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Table of Contents

 



 

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 June 30, 2020

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: (408217-7300

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value per share

IPHI

The New York Stock Exchange

 

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 every Interactive Data File required to be submitted 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 such files).  Yes  ☑      No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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. 

 

Large accelerated filer  ☑

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company 

Emerging growth 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 August 4, 2020 was 51,930,086.

 



 

 

 

 

INPHI CORPORATION

QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2020

 

TABLE OF CONTENTS

 

 

 

Page

Note Regarding COVID-19 2  

PART I. FINANCIAL INFORMATION

3

 

Item 1.

Financial Statements

3

 

 

Unaudited Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019

3

 

 

Unaudited Condensed Consolidated Statements of Income (Loss) for the Three and Six Months Ended June 30, 2020 and 2019

4

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2020 and 2019

5

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019

6

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

7

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

 

Item 2.

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

26

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

33

 

Item 4.

Controls and Procedures

34

 

 

 

 

 

PART II. OTHER INFORMATION

35

 

Item 1.

Legal Proceedings

35

 

Item 1A.

Risk Factors

35

 

Item 6.

Exhibits

36

 

Signatures

 

 

 

 

 

 

NOTE REGARDING COVID-19

 

In March 2020, the World Health Organization declared the outbreak of coronavirus first reported in Wuhan, China (“COVID-19”), a pandemic, and the virus continues to spread in areas where we operate and sell our products and services. Several public health organizations have recommended, and many local governments have implemented, certain measures to slow and limit the transmission of the virus, including shelter in place and social distancing ordinances, which has resulted in a significant deterioration of economic conditions in many of the countries in which we operate.

 

The spread of the COVID-19 virus has caused us to modify our business practices, including implementing work-from-home policies and restricting travel by our employees, among other things.  In response to the outbreak of COVID-19, we have taken the following measures to date:

 

 

Implemented work-from-home and social distancing policies throughout our organization;

 

Suspended all company travel;

 

Issued $506.0 million in convertible senior notes due 2025 in a private placement to provide additional liquidity;

 

Expanded internet capacity at multiple global sites to enable work from home connectivity to our internal networks; 
 

Significantly increased the level of donations and planned contributions by year end towards COVID-19 medical support, supplies, and to abate hunger; and
 

Analyzed supply chain and enabled, in some situations, alternative sources and inventory movements to reduce supply chain risk.

 

COVID-19 has had a significant impact on the global economy, including accelerating a shift to cloud computing and driving a sharp increase in demand for bandwidth.  While we expect our business to continue to be favorably impacted by these phenomena, given the dynamic nature of COVID-19, we have considered its impact when developing our estimates and assumptions. Actual results and outcomes may differ from our estimates and assumptions.  Additionally, while the impact of the pandemic may increase demand for our products either in the short-term or in the long-term, it may also adversely affect our ability to meet that demand, as measures taken in response to the pandemic may affect the operations of our suppliers and customers, as their own workforces are disrupted.  As a result, our supply chain may be interrupted, and we may experience delays in the delivery of our product. 

 

The impact of the pandemic on our business, as well as the business of our suppliers and customers, and the additional measures that may be needed in the future in response to it, will depend on many factors beyond our control and knowledge. We will monitor the situation to determine what actions may be necessary or appropriate to address the impact of the pandemic, which may include actions mandated or recommended by federal, state or local authorities.

 

 

2

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 
         

Assets

        

Current assets:

        

Cash and cash equivalents

 $133,885  $282,723 
Restricted cash  100    

Investments in marketable securities (amortized cost of $87,084 and $139,448 as of June 30, 2020 and December 31, 2019, respectively)

  88,040   140,131 

Accounts receivable, net

  85,413   60,295 

Inventories

  90,419   55,013 

Prepaid expenses and other current assets

  18,175   17,463 

Total current assets

  416,032   555,625 

Property and equipment, net

  109,334   79,563 

Goodwill

  181,689   104,502 

Intangible assets, net

  277,649   168,290 

Right of use assets, net

  33,974   33,576 

Other assets, net

  32,221   34,450 

Total assets

 $1,050,899  $976,006 
         

Liabilities and Stockholders’ Equity

        

Current liabilities:

        

Accounts payable

 $45,159  $18,771 

Deferred revenue

  5,271   3,719 

Accrued employee expenses

  22,023   13,164 

Other accrued expenses

  13,768   5,125 

Convertible debt

  48,277   217,467 

Other current liabilities

  42,843   33,531 

Total current liabilities

  177,341   291,777 
Convertible debt  455,246   258,711 

Other long-term liabilities

  68,901   78,917 

Total liabilities

  701,488   629,405 

Commitments and contingencies (Note 17)

          
         

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; 51,870,076 and 45,909,466 issued and outstanding at June 30, 2020 and December 31, 2019, respectively

  52   46 

Additional paid-in capital

  634,729   587,862 

Accumulated deficit

  (287,144)  (242,807)

Accumulated other comprehensive income

  1,774   1,500 

Total stockholders’ equity

  349,411   346,601 

Total liabilities and stockholders’ equity

 $1,050,899  $976,006 

 

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

 

3

Table of Contents

 

 

INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(in thousands, except share and per share amounts)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenue

  $ 175,292     $ 86,285     $ 314,722     $ 168,508  

Cost of revenue

    82,360       37,176       148,093       71,768  

Gross profit

    92,932       49,109       166,629       96,740  

Operating expenses:

                               

