The Company and Summary of Significant Accounting Policies

Operations

Applied Micro Circuits Corporation (the "Company) was incorporated and commenced operations in California in 1979 and was reincorporated in Delaware in 1987. The Company is a global leader in silicon solutions for next-generation cloud infrastructure and data centers, as well as connectivity products for edge, metro and long haul communications equipment. The Company's principal executive offices are located at 4555 Great America Parkway, 6th Floor, Santa Clara, California 95054 and sales and engineering offices are located throughout the world.

Basis of Presentation

The Consolidated Financial Statements include all the accounts of 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 U.S. generally accepted accounting principles, or GAAP, and pursuant to the rules and regulations of the United States Securities and Exchange Commission.

In management’s opinion, the Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the Company's financial position, results of operations and cash flows.

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 affect interest income (expense), net


•	valuation of other long-lived assets and goodwill, which affects depreciation and impairments of long-lived assets, 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 affect 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.

Risks and Uncertainties

The Company's future results of operations involve a number of risks and uncertainties. Factors that could affect the Company's business or future results and cause actual results to vary materially from historical results include, but are not limited to, the highly cyclical nature of the semiconductor industry; high fixed costs; declines in average selling prices; ability to fund liquidity needs; failure to maintain an effective system of internal controls; product return and liability risks; absence of significant backlog; dependence on international operations and sales; proposed changes to United States tax laws which results in adverse tax consequences; inadequate management information systems; ability to attract and retain qualified employees; difficulties consolidating and evolving the operational capabilities; dependence on materials and equipment suppliers; loss of customers; development of new proprietary technology and the enforcement of intellectual property ("IP") rights by or against the Company; the complexity of packaging and test processes; competition; existing and future environmental regulations; and fire, flood or other calamity affecting the Company or others with whom it does business.

The Company's cash, cash equivalents, short-term investments and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents may be redeemable upon demand and are maintained with several financial institutions that management believes are of high credit quality and therefore bear minimal credit risk. The Company's accounts receivables are derived from revenue earned from customers located around the world. Two customers accounted for 68.9% and 63.3% of accounts receivable at March 31, 2016 and 2015, respectively. This concentration and the concentration of credit risk resulting from trade receivables is substantially mitigated by the credit evaluation process and collateral.

The Company currently purchases wafers from a limited number of vendors. Additionally, since the Company does not maintain manufacturing facilities, it depends upon close relationships with contract manufacturers to assemble its products. The Company anticipates the continued use of a limited number of vendors and contract manufacturers in the near future. Under the Company's fabless business model, long-term revenue growth is dependent on its ability to obtain sufficient external manufacturing capacity, including wafer production. The Company believes there are other vendors that can provide the same quality wafers at competitive prices and other contract manufacturers that can provide comparable services at competitive prices.

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.

Short-Term Investments

The Company holds a variety of securities in its investments portfolio and classifies them as “available-for-sale” investments. These investments are recorded at their estimated fair values with unrealized gains and losses excluded from net loss and reported, net of tax, in other comprehensive loss. When the investments are sold, such gains or losses are transferred from accumulated other comprehensive loss to net realized gain on short-term investments and interest income, net on the Consolidated Statements of Operations. The portion of unrealized losses that are deemed to be other-than-temporary in nature are charged to the Consolidated Statements of Operations. The basis for computing realized and unrealized gains or losses is by specific identification.

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 the 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 has to be made as to whether the impairment is other-than-temporary. If the Company does not intend to sell the security, the Company has to consider available evidence to assess whether it is more likely than not, that it will be required to sell the security before the recovery of the amortized cost basis due to cash, 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 will be 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 compares 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.

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 classifies inputs to derive fair values for short-term investments as Level 1 and 2. Instruments classified as Level 1 include highly liquid U.S. Treasury and agency securities, money market funds and mutual funds in active markets. Instruments classified as Level 2 include corporate bonds, mortgage-backed and asset-backed securities, municipal bonds and preferred stock. The Company did not have any Level 3 short-term investments as of any of the periods presented.

