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EX-31.1 - EXHIBIT 31.1 - INPHI Corpex_99000.htm
 

 



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 


 

 

 

 

(Mark One)

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended September 30, 2017 

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission file number 001-34942

 

 

Inphi Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

77-0557980

(State or Other Jurisdiction
of Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

2953 Bunker Hill Lane, Suite 300,

Santa Clara, California 95054

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s telephone number, including area code: (408) 217-7300

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☑      No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☑      No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☑

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

(Do not check if a smaller reporting company)

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in 12b-2 of the Exchange Act).  Yes  ☐      No  ☑

 

The total number of shares outstanding of the Registrant’s common stock, $0.001 par value per share, as of November 3, 2017 was 42,533,551.

 



 

 

 

INPHI CORPORATION

 

QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2017

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

2

 

Item 1.

Financial Statements

 

2

 

 

Unaudited Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016

 

2

 

 

Unaudited Condensed Consolidated Statements of Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016

 

3

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016

 

4

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

 

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

26

 

Item 4.

Controls and Procedures

 

26

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

27

 

Item 1.

Legal Proceedings

 

27

 

Item 1A.

Risk Factors

 

28

 

Item 6.

Exhibits

 

29

 

Signatures

       

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements

 

INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

   

September 30,

2017

   

December 31,

2016

 
                 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 165,868     $ 144,867  

Investments in marketable securities

    238,877       249,476  

Accounts receivable, net

    72,115       49,999  

Inventories

    34,636       32,039  

Prepaid expenses and other current assets

    11,703       23,139  

Total current assets

    523,199       499,520  

Property and equipment, net

    57,957       44,471  

Goodwill

    104,564       105,077  

Identifiable intangible assets, net

    236,549       327,063  

Deferred tax charge

          1,384  

Other assets, net

    11,338       13,080  

Total assets

  $ 933,607     $ 990,595  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities:

               

Accounts payable

  $ 15,023     $ 14,039  

Deferred revenue

    7,999       3,630  

Accrued employee expenses

    12,609       16,588  

Other accrued expenses

    7,699       7,277  

Other current liabilities

    29,327       24,736  

Total current liabilities

    72,657       66,270  

Convertible debt

    415,074       396,857  

Other long-term liabilities

    40,293       64,944  

Total liabilities

    528,024       528,071  

Commitments and contingencies (Note 16)

               
                 

Stockholders’ equity:

               

Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued

           

Common stock, $0.001 par value; 500,000,000 shares authorized; 42,426,178 and 41,303,353 issued and outstanding at September 30, 2017 and December 31, 2016, respectively

    43       41  

Additional paid-in capital

    478,942       459,928  

Retained earnings (accumulated deficit)

    (74,247 )     1,976  

Accumulated other comprehensive income

    845       579  

Total stockholders’ equity

    405,583       462,524  

Total liabilities and stockholders’ equity

  $ 933,607     $ 990,595  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(in thousands, except share and per share amounts)

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Revenue

  $ 84,511     $ 70,750     $ 262,518     $ 185,365  

Cost of revenue

    42,440       22,562       119,099       58,958  

Gross profit

    42,071       48,188       143,419       126,407  

Operating expenses:

                               

Research and development

    78,849       25,897       158,574       77,205  

Sales and marketing

    10,100       6,688       31,580       18,282  

General and administrative

    5,584       5,359       18,177       14,436  

Total operating expenses

    94,533       37,944       208,331       109,923  

Income (loss) from operations

    (52,462 )     10,244       (64,912 )     16,484  

Interest expense

    (7,566 )     (3,987 )     (22,109 )     (10,290 )

Other income, net

    1,080       1,869       2,656       2,756  

Income (loss) before income taxes from continuing operations

    (58,948 )     8,126       (84,365 )     8,950  

Provision (benefit) for income taxes

    (10,182 )     1,530       (9,359 )     1,501  

Net income (loss) from continuing operations

    (48,766 )     6,596       (75,006 )     7,449  

Discontinued operations:

                               

Gain from sale

          78,531             78,531  

Loss from discontinued operations

          (3,822 )           (3,907 )

Provision for income taxes

          1,733             1,750  

Net income from discontinued operations

          72,976             72,874  

Net income (loss)

  $ (48,766 )   $ 79,572     $ (75,006 )   $ 80,323  

Earnings per share:

                               

Basic

                               

Net income (loss) from continuing operations

  $ (1.15 )   $ 0.16     $ (1.78 )   $ 0.18  

Net income from discontinued operations

          1.79             1.81  

Basic earnings per share

  $ (1.15 )   $ 1.95     $ (1.78 )   $ 1.99  

Diluted

                               

Net income (loss) from continuing operations

  $ (1.15 )   $ 0.15     $ (1.78 )   $ 0.17  

Net income from discontinued operations

          1.65             1.66  

Diluted earnings per share

  $ (1.15 )   $ 1.80     $ (1.78 )   $ 1.83  

Weighted-average shares used in computing earnings per share:

                               

Basic

    42,350,313       40,854,508       42,022,272       40,343,548  

Diluted

    42,350,313       44,318,827       42,022,272       43,998,821  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

  

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Net income (loss)

  $ (48,766 )   $ 79,572     $ (75,006 )   $ 80,323  
                                 

Other comprehensive income (loss):

                               

Available for sale investments:

                               

Change in unrealized gain, net of tax

    42       (174 )     266       139  

Realized gain reclassified into earnings, net of tax

                      (5 )

Comprehensive income (loss)

  $ (48,724 )   $ 79,398     $ (74,740 )   $ 80,457  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 

Cash flows from operating activities

               

Net income (loss)

  $ (75,006 )   $ 80,323  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

               

Depreciation and amortization

    58,730       22,291  

Stock-based compensation

    32,368       22,202  

Impairment of intangible assets

    47,014        

Deferred income taxes and deferred tax charge

    (10,304 )     900  

Accretion of convertible debt and amortization of debt issuance costs

    18,217       8,258  

Gain from sale of discontinued operations

          (78,531 )

Gain from sale of cost method investment

          (1,138 )

Amortization of premium on marketable securities

    931       1,040  

Other noncash items

    (50 )     (8 )

Changes in assets and liabilities:

               

Accounts receivable

    (21,576 )     (11,008 )

Inventories

    (2,597 )     (2,905 )

Prepaid expenses and other assets

    2,494       776  

Income tax payable/receivable

    (1,020 )     1,872  

Accounts payable

    3,081       5,212  

Accrued expenses

    (3,836 )     (220 )

Deferred revenue

    4,369       (1,145 )

Other liabilities

    (4,570 )     2,424  

Net cash provided by operating activities

    48,245       50,343  

Cash flows from investing activities

               

Purchases of property and equipment

    (30,914 )     (16,285 )

Purchases of marketable securities

    (158,244 )     (277,831 )

Sales of marketable securities

    39,372       2,435  

Maturities of marketable securities

    139,768       71,903  

Purchases of software licenses

    (12,799 )      

Remaining payment related to acquisition of business

    (1,800 )      

Proceeds from sale of cost method investment

          6,345  

Proceeds from sale of discontinued operations

    10,690       78,750  

Purchase of cost-method investment in private company

          (2,000 )

Other investing activity

    100        

Net cash used in investing activities

    (13,827 )     (136,683 )

Cash flows from financing activities

               

Proceeds from exercise of stock options

    1,514       5,108  

Proceeds from employee stock purchase plan

    5,776       5,518  

Payment of capital lease obligations

    (731 )      

Long-term loan

    272       (725 )

Proceeds from issuance of convertible debt, net of issuance costs paid

          279,960  

Minimum tax withholding paid on behalf of employees for restricted stock units

    (20,248 )     (15,986 )

Purchase of capped call options

          (22,540 )

Net cash provided by (used in) financing activities

    (13,417 )     251,335  

Net increase in cash and cash equivalents

    21,001       164,995  

Cash and cash equivalents at beginning of period

    144,867       283,044  

Cash and cash equivalents at end of period

  $ 165,868     $ 448,039  

Supplemental cash flow information:

               

Income taxes paid

  $ 2,100     $ 226  

Interest paid

    3,378       1,243  

Supplemental disclosure of non-cash investing and financing activities:

               

Software licenses purchased with debt

    2,808        

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

 

1. Organization and Basis of Presentation

 

Inphi Corporation (the “Company”), a Delaware corporation, was incorporated in November 2000. The Company is a fabless provider of high-speed analog and mixed signal semiconductor solutions for the communications and datacenter markets. The Company’s semiconductor solutions are designed to address bandwidth bottlenecks in networks, maximize throughput and minimize latency in computing environments and enable the rollout of next generation communications and datacenter infrastructures. In addition, the semiconductor solutions provide a vital high-speed interface between analog signals and digital information in high-performance systems such as telecommunications transport systems, enterprise networking equipment and datacenters.

