Summary of Significant Accounting Policies

Basis of Presentation

The Consolidated Financial Statements include all the accounts of Applied Micro Circuits Corporation (the "Company") and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company prepared the accompanying Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”).

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management 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. The Company regularly evaluates estimates and assumptions related to its:


•	capitalized mask sets including their useful lives, which affects cost of goods sold and property and equipment or Research and Development ("R&D") expenses, if not capitalized;


•	inventory valuation, warranty liabilities and revenue reserves, which affects cost of sales, gross margin and revenues;


•	allowance for doubtful accounts, which affects operating expenses;


•	unrealized losses or other-than-temporary impairments of short-term investments available for sale, which affects net interest income (expense), net


•	valuation of other long-lived assets and goodwill, which affects depreciation and impairments of long-lived asset, impairments of goodwill and apportionment of goodwill related to divestitures;


•	valuation of cost method investments, which affects impairment of strategic investments;


•	potential costs of litigation, which affects operating expenses;


•	valuation of deferred income taxes, which affects income tax expense (benefit); and


•	stock-based compensation, which affects gross margin and operating expenses.

The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and actual results, future results of operations will be affected.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity from the date of purchase of 90 days or less to be cash equivalents.

Investments

The Company holds a variety of securities in its investments portfolio. The Company reviews its investment portfolio periodically to assess for other-than-temporary impairment. The Company assesses the impairment of its investments in order to determine the classification of the impairment as “temporary” or “other-than-temporary”. The factors used to determine whether an impairment is temporary or other-than-temporary involve considerable judgment primarily including the duration and extent to which the market value has been less than amortized cost, the nature of underlying assets (including the degree of collateralization) and the financial condition, credit rating, market liquidity conditions and near-term prospects of the issuer. If the fair value of a security is less than its amortized cost basis at the balance sheet date, an assessment would have to be made as to whether the impairment is other-than-temporary. If the Company does not intend to sell the security, the Company shall consider available evidence to assess whether it is more likely than not, it will be required to sell the security before the recovery of the amortized cost basis due to cash, working capital requirements, contractual or regulatory obligations indicate that the security will be required to be sold before a forecasted recovery occurs. If it is more likely than not that the Company is required to sell the security before recovery of the amortized cost basis, an other-than-temporary impairment is considered to have occurred. The Company uses present value cash flow models to determine whether the entire amortized cost basis of the security will be recovered. The Company will compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. An other-than-temporary impairment is said to have occurred if the present value of cash flows expected to be collected is less than the amortized cost basis of the security. Refer to Note 2, Investments, to the Consolidated Financial Statements for additional information.

Fair Value of Financial Instruments

Short-term investments are recorded at fair value in the Company’s Consolidated Balance Sheets and are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Accounting Standards Codification ("ASC") 820-10 defines a three-level valuation hierarchy for disclosure of fair value measurements. The Company currently classifies inputs to derive fair values for short-term investments as Level 1 and 2. Instruments classified as Level 1 include highly liquid government and agency securities, money market funds and publicly traded closed end bond funds in active markets. Instruments classified as Level 2 include corporate notes, mortgage-backed securities, asset-backed securities and preferred stock. The Company did not have any Level 3 short-term investments as of any of the periods presented.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of available-for-sale securities and trade receivables. The Company believes that the credit risk in its trade receivables is mitigated by the Company’s credit evaluation process, relatively short collection terms and dispersion of its customer base. The Company generally does not require collateral and losses on trade receivables have historically been within management’s expectations.

The Company invests its excess cash primarily in debt instruments of the U.S. Treasury, corporate bonds and mutual funds mainly with investment grade credit ratings. The Company has established guidelines relative to diversification and maturities that attempt to maintain safety and liquidity of the portfolio. These guidelines are periodically reviewed.

Inventories

The Company’s policy is to value inventories at the lower of cost or market on a part-by-part basis, with cost being determined based on the first-in, first-out method. This policy requires the Company to make estimates regarding the market value of its inventories, including an assessment of excess or obsolete inventories. The Company determines excess and obsolete inventories based on an estimate of the future demand for its products within a specified time horizon, generally 12 months. If the Company’s future demand is lower than its inventory balance, the Company may be required to take additional excess inventory charges, which would decrease gross margin and net operating results. The written down value of the inventory becomes its new cost basis, and the cost basis for such inventory is not marked-up if market conditions improve. This accounting is consistent with the guidance provided by Financial Accounting Standards Board ("FASB") ASC 330.