Research and development

    69,176       44,705       131,869       89,104  

Sales and marketing

    15,024       11,154       29,933       23,033  

General and administrative

    12,991       7,480       25,383       14,313  

Total operating expenses

    97,191       63,339       187,185       126,450  

Loss from operations

    (4,259 )     (14,230 )     (20,556 )     (29,710 )

Interest expense

    (10,159 )     (8,552 )     (19,059 )     (16,975 )
Loss on early extinguishment of debt     (13,297 )           (13,297 )      

Other income, net

    3,913       1,617       8,869       3,995  

Loss before income taxes

    (23,802 )     (21,165 )     (44,043 )     (42,690 )

Provision (benefit) for income taxes

    249       (587 )     294       633  

Net loss

  $ (24,051 )   $ (20,578 )   $ (44,337 )   $ (43,323 )

Earnings per share:

                               

Basic

  $ (0.49 )   $ (0.46 )   $ (0.93 )   $ (0.97 )

Diluted

  $ (0.49 )   $ (0.46 )   $ (0.93 )   $ (0.97 )
                                 

Weighted-average shares used in computing earnings per share:

                               

Basic

    48,928,224       45,191,674       47,477,159       44,823,562  

Diluted

    48,928,224       45,191,674       47,477,159       44,823,562  

 

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

 

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INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net loss

  $ (24,051 )   $ (20,578 )   $ (44,337 )   $ (43,323 )
                                 

Other comprehensive income (loss):

                               

Available for sale investments:

                               
Realized gain reclassified into earnings, net of tax     (296 )           (296 )      

Change in unrealized gain or loss

    1,465       566       570       1,106  

Comprehensive loss

  $ (22,882 )   $ (20,012 )   $ (44,063 )   $ (42,217 )

 

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

 

5

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INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share amounts)

 

 

Six Months Ended June 30, 2020

 

  

Common Stock

  

Additional Paid-in Capital

  

Accumulated Deficit

  

Accumulated Other Comprehensive Income

  

Total Stock- holders’ Equity

 
                         
  

Shares

  

Amount

                 

Balance at December 31, 2019

  45,909,466  $46  $587,862  $(242,807) $1,500  $346,601 

Issuance of common stock from exercise of stock options

  103,318      995         995 

Issuance of common stock from restricted stock unit grant, net of shares withheld for tax

  60,651      (2,490)        (2,490)

Issuance of common stock from employee stock purchase plan purchases

  74,896      4,112         4,112 

Stock-based compensation expense

        24,029         24,029 

Net loss

           (20,286)     (20,286)

Other comprehensive loss, net

              (895)  (895)

Balance at March 31, 2020

  46,148,331  $46  $614,508  $(263,093) $605  $352,066 
                         

Issuance of common stock from exercise of stock options

  77,051      904         904 

Issuance of common stock from restricted stock unit grant, net of shares withheld for tax

  702,180   1   (39,840)        (39,839)

Conversion feature of convertible debt, net of issuance costs

        100,616         100,616 

Purchase of capped calls

        (55,660)        (55,660)

Impact of convertible debt repurchases

 4,942,490   5   (14,025)        (14,020)

Conversion of convertible debt to common stock

  24                

Stock-based compensation expense

        28,226         28,226 

Net loss

           (24,051)     (24,051)

Other comprehensive income, net

              1,169   1,169 

Balance at June 30, 2020

  51,870,076  $52  $634,729  $(287,144) $1,774  $349,411 

 

 

Six Months Ended June 30, 2019

 

  

Common Stock

  

Additional Paid-in Capital

  

Accumulated Deficit

  

Accumulated Other Comprehensive Income

  

Total Stock- holders’ Equity

 
                         
  

Shares

  

Amount

                 

Balance at December 31, 2018

  44,292,722  $44  $536,157  $(169,896) $389  $366,694 

Issuance of common stock from exercise of stock options

  78,205      646         646 

Issuance of common stock from restricted stock unit grant, net of shares withheld for tax

  168,227   1   (4,017)        (4,016)

Issuance of common stock from employee stock purchase plan purchases

  121,549      3,477         3,477 

Stock-based compensation expense

        18,758         18,758 

Net loss

           (22,745)     (22,745)

Other comprehensive income, net

              540   540 

Balance at March 31, 2019

  44,660,703  $45  $555,021  $(192,641) $929  $363,354 
                         

Issuance of common stock from exercise of stock options

  45,317      486         486 

Issuance of common stock from restricted stock unit grant, net of shares withheld for tax

  695,379   1   (18,386)        (18,385)

Stock-based compensation expense

        17,961         17,961 

Net loss

           (20,578)     (20,578)

Other comprehensive income, net

              566   566 

Balance at June 30, 2019

  45,401,399  $46  $555,082  $(213,219) $1,495  $343,404 

 

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

 

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INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 
                 

Cash flows from operating activities

               

Net loss

  $ (44,337 )   $ (43,323 )

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation and amortization

    62,410       48,518  

Stock-based compensation

    52,255       36,719  

Deferred income taxes

    244       446  

Accretion of convertible debt and amortization of debt issuance costs

    15,931       13,805  

Net unrealized loss (gain) on equity investments

    (1,744 )     75  
Realized gain on an equity investment     (4,999 )      

Amortization of discount on marketable securities

    (42 )     (516 )

Loss on termination of software lease contracts

    3,370        
Loss on early extinguishment of debt     13,297        

Other noncash items

    (328 )     302  

Changes in assets and liabilities, net of acquisition:

               

Accounts receivable

    (24,818 )     (5,737 )

Inventories

    (14,194 )     (11,043 )