 

On August 4, 2016, the Company completed the sale of its memory product business to Rambus Inc. (Rambus) for $90,000. The Company’s condensed consolidated financial statements and the accompanying notes for prior period has been retrospectively reclassified to present the results of operations of memory product business as discontinued operations.

 

On December 12, 2016, the Company completed the acquisition of ClariPhy Communications Inc. (ClariPhy) for $303,661 in cash. The revenue and expenses of ClariPhy are included in the consolidated statement of income from December 12, 2016.

 

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”), Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2016, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2017.

 

The interim condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to state fairly the Company’s consolidated financial position at September 30, 2017, and its consolidated results of operations for the three and nine months ended September 30, 2017 and 2016 and cash flows for the nine months ended September 30, 2017 and 2016. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for future quarters or the full year.

 

 

2. Recent Accounting Pronouncements 

 

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on “Revenue from Contracts with Customers.” The new revenue recognition guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance was initially effective for the Company on January 1, 2017. The new guidance permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB voted to defer the effective date of the new revenue recognition standard by one year. The guidance may be adopted as early as January 1, 2017, the effective date of the original guidance. In March 2016, the FASB issued guidance in the assessment of whether an entity is a principal or an agent in the new revenue standard (gross versus net revenue presentation). In April 2016, the FASB issued guidance which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. The guidance changed the previous proposals on renewals of right-of-use licenses and contractual restrictions. The guidance has the same effective date and transition requirements as the new revenue standard. The Company selected the cumulative effect transition method. Under the new guidance, the Company is likely to recognize revenue on sales to distributors upon shipment and transfer of control (known as “sell-in” revenue recognition), rather than deferring recognition until distributors report that they have sold the products to their customers (known as “sell-through” revenue recognition). The Company is currently evaluating other effects that the new revenue standards might have on its consolidated financial statements and related disclosures.

 

In July 2015, the FASB issued guidance applying to inventory measured using any other method other than last-in, last-out method. Under this guidance inventory is measured at the lower of cost and net realizable value. The net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is applied prospectively and is effective for the Company beginning January 1, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

In January 2016, the FASB issued guidance that requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. The guidance eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, and requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The guidance also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements is required under this guidance. The guidance further clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The guidance is applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and is effective for the Company in its first quarter of fiscal 2018. Early adoption is permitted only if certain criteria is met. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued guidance that requires companies that lease assets (lessees) to recognize on the balance sheet the assets and liabilities for the rights and obligations created by the leases with lease terms of more than 12 months. This guidance is effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued guidance that eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The guidance require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The guidance also requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The guidance is effective for the Company beginning after January 1, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

 

In August 2016, the FASB issued guidance related to the classification of certain transactions on the statement of cash flows. The guidance will be effective for calendar year-end public companies in 2018, however early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.

 

In October 2016, the FASB issued guidance which amends the financial reporting for the income tax consequences of intra-entity transfers other than inventory. The guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset (with the exception of inventory) when the transfer occurs. The guidance will be effective for calendar year-end public companies in 2018, however early adoption is permitted. The Company early adopted this standard and the effect of adoption is discussed in Note 11 of the condensed consolidated financial statements.

 

In January 2017, the FASB issued guidance on classifying the definition of a business. This guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance will be effective for calendar year-end public companies in 2018. Early adoption is permitted for transactions for which the acquisition date occurs before the effective date of the guidance only when the transaction has not been reported in financial statements that have been issued.

 

In January 2017, the FASB issued guidance to simplify the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

In May 2017, the FASB issued guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or condition. The guidance will be effective for calendar year-end beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the impact of this new guidance on our consolidated financial statements and related disclosures.

 

 

3. Discontinued Operations

 

As discussed in Note 1, on August 4, 2016, the Company completed the sale of its memory product business to Rambus. The Company recorded a gain of $78,531 in the three and nine months ended September 30, 2016. The Company’s condensed consolidated financial statements and the accompanying notes for prior period has been retrospectively reclassified to present the results of operations of memory product business as discontinued operations.

 

The components of the gain on sale of the memory product business were as follows:

 

Cash proceeds from sale (including amounts held in escrow)

  $ 90,000  

Less book value of assets sold:

       

Inventories

    (5,947 )

Prepaid expenses

    (250 )

Property and equipment

    (7,051 )

Goodwill

    (714 )

Deferred revenue

    1,757  

Liabilities

    736  

Gain on sale

  $ 78,531  

 

The results of discontinued operations for the three and nine months ended September 30, 2016 were as follows:

 

   

Three Months Ended

September 30, 2016

   

Nine Months Ended

September 30, 2016

 

Revenue

  $ 2,212     $ 24,418  

Cost of revenue

    (1,163 )     (13,367 )

Operating expenses

    (4,871 )     (15,134 )

Other income

          176  

Gain on sale

    78,531       78,531  

Provision for income taxes

    (1,733 )     (1,750 )

Net income from discontinued operations

  $ 72,976     $ 72,874  

 

The results of discontinued operations for the three months and nine months ended September 30, 2016 included the following:

 

   

Three Months Ended

September 30, 2016

   

Nine Months Ended

September 30, 2016

 

Depreciation and amortization

  $ 149     $ 1,108  

Stock-based compensation expense

    314       2,324  

Property and equipment expenditures

    905       2,455  

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

 

4. Investments

 

The following table summarizes the investments by investment category:

 

   

September 30, 2017

   

December 31, 2016

 
   

Cost

   

Fair Value

   

Cost

   

Fair Value

 

Available-for-sale securities:

                               

U.S. treasury securities

  $ 1,000     $ 1,000     $ 3,999     $ 4,000  

Municipal bonds

    29,307       29,305       45,289       45,171  

Corporate notes/bonds

    114,255       114,291       112,330       112,205  

Variable rate demand notes

    44,640       44,640       58,930       58,930  

Commercial paper

    44,227       44,224       23,945       23,947  

Asset backed securities

    5,418       5,417       5,221       5,223  

Total investments

  $ 238,847     $ 238,877     $ 249,714     $ 249,476  

 

As of September 30, 2017, the Company had 63 investments that were in an unrealized loss position. The gross unrealized losses on these investments at September 30, 2017 of $84 were determined to be temporary in nature. The Company reviews the investments to identify and evaluate investments that have an indication of possible other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

 

The contractual maturities of available-for-sale securities at September 30, 2017 are presented in the following table:

 

   

Cost

   

Fair Value

 

Due in one year or less

  $ 140,724     $ 140,704  

Due between one and five years

    53,483       53,533  

Due after five years

    44,640       44,640  
    $ 238,847     $ 238,877  

 

 

5. Inventories

 

Inventories consist of the following:

 

   

September 30,

2017

   

December 31,

2016

 
                 

Raw materials

  $ 12,842     $ 1,648  

Work in process

    14,328       15,999  

Finished goods

    7,466       14,392  
    $ 34,636     $ 32,039  

 

Finished goods include $1,188 and $805 of inventories held by distributors as of September 30, 2017 and December 31, 2016, respectively.

 

 

6. Property and Equipment, net

 

Property and equipment consist of the following:

 

   

September 30,

2017

   

December 31,

2016

 

Laboratory and production equipment

  $ 87,732     $ 64,402  

Office, software and computer equipment

    27,733       25,248  

Furniture and fixtures

    1,616       1,396  

Leasehold improvements

    7,253       6,707  
      124,334       97,753  

Less accumulated depreciation

    (66,377 )     (53,282 )
    $ 57,957     $ 44,471  

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

Depreciation and amortization expense of property and equipment for the three and nine months ended September 30, 2017 was $5,304 and $15,203, respectively. Depreciation and amortization expense of property and equipment for the three and nine months ended September 30, 2016 was $4,014 and $11,651, respectively.

 

As of September 30, 2017 and December 31, 2016, computer software costs included in property and equipment were $7,065 and $6,453, respectively. Amortization expense of capitalized computer software costs was $252 and $791 for the three and nine months ended September 30, 2017, respectively. Amortization expense of capitalized computer software costs was $293 and $879 for the three and nine months ended September 30, 2016, respectively.

 

Property and equipment not yet paid as of September 30, 2017 and December 31, 2016 were $2,049 and $4,221, respectively.

 

The Company leases certain equipment under capital lease agreements. Assets held under capital leases are included in property and equipment above. Gross amount and accumulated depreciation of assets under capital lease as of September 30, 2017 was $3,639 and $682, respectively. Gross amount and accumulated depreciation of assets under capital lease as of December 31, 2016 was $3,698 and $36, respectively.