Strategic Investments

The Company has entered into certain equity investments in privately held businesses to achieve certain strategic business objectives. The Company’s investments in equity securities of privately held businesses are accounted for under the cost method. Under the cost method, strategic investments in which the Company holds less than a 20% voting interest and in which the Company does not have the ability to exercise significant influence are carried at cost reduced by other-than-temporary impairments, as appropriate. The Company periodically reviews these investments for other-than-temporary declines in fair value based on the specific identification method and writes down investments when an other-than-temporary decline has occurred. The fair value was estimated on a non-recurring basis based on Level 3 inputs. The Level 3 inputs used to estimate the fair value of these investments included consideration of the current cash position, recent operational performance, and forecasts of the investees. The Company recorded other-than-temporary impairment charges of $3.0 million, zero, and $2.3 million during the fiscal years ended March 31, 2015, 2014, and 2013, respectively. The strategic investments are included in other assets on the Company’s Consolidated Balance Sheets, and the balance was zero as of March 31, 2015.

Goodwill and Other Long-Lived Assets

Goodwill represents the excess of the fair value of purchase consideration over the fair values of assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but is reviewed annually or more frequently if impairment indicator arise. The Company elected to use the qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. As part of its qualitative assessment, the Company evaluated and determined that its market capitalization was well in excess of its book value and based on this and other qualitative factors determined that there was no goodwill impairment as of and for the fiscal year ended March 31, 2015.

The Company’s long-lived assets consist of property, plant and equipment. Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets ranging from 1 to 5 years using the straight line method. Leasehold improvements are stated at cost and amortized over the shorter of the term of the related lease or its estimated useful life. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. In addition, the Company assesses its long-lived assets for impairment if they are abandoned. There was no impairment of long-lived assets other than the write-off of a mask set of $2.6 million relating to a restructuring plan during the fiscal year ended March 31, 2015. There was no impairment during the fiscal year ended March 31, 2014. Refer to the paragraph below, Mask Costs, and Note 7, Restructuring, to the Consolidated Financial Statements for additional information.

Revenue Recognition

The Company recognizes revenue based on four basic criteria: 1) there is evidence that an arrangement exists; 2) delivery has occurred and title and risk of loss have transferred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. The Company considers the price to be determinable when the price is not subject to refund or adjustments or when any such adjustments can be estimated. The Company evaluates the creditworthiness of its customers to determine that appropriate credit limits are established prior to the acceptance of an order. Revenue, including sales to resellers and distributors, is reduced for estimated returns and distributor allowances and is recognized upon shipment. These estimates are based on the Company's experience with the contractual terms of the competitive pricing and rebate programs and stock rotations.

From time to time, the Company generates revenue from the sale of internally developed intellectual property ("IP") and royalty revenues from the sale of the Company's customers' products that contain its technology. The Company generally recognizes revenue from the sale of IP and from royalties when all four basic criteria outlined above are met.

Research and Development

R&D costs are expensed as incurred. Substantially all R&D expenses are related to new product development and designing significant improvements to existing products. Also refer to Note 4, Veloce, to the Consolidated Financial Statements.

Mask Costs

The Company incurs significant costs for the fabrication of masks used by its contract manufacturers to manufacture its products. If the Company determines, at the time the costs for the fabrication of masks are incurred, that technological feasibility of the product has been achieved, such costs are capitalized as property and equipment under machinery and equipment. When its related product is released to production, the mask costs are amortized as cost of sales over three years, representing the estimated production period of the product. The Company periodically reassesses the estimated production period for specific mask sets capitalized. During the fiscal years ended March 31, 2015 and 2014, total mask costs capitalized were $5.9 million and $6.4 million, respectively. If the Company determines, at the time fabrication mask costs are incurred, that either technological feasibility of the product has not occurred or that the mask is not reasonably expected to be used in production or that the commercial feasibility of the product is uncertain, the related mask costs are expensed to R&D in the period in which the costs are incurred. The Company also periodically assesses capitalized mask costs for impairment. As a result of recent restructuring, the Company recorded an impairment charge of a capitalized mask set of $2.6 million during the fiscal year ended March 31, 2015. There were no impairments during the fiscal year ended March 31, 2014. Refer to Note 7, Restructuring, to the Consolidated Financial Statements for additional information.

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award. The fair value of restricted stock units ("RSUs") is estimated using the Company's stock price on the grant date. The fair value of options and employee stock purchase rights is estimated using the Black-Scholes model on the grant date. The Black-Scholes model determines the fair value of share-based payment awards based on assumptions including the Company's stock price on the date of grant, volatility over the term of the awards, actual and projected employee stock option exercise behaviors and risk free interest rate. The market stock units ("MSUs") were valued using the Monte Carlo pricing model, which uses the Company's stock price, the Index price, expected volatilities of the Company's stock price and the Index, correlation coefficients and risk free interest rates to determine the fair value.

