 31, 2019,
2018, and 2017 was $0.0128, $0.0114, and $0.0168, respectively. The weighted-average fair value of
options granted under the 2009 Purchase Plan during the years ended December 31, 2019, 2018, and 2017
was $0.0060, $0.0062, and $0.0092, respectively.
Share Incentive Plan
The Board adopted the 2005 SIP, which was effective on March 2, 2006. 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. 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, 2019, and changes during the year
ended December 31, 2019, is presented as follows:
Weighted
Average
Number of
Outstanding Grant-Date
Fair Value
RSUs
Nonvested at January 1, 2019
Granted
Vested
Forfeited and expired
Nonvested at December 31, 2019
$ 0.0353
80,763,800
41,754,000
$ 0.0329
(28,661,400) $ 0.0372
(4,411,050) $ 0.0309
89,445,350 $ 0.0338
As of December 31, 2019, there was $1,818,000 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 2.25 years. The total fair
value of RSUs vested during the years ended December 31, 2019, 2018, and 2017 was $1,065,000,
$1,196,000, and $998,000, respectively.
Cash received from option exercise under all share-based payment arrangements for the years ended
December 31, 2019, 2018, and 2017, was $116,000, $96,000, and $113,000, respectively.
Ordinary Shares Reserved
As of December 31, 2019, 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
167,717,500
89,445,350
119,410,450
15,996,800
392,570,100
- 33 -
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.
16. 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 (loss) income 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
2018
2019
2017
Net (loss) income (in thousands)
$ (5,039)
$ 2,088
$ (6,145)
Weighted average shares outstanding (in thousands) – basic
1,316,032
1,300,795
1,288,977
Effect of dilutive securities:
Options and RSUs (in thousands)
-
30,027
-
Weighted average shares outstanding (in thousands) – diluted
1,316,032
1,330,822
1,288,977
(Loss) earnings per share
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 167,717,500 shares at $0.0266 to $0.1636 as of December 31, 2019, 160,388,575
shares at $0.0270 to $0.1636 as of December 31, 2018, and 185,500,550 shares at $0.0274 to $0.1636 as
of December 31, 2017. The anti-dilutive RSUs excluded were 89,445,350 shares, 6,214,513 shares, and
72,117,700 shares as of December 31, 2019, 2018, and 2017, respectively.
17. COMMITMENTS
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, 2019, those
purchase commitments were as follows:
Year
2020
2021
2022
Total
- 34 -
(In Thousands)
$ 654
505
144
$ 1,303
18. CONTINGENCIES
Legal Proceeding
The Company is involved in the litigation matter relating to its civil contract, as detailed below. While
there exists two different possibilities of this litigation, the Company cannot make any assurances
regarding the eventual resolution of this matter.
Taiwan Fertilizer Co., Ltd. v. O2Micro Electronics, Inc. (“O2Micro-Taiwan”)
Taiwan Fertilizer Co., Ltd. filed a civil lawsuit for breach of Residential Lease Contract in Taipei District
Court against O2Micro-Taiwan, requesting O2Micro-Taiwan to pay compensatory damages. This lawsuit
was accepted by Taipei District Court of Taiwan and the first trail session executed at October 8, 2019.
Two hearings have been held and the 3rd trail session is due to date of February 13, 2020. This case is still
proceeding. The Company has accrued its best estimate for the ultimate resolution of the matter.
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. The
Company continuously evaluates these contingencies to determine the provision of accruals, when
relevant information becomes available. As of December 31, 2019, the accrued liability for estimated loss
contingencies that we believe are probable and for which a reasonable estimate can be made was $93,000,
recorded in accrued expenses and other current liabilities. No provision for any litigation has been
provided as of December 31, 2018.
19. FINANCIAL INSTRUMENTS
Information on the Company’s financial instruments was as follows:
(In Thousands)
December 31
2019
2018
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$ 10,696
35
35,693
4,172
$ 10,696
35
35,693
4,172
$ 32,414
34
6,172
10,445
$ 32,414
34
6,172
10,445
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,
2019 and 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.
20. 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.
- 35 -
Revenues by geographic region are based on the location to which our products or services are delivered
and were as follows:
China
U.S.A.
Taiwan
Japan
Malaysia
Korea
Singapore
Other
Total
Revenues by product category were as follows:
Integrated Circuits
Mixed-signal
Analog
Digital
Licensing revenue
Total
(In Thousands)
Years Ended December 31
2018
2017
2019
$
$
$
52,233
2,077
2,016
1,354
1,287
950
648
363
55,303
68
1,987
1,485
1,396
1,201
959
315
51,962
160
2,305
3,148
94
1,435
905
196
$
60,928
$
62,714
$
60,205
(In Thousands)
Years Ended December 31
2018
2017
2019
$
$
34,944
23,901
3
2,080
39,603
23,063
48
-
$
40,334
19,801
50
20
$
60,928
$
62,714
$
60,205
For the year ended December 31, 2019 and 2018, two customers accounted for 10% or more of revenues.
For the years ended December 31, 2017, only one customer accounted for 10% or more of revenues. The
percentage of revenues to these customers was as follows:
Customer A
Customer B
Years Ended December 31
2018
2017
2019
14%
12%
13%
11%
15%
9%
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
2019
December 31
2018
2017
$
7,621 $
4,015
3,661
254
6,037 $
4,029
3,620
28
6,145
4,015
3,565
30
$
15,551
$
13,714
$
13,755
- 36 -
21. SUBSEQUENT EVENT
On January 30, 2020, the World Health Organization declared a public health emergency of international
concern with respect to coronavirus (COVID-19) which emerged in the Chinese city of Wuhan in early
January, and has since spread throughout the world, negatively affecting financial and industrial markets in
the first few months of 2020. The Company has not yet experienced significant adverse impacts to its
business, results of operations, or financial position as a result of COVID-19. Although we are taking
steps to mitigate the impact of the COVID-19 on our business, we expect it could have a negative impact
our business and results of operations in the near term. Because this situation is continuing to develop, the
full extent of the impact is not yet known and will depend on, among other things, the duration of
quarantines and other travel restrictions, both within China and globally, and the degree to which the virus
spreads beyond currently affected geographies.
- 37 -