 

The minimum lease payments under capital leases as of September 30, 2017 are as follows:

 

2017 (remaining)

  $ 213  

2018

    719  

2019

    546  

2020

    402  

2021

    115  

Total minimum lease payments

    1,995  

Less: Amount representing interest

    296  

Minimum lease payments, net of interest

  $ 1,699  

 

 

7. Identifiable Intangible Assets

 

The following table presents details of identifiable intangible assets:

 

   

September 30, 2017

   

December 31, 2016

 
   

Gross

   

Accumulated Amortization

   

Net

   

Gross

   

Accumulated Amortization

   

Net

 

Developed technology

  $ 126,300     $ 46,782     $ 79,518     $ 138,020     $ 26,579     $ 111,441  

Customer relationships

    70,540       9,522       61,018       70,540       2,227       68,313  

Trade name

    2,310       772       1,538       2,310       426       1,884  

Patents

    1,579       690       889       1,579       552       1,027  

Software

    47,421       14,335       33,086       47,394       336       47,058  

In-process research and development

    60,500             60,500       97,340             97,340  
    $ 308,650     $ 72,101     $ 236,549     $ 357,183     $ 30,120     $ 327,063  

 

During the nine months ended September 30, 2017, the Company recorded a measurement period adjustment of $513. This resulted in a net decrease of $513 in goodwill, increase in accounts receivable of $540, decreases of $96 in deferred tax liability and income tax payable and prepaid expenses and other current assets of $123.

 

During the three months ended September 30, 2017, the Company abandoned a project related to certain developed technology and in-process research and development from the ClariPhy acquisition resulting in an impairment charge of $47,014, of which $10,174 was included in the cost of revenue and $36,840 was included in the research and development expenses in the unaudited condensed consolidated statement of income (loss). The abandonment of the project was primarily related to change in product roadmap that occurred during the three months ended September 30, 2017.

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

The following table presents amortization of intangible assets for the three and nine months ended September 30, 2017 and 2016:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Cost of goods sold

  $ 7,249     $ 2,875     $ 21,749     $ 8,624  

Research and development

    4,777             13,999        

Sales and marketing

    2,432       204       7,295       613  

General and administrative

    158       97       484       295  
    $ 14,616     $ 3,176     $ 43,527     $ 9,532  

 

Based on the amount of intangible assets subject to amortization at September 30, 2017, the expected amortization expense for each of the next five fiscal years and thereafter is as follows:

 

2017 (remaining)

  $ 13,611  

2018

    52,411  

2019

    48,600  

2020

    21,098  

2021

    17,919  

Thereafter

    22,410  
    $ 176,049  

 

The weighted-average amortization periods remaining by intangible asset category are as follows (in years):

 

Developed technology

    3.4  

Customer relationship

    6.3  

Trade name

    3.7  

Patents

    10.3  

Software

    2.1  

 

 

8. Product Warranty Obligation

 

As of September 30, 2017 and December 31, 2016, the product warranty liability was $110. There was no movement in product warranty liability during the three and nine months ended September 30, 2017 and 2016.

 

 

9. Convertible debt

 

In December 2015, the Company issued $230,000 of 1.125% convertible senior notes due 2020 (Convertible Notes 2015). The Convertible Notes 2015 will mature December 1, 2020, unless earlier converted or repurchased. Interest on the Convertible Notes is payable on June 1 and December 1 of each year, beginning on June 1, 2016. The initial conversion rate is 24.8988 shares of common stock per $1 principal amount of Convertible Notes 2015, which represents an initial conversion price of approximately $40.16 per share. The total interest expense recognized for the three months ended September 30, 2017 was $3,443, which consists of $650 of contractual interest expense, $2,562 of amortization of debt discount and $231 of amortization of debt issuance costs. The total interest expense recognized for the nine months ended September 30, 2017 was $10,075, which consists of $1,936 of contractual interest expense, $7,467 of amortization of debt discount and $672 of amortization of debt issuance costs. The total interest expense recognized for the three months ended September 30, 2016 was $3,249, which consists of $650 of contractual interest expense, $2,384 of amortization of debt discount and $215 of amortization of debt issuance costs. The total interest expense recognized for the nine months ended September 30, 2016 was $9,552, which consists of $1,926 of contractual interest expense, $6,997 of amortization of debt discount and $629 of amortization of debt issuance costs.

 

In connection with the issuance of the Convertible Notes 2015, the Company entered into capped call transactions (Capped Call 2015) in private transactions. Under the Capped Call 2015, the Company purchased capped call options that in aggregate relate to 100% of the total number of shares of the Company's common stock underlying the Convertible Notes 2015, with a strike price equal to the conversion price of the Convertible Notes 2015 and with a cap price equal to $52.06 per share.

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

In September 2016, the Company issued $287,500 of 0.75% convertible senior notes due 2021 (Convertible Notes 2016, and together with the Convertible Notes 2015, the Convertible Notes). The Convertible Notes 2016 will mature September 1, 2021, unless earlier converted or repurchased. Interest on the Convertible Notes 2016 is payable on March 1 and September 1 of each year, beginning on March 1, 2017. The initial conversion rate is 17.7508 shares of common stock per $1 principal amount of Convertible Notes 2016, which represents an initial conversion price of approximately $56.34 per share. The total interest expense recognized for the three months ended September 30, 2017 was $3,999, which consists of $542 of contractual interest expense, $3,195 of amortization of debt discount and $262 of amortization of debt issuance costs. The total interest expense recognized for the nine months ended September 30, 2017 was $11,684, which consists of $1,606 of contractual interest expense, $9,315 of amortization of debt discount and $763 of amortization of debt issuance costs. The total interest expense recognized for the three and nine months ended September 30, 2016 was $738, which consists of $106 of contractual interest expense, $584 of amortization of debt discount and $48 of amortization of debt issuance costs.

 

In connection with the issuance of the Convertible Notes 2016, the Company entered into capped call transactions (Capped Call 2016) in private transactions. Under the Capped Call 2016, the Company purchased capped call options that in aggregate relate to 100% of the total number of shares of the Company's common stock underlying the Convertible Notes 2016, with a strike price approximately equal to the conversion price of the Convertible Notes 2016 and with a cap price equal to approximately $73.03 per share.

 

 

10. Other liabilities

 

Other current liabilities consist of the following:

 

   

September 30,

2017

   

December 31,

2016

 

Obligations under capital lease

  $ 622     $ 797  

Intangible asset liability

    16,411       14,688  

Others

    12,294       9,251  
    $ 29,327     $ 24,736  

 

Other long-term liabilities consist of the following:

 

   

September 30,

2017

   

December 31,

2016

 

Deferred rent

  $ 1,440     $ 1,067  

Income tax payable

    1,926       1,554  

Obligations under capital lease

    1,077       1,633  

Intangible asset liability

    18,156       32,651  

Deferred tax liabilities

    16,803       27,371  

Others

    891       668  
    $ 40,293     $ 64,944  

 

 

11. Income Taxes

 

The Company normally determines its interim provision using an estimated single annual effective tax rate for all tax jurisdictions. ASC 740 provides that when an entity operates in a jurisdiction that has generated ordinary losses on a year-to-date basis or on the basis of the results anticipated for the full fiscal year and no benefit can be recognized on those losses, a separate effective tax rate should be computed and applied to ordinary income (or loss) in that jurisdiction. The Company incurred pretax loss during the three and nine months ended September 30, 2017 from its U.S. operations and will not recognize tax benefit of the losses due to full valuation allowance established against deferred tax assets. Thus, a separate effective tax rate was applied to losses from the U.S. jurisdiction to compute the Company’s interim tax provision. For the three and nine months ended September 30, 2016, the Company determined its interim provision using an estimated single annual effective tax rate for all tax jurisdictions.

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

The Company recorded an income tax benefit of $10,182 and $9,359 in the three and nine months ended September 30, 2017, respectively. The effective tax rate for both three and nine months ended September 30, 2017 was 17% and 11%. The difference between the effective tax rates and the 34% federal statutory rate was primarily due to tax impact of developed technology and in-process research and development impairment charge, change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in expected operating results, unrecognized tax benefits, recognition of federal and state research and development credits and windfall tax benefits from stock-based compensation.

 

The Company recorded an income tax provision from continuing operations of $1,530 and $1,501 in the three and nine months ended September 30, 2016, respectively. The effective tax rate for the three and nine months ended September 30, 2016 was 19% and 17%, respectively. The difference between the effective tax rates and the 34% federal statutory rate was primarily due to the change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in operating results, unrecognized tax benefits, recognition of federal and state research and development credits and windfall tax benefits from stock-based compensation from early adoption of Accounting Standards Update 2016-09.