Prepaid expenses and other assets

    19,591       (469 )

Income tax payable/receivable

    10       126  

Accounts payable

    10,434       7,130  

Accrued expenses

    (7,130 )     194  

Deferred revenue

    (5,949 )     813  

Other liabilities

    (1,076 )     2,362  

Net cash provided by operating activities

    72,925       49,402  
                 

Cash flows from investing activities

               

Purchases of property and equipment

    (27,849 )     (12,610 )

Purchases of marketable securities

    (39,511 )     (141,764 )

Sales of marketable securities

    65,509       15,029  

Maturities of marketable securities

    26,736       109,352  
Purchases of intangible assets     (277 )     (450 )

Purchase of equity investments

    (5,999 )      

Proceeds from eSilicon investment

    14,999        

Acquisitions of business, net of cash

    (223,731 )      

Net cash used in investing activities

    (190,123 )     (30,443 )
                 

Cash flows from financing activities

               

Proceeds from exercise of stock options

    1,899       1,132  

Proceeds from employee stock purchase plan purchases

    4,112       3,477  
Proceeds from issuance of convertible debt, net of cost     492,743        

Payment for convertible debt repurchases

    (407,782 )      

Payment of obligations related to equipment financing

    (198 )     (238 )
Payment of obligations related to purchase of intangible assets     (23,595 )     (13,158 )
Purchase of capped call options     (55,660 )      

Minimum tax withholding paid on behalf of employees for net share settlement

    (43,059 )     (22,566 )

Net cash used in financing activities

    (31,540 )     (31,353 )

Net decrease in cash and cash equivalents

    (148,738 )     (12,394 )

Cash, cash equivalents and restricted cash at beginning of period

    282,723       172,018  

Cash, cash equivalents and restricted cash at end of period

  $ 133,985     $ 159,624  
                 

Supplemental cash flow information:

               

Interest paid

  $ 3,097     $ 3,196  

Income taxes paid

    629       126  

Supplemental disclosure of non-cash investing and financing activities:

               

Software license intangible assets

    1,000       2,433  
Settlement of net receivable from eSilicon as part of purchase consideration     5,250        

 

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

 

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Table of Contents

 

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 cloud markets. The Company’s semiconductor solutions are designed to address bandwidth bottlenecks in networks, maximize throughput and minimize latency in computing environments and enable the rollout of next generation communications and cloud infrastructures. In addition, the semiconductor solutions provide a vital high-speed interface between analog signals and digital information in high-performance systems such as telecommunications transport systems, enterprise networking equipment and data centers.

 

On January 10, 2020, the Company completed the acquisition of  eSilicon Corporation (“eSilicon”) for $214,644. The revenue and expenses of eSilicon from January 10, 2020 onwards are included in the condensed consolidated statement of income (loss).

 

On May 18, 2020, the Company purchased  certain assets and rights of  Arrive Technologies, Inc. ("Arrive") for $20,141.  The revenue and expenses related to this purchase from May 18, 2020 onwards are included in the condensed consolidated statement of income (loss).

 

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 in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 2, 2020.

 

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 as of June 30, 2020, its consolidated results of operations and stockholders’ equity for the three and six months ended  June 30, 2020 and 2019, and cash flows for the six months ended June 30, 2020 and 2019. The results of operations for the three and six months ended  June 30, 2020 are not necessarily indicative of the results to be expected for future quarters or the full year.

 

Use of Estimates and Judgments

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates its estimates and judgments compared to historical experience and expected trends. In March 2020, the outbreak of COVID-19 was declared a pandemic by the World Health Organization. While the nature of the situation is dynamic, the Company has considered the impact when developing its estimates and assumptions. Actual results and outcomes may differ from management's estimates and assumptions.

 

Revisions

 

As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, in connection with the preparation of the Company’s 2019 year-end consolidated financial statements, a classification error in the Company’s previously issued consolidated statements of cash flows was identified. Specifically, it was determined that payments made under the Company’s multiyear agreements for the purchase of internal use intangible assets should have been classified as use of cash for financing activities and not as use of cash for investing activities as originally presented. Such classification error had no impact on the Company’s consolidated balance sheets, statements of income (loss), statements of comprehensive income (loss) or statements of stockholders’ equity. Although the Company assessed the materiality of the error and concluded that the error was not material to the previously issued annual or interim financial statements, the Company did revise its previously issued 2018 and 2017 annual financial statements to correct for such classification error in connection with the filing of its 2019 Annual Report on Form 10-K, and disclosed that it would be revising its unaudited quarterly condensed consolidated statements of cash flows in connection with the filing of its Quarterly Reports on Form 10-Q in fiscal year 2020.  In connection with the filing of this Quarterly Report on Form 10-Q, the Company has revised the accompanying 2019 unaudited condensed consolidated statement of cash flows to correct for such classification error. The effect of the revisions on the unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2019 was as follows: (i) cash used in investing activities decreased by $13,158 from $43,601 to $30,443, and (ii) cash used in financing activities increased by $13,158 from $18,195 to $31,353.  

 

Summary of Significant Accounting Policies

 

Refer to the Company’s Annual Report on Form 10-K for a summary of significant accounting policies. On January 1, 2020, the Company adopted Accounting Standards Codification (“ASC”) Topic 326, Measurement of Credit Losses on Financial Instruments (“ASC 326”), and accordingly, modified its policy on accounting for allowance for doubtful accounts on trade accounts receivable and available-for-sale debt securities as stated below. As described under the “Recent Accounting Pronouncements,” below, the impact of adopting ASC 326 for the Company was not material.

