INPHI This Management's Discussion and Analysis of Financial Condition and Results of Operations and this report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the terms "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "predict," "potential," "plan," "anticipate," "seek," "future," "strategy," "likely," or the negative of these terms, and similar expressions are intended to identify forward-looking statements. These statements include statements regarding our proposed acquisition by Marvell and the timing and impact thereof; anticipated trends and challenges in our business and the markets in which we operate, including the market for 25G to 600G high-speed analog and mixed signal semiconductor solutions, demand for our current products, our plans for future products and anticipated features and benefits thereof, expansion of our product offerings and business activities, enhancements of existing products, our ability to forecast demand and its effects, the impact ofU.S. government export restrictions on Huawei, our acquisitions and investments in other companies or technologies, including our acquisition of eSilicon, and the anticipated benefits thereof and increase in expenses related thereto, critical accounting policies and estimates, our expectations regarding our expenses and revenue, sources of revenue, our effective tax rate and tax benefits, the benefits of our products and services, our technological capabilities and expertise, our liquidity position and sufficiency thereof, including our anticipated cash needs and uses of cash, our ability to generate cash, our operating and capital expenditures and requirements and our needs for additional financing and potential consequences thereof, repatriation of cash balances from our foreign subsidiaries, our contractual obligations, our anticipated growth and growth strategies, including growing our end customer base, interest rate sensitivity, adequacy of our disclosure controls, our legal proceedings and warranty claims. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these or any other forward-looking statements. These risks and uncertainties include, but are not limited to, those risks discussed below, as well as risks related to the satisfaction of the conditions to closing the acquisition by Marvell of us (including the failure to obtain necessary regulatory and stockholder approvals) in the anticipated timeframe or at all, risks related to the ability to realize the anticipated benefits of the acquisition, including the possibility that the expected benefits to the combined company from the proposed acquisition will not be realized or will not be realized within the expected time period, disruption from the transaction making it more difficult to maintain business, contractual and operational relationships, the unfavorable outcome of any legal proceedings that have been or may be instituted against Marvell, us or the combined company, the ability to retain key personnel, negative effects of this announcement or the consummation of the proposed acquisition on the market price of the capital stock of us or Marvell, and on our and Marvell's operating results, risks relating to the value of the HoldCo Common Stock (as defined below)to be issued in the transaction, significant transaction costs, fees, expenses and charges, unknown liabilities, the risk of litigation and/or regulatory actions related to the proposed acquisition, the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; factors affecting our results of operations, our ability to manage our growth, our ability to sustain or increase profitability, demand for our solutions, the effect of changes in average selling prices for our products, our ability to compete, our ability to rapidly develop new technology and introduce new products, our ability to safeguard our intellectual property, our ability to qualify for tax holidays and incentives, trends in the semiconductor industry and fluctuations in general economic conditions, and the risks set forth throughout this report, including the risks set forth under Part I, "Item 1A, Risk Factors." Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on current expectations and reflect management's opinions only as of the date hereof. These forward-looking statements speak only as of the date of this Report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. Overview We are a fabless provider of high-speed analog and mixed signal semiconductor solutions for the communications and cloud markets. Our analog and mixed signal semiconductor solutions provide high signal integrity at leading-edge data speeds while reducing system power consumption. Our semiconductor solutions are designed to address bandwidth bottlenecks in networks, maximize throughput and minimize latency in computing environments and enable the rollout of next generation communications and cloud infrastructures. Our solutions provide a vital high-speed interface between analog signals and digital information in high-performance systems such as telecommunications transport systems, enterprise networking equipment and data centers. We provide 25G to 600G high-speed analog and mixed signal semiconductor solutions for the communications market. We have a wide range of products in our portfolio with many products sold in communication and cloud markets as ofDecember 31, 2020 . We have ongoing, informal collaborative discussions with industry and technology leaders in Tier-1 cloud providers, telecom operators, network system OEMs and optical module and component vendors to design architectures and products that solve bandwidth bottlenecks in existing and next generation communications systems. Although we do not have any formal agreements with these entities, we engage in informal discussions with these entities with respect to anticipated technological challenges, next generation customer requirements and industry conventions and standards. We help define industry conventions and standards within the markets we target by collaborating with technology leaders, OEMs, systems manufacturers and standards bodies.