 

As discussed in Note 2, the Company early adopted ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory at the beginning of 2017. As a result of the adoption, the Company wrote off the unamortized deferred tax charge balance to retained earnings. At the same time, the Company recorded deferred tax asset on the difference between tax basis and financial reporting carrying value in the consolidated financial statements related to the intercompany transfer of an asset in prior years. The effect of the adoption resulted in a charge of $1,217 on the beginning balance of retained earnings.

 

During the three and nine months ended September 30, 2017, the gross amount of the Company’s unrecognized tax benefits increased by approximately $953 and $4,010, respectively primarily as a result of tax positions taken during the current year. Substantially all of the unrecognized tax benefits as of September 30, 2017, if recognized, would affect the Company’s effective tax rate. The Company believes that in the next twelve months, it is reasonably possible that the gross unrecognized tax benefit may decrease by approximately $119 due to the expiration of statute of limitations on certain foreign income taxes.

 

The Company does not provide for U.S. income taxes on undistributed earnings of its controlled foreign corporations that are intended to be invested indefinitely outside the United States.

 

 

12. Earnings Per Share

 

The following shows the reconciliation of weighted average shares used in the calculation of basic and diluted earnings per share:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Weighted-average common stock—basic

    42,350,313       40,854,508       42,022,272       40,343,548  

Effect of potentially dilutive securities:

                               

Add options to purchase common stock

          1,307,334             1,338,945  

Add unvested restricted stock unit

          2,156,985             2,283,373  

Add employee stock purchase plan

                      32,955  

Weighted-average common stock—diluted

    42,350,313       44,318,827       42,022,272       43,998,821  

 

The following securities were not included in the computation of diluted earnings per share as inclusion would have been anti-dilutive:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Common stock options

    1,430,497             1,479,810        

Unvested restricted stock unit

    2,591,442             3,107,210       60,052  

Convertible debts

    10,830,038       6,780,961       10,830,038       6,080,946  
      14,851,977       6,780,961       15,417,058       6,140,998  

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

 

13. Stock–Based Compensation

 

In June 2010, the Board of Directors (the “Board”) approved the Company’s 2010 Stock Incentive Plan (the “2010 Plan”), which became effective in November 2010. The 2010 Plan provides for the grants of restricted stock, stock appreciation rights and stock unit awards to employees, non-employee directors, advisors and consultants. The Compensation Committee administers the 2010 Plan, including the determination of the recipient of an award, the number of shares subject to each award, whether an option is to be classified as an incentive stock option or nonstatutory option, and the terms and conditions of each award, including the exercise and purchase prices and the vesting or duration of the award. Options granted under the 2010 Plan are exercisable only upon vesting. At September 30, 2017, 4,337,307 shares of common stock have been reserved for future grants under the 2010 Plan.

 

Stock Option Awards 

 

The Company did not grant any stock options during the three and nine months ended September 30, 2017 and 2016.

 

The following table summarizes information regarding options outstanding:

 

   

Number of
Shares

   

Weighted
Average
Exercise
Price

   

Weighted
Average
Remaining
Contractual
Life

   

Aggregate
Intrinsic
Value

 
                                 

Outstanding at December 31, 2016

    1,647,845     $ 10.86       4.28     $ 55,636  

Exercised

    (221,395 )     6.66                  

Outstanding at September 30, 2017

    1,426,450     $ 11.51       3.57     $ 40,200  

Vested and exercisable at September 30, 2017

    1,426,450     $ 11.51       3.57     $ 40,200  

 

The intrinsic value of options outstanding, exercisable and vested and expected to vest is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the respective balance sheet dates.

 

The total intrinsic value of options exercised during the nine months ended September 30, 2017 and 2016 was $8,796 and $13,401, respectively. The intrinsic value of exercised options is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date. Cash received from the exercise of stock options was $1,514 and $5,108, respectively, for the nine months ended September 30, 2017 and 2016.

 

Restricted Stock Units

 

The Company granted restricted stock units (“RSUs”) to members of the Board and employees. Most of the Company’s outstanding RSUs vest over four years with vesting contingent upon continuous service. The Company estimates the fair value of RSUs using the market price of the common stock on the date of the grant. The fair value of these awards is amortized on a straight-line basis over the vesting period.

 

The following table summarizes information regarding outstanding restricted stock units:

 

   

Number of
Shares

   

Weighted
Average
Grant Date Fair

Value Per Share

 
                 

Outstanding at December 31, 2016

    4,448,630     $ 27.29  

Granted

    1,382,707       42.51  

Vested

    (1,196,167 )     19.53  

Canceled

    (232,819 )     32.38  

Outstanding at September 30, 2017

    4,402,351     $ 33.91  

Expected to vest at September 30, 2017

    4,316,950          

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

The RSUs include performance-based stock units subject to achievement of pre-established revenue goal and earnings per share on non-GAAP basis. Once the goals are met, the performance-based stock units are subject to four years of vesting from the original grant date, contingent upon continuous service. The total performance-based units that vested for the nine months ended September 30, 2017 was 96,724. As of September 30, 2017, the total performance-based units outstanding was 329,132.

 

Employee Stock Purchase Plan

 

In December 2011, the Company adopted the Employee Stock Purchase Plan (“ESPP”). Participants purchase the Company's stock using payroll deductions, which may not exceed 15% of their total cash compensation. Pursuant to the terms of the ESPP, the "look-back" period for the stock purchase price is six months. Offering and purchase periods will begin on February 10 and August 10 of each year. Participants will be granted the right to purchase common stock at a price per share that is 85% of the lesser of the fair market value of the Company's common stock at the beginning or the end of each six-month period.

 

The ESPP imposes certain limitations upon an employee’s right to acquire common stock, including the following: (i) no employee shall be granted a right to participate if such employee immediately after the election to purchase common stock, would own stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company, and (ii) no employee may be granted rights to purchase more than $25 fair value of common stock for each calendar year. The maximum aggregate number of shares of common stock available for purchase under the ESPP is 1,750,000 shares. The total common stock issued under the ESPP during the nine months ended September 30, 2017 and 2016 was 171,099 and 285,101, respectively.

 

The fair value of the ESPP is estimated at the start of offering period using the Black-Scholes option pricing model with the following assumptions:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Risk-free interest rate

    1.13 %     0.45 %     0.94 %     0.45 %

Expected life (in years)

    0.50       0.50       0.50       0.50  

Dividend yield

                       

Expected volatility

    45 %     52 %     42 %     54 %

Estimated fair value

  $ 10.04     $ 12.53     $ 11.03     $ 8.99  

 

 

Stock-Based Compensation Expense

 

Stock-based compensation expense is included in the Company’s results of operations as follows:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Operating expenses

                               

Cost of goods sold

  $ 556     $ 529     $ 1,654     $ 1,290  

Research and development

    7,770       4,050       20,959       12,448  

Sales and marketing

    2,247       1,298       6,048       3,026  

General and administrative

    1,320       1,279       3,707       3,114  

Discontinued operations

          314             2,324  
    $ 11,893     $ 7,470     $ 32,368     $ 22,202  

 

Total unrecognized compensation cost related to unvested stock options, restricted stock units and awards at September 30, 2017, prior to the consideration of expected forfeitures, is approximately $117,141 and is expected to be recognized over a weighted-average period of 2.94 years.

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

 

14. Fair Value Measurements

 

The guidance on fair value measurements requires fair value measurements to be classified and disclosed in one of the following three categories:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

The Company measures its investments in marketable securities at fair value using the market approach, which uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company has cash equivalents, which consist of money market funds valued using the amortized cost method, in accordance with Rule 2a-7 under the 1940 Act, which approximates fair value.

 

The Company determines the amount of transfers between Levels 1 and 2 or transfers into or out of Level 3 by using the end-of-period fair value. The Company had no transfers among the fair value hierarchy during the three and nine months ended September 30, 2017.