 

There have been no other significant changes to the Company’s significant accounting policies during the three and six months ended June 30, 2020.

 

Accounts Receivable

 

The Company performs ongoing credit evaluations of its customers and assesses each customer’s credit worthiness. The Company monitors collections and payments from its customers and maintains an allowance for doubtful accounts based upon applying an expected credit loss rate to receivables based on the historical loss rate from similar high risk customers adjusted for current conditions, including any specific customer collection issues identified, and forecasts of economic conditions. Delinquent account balances are written off after management has determined that the likelihood of collection is remote. The allowance for credit losses as of June 30, 2020 was $1,202.  The allowance for doubtful accounts as of December 31, 2019 was $1,152. The activities in this account, including the current-period provision for expected credit losses for the three and six months ended June 30, 2020, were not material.

 

8

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

Debt Securities

 

The Company performs an evaluation of its available-for-sale debt securities in unrealized loss position.  The Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis.  If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through the statement of income (loss).  For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.  In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.  If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.  If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.  Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense.  Losses are charged against the allowance when the Company believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.  There was no allowance for credit loss as of June 30, 2020.  Accrued interest receivable on available-for-sale debt securities as of  June 30, 2020 was $629 and excluded from the estimate of credit losses. Accrued interest receivable on available-for-sale debt securities is reported within Prepaid expenses and other current assets on the condensed consolidated balance sheets. Any interest accrued that is past due by more than 90 days is written off through reversal of interest income.

 

 

2. Recent Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASC 326, to replace the incurred loss methodology with an expected credit loss model that requires consideration of a broader range of information to estimate credit losses over the lifetime of the asset, including current conditions and reasonable and supportable forecasts in addition to historical loss information, to determine expected credit losses. Pooling of assets with similar risk characteristics and the use of a loss model are also required. Also, in April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, to clarify the inclusion of recoveries of trade receivables previously written off when estimating an allowance for credit losses. The guidance is effective for the Company beginning with fiscal year 2020, including interim periods. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. 

 

In August 2018, the FASB issued guidance that eliminates certain disclosure requirements for fair value measurements for all entities, requiring public entities to disclose certain new information and modifies some disclosure requirements. The new guidance will no longer require disclosure of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will require disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance will be effective for fiscal years beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued guidance requiring a customer in a cloud computing arrangement under a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. Capitalized implementation costs are expensed over the term of the hosting arrangement beginning when the module or component of the hosting arrangement is ready for its intended use. The guidance will be effective for fiscal years beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

In November 2018, the FASB issued amendments to guidance on “Collaborative Arrangements” and “Revenue from Contracts with Customers”, that require transactions in collaborative arrangements to be accounted for under “Revenue from Contracts with Customers” if the counterparty is a customer for a good or service (or bundle of goods and services) that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers.  The amendments to the guidance are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.  The Company adopted this guidance on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

In December 2019, the FASB issued guidance that simplifies the accounting for income taxes as part of FASB's overall initiative to reduce complexity in accounting standards. Amendments include removal of certain exceptions to the general principles of ASC 740, Income Taxes, and simplification in general other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. The guidance will be effective for fiscal years beginning after December 15, 2020, though early adoption is permitted. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.

 

In August 2020, the FASB issued guidance that simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.   The guidance will reduce the number of accounting models for convertible debt instruments and convertible preferred stock.  This will result in fewer embedded conversion features being separately recognized from the host contract compared with current GAAP. More convertible debt instruments will be reported as a single liability instrument, and more convertible preferred stock will be reported as a single equity instrument with no separate accounting for embedded conversion features.  FASB also made changes to the disclosures for convertible instruments and earnings-per-share guidance.  The guidance will be effective for fiscal years beginning after December 15, 2021, though early adoption is permitted. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.

 

 

 

3.  Acquisitions

 

eSilicon 

 

On January 10, 2020, the Company completed the acquisition of eSilicon for approximately $214,644. The Company acquired eSilicon to accelerate the Company’s roadmap in developing electro-optics solutions for cloud and telecommunications customers. An amount of $10,000 was placed in an escrow fund for 12 months (up to 36 months in certain circumstances) following the closing for the satisfaction of certain potential indemnification claims. The condensed consolidated financial statements include the results of operations of eSilicon from the acquisition date.

 

The acquisition has been accounted for using the purchase method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The Company allocated the purchase price to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The fair value of identifiable intangible assets acquired was based on estimates and assumptions made by management at the time of acquisition. As additional information becomes available, such as finalization of the estimated fair value of tax related items, the Company may revise the preliminary purchase price allocation during the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes may be material as the Company finalizes the fair values of the tangible and intangible assets acquired and liabilities assumed.

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

The following table summarizes the preliminary purchase price allocation as of the acquisition date:
 

Cash

 $704 

Restricted cash

  2,100 

Accounts receivable

  5,750 

Inventories

  21,086 

Prepaid expenses and other current assets

  21,012 

Property and equipment

  7,106 

Intangible assets

  148,720 

Right of use asset

  1,022 

Other noncurrent assets

  252 

Accounts payable

  (9,105)

Accrued expenses

  (25,060)

Deferred revenue

  (7,501)

Other current liabilities

  (13,886)

Other liabilities

  (3,567)

Total identifiable net assets

 $148,633 

Goodwill

  66,011 

Net assets acquired

 $214,644 

 

As of the acquisition date, the fair value of receivables, other assets, accounts payable, accrued expenses and other liabilities approximated the book value acquired.