The recent history of our product development and sales and marketing efforts is as follows:
• In 2015, we started sampling a new product in our 45GBaud Linear Coherent
Product Family, IN4518SZ. The IN4518SZ is a quad linear differential to
single-ended Mach-Zehnder Modulator Driver, pin-compatible with the linear
driver IN3214SZ, for 200G coherent Optical interconnect applications. The
IN4518SZ extends the reach of 200G coherent for telecommunication applications
and enables one set of hardware to serve multiple segments in the
telecommunication markets. We also announced the availability of the
industry's first, highly integrated, lowest power PAM4 chipset solutions for
intra-data center and inter-data center cloud interconnects. The PAM4 chipset
solution is a family of PAM4 PHY ICs for 40G (IN014020-XL), 50G (IN015050-SF),
100G (IN015025-CA), 400G (IN015025-CD) and a companion linear TIA (IN2860TA)
to enable platform solutions for multi-rate PAM4 interconnects. We also
started sampling IN3217SZ, a quad linear differential to single-ended
Mach-Zehnder Modulator Driver in a Surface
new SMT quad linear driver extends the product portfolio by utilizing cost
effective packaging for higher volume 100G/200G coherent long haul and metro
optical interconnect applications.
• In 2016, we completed the acquisition of
this acquisition, we are able to provide a complete coherent platform to our
customers in telecommunication and cloud interconnect applications. We also
introduced ColorZ® reference design, the industry's first Silicon Photonics
100G PAM4 platform solution for 80 km DWDM Data Center Interconnect in QSFP28
form factor. Utilizing advanced Pulse Amplitude Modulation signaling, ColorZ®
delivers up to 4Tb/s of bandwidth over a single fiber and allows multiple data
centers located up to 80 km of each other to be connected and act like a
single data center. We further introduced a highly integrated Silicon
Photonics (SiPho) technology platform for 100Gbit/s data center applications.
The single-chip SiPho optics includes multi-channel modulators,
photodetectors, multiplexers, demultiplexers, optical power monitors and fiber
coupling structures all integrated onto a single integrated circuit. We also
announced the availability of the industry's lowest power Clock and Data
Recovery Retimer for module applications, IN012525-CQ CMOS CDR and 45GBaud
Linear Coherent Product Family, the industry's first linear ICs enabling 400G
coherent solutions for next-generation telecommunication and cloud
applications. We also announced the industry's first 400GbE platform solution
for next-generation 400G CFP8 modules. The platform solution includes our PAM4
DSP IC that supports IEEE P802.3bs 400G/s Ethernet standard alongside its
companion market leading linear TIA and linear drivers for client based cloud
interconnects. With the introduction of these new products, we are offering
customers an end-to-end platform solution for moving data faster within and
between data centers. We also announced the production availability of a new
product in the 32GBaud Linear Coherent Product Family. The IN3217SZ, a quad
linear Mach-Zehnder Modulator Driver in a SMT package, extends the product
portfolio by utilizing cost effective packaging for the 100G/200G coherent
long haul and metro optical interconnect applications. We also announced the
sampling of IN6450TA, the world's first 64GBaud dual channel linear TIA/VGA
amplifier. The IN6450TA supports data rates of 400Gbps to 600Gbps on a single
wavelength for long haul, metro, and data center interconnect networks using
coherent technology.