 

The following table presents information about assets required to be carried at fair value on a recurring basis:

 

September 30, 2017

 

Total

   

Level 1

   

Level 2

 

Assets

                       

Cash equivalents:

                       

Money market funds

  $ 24,877     $ 55     $ 24,822  

Municipal bonds

    4,001             4,001  

Corporate notes/bonds

    1,725             1,725  

Commercial paper

    66,229             66,229  

Investment in marketable securities:

                       

U.S. treasury securities

    1,000       1,000        

Municipal bonds

    29,305             29,305  

Corporate notes/bonds

    114,291             114,291  

Variable rate demand notes

    44,640             44,640  

Asset backed securities

    5,417             5,417  

Commercial paper

    44,224             44,224  
    $ 335,709     $ 1,055     $ 334,654  

Liabilities

                       

Convertible Notes

  $ 573,901     $     $ 573,901  

 

 

December 31, 2016

 

Total

   

Level 1

   

Level 2

 

Assets

                       

Cash equivalents:

                       

Money market funds

  $ 17,267     $ 10,110     $ 7,157  

Investment in marketable securities:

                       

U.S. treasury securities

    4,000       4,000        

Municipal bonds

    45,171             45,171  

Corporate notes/bonds

    112,205             112,205  

Variable rate demand notes

    58,930             58,930  

Asset backed securities

    5,223             5,223  

Commercial paper

    23,947             23,947  
    $ 266,743     $ 14,110     $ 252,633  

Liabilities

                       

Convertible Notes

  $ 616,831     $     $ 616,831  

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

The Convertible Notes are carried on the Consolidated Balance Sheets at their original issuance value including accreted interest, net of unamortized debt discount and issuance cost. The Convertible Notes are not marked to fair value at the end of each reporting period. As of September 30, 2017 and December 31, 2016, the fair value of Convertible Notes was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy.

 

 

15. Segment and Geographic Information

 

The Company operates in one reportable segment. The Company’s Chief Executive Officer, who is considered to be the chief operating decision maker, manages the Company’s operations as a whole and reviews consolidated financial information for purposes of evaluating financial performance and allocating resources. Revenue by region is classified based on the locations to which the product is transported, which may differ from the customer’s principal offices.

 

The following table sets forth the Company’s revenue by geographic region:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

United States

  $ 31,985     $ 5,906     $ 63,029     $ 20,373  

China

    20,435       28,573       80,990       69,087  

Thailand

    14,447       11,372       38,185       28,024  

Japan

    3,601       7,694       24,254       23,536  

Other

    14,043       17,205       56,060       44,345  
    $ 84,511     $ 70,750     $ 262,518     $ 185,365  

 

As of September 30, 2017, $7,890 of long-lived tangible assets are located outside the United States, of which $4,674 are located in Taiwan. As of December 31, 2016, $6,567 of long-lived tangible assets are located outside the United States, of which $5,068 are located in Taiwan.

 

 

16. Commitments and Contingencies

 

Leases

 

The Company leases its facility under noncancelable lease agreements expiring in various years through 2026. The Company also licenses certain software used in its research and development activities under a term license subscription and maintenance arrangement.

 

As of September 30, 2017, future minimum lease payments under noncancelable operating leases having initial terms in excess of one year are as follows:

 

2017 (remaining)

  $ 2,308  

2018

    5,797  

2019

    5,617  

2020

    2,832  

2021

    1,988  

Thereafter

    5,045  
    $ 23,587  

  

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

For the three and nine months ended September 30, 2017, lease operating expense was $1,709 and $5,075, respectively. For the three and nine months ended September 30, 2016, lease operating expense was $3,753 and $10,657, respectively.

 

Noncancelable Purchase Obligations

 

 The Company depends upon third party subcontractors to manufacture its wafers. These subcontractor relationships typically allow for the cancellation of outstanding purchase orders, but require payment of all expenses incurred through the date of cancellation. As of September 30, 2017, the total value of open purchase orders for wafers was approximately $4,688. As of September 30, 2017, the company has a commitment to pay $171 for software licenses.

 

Legal Proceedings

 

Netlist, Inc. v. Inphi Corporation, Case No. 09-cv-6900 (C.D. Cal.)

 

On September 22, 2009, Netlist filed suit in the United States District Court, Central District of California, or the Court, asserting that the Company infringes U.S. Patent No. 7,532,537. Netlist filed an amended complaint on December 22, 2009, further asserting that the Company infringes U.S. Patent Nos. 7,619,912 and 7,636,274, collectively with U.S. Patent No. 7,532,537, the patents-in-suit, and seeking both unspecified monetary damages to be determined and an injunction to prevent further infringement. These infringement claims allege that the iMB™ and certain other memory module components infringe the patents-in-suit. The Company answered the amended complaint on February 11, 2010 and asserted that the Company does not infringe the patents-in-suit and that the patents-in-suit are invalid. In 2010, the Company filed inter partes requests for reexamination with the United States Patent and Trademark Office (the “USPTO”), asserting that the patents-in-suit are invalid. As a result of the proceedings at the USPTO, the Court has stayed the litigation, with the parties advising the Court on status every 120 days.

 

As to the proceedings at the USPTO, reexamination has been ordered for all of the patents that were alleged to infringe, and at present, the USPTO has determined that almost all of the originally filed claims are not valid, with certain amended claims being determined patentable. The Reexamination Certificate for U.S. Patent No. 7,532,537 was issued on August 2, 2016 based upon amended claims, and the parties continue to assert their respective positions with respect to the reexamination proceedings for U.S. Patent Nos. 7,619,912 and 7,636,274.

 

While the Company intends to defend the foregoing USPTO proceedings and lawsuit vigorously, the USPTO proceedings and litigation, whether or not determined in the Company’s favor or settled, could be costly and time-consuming and could divert management’s attention and resources, which could adversely affect the Company’s business.

 

Based on the nature of USPTO proceedings and litigation, the Company is currently unable to predict the final outcome of this lawsuit and therefore, cannot determine the likelihood of loss nor estimate a range of possible loss. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company’s business, financial condition, results of operations or cash flows could be materially and adversely affected.

 

Indemnifications

 

In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third-parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnifications. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2017 and December 31, 2016.

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations and this report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the terms “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements include statements regarding our anticipated trends and challenges in our business and the markets in which we operate, including the market for 25G to 600G high-speed analog semiconductor solutions, demand for our current products, our plans for future products and anticipated features and benefits thereof, expansion of our product offerings and enhancements of existing products, anticipated benefits of our acquisition of ClariPhy and divestiture of our memory product business, critical accounting policies and estimates, our expectations regarding our expenses and revenue, sources of revenue, our tax benefits, the benefits of our products and services, our technological capabilities and expertise, timing of the development of our products, our liquidity position and sufficiency thereof, including our anticipated cash needs and uses of cash, our operating and capital expenditures and requirements and our needs for additional financing and potential consequences thereof, repatriation of cash balances from our foreign subsidiaries, our contractual obligations, our anticipated growth and growth strategies, our ability to retain and attract customers, particularly in light of our dependence on a limited number of customers for a substantial portion of our revenue, competition, interest rate sensitivity, adequacy of our disclosure controls, our legal proceedings and warranty claims. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these or any other forward-looking statements. These risks and uncertainties include, but are not limited to, those risks discussed below, as well as factors affecting our results of operations, our ability to manage our growth, our ability to sustain or increase profitability, demand for our solutions, the effect of declines in average selling prices for our products, our ability to compete, our ability to rapidly develop new technology and introduce new products, our ability to safeguard our intellectual property, our ability to qualify for tax holidays and incentives, trends in the semiconductor industry and fluctuations in general economic conditions, and the risks set forth throughout this Report, including the risks set forth under Part II, “ Item 1A, Risk Factors”. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on current expectations and reflect management's opinions only as of the date hereof. These forward-looking statements speak only as of the date of this Report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

 

All references to “Inphi,” “we,” “us” or “our” mean Inphi Corporation.

 

Inphi®, iKON™, InphiNityCore™, ColorZ™, ColorZ-Lite™, Polaris, Vega™, and the Inphi logo are trademarks or service marks owned by Inphi. All other trademarks, service marks and trade names appearing in this report are the property of their respective owners.

 

 

Overview

 

Our Company     

 

We are a fabless provider of high-speed analog and mixed signal semiconductor solutions for the communications and datacenter markets. Our analog and mixed signal semiconductor solutions provide high signal integrity at leading-edge data speeds while reducing system power consumption. Our semiconductor solutions are designed to address bandwidth bottlenecks in networks, maximize throughput and minimize latency in computing environments and enable the rollout of next generation communications and datacenter infrastructures. Our solutions provide a vital high-speed interface between analog signals and digital information in high-performance systems such as telecommunications transport systems, enterprise networking equipment and datacenters. We provide 25G to 600G high-speed analog semiconductor solutions for the communications market.

 

During the third quarter of 2017, we announced the new Vega™ family of low power 50/100/200/400G PAM4 Gearbox and Retimer Digital Signal Processor (DSP)s for system line cards. Leveraging our DSP-based PAM4, the new Gearbox and Retimer DSPs expand bandwidth capacity of next generation networks, delivering accelerated connectivity for wired network infrastructure at cloud-scale data centers, enterprise, and service providers. We also started sampling our M200, an ultra-low power, and high-performance Coherent DSP, supporting 100G and 200G data rates for long haul, metro and data center interconnect applications. We announced the expansion of our ColorZ™ portfolio with ColorZ-Lite™, 100G DWDM in QSFP28 form factor for campus and data center interconnects. The addition of ColorZ-Lite™ offers campus and data centers a cost optimized solution for shorter distances up to 20 km. We also expanded our 16nm Polaris™ PAM4 DSP portfolio for next generation 50G-400G cloud deployments. The new Polaris™ PAM4 DSP now includes products supporting an integrated driver to address the growing demands for lower power and reduced cost solutions over short reach data center optical connectivity.