 

The following table summarizes the estimated fair value of intangible assets and their estimated useful lives as of the date of acquisition:

 

  Estimated Fair Value  Estimated Useful Life (Years) 

Contract manufacturing rights

 $105,160   5.0 

Developed technology

  33,630   8.0 

Software

  9,930   0.5 to 2.0 
  $148,720     

 

Developed technology was valued using the multi-period excess earnings method under the income approach. This method involves discounting the direct cash flows expected to be generated by the technologies over their remaining lives, net of returns on contributory assets. The estimated useful life was determined based on the technology cycle related to product family and its expected contribution to forecasted revenue. Contract manufacturing rights were valued using a multi-period excess earnings method, which involved discounting the direct cash flow expected to be generated by these rights over their remaining economic lives, net of returns on contributory assets. The estimated useful life was determined to be five years based on the estimated life of the product, assuming that the existing customers will remain with the Company until the product becomes obsolete.  The cash flows for the two intangible assets were distinctly separate and bifurcated for the purposes of the valuation of each asset.

 

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and is attributable to the workforce of eSilicon, the Company’s going concern value with the opportunity to leverage its workforce to develop new technologies and the ability of the Company to grow the business faster and more profitable than was possible by eSilicon as a stand-alone company. Goodwill is not amortized and is not deductible for tax purposes.

 

The Company incurred acquisition costs of $1,550, of which $1,015 was incurred in the year ended  December 31, 2019 and $535 was included in general and administrative expense in the condensed consolidated statement of income (loss) for the six months ended June 30, 2020.

 

eSilicon contributed revenue of $41,178 and pre-tax loss of $996 to the Company for the three months ended June 30, 2020.  eSilicon contributed revenue of $59,851 and pre-tax loss of $14,991 for the period from January 10, 2020 to June 30, 2020.  

 

Prior to the acquisition, the Company owned a minority equity interest in eSilicon.  The fair value of the equity interest immediately before the acquisition date was $14,999, which resulted in a gain of $4,999 and was included in Other income, net in the condensed consolidated statement of income (loss) for the six months ended June 30, 2020.  The fair value was determined based on the proceeds received as a holder of eSilicon's preferred stock.

 

Arrive 

 

On May 18, 2020, the Company purchased  certain assets and rights of Arrive for $20,141. The Company acquired Arrive for the purpose of expanding its presence into strategic geographic regions for talent acquisition.  An amount of $3,000 was withheld by the Company for 12 months  following the closing for the satisfaction of certain potential indemnification claims. The condensed consolidated financial statements include the results of operations of Arrive from the acquisition date.

 

10

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

The acquisition has been accounted for using the purchase method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The Company allocated the purchase price to tangible and intangible assets acquired based on their estimated fair values. The fair value of the identifiable intangible asset acquired was based on estimates and assumptions made by management at the time of acquisition. As additional information becomes available, such as finalization of the estimated fair value of tax related items, the Company may revise the preliminary purchase price allocation during the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes may be material as the Company finalizes the fair values of the tangible and intangible assets acquired.
 
The following table summarizes the preliminary purchase price allocation as of the acquisition date:
 

Inventories

 $126 

Intangible asset

  8,840 

Total identifiable net assets

  8,966 

Goodwill

  11,175 

Net assets acquired

 $20,141 

     

The estimated fair value of developed technology was $8,840 with an estimated useful life of five years.  The developed technology was valued using the multi-period excess earnings method under the income approach. This method involves discounting the direct cash flows expected to be generated by the technologies over their remaining lives, net of returns on contributory assets. The estimated useful life was determined to be five years based on the estimated life of the product, assuming that the existing customers will remain with the Company until the product becomes obsolete.  

 

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and is attributable to the workforce of Arrive, the Company’s going concern value with the opportunity to leverage its workforce to develop new technologies and the ability of the Company to grow the business faster and more profitable than was possible by Arrive as a stand-alone company. Since this is an asset purchase agreement, the goodwill is amortized and is deductible for tax purposes.

 

The Company incurred acquisition costs of $180 included in general and administrative expense in the condensed consolidated statement of income (loss) for the three and six months ended June 30, 2020.

 

Arrive contributed revenue of $571 and pre-tax loss of $121 to the Company for the period from May 18, 2020 to June 30, 2020.  

 

Pro Forma Information

 

The following unaudited pro forma financial information presents a summary of the Company’s condensed consolidated results of operations for the three and six months ended June 30, 2020 and 2019, assuming the eSilicon and Arrive acquisitions have been completed as of January 1, 2019. The pro forma information includes adjustments to revenue, amortization and depreciation for intangible assets and property and equipment acquired, amortization of the purchase accounting effect on inventory acquired from eSilicon and interest income for reduction in short-term investments to fund the acquisition.

 

  

Pro Forma Three Months Ended

  

Pro Forma Six Months Ended

 
  

June 30, 2020

  

June 30, 2019

  

June 30, 2020

  

June 30, 2019

 
  

(unaudited)

 

(unaudited)

 

Revenue

 $177,537  $97,443  $322,201  $223,228 

Net loss

 $(21,683) $(47,229) $(47,881) $(84,902)

 

The unaudited pro forma financial information was prepared using the acquisition method of accounting and are based on the historical financial information of the Company, eSilicon and Arrive, reflecting the results of operations for the three and six months ended June 30, 2020 and 2019. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the Company completed the acquisitions as of the beginning of the period presented. In addition, the unaudited pro forma financial information does not purport to project the future results of operations of the combined company nor do they reflect the expected realization of any cost savings associated with the acquisitions.

