BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by Monolithic Power Systems, Inc. (the “Company” or “MPS”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted in accordance with these accounting principles, rules and regulations. The information in this report should be read in conjunction with the Company

’s audited consolidated financial statements and notes thereto included in the Annual Report on Form

-K for the year ended

December 31, 2016,

filed with the SEC on

March 1, 2017.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company

’s financial position, results of operations and cash flows for the interim periods presented. The financial statements contained in this Form

-Q are

not

necessarily indicative of the results that

may

be expected for the year ending

December

31,

2017

or for any other future periods.

Summary of Significant Accounting Policies

Other than those discussed in “Recent Accounting Pronouncements” below, there have been

changes to the Company

’s significant accounting policies during the

three

six

months ended

June 30, 2017

as compared to the significant accounting policies described in the Company’s audited consolidated financial statements included in the Annual Report on Form

-K for the year ended

December 31, 2016.

Recent Accounting Pronouncements

Stock-Based

Compensation:

March 2016,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Board (“ASU”)

No.

2016

09,

Compensation—Stock Compensation (Topic

718

): Improvements to Employee Share-Based Payment Accounting,

which changed how entities account for certain aspects of share-based payment awards, including the accounting for excess tax benefits and tax deficiencies, forfeitures, statutory tax withholding requirements, as well as classification of excess tax benefits in the statements of cash flows. The Company adopted the standard on

January 1, 2017

and the primary impact of the adoption was as follows:

●

The

Company elected to account for forfeitures of equity awards when they occur. The change was applied on a modified

retrospective basis and the Company recorded a cumulative-effect adj

ustment of

$5.1

million to retained earnings on

January 1, 2017 (

with a corresponding offset to additional paid-in capital).

●

Excess tax benefits are recognized in the income tax provision in the Condensed Consolidated Statements of Operations prospectively, rather than in additional paid-in capital in the Condensed Consolidated Balance Sheets. The Company applied the modified retrospective method and there was

net cumulative-effect adjustment to retained earnings on

January 1, 2017,

as the increase in deferred tax assets was fully offset by a valuation allowance.

●

The Company is presenting excess tax benefits as an operating activity in the Condensed Consolidated Statements of Cash

Flows on a prospective basis.

Revenue Recognition:

May 2014,

the FASB issued ASU

No.

2014

09,

Revenue from Contracts with Customers (Topic

606

which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard defines a

five

-step process in order to achieve this core principle and requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used by management. The standard will be effective for annual reporting periods beginning after

December 15, 2017.

Early adoption is permitted for reporting periods beginning after

December 15, 2016.

The Company does

not

plan to early adopt, and accordingly, the Company will adopt the new standard effective

January 1, 2018.

While the Company continues to assess the impact of the new standard on its accounting policies, processes and system requirements, the primary

effects include the timing of recognition of revenue with certain distributors in the U.S. Currently, sales to these distributors are made under agreements which provide these distributors with price adjustment and other rights. The Company determines that uncertainties on the sales price exist under these arrangements primarily because the amount of price adjustments to be claimed by the distributors is

not

fixed or determinable. As a result, revenue and costs related to these sales are deferred until the Company receives notification from the distributors that products have been sold to the end customers and the amount of price adjustments is finalized. Under the new standard, the transaction price takes into consideration the effect of variable consideration, which is estimated at the time the promised goods are transferred to the customers. Accordingly, the Company will be required to recognize revenue at the time of shipment to the distributors, adjusted for an estimate of the price adjustments based on the information available at the time. As of

June 30, 2017,

the deferred revenue balance before the final price adjustments from the U.S. distributors and the related deferred costs were

$2.8

million and

$0.3

million, respectively.

Revenue from non-U.S. distributors, which make up the majority of the Company

’s total sales to distributors, is currently recognized at the time of shipment to the distributors because these arrangements do

not

contain price adjustments, or other amounts that are

not

fixed or determinable. Accordingly, revenue recognition will remain substantially unchanged upon adoption of the new standard.

The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The Company

currently plans to adopt the modified retrospective method.

While the Company continues to assess the potential impact of the provisions in the new standard, including the areas described above, the Company cannot reasonably estimate quantitative information related to the impact of the new standard on

its financial statements upon adoption at this time.

Others:

February 2016,

the FASB issued ASU

No.

2016

02,

Leases (Topic

842

which requires entities to recognize a right-of-use asset and a lease liability on the balance sheets for substantially all leases with a lease term greater than

months, including leases currently accounted for as operating leases. The standard requires modified retrospective adoption and will be effective for annual reporting periods beginning after

December 15, 2018,

with early adoption permitted. The Company is evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures.

June 2016,

the FASB issued ASU

No.

2016

13,

Financial Instruments – Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments,

which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard will be effective for annual reporting periods beginning after

December 15, 2019,

with early adoption permitted for annual reporting periods beginning after

December 15, 2018.

Entities will apply the standard by recording a cumulative-effect adjustment to retained earnings. The Company is evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures.

January 2017,

the FASB issued ASU

No.

2017

04,

Intangibles – Goodwill and Other (Topic

350

): Simplifying the Accounting for Goodwill Impairment,

which simplifies the accounting for goodwill impairment. The guidance removes step

two

of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value,

not

to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The standard will be applied prospectively, and is effective for annual reporting periods beginning after

December 15, 2019.

Early adoption is permitted after

January 1, 2017.

The Company is evaluating the impact of the adoption on its annual goodwill impairment test.