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• In 2017, we started sampling IN6417SZ, the industry's first 64GBaud quad
linear differential to single-ended Mach-Zehnder Modulator Driver in 14x9 mm
Surface
driver extends our 64G product portfolio for next-generation 400G/600G
coherent, long haul, and metro optical interconnect applications. We
introduced Polaris™, the industry's first 16nm CMOS PAM4 platform solution for
next-generation cloud deployments. The Polaris platform includes our highly
integrated, lowest power PAM4 digital signal processing IC alongside its
companion market leading, low power linear driver and TIA for data center
connectivity. We announced the commercial availability and production ramp of
ColorZ®, the industry's first Silicon Photonics 100G PAM4 platform solution
for 80 km DWDM Data Center Interconnect in QSFP28 form factor, and our
IN6450TA, the world's first 64GBaud dual channel linear TIA/VGA amplifier. We
also announced the new Vega™ family of low power 50/100/200/400G PAM4 Gearbox
and Retimer DSPs for system line cards. Leveraging our DSP-based PAM4, the new
Gearbox and Retimer DSPs expand bandwidth capacity of next generation
networks, delivering accelerated connectivity for wired network infrastructure
at cloud-scale data centers, enterprise, and service providers. We also
started sampling our M200, an ultra-low power, and high-performance Coherent
DSP, supporting 100G and 200G data rates for telecommunication and cloud
interconnect applications. We announced the expansion of our ColorZ® portfolio
with ColorZ-Lite™, 100G DWDM in QSFP28 form factor for campus and data center
interconnects. The addition of ColorZ-Lite™ offers campus and data centers a
cost optimized solution for shorter distances up to 20 km. We also expanded
our 16nm Polaris™ PAM4 DSP portfolio for next generation 50G-400G cloud
deployments. The new Polaris™ PAM4 DSP now includes products supporting an
integrated driver to address the growing demands for lower power and reduced
cost solutions over short reach data center optical connectivity.
• In 2018, we announced our 16nm 400Gbps Porrima™ Single-Lambda PAM4 platform,
the first complete 56GBaud platform solution for wired network infrastructure
including hyperscale cloud data center, service provider and enterprise
network. We also announced the production availability of the Polaris™ 16nm
CMOS PAM4 platform. The Polaris platform is the industry's first 16nm 28GBaud
PAM4 DSP that includes integrated driver options for EML and VCSEL lasers to
cover a broad range of optical interconnects from 50G to 400G. The platform
also supports a family of discrete EML and VCSEL drivers and linear TIAs. We
started shipping the production version of its M200 LightSpeed-III™, Coherent
DSP with ultra-low power and high-performance supporting 100G and 200G data
rates for telecommunication and cloud data center interconnect applications.
We announced the expansion of its 16nm Porrima™ Single-Lambda PAM4 platform
family, with the complete 100Gbps/56GBaud platform solution for 100G QSFP28
and SFP-DD DR/FR optical modules for wired network infrastructure including
hyperscale cloud data center, service provider, wireless 5G and enterprise
networks. We introduced the industry's smallest form factor, lowest power and
highest performance 64GBaud quad coherent TIA and driver. Paired up as a
chipset, the new TIA and Driver will enable higher density line cards and
pluggable solutions that are critical for next generation 400/600G
telecommunication and cloud data center interconnect (DCI) applications.
• In 2019, we announced our Porrima™ Gen2 Single-Lambda PAM4 platform with
integrated laser drivers that reduces optical module Bill of Material (BOM)
cost and enables sub-10 watt 400Gbps QSFP-DD optical transceiver modules for
wired network infrastructure - including hyperscale cloud data center, service
provider and enterprise networks. We also announced first to production of a
100Gbps and 400Gbps Single-Lambda PAM4 platform for the next frontier of data
center and cloud networking. Our Porrima™ PAM4 platform is a complete 56GBaud
solution, with linear TIA and drivers, for the optical network infrastructure
including mass-scale cloud data center, service provider and enterprise
networks. We started sampling our new Canopus™ coherent DSP, the industry's
first merchant 7nm coherent DSP. Canopus paves the way for an industry-wide
paradigm shift in deployment models by providing low power and high density
QSFP-DD, OSFP and CFP2-DCO coherent pluggable modules for cloud and telecom
customers. We started engineering sampling of ColorZ® II, the industry's
first 400ZR QSFP-DD pluggable coherent transceiver for cloud DCIs to major
cloud operators and OEMs. COLORZ II enables large cloud operators to connect
metro data centers at a fraction of the cost of traditional coherent transport
systems and allows switch and router companies to offer the same density for
both coherent DWDM and client optics in the same chassis.