 

 

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 in marketable securities by investment category: 

 

  

June 30, 2020

  

December 31, 2019

 
  

Cost

  

Fair Value

  

Cost

  

Fair Value

 

Available-for-sale securities:

                

U.S. Treasury securities

 $  $  $3,752  $3,759 

Municipal bonds

  19,083   19,220   6,062   6,119 

Corporate notes/bonds

  60,307   61,090   118,859   119,449 

Asset backed securities

  2,579   2,612   4,239   4,268 

Commercial paper

  5,115   5,118   6,464   6,464 

Certificate of deposit

        72   72 

Total investments

 $87,084  $88,040  $139,448  $140,131 

 

As of June 30, 2020, there were no investments that had unrealized loss position. 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 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 June 30, 2020 are presented in the following table:

 

  

Cost

  

Fair Value

 

Due in one year or less

 $53,653  $53,963 

Due between one and five years

  33,431   34,077 
  $87,084  $88,040 

 

The Company has a marketable equity investment in a company located in Taiwan. The fair value of the investment and unrealized loss as of June 30, 2020 was $1,606 and $388, respectively.  The fair value of the investment and unrealized loss as of December 31, 2019 was $1,662 and $332, respectively.  This investment is included in Other assets, net in the condensed consolidated balance sheets.

 

The Company has non-marketable equity investments in privately held companies without readily determinable market values. The Company adjusts the carrying value of non-marketable equity investments to fair value upon observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). All gains and losses on non-marketable equity investments, realized and unrealized, are recognized in Other income, net in the condensed consolidated statement of income (loss).  As of June 30, 2020, non-marketable equity investments had a carrying value of approximately $23,593, of which $11,093 was remeasured to fair value based on an observable transaction during the three months ended June 30, 2020.  These investments are included in Other assets, net in the condensed consolidated balance sheets.  An unrealized gain of $1,801 was recorded in Other income and included as an adjustment to the carrying value of non-marketable equity investments for the three and six months ended June 30, 2020.

 

 

5. Inventories

 

Inventories consist of the following:

 

  June 30, 2020  December 31, 2019 

Raw materials

 $38,416  $18,593 
Work in process  31,336   19,081 
Finished goods  20,667   17,339 
  $90,419  $55,013 

 

 

 

6. Property and Equipment, net

 

Property and equipment consist of the following:

 

  June 30, 2020  December 31, 2019 

Laboratory and production equipment

 $173,919  $144,866 

Office, software and computer equipment

  41,941   37,241 

Furniture and fixtures

  1,952   1,617 

Leasehold improvements

  17,646   8,282 
   235,458   192,006 

Less accumulated depreciation and amortization

  (126,124)  (112,443)
  $109,334  $79,563 

 

 

 

 

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 six months ended  June 30, 2020 was $6,385 and $13,265, respectively.  Depreciation and amortization expense of property and equipment for the three and six months ended  June 30, 2019 was $5,566 and $11,058, respectively.

  

As of June 30, 2020 and December 31, 2019, computer software costs included in property and equipment were $8,009 and $7,339, respectively. Amortization expense of capitalized computer software costs was $253 and $503 for the three and six months ended  June 30, 2020, respectively.  Amortization expense of capitalized computer software costs was $86 and $186 for the three and six months ended June 30, 2019, respectively. 

 

Property and equipment not yet paid in cash as of June 30, 2020 and December 31, 2019 was $11,829 and $4,728, respectively.

 

 

7. Intangible Assets

 

The following table presents details of intangible assets:

 

  

June 30, 2020

  

December 31, 2019

 
  

Gross

  Accumulated Amortization  

Net

  

Gross

  Accumulated Amortization  

Net

 

Developed technology

 $229,270  $137,108  $92,162  $186,800  $123,365  $63,435 

Customer relationships

  70,540   36,273   34,267   70,540   31,409   39,131 
Contract manufacturing rights  102,388   9,675   92,713          

Trade name

  2,310   1,905   405   2,310   1,766   544 

Patents

  1,579   1,063   516   1,579   1,010   569 

Software

  78,646   21,060   57,586   74,022   9,411   64,611 
  $484,733  $207,084  $277,649  $335,251  $166,961  $168,290 

 

The following table presents amortization of intangible assets for the three and six months ended  June 30, 2020 and 2019:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Cost of goods sold

 $12,175  $9,724  $23,558  $19,448 

Research and development

  6,959   5,514   13,584   10,916 

Sales and marketing

  2,432   2,432   4,864   4,864 

General and administrative

  95   148   192   298 
  $21,661  $17,818  $42,198  $35,526 

 

Based on the amount of intangible assets subject to amortization at June 30, 2020, the expected amortization expense for each of the next five fiscal years and thereafter is as follows:

 

2020 (remaining)

 $43,885 

2021

  80,795 

2022

  69,413 

2023

  42,315 

2024

  27,122 

Thereafter

  14,119 
  $277,649 

 

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

 

Developed technology

  4.5 

Customer relationship

  3.5 
Contract manufacturing rights  4.5 

Trade name

  1.5 

Patents

  7.4 

Software

  2.2 

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

 

 

8. Leases

 

The Company has operating leases for office facilities. The leases have remaining lease terms of one year to ten years and some may include options to extend the lease for up to five years.