Accounts Receivable, Net

Accounts receivable are recorded at the invoice amount and presented net of the allowance for doubtful accounts; they do not bear interest. Accounts receivable are also reported net of sales returns and distributor allowances. These amounts are recognized when it is both probable and estimable that discounts will be granted or products will be returned.

Inventories

Inventories are stated at the lower of cost or market on a part-by-part basis and consist of materials, labor, depreciation, and overhead. Inventory costs are determined using standard costs which approximate actual costs under the first-in, first-out method. Costs include the costs of purchased finished products, sorted wafers, outsourced assembly and testing, and operations overhead. The Company regularly reviews the cost of inventories against estimated market value and records a lower of cost or market reserve for inventories that have a cost in excess of estimated market value. The lower of cost or market reserve is based on an analysis of composition of the inventory and management's judgment regarding future demand and market conditions. This policy also requires the Company to make 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.

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 strategic investments were fully impaired as of 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 during the fourth quarter of our fiscal year or more frequently if impairment indicators arise. The Company has one reporting unit and elected to use the qualitative assessment of whether it is more likely than not that its 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 in excess of its book value and based on this and other qualitative factors determined that there was no goodwill impairment as of March 31, 2016.

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 property and equipment 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.

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 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.

The Company recognizes revenue from development agreements upon completion and acceptance by the customer of contract deliverables or as services are provided, depending on the terms of the arrangement and when all four basic criteria outlined above are met. Revenue is deferred for any amounts billed or received prior to completion of milestones or delivery of services. As the Company retains the IP generated from these development agreements, costs related to these arrangements are included in R&D expense.

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.

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 depreciated as cost of revenues over the estimated production period of the product not to exceed three years. The Company periodically reassesses the estimated production period for specific mask sets capitalized. 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. The respin cost of previously capitalized mask set is expensed to R&D in the period in which the costs are incurred.

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award, net of estimated forfeitures. 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, expected 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 prices, the Standard & Poor's Depositary Receipts S&P Semiconductor Index (the "Index"), expected volatilities of the Company's stock price and the Index, correlation coefficients, and risk-free interest rate to determine the fair value.

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. The calculation of the tax liabilities involves dealing with uncertainties in the application of complex tax regulations. If it is more likely than not that the tax position will not be sustained on audit, an uncertain tax position is reserved. The Company re-evaluates these uncertain tax positions on a quarterly basis.

Segments

The Company has one operating segment and therefore one reportable segment based on how the Chief Operating Decision Maker ("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 May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", 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. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption of one year prior to the required effective date is permitted. The ASU allows for either full retrospective or modified retrospective adoption. In April 2016, the FASB issued an amendment to clarify the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting for licenses of IP. In May 2016, the FASB finalized amendments on collectibility, non-cash consideration, presentation of sales tax, and transition. The Company is currently evaluating the method of adoption as well as the potential effect of this ASU on its financial statements and related disclosures.

In August 2014, the FASB issued 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 reporting 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 November 2015, the FASB issued ASU No. 2015-17, "Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes" to simplify the presentation of deferred taxes in the statement of financial position. The new guidance requires that deferred tax assets and liabilities be classified as non-current in a classified balance sheet. This ASU is effective for fiscal years beginning after December 15,2016, and for interim periods within those fiscal years. Earlier adoption is permitted as of the beginning of an interim or annual reporting period, and maybe applied either prospectively, for all deferred tax assets and liabilities, or retrospectively. The Company has adopted this ASU prospectively as of March 31, 2016. Therefore, prior periods have not been adjusted to reflect this adoption. This change in accounting principle does not change our results of operations, cash flows or stockholders’ equity.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)", requiring the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. The Company is currently evaluating the potential effect of this ASU on its financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, "Stock Compensation (Topic 718); Improvements to Employee Share-Based Payment Accounting". The new guidance simplifies several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, policy election to account for forfeitures as they occur rather than on an estimated basis, and classification on the statement of cash flows. The ASU is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The Company is currently evaluating the potential effect of this ASU on its financial statements and related disclosures.