 

 

A detailed discussion of our business may be found in Part I, Item 1, “Business,” of our 2016 Annual Report on Form 10-K.

 

Quarterly Update

 

As discussed in more detail below, for the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016, we delivered the following financial performance:

 

 

Revenue increased by $13.8 million, or 19.5%, to $84.5 million in the three months ended September 30, 2017. In the nine months ended September 30, 2017, total revenues increased by $77.2 million, or 41.6%, to $262.5 million.

 

 

Gross profit as a percentage of revenue decreased to 49.8% from 68.1% in the three months ended September 30, 2017. In the nine months ended September 30, 2017, gross profit as a percentage of revenue decreased to 54.6% from 68.2%.

     
 

Total operating expenses from continuing operations increased by $56.6 million, or 149.1%, to $94.5 million in the three months ended September 30, 2017. In the nine months ended September 30, 2017, total operating expenses increased by $98.4 million, or 89.5%, to $208.3 million.

 

 

Loss from continuing operations increased by $62.7 million to $52.5 million in the three months ended September 30, 2017. In the nine months ended September 30, 2017, loss from continuing operations increased by $81.4 million to $64.9 million.

 

 

Diluted earnings per share from continuing operations decreased to ($1.15) from $0.15 in the three months ended September 30, 2017. In the nine months ended September 30, 2017, diluted earnings per share from continuing operations decreased to ($1.78) from $0.17.

     
 

During the three months ended September 30, 2017, we abandoned a project related to certain developed technology and in-process research and development that resulted to an impairment charge of $47.0 million.  The abandonment of the project was primarily related to change in product roadmap following the acquisition of ClariPhy.

 

The increase in our revenue for the three and nine months ended September 30, 2017 was primarily a result of the increase in consumption of our dual linear transimpedance amplifiers (TIA), quad linear driver products, ColorZ™, and ClariPhy products.

 

The decrease in gross margin was due to amortization of inventory fair value step-up of acquired inventories, amortization and impairment of acquired intangibles related to the ClariPhy acquisition and change in product mix for the three and nine months ended September 30, 2017.

 

Total operating expenses increased due primarily to impairment of in-process research and development cost of $36.8 million and increase in headcount and stock-based compensation expense. Our expenses primarily consist of personnel costs, which include compensation, benefits, payroll related taxes and stock-based compensation. From October 2016 to September 2017, our headcount increased by 50 new employees, primarily in the engineering department. In addition, the acquisition of ClariPhy added 145 employees. We expect expenses to continue to increase in absolute dollars as we continue to invest resources to develop more products and to support the growth of our business. Our diluted earnings per share from continuing operations decreased primarily due to increases in operating expenses and interest expense from convertible debts, partially offset by an increase in revenues.

 

Our cash and cash equivalents were $165.9 million at September 30, 2017, compared with $144.9 million at December 31, 2016. Cash provided by operating activities was $48.2 million during the nine months ended September 30, 2017 compared to $50.3 million during the nine months ended September 30, 2016. Cash used in investing activities during the nine months ended September 30, 2017 was $13.8 million, primarily due to purchase property and equipment of $30.9 million, purchases of marketable securities of $158.2 million, payment of debt related to purchase of intangible assets of $12.8 million, and remaining payment to shareholders of ClariPhy of $1.8 million; partially offset by sales and maturities of marketable securities of $179.1 million and proceeds from the sale of discontinued operations previously held in escrow of $10.7 million. Cash used in financing activities was $13.4 million primarily due to minimum tax withholding paid on behalf of employees for restricted stock units of $20.2 million and payment of capital lease obligations of $0.7 million; partially offset by proceeds from the exercise of stock options and employee stock purchase plan of $7.3 million and repayment of long-term loan provided to a supplier of $0.3 million.

 

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to allowances for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, goodwill and intangible assets valuation, deferred income tax asset valuation allowances, uncertain tax positions, litigation, other loss contingencies and business combinations. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes in any of our critical accounting policies during the nine months ended September 30, 2017. We early adopted Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. The effect of adoption is discussed in Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements.

 

Results of Operations

 

The following table sets forth a summary of our statement of operations as a percentage of each line item to the revenue:

 

   

Three Months

Ended September 30,

   

Nine Months

Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Revenue

    100 %     100 %     100 %     100 %

Cost of revenue

    50       32       45       32  

Gross profit

    50       68       55       68  

Operating expenses:

                               

Research and development

    93       37       60       41  

Sales and marketing

    12       10       12       10  

General and administrative

    6       7       7       8  

Total operating expenses

    111       54       79       59  

Income (loss) from operations

    (61 )     14       (24 )     9  

Interest expense

    (9 )     (6 )     (9 )     (5 )

Other income

    1       3       1       1  

Income (loss) before income taxes from continuing operations

    (69 )     11       (32 )     5  

Provision (benefit) for income taxes

    (12 )     2       (4 )     1  

Net income (loss) from continuing operations

    (57 )     9       (28 )     4  

Net loss from discontinued operations, net of tax

          103             39  

Net income (loss)

    (57% )     112 %     (28% )     43 %

 

 

Comparison of Three and Nine Months Ended September 30, 2017 and 2016

 

Revenue

 

   

Three Months Ended September 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(dollars in thousands)

 

Revenue

  $ 84,511     $ 70,750     $ 13,761       19 %

 

 

   

Nine Months Ended September 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(dollars in thousands)

 

Revenue

  $ 262,518     $ 185,365     $ 77,153       42 %

 

 

Revenue for the three and nine months ended September 30, 2017 increased compared to corresponding 2016 periods mainly due to an increase in the number of units sold, partially offset by a decrease in average selling price. For the three and nine months ended September 30, 2017, the number of units sold increased by 130% and 90%, respectively. The volumes were up in particular due to announced end of life programs on the legacy components.  In addition, higher shipments of dual linear TIA, quad linear driver, ColorZ™, and ClariPhy products also contributed to the increase in the number of units sold. For the three and nine months ended September 30, 2017, average selling price decreased by 48% and 25%, respectively, primarily due to product mix.  Legacy products contributed to the significant decline in average selling price because of larger shipments to customers due to end of life programs we initiated in 2017.  Excluding legacy and ClariPhy products, the average selling price of other products generally increased, mainly due to ColorZ™.

 

Cost of Revenue and Gross Profit

 

   

Three Months Ended September 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(dollars in thousands)

 

Cost of revenue

  $ 42,440     $ 22,562     $ 19,878       88 %

Gross profit

  $ 42,071     $ 48,188     $ (6,117 )     (13% )

Gross profit as a percentage of revenue

    50 %     68 %           (18% )

 

 

   

Nine Months Ended September 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(dollars in thousands)

 

Cost of revenue

  $ 119,099     $ 58,958     $ 60,141       102 %

Gross profit

  $ 143,419     $ 126,407     $ 17,012       13 %

Gross profit as a percentage of revenue

    55 %     68 %           (13% )

 

 

Cost of revenue for the three and nine months ended September 30, 2017 increased compared to the corresponding 2016 periods primarily due to increase in revenue from sales of our dual linear TIA, ColorZ™, and ClariPhy products and impairment charge of $10.2 million of certain developed technology. Gross profit as a percentage of revenue decreased for both the three and nine months ended September 30, 2017, due to impairment charge of $10.2 million of certain developed technology, product mix, amortization of inventory fair value step-up related to acquired ClariPhy inventories of $0.3 million and $9.3 million sold during the three and nine months ended September 30, 2017, respectively and amortization of acquired ClariPhy intangibles of $4.4 million and $13.1 million for three and nine months ended September 30, 2017, respectively.