 

Information related to operating leases are as follows:

 

  Three Months Ended June 30,  Six Months Ended June 30, 
  

2020

  

2019

  

2020

  

2019

 

Operating lease cost

 $2,375  $1,044  $4,526  $2,098 

Cash paid for leases

  1,741   927   3,320   2,191 

Right of use assets obtained in exchange for lease obligations

  2,001      3,743   224 

 

Weighted average remaining lease term and weighted average discount are as follows:

 

  

June 30, 2020

  

December 31, 2019

 

Weighted average remaining lease term (years)

  7.88   8.52 

Weighted average discount rate

  3.7%  3.9%

 

Future minimum lease payments under non-cancellable leases as of June 30, 2020 are as follows:

 

2020 (remaining)

 $3,726 

2021

  6,694 

2022

  6,900 

2023

  6,873 

2024

  6,621 

Thereafter

  23,914 

Total future minimum lease payments

  54,728 

Less: Imputed interest

  7,966 
Lease incentive recognized as offset to lease liability  2,576 

Present value of lease obligations

 $44,186 

 

As of   June 30, 2020, the Company has additional operating leases for office facilities that have not yet commenced of $661. These operating leases will commence in the third quarter of 2020 with lease terms between three to five years.

 

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

 

9. Product Warranty Obligation

 

As of  June 30, 2020 and December 31, 2019, the product warranty liability was $110. There was no change in product warranty liability during the three and six months ended  June 30, 2020 and 2019.

 

 

10. Convertible Debt 

 

The carrying amount of the Company’s long-term debt consists of the following:

 

  June 30, 2020  December 31, 2019 

Principal

 $619,956  $517,500 

Less:

        

Unamortized debt discount

  (105,568)  (38,105)

Unamortized debt issuance costs

  (10,865)  (3,217)

Net carrying amount of long-term debt

  503,523   476,178 

Less current portion of long-term debt

  48,277   217,467 

Long-term debt, non-current portion

 $455,246  $258,711 

 

In December 2015, the Company issued $230,000 of 1.125% convertible senior notes due 2020 (the “Convertible Notes 2015”). The Convertible Notes 2015 will mature December 1, 2020, unless earlier converted or repurchased. Interest on the Convertible Notes 2015 is payable on June 1 and December 1 of each year, beginning on June 1, 2016. The initial conversion rate is 24.8988 shares of common stock per $1 principal amount of Convertible Notes 2015, which represents an initial conversion price of approximately $40.16 per share.   

 

Interest expense for the Convertible Notes 2015 are as follows:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Contractual interest expense

 $370  $646  $1,013  $1,286 

Amortization of debt discount

  1,704   2,877   4,740   5,667 

Amortization of debt issuance costs

  153   259   427   510 

Total interest expense

 $2,227  $3,782  $6,180  $7,463 

 

In connection with the issuance of the Convertible Notes 2015, the Company entered into capped call transactions (the “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 approximately 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 (the “Convertible Notes 2016”). The Convertible Notes 2016 will mature on 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 the Convertible Notes 2016, which represents an initial conversion price of approximately $56.34 per share.  

 

Interest expense for the Convertible Notes 2016 are as follows:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Contractual interest expense

 $397  $533  $934  $1,066 

Amortization of debt discount

  2,877   3,577   6,649   7,050 

Amortization of debt issuance costs

  236   293   545   578 

Total interest expense

 $3,510  $4,403  $8,128  $8,694 

 

In connection with the issuance of the Convertible Notes 2016, the Company entered into capped call transactions (the “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.  

 

In April 2020, the Company issued $506,000 of 0.75% convertible senior notes due 2025 (“Convertible Notes 2020” and, together with the Convertible Notes 2015 and Convertible Notes 2016, the “Convertible Notes”). The Convertible Notes 2020 will mature April 15, 2025, unless earlier converted or repurchased. Interest on the Convertible Notes 2020 is payable on April 15 and October 15 of each year, beginning on October 15, 2020. The initial conversion rate is 8.0059 shares of common stock per $1 principal amount of Convertible Notes 2020, which represents an initial conversion price of approximately $124.91 per share.  The Convertible Notes 2020 will be subject to repurchase at the option of the holders following certain fundamental corporate changes, at a fundamental change in repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. Certain corporate events that occur prior to the stated maturity date can cause the Company to increase the conversion rate for a holder.

 

Prior to the close of business on the business day immediately preceding October 15, 2024, holders may convert all or any portion of their Convertible Notes 2020 only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the Convertible Notes 2020 on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture 2020 (as defined below)) per $1 principal amount of Convertible Notes 2020 for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; (iii) if the Company calls any or all of the Convertible Notes 2020 for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (iv) upon the occurrence of specified corporate events. On or after October 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Notes 2020 at any time, regardless of the foregoing circumstances. Upon conversion of a Convertible Notes 2020, the Company will pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election. The Company's current intent is to settle the principal amount of the Convertible Notes 2020 in cash upon conversion. If the conversion value exceeds the principal amount, the Company would deliver shares of its common stock in respect to the remainder of its conversion obligation in excess of the aggregate principal amount.

 

The Company may not redeem the Convertible Notes 2020 prior to April 20, 2023. The Company may redeem for cash all or any portion of the Convertible Notes 2020, at its option, on or after April 20, 2023 if the last reported sale price of the common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes 2020 to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

 

Upon the occurrence of certain fundamental changes, the holders of the Convertible Notes 2020 may require the Company to repurchase all or a portion of the Convertible Notes 2020 for cash at a price equal to 100% of the principal amount of the Convertible Notes 2020, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.  