The following tables summarize the allocation of the stock-based compensation expense (in thousands):



	Fiscal Years Ended March 31,
	2015		2014			2013
Stock-based compensation expense by type of grant:
Option grants and employee stock purchase rights	$	1,408	$	2,520		$	3,469
Restricted stock units	16,892		14,517			20,620
	18,300		17,037			24,089
Stock-based compensation expensed from (capitalized to) inventory	5		(16		)	147
Total stock-based compensation expense	$	18,305	$	17,021		$	24,236



	Fiscal Years Ended March 31,
	2015		2014			2013
Stock-based compensation expense by cost centers:
Cost of revenues	$	285	$	460		$	545
Research and development	11,657		6,371			11,760
Selling, general and administrative	6,358		10,206			11,784
	18,300		17,037			24,089
Stock-based compensation expensed from (capitalized to) inventory	5		(16		)	147
Total stock-based compensation expense	$	18,305	$	17,021		$	24,236

The fair values of the options and employee stock purchase rights granted are estimated as of the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:



	Options							Employee Stock Purchase Rights
	Fiscal Years Ended March 31,							Fiscal Years Ended March 31,
	2015	2014			2013			2015			2014			2013
Expected life (years)	*	4.4			4.4			0.5			0.5			0.5
Risk-free interest rate	*	0.6		%	0.7		%	0.1		%	—		%	—		%
Volatility	*	0.49			0.54			0.57			0.56			0.50
Dividend yield	*	—		%	—		%	—		%	—		%	—		%
Expected forfeiture rate	*	5.8		%	6.6		%	—		%	—		%	—		%
Weighted average fair value	*	$	2.95		$	2.47		$	2.17		$	3.40		$	1.77

* The Company did not grant options during the twelve months ended March 31, 2015.

Compensation Amortization Period. All stock-based compensation is amortized over the requisite service period of the awards, which is generally the same as the vesting period of the awards. The Company amortizes the fair value cost on a straight-line basis over the expected service periods.

Expected Life. The expected life of stock options granted represents the expected weighted average period of time from the date of grant to the estimated date that the stock option would be fully exercised. To calculate the expected term, the Company utilizes historical actual exercise data and assumes that unexercised stock options would be exercised at the midpoint of the valuation date of its analysis and the full contractual term of the option.

Risk-Free Interest Rate. The risk-free interest rate is the implied yield currently available on zero-coupon government issues with a remaining term equal to the expected life.

Expected Volatility. Expected volatility is a measure of the amount by which the stock price is expected to fluctuate. The Company estimates the expected volatility of its stock options at their grant date by equally weighting the historical volatility and the implied volatility of its stock. The historical volatility is calculated using the weekly stock price of its stock over a recent historical period equal to its expected life. The implied volatility is calculated from the implied market volatility of exchange-traded call options on its common stock.

Expected Dividends. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero percent in valuation models.

Expected Forfeitures. As stock-based compensation expense recognized in the Consolidated Statements of Operations for the fiscal years ended March 31, 2015, 2014 and 2013 is based on awards that are ultimately expected to vest, it should be reduced for estimated forfeitures. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeiture rates were based upon the expected forfeiture data using the Company’s current demographics and standard probabilities of employee turnover.

During the fourth quarter of fiscal 2015, the Company revised the estimated forfeiture rate used in determining the amount of stock-based compensation from 5.8% to 6.1%, which the Company believes is indicative of the rate it will experience during the remaining vesting period of currently outstanding unvested grants.

The weighted average grant-date fair value per share of the RSUs awarded was $7.81, $9.46 and $6.11 during the fiscal years ended March 31, 2015, 2014 and 2013, respectively. The weighted average grant-date fair value per share was calculated based on the fair market value of the Company’s common stock on the respective grant dates.

As of March 31, 2015, the amount of unrecognized stock-based compensation cost, net of estimated forfeitures, related to unvested stock options and unvested RSUs was $24.6 million which will be recognized over a weighted average period of 1.2 years.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes as set forth in ASC 740-10. Under the asset and liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.

Segments

As of March 31, 2014 and 2013, the Company had two operating segments, Connectivity and Computing, and under the aggregation criteria set forth in ASC 280-10 had one reportable segment, as the two operating segments shared similar economic characteristics and other operating similarities (the nature of the products, the nature of the production processes, the type of customers and the methods of distribution). During fiscal year 2015, the Company continued to conclude that the Company’s Chief Executive Officer is its Chief Operating Decision Maker ("CODM"). As of March 31, 2015, the Company has one operating segment and therefore one reportable segment due to changes in its organizational structure as a result of recent restructuring activities and changes in how the CODM allocates resources and assesses performance of the Company. The Company’s CODM evaluates the performance of the Company and makes decisions regarding allocation of resources based on overall Company results.

New Accounting Pronouncements

In August 2014, the FASB issued Accounting Standard Update ("ASU") No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires an entity's management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or within one year after the date that the financial statements are available to be issued, when applicable. The standard is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating this new standard, and after adoption, it will incorporate this guidance in its assessment of going concern.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers", which will supersede most of the existing revenue recognition guidance under U.S. GAAP. This ASU requires an entity to 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 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the potential effect of this ASU on its financial statements and related disclosures.