 

 

Research and Development

 

   

Three Months Ended September 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(dollars in thousands)

 

Research and development

  $ 78,849     $ 25,897     $ 52,952       204 %

 

   

Nine Months Ended September 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(dollars in thousands)

 

Research and development

  $ 158,574     $ 77,205     $ 81,369       105 %

 

Research and development expenses for the three and nine months ended September 30, 2017 increased compared to the corresponding 2016 periods primarily due to an increase in research and development headcount, salaries and equity awards, which resulted in a $6.5 million and $21.4 million increase in personnel costs and stock-based compensation expense, respectively. During the three and nine months ended September 30, 2017, we abandoned a project related to in-process research and development costs, which resulted in an impairment charge of $36.8 million. In addition, CAD software tool license expense increased $2.5 million and $7.4 million during the three months and nine months ended September 30, 2017, respectively due to an increase in headcount and engineering activities. Testing, laboratory supplies, packaging and pre-production engineering mask cost increased by $1.1 million and $3.2 million during the three and nine months ended September 30, 2017, respectively. Depreciation, consulting and allocated expenses increased by $4.4 million and $11.4 million during the three and nine months ended September 30, 2017, respectively, due to an increase in equipment and research and development activities. The increase in research and development expense was primarily driven by the acquisition of ClariPhy and our strategy to continue to expand our product offerings and enhance our existing product offerings.

 

 

Sales and Marketing

 

   

Three Months Ended September 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(dollars in thousands)

 

Sales and marketing

  $ 10,100     $ 6,688     $ 3,412       51 %

 

   

Nine Months Ended September 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(dollars in thousands)

 

Sales and marketing

  $ 31,580     $ 18,282     $ 13,298       73 %

 

Sales and marketing expenses for the three and nine months ended September 30, 2017 increased compared to the corresponding 2016 periods primarily due to an increase in personnel costs, including stock-based compensation expense of $1.5 million and $6.0 million, respectively, due in part to the addition of ClariPhy employees and to support increasing sales activities from new products. In addition, amortization of intangible assets related to the ClariPhy acquisition was $2.2 million and $6.7 million for the three and nine months ended September 30,2017, respectively.

 

 

General and Administrative

 

 

   

Three Months Ended September 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(dollars in thousands)

 

General and administrative

  $ 5,584     $ 5,359     $ 225       4 %

 

   

Nine Months Ended September 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(dollars in thousands)

 

General and administrative

  $ 18,177     $ 14,436     $ 3,741       26 %

 

General and administrative expenses for the nine months ended September 30, 2017 increased due to salaries and stock-based compensation of $1.4 million, which resulted from a mix of salary increases and new hires. Professional and consulting fees increased by $1.0 million during the nine months ended September 30, 2017 in relation to the acquisition of ClariPhy. In addition, facilities and information technology expenses increased by $0.6 million due to expansion of office space and increase in headcount.

 

 

Provision (Benefit) for Income Taxes

 

   

Three Months Ended September 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(dollars in thousands)

 

Provision (benefit) for income taxes

  $ (10,182 )   $ 1,530     $ (11,712 )     NM  

 

   

Nine Months Ended September 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(dollars in thousands)

 

Provision (benefit) for income taxes

  $ (9,359 )   $ 1,501     $ (10,860 )     NM  

 

We normally determine our interim provision using an estimated single annual effective tax rate for all tax jurisdictions. ASC 740 provides that when an entity operates in a jurisdiction that has generated ordinary losses on a year-to-date basis or on the basis of the results anticipated for the full fiscal year and no benefit can be recognized on those losses, a separate effective tax rate should be computed and applied to ordinary income (or loss) in that jurisdiction. We incurred pretax loss during the three and nine months ended September 30, 2017 from our U.S. operations and will not recognize tax benefit of the losses due to full valuation allowance established against deferred tax assets. Thus, a separate effective tax rate was applied to losses from the U.S. jurisdiction to compute the Company’s interim tax provision. For the three and nine months ended September 30, 2016, we determined our interim provision using an estimated single annual effective tax rate for all tax jurisdictions.

 

 

The income tax benefit of $10,182 and $9,359 in the three and nine months ended September 30, 2017, respectively, reflects an effective tax rate of 17% and 11%, respectively. The effective tax rate for both three and nine months ended September 30, 2017 differs from the statutory rate of 34% primarily due to the tax impact of developed technology and in-process research and development impairment charge, change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in expected operating results, unrecognized tax benefits, recognition of federal and state research and development credits and windfall tax benefits from stock-based compensation.

 

The income tax provision from continuing operations for the three and nine months ended September 30, 2016 reflects an effective tax rate of 19% and 17%, respectively. The effective tax rates for the three and nine months ended September 30, 2016 differs from the statutory rate of 34% primarily due to the change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in operating results, unrecognized tax benefits, recognition of federal and state research and development credits and windfall tax benefits from stock-based compensation from early adoption of Accounting Standards Update 2016-09.

 

Liquidity and Capital Resources

 

As of September 30, 2017, we had cash, cash equivalents and investments in marketable securities of $404.7 million. Our primary uses of cash are to fund operating expenses, purchase inventory and acquire property and equipment. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the changes in our outstanding accounts payable and accrued expenses. Our primary sources of cash are cash receipts on accounts receivable from our revenue. In 2015 and 2016, we issued convertible debts, which resulted in an increase in cash, cash equivalents and investments in marketable securities. Aside from the growth in amounts billed to our customers, net cash collections of accounts receivable are impacted by the efficiency of our cash collections process, which can vary from period to period, depending on the payment cycles of our major customers.

 

The following table summarizes our cash flows for the periods indicated:

 

   

Nine Months

Ended September 30,

 
   

2017

   

2016

 
   

(in thousands)

 

Net cash provided by operating activities

  $ 48,245     $ 50,343  

Net cash used in investing activities

    (13,827 )     (136,683 )

Net cash provided by (used in) financing activities

    (13,417 )     251,335  

Net increase in cash and cash equivalents

  $ 21,001     $ 164,995  

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities during the nine months ended September 30, 2017 primarily reflected depreciation and amortization of $58.7 million, stock-based compensation expense of $32.4 million, impairment of intangible assets of $47.0 million, accretion of convertible debt of $18.2 million, decrease in prepaid expenses and other assets of $2.5 million and increases in accounts payable of $3.1 million and deferred revenue of $4.4 million, partially offset by a net loss of $75.0 million, increases in accounts receivable of $21.6 million and inventories of $2.6 million, and decreases in accrued expenses of $3.8 million and other liabilities of $4.6 million. Our prepaid expenses and other assets decreased mainly due to receipt of funds from escrow related to the ClariPhy acquisition. Our accounts payable increased due to increased production volume and timing of payments. Our deferred revenue increased due to higher inventory in the distributors and receipts from customers. Our accounts receivable increased due to higher product shipments to customers and longer payment terms of some customers. Inventories increased due to driver products and acquisition of ClariPhy. Our accrued expenses and other liabilities decreased mainly due to the timing of payments.

 

Net cash provided by operating activities during the nine months ended September 30, 2016 primarily reflected net income of $80.3 million, depreciation and amortization of $22.3 million, stock-based compensation expense of $22.2 million, accretion of convertible debt of $8.3 million, an increase in accounts payable of $5.2 million, a change in income tax payable/receivable of $1.9 million and an increase in other liabilities of $2.4 million partially offset by a gain from the sale of discontinued operations and cost method investment of $79.7 million, increases in accounts receivable of $11.0 million and inventories of $2.9 million. Our accounts payable increased due to increased production volume. Our other liabilities increased due to payable to Rambus for receipts received on their behalf during the transition period. Our accounts receivable increased due to higher product shipments to customers. Our inventories increased as a result of growing production for expected delivery to customers in the fourth quarter of 2016.

 

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities during the nine months ended September 30, 2017 primarily consisted of cash used to purchase property and equipment of $30.9 million, purchases of marketable securities of $158.2 million, payment of debt related to purchase of intangible assets of $12.8 million, and remaining payment to shareholders of ClariPhy of $1.8 million; partially offset by sales and maturities of marketable securities of $179.1 million and proceeds from the sale of discontinued operations previously held in escrow of $10.7 million.

 

Net cash used in investing activities during the nine months ended September 30, 2016 consisted of cash used to purchase property and equipment of $16.3 million, purchases of marketable securities of $277.8 million and cost method investment of $2.0 million, partially offset by sales and maturities of marketable securities of $74.3 million and proceeds from the sale of discontinued operations and cost method investment of $85.1 million.

 

 

Net Cash Provided by (Used in) Financing Activities

 

Net cash used in financing activities during the nine months ended September 30, 2017 primarily consisted of minimum tax withholding paid on behalf of employees for restricted stock units of $20.2 million and payment of capital lease obligations of $0.7 million; partially offset by proceeds from the exercise of stock options and employee stock purchase plan of $7.3 million and repayment of long-term loan provided to a supplier of $0.3 million.

 

Net cash provided by financing activities during the nine months ended September 30, 2016 consisted of proceeds from the exercise of stock options and employee stock purchase plan of $10.6 million and net proceeds from issuance of convertible debt of $280.0 million, partially offset by minimum tax withholding paid on behalf of employees for restricted stock units of $16.0 million, the purchase of capped call options of $22.5 million and a loan to a supplier of $0.7 million.