 

16

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

The Convertible Notes 2020 are governed by an Indenture dated April 24, 2020 (the “Indenture 2020”) between the Company and U.S. Bank National Association, as trustee (the “Trustee”). The Indenture 2020 does not contain any financial or operating covenants, or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries.  The Indenture 2020 contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Convertible Notes 2020 then outstanding may declare 100% of the principal of and accrued and unpaid interest, if any, on all the Convertible Notes 2020, to be due and payable. Upon events of default involving specified bankruptcy events involving the Company, 100% of the principal of and accrued and unpaid interest, if any, on all of the Convertible Notes 2020 will be due and payable immediately.  Notwithstanding the foregoing, the Indenture 2020 provides that, to the extent the Company elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture 2020 consists exclusively of the right to receive additional interest on the Convertible Notes 2020.  As of June 30, 2020, none of the conditions allowing holders of the Convertible Notes 2020 to convert had been met.

 

In accounting for the issuance of the Convertible Notes 2020, the Company separated the Convertible Notes 2020 into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes 2020 as a whole. The excess of the face amount of the liability component over its carrying amount is amortized to interest expense over the term of the Convertible Notes 2020 using the effective interest method. The gross proceeds of $506,000 were accordingly allocated between long-term debt of $402,624 and stockholders' equity of $103,376.  Issuance costs of $13,507 were allocated between long-term debt of $10,747 and equity of $2,760

 

Interest expense for the Convertible Notes 2020 for the three and six months ended June 30, 2020 are as follows:

 

Contractual interest expense

 $759 

Amortization of debt discount

  3,234 

Amortization of debt issuance costs

  336 

Total interest expense

 $4,329 

 

In connection with the issuance of the Convertible Notes 2020, the Company entered into capped call transactions (“Capped Call 2020”) in private transactions. Under the Capped Call 2020, 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 2020, with a strike price approximately equal to the conversion price of the Convertible Notes 2020 and with a cap price equal to $188.54 per share. The Capped Call 2020 were purchased for $55,660 and recorded as a reduction to additional paid-in-capital in accordance with ASC 815-40, Contracts in Entity’s Own Equity.

 

The purchased Capped Call 2020 allows the Company to receive shares of its common stock and/or cash from counterparties equal to the amounts of common stock and/or cash related to the excess of the market price per share of the common stock, as measured under the terms of the Capped Call 2020 over the strike price of the Capped Call 2020 during the relevant valuation period. The purchased Capped Call 2020 is intended to reduce the potential dilution to common stock upon future conversion of the Convertible Notes 2020 by effectively increasing the initial conversion price to $188.54 as well as to offset potential cash payments the Company is required to make in excess of the principal amount of the Convertible Notes 2020 in applicable events.

 

The Capped Call 2020 is a separate transaction entered into by the Company with the option counterparties, is not part of the terms of the Convertible Notes 2020 and will not change the holders' rights under the Convertible Notes 2020.

 

During the three months June 30, 2020, the Company repurchased $180,454 and $223,090 aggregate principal amount of the Convertible Notes 2015 and Convertible Notes 2016, respectively.  The repurchase was accounted for as debt extinguishment.  The Company paid $407,782 cash (excluding payment for accrued interest) and issued 4,942,490 shares of common stock.  The total repurchase consideration was allocated to the liability and equity components of respective Convertible Notes.  The total repurchase consideration allocated to the liability component was based on the fair value of the liability component using discount rates based on the Company's estimated rate for a similar liability with the same maturity, but without the conversion option.  The repurchase consideration allocated to the equity component was calculated by deducting the fair value of the liability component from the aggregate repurchase consideration.  The loss on extinguishment was determined by comparing the allocated purchase consideration with the carrying value of the liability component, which includes the proportionate amounts of unamortized debt discount and the remaining unamortized debt issuance costs.  

 

17

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

The net carrying amount of the liability component of the convertible debt immediately prior to the repurchase was as follows:

 

  

Convertible Notes 2015

  

Convertible Notes 2016

 

Principal

 $180,454  $223,090 

Unamortized debt discount

  (5,596)  (15,694)

Unamortized debt issuance costs

  (504)  (1,287)

Total

 $174,354  $206,109 

 

The loss on early extinguishment of debt is calculated as follows:

 

  

Convertible Notes 2015

  

Convertible Notes 2016

 

Repurchase consideration allocated to the liability component

 $177,622  $216,138 

Net carrying value of debt

  (174,354)  (206,109)

Loss on early extinguishment

 $3,268  $10,029 

 

The repurchase consideration allocated to the equity component of $299,458 and $269,875 for the Convertible Notes 2015 and Convertible Notes 2016, respectively, was recorded as a reduction to additional paid-in capital in the Company's balance sheet.  The  total value of common stock issued in relation to the repurchases was $295,660 and $259,653 for the Convertible Notes 2015 and Convertible Notes 2016, respectively.

 

The conversion condition for the Convertible Notes 2015 and Convertible Notes 2016 was met during the three months ended June 30, 2020.  During the three months ended June 30, 2020, the Company received conversion request on the aggregate principal amount for the Convertible Notes 2016 of $2,211, which remain unsettled as of  June 30, 2020.  

 

 

11. Other Liabilities

 

Other current liabilities consist of the following:

 

  June 30, 2020  December 31, 2019 

Software license agreements liability

 $28,500  $25,810 

Operating lease liability

  3,128   2,545 

Others

  11,215   5,176 
  $42,843  $33,531 

 

18

 

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

 

Other long-term liabilities consist of the following:

 

  June 30, 2020  December 31, 2019 

Income tax payable

 $1,067  $692 

Software license agreements liability

  24,823   36,144 

Operating lease liability

  41,058