 

 

 Operating and Capital Expenditure Requirements

 

Our principal source of liquidity as of September 30, 2017 consisted of $404.7 million of cash, cash equivalents and investments in marketable securities, of which $33.7 million is held by our foreign subsidiaries. Based on our current operating plan, we believe that our existing cash and cash equivalents from operations will be sufficient to finance our operational cash needs through at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities and grow our end customer base which will result in higher needs for working capital. Our ability to generate cash from operations is also subject to substantial risks described in Part II, Item 1A, Risk Factors. If any of these risks occur, we may be unable to generate or sustain positive cash flow from operating activities. We would then be required to use existing cash and cash equivalents to support our working capital and other cash requirements. If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through debt financing or from other sources. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility, and would also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us.

 

We do not plan to repatriate cash balances from foreign subsidiaries to fund our operations in the United States. There may be adverse tax effects upon repatriation of these funds to the United States.

 

 Contractual Payment Obligations

 

Our contractual obligations for 2017 and beyond are included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 1, 2017. See note 16 of the notes to our unaudited condensed consolidated financial statements for information regarding obligations as of September 30, 2017.

 

Off-Balance Sheet Arrangements

 

At September 30, 2017, we had no material off-balance sheet arrangements, other than our facility operating leases.

 

Recent Authoritative Accounting Guidance

 

See note 2 of the notes to our unaudited condensed consolidated financial statements for information regarding recently issued accounting pronouncements.

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Sensitivity

 

We had cash and cash equivalents and investments in marketable securities of $404.7 million and $394.3 million at September 30, 2017 and December 31, 2016, respectively, which was held for working capital purposes. Our exposure to market interest-rate risk relates primarily to our investment portfolio. We do not use derivative financial instruments to hedge the market risks of our investments. We manage our total portfolio to encompass a diversified pool of investment-grade securities to preserve principal and maintain liquidity. We place our investments with high-quality issuers, money market funds and debt securities. Our investment portfolio as of September 30, 2017 consisted of money market funds, U.S. Treasuries, municipal bonds, variable rate demand notes, corporate bonds, commercial papers and asset backed securities. Investments in both fixed rate and floating rate instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to an increase in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. However, because any debt securities we hold are classified as available-for-sale, no gains or losses are realized in the income statement due to changes in interest rates unless such securities are sold prior to maturity or unless declines in value are determined to be other-than-temporary. These securities are reported at fair value with the related unrealized gains and losses, net of applicable taxes, included in accumulated other comprehensive income (loss), reported in a separate component of stockholders' equity. Although, we currently expect that our ability to access or liquidate these investments as needed to support our business activities will continue, we cannot ensure that this will not change.

     

In a low interest rate environment, as short-term investments mature, reinvestment may occur at less favorable market rates. Given the short-term nature of certain investments, the current interest rate environment may negatively impact our investment income.

          

As of September 30, 2017, we had outstanding debt of $517.5 million in the form of Convertible Notes. The fair value of our Convertible Notes is subject to interest rate risk, market risk and other factors due to the convertible feature. The fair value of the Convertible Notes will generally increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of the Convertible Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines in value. The interest and market value changes affect the fair value of our Convertible Notes but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation.

 

 

Foreign Currency Risk

 

To date, our international customer and vendor agreements have been denominated almost exclusively in United States dollars. Accordingly, we have limited exposure to foreign currency exchange rates and currently enter into immaterial foreign currency hedging transactions. 

 

 

Item 4.

Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15-(e) under the Securities Exchange Act 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that such controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards, but management does not expect that our disclosure controls and procedures will prevent or detect all error and all fraud. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

 

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer) have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     

The information required by this Item 1 is set forth under Note 16 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, and is hereby incorporated by reference herein. For an additional discussion of certain risks associated with legal proceedings, see Item 1A. Risk Factors, below.

 

Item 1A. Risk Factors

 

You should carefully consider the risks described in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2016, which are incorporated by reference herein, as our business, financial condition and results of operations could be adversely affected by any of the risks and uncertainties described therein. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

 

Item 6. Exhibits

 

 

(a)

Exhibits.

 

 

 

 

Exhibit

 

 

Number

 

Description

2.1

 

Agreement and Plan of Merger dated as of November 1, 2016 by and among the Registrant, Clarice Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of the Registrant, ClariPhy Communications, Inc., a Delaware corporation, and Fortis Advisors LLC, a Delaware limited liability company, solely in its capacity as Securityholders’ Agent (incorporated by reference to exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on November 1, 2016).

     

3(i)

 

Restated Certificate of Incorporation of the Registrant (incorporated by reference to exhibit 3(i) of the Registrant’s annual report on Form 10-K filed with the SEC on March 7, 2011).

     

3(ii)

 

Amended and Restated Bylaws of the Registrant (incorporated by reference to exhibit 3.1 of the Registrant’s current report on Form 8-K filed with the SEC on October 20, 2015).

     

4.1

 

Specimen Common Stock Certificate (incorporated by reference to exhibit 4.1 filed with Registration Statement on Form S-1 (File No. 333-167564).

     

4.2

 

Amended and Restated Investors’ Rights Agreement dated as of August 12, 2010 (incorporated by reference to exhibit 4.2 of the Registrant’s annual report on Form 10-K filed with the SEC on March 7, 2011).

     

10.1+

 

Amended and Restated Inphi Corporation 2010 Stock Incentive Plan dated as of July 19, 2017 (incorporated by reference to exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended June 30, 2017).

   

10.2

 

Asset Purchase Agreement dated June 29, 2016 by and among Rambus Inc., Bell ID Singapore Ptd Ltd, Inphi Corporation and Inphi International Ptd. Ltd. (incorporated by reference to exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended June 30, 2016).

   

31.1

  

Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

     

31.2

  

Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

     

32.1(1)

  

Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

     

32.2(1)

  

Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

   

101.INS

 

XBRL Instance Document

   

101.SCH

 

XBRL Taxonomy Extension Schema

   

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

   

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

   

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

   

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 


 

+ Indicates management contract or compensatory plan.

 

(1)           The material contained in Exhibit 32.1 and Exhibit 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically incorporates it by reference.

 

 

SIGNATURES

 

 

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

INPHI CORPORATION,

(Registrant)

 
   

By: /s/ Ford Tamer

 

Ford Tamer

Chief Executive Officer
(Duly Authorized and Principal Executive Officer)
 
   

By: /s/ John Edmunds

 

John Edmunds

Chief Financial Officer

(Duly Authorized and Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

November 7, 2017

 

 

 

EXHIBIT INDEX

 

 

 

 

 

Exhibit

 

 

Number

 

Description

2.1

 

Agreement and Plan of Merger dated as of November 1, 2016 by and among the Registrant, Clarice Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of the Registrant, ClariPhy Communications, Inc., a Delaware corporation, and Fortis Advisors LLC, a Delaware limited liability company, solely in its capacity as Securityholders’ Agent (incorporated by reference to exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on November 1, 2016).

     

3(i)

 

Restated Certificate of Incorporation of the Registrant (incorporated by reference to exhibit 3(i) of the Registrant’s annual report on Form 10-K filed with the SEC on March 7, 2011).

     

3(ii)

 

Amended and Restated Bylaws of the Registrant (incorporated by reference to exhibit 3.1 of the Registrant’s current report on Form 8-K filed with the SEC on October 20, 2015).

     

4.1

 

Specimen Common Stock Certificate (incorporated by reference to exhibit 4.1 filed with Registration Statement on Form S-1 (File No. 333-167564).

     

4.2

 

Amended and Restated Investors’ Rights Agreement dated as of August 12, 2010 (incorporated by reference to exhibit 4.2 of the Registrant’s annual report on Form 10-K filed with the SEC on March 7, 2011).

     

10.1+

 

Amended and Restated Inphi Corporation 2010 Stock Incentive Plan dated as of July 19, 2017 (incorporated by reference to exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended June 30, 2017).

   

10.2

 

Asset Purchase Agreement dated June 29, 2016 by and among Rambus Inc., Bell ID Singapore Ptd Ltd, Inphi Corporation and Inphi International Pte. Ltd. (incorporated by reference to exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended June 30, 2016).

     

31.1

  

Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

     

31.2

  

Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

     

32.1(1)

  

Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

     

32.2(1)

  

Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

   

101.INS

 

XBRL Instance Document

   

101.SCH

 

XBRL Taxonomy Extension Schema

   

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

   

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

   

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

   

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 


 

+ Indicates management contract or compensatory plan.

 

  (1)          The material contained in Exhibit 32.1 and Exhibit 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically incorporates it by reference.
 

30