• In 2020, we completed the acquisition of eSilicon. With this acquisition, we
are able to accelerate our roadmap in developing electro-optics solutions for
cloud and telecommunications customers. We also purchased certain assets and
rights of Arrive to expand our presence into strategic geographic regions for
talent acquisition. We announced the availability of Capella™, our
second-generation, high performance 112Gbps SerDes IP solution in 7nm. The
Capella SerDes IP is designed to ensure high performance across the most
demanding environments for network connectivity and data transmission. We
started engineering sampling of our Spica™ 800G 7nm PAM4 DSP, the first
800Gbps or 8x100Gbps PAM4 DSP to enable 800G optical transceiver modules in
QSFP-DD800 or OSFP form factors. The highly integrated Spica 800G platform
includes our high-performance, low power PAM4 DSPs alongside its companion
market leading low power linear driver and TIAs. We also announced our new
Porrima™ Gen3 Single-Lambda PAM4 platform, the third generation of its
industry-leading PAM4 platform solution optimized for hyperscale data center
networks. The Porrima Gen3 platform reduces the total module power
consumption, lowers total cost of ownership and enables a wider range of
lasers, enriching the ecosystem with the next generation of innovation.
We
started engineering sampling of our next-generation 400G DR4 silicon photonics
platform solution which includes a silicon photonics integrated circuit (PIC),
a flip chip TIA, and an analog controller; all designed to work seamlessly
with our Porrima™ PAM4 DSP to enable faster time to ramp and lower cost per
bit. We announced our new Alcor™ PAM4 DSP platform to accelerate the
industry's transition from 25G to 100G per wavelength. Based on our Porrima™
PAM4 DSP platform, the new
linear TIA and driver to provide even higher levels of integration and lower
power for high-performance hyperscale data center, cloud computing and
emerging AI applications. We also announced the Polaris™ Gen2 PAM4 platform,
the industry's first 50G, 28Gbaud PAM4 DSP solution based on low-power 7nm
CMOS technology. Polaris Gen2 builds on the innovation of our
field-proven Polaris Gen1 PAM4 platform, providing even higher levels of
integration and lower power for high-performance hyperscale data center, cloud
computing and emerging AI applications.
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Our products are designed into systems sold by OEMs, including Tier-1 OEMs in the telecom and networking system markets worldwide. We believe we are one of a limited number of suppliers to these OEMs for the types of products we sell, and in some cases we may be the sole supplier for certain applications. We sell both directly to these OEMs and to module manufacturers, ODMs, and subsystems providers that, in turn, sell to these OEMs. During the year endedDecember 31, 2020 , we sold our products to approximately 140 customers. A significant portion of our revenue has been generated by a limited number of customers. In the year endedDecember 31, 2020 , we believe that sales to Microsoft andInnolight , directly and indirectly, through subcontractors, accounted for approximately 12% and 14% of our total revenue, respectively.
We
sell products to Cyberlink, a distributor who sells to various end customers. Sales to Cyberlink accounted for approximately 15% of our total revenue for the year endedDecember 31, 2020 . In the year endedDecember 31, 2019 , we believe that sales to Microsoft and Huawei, directly and indirectly, through subcontractors, accounted for approximately 14% and 11% of our total revenue, respectively. We sell products to Fabrinet, a subcontractor who sells to various end customers. Sales to Fabrinet accounted for approximately 11% of our total revenue for the year endedDecember 31, 2019 . In the year endedDecember 31, 2018 , we believe that sales to Microsoft, Huawei, and Cisco, directly and indirectly, through subcontractors, accounted for approximately 18%, 14% and 11% of our total revenue, respectively. Sales to Cyberlink accounted for approximately 11% of our total revenue for the year endedDecember 31, 2018 . Substantially all of our sales to date, including our sales to Microsoft,Innolight , Fabrinet, Cyberlink, Huawei and Cisco, are made on a purchase order basis. Since the beginning of 2006, we have shipped more than 121 million high-speed analog and mixed signal semiconductors, of which eSilicon contributed approximately 39 million units in 2020. Our total revenue was$683.0 million ,$365.6 million and$294.5 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. The increase in our revenue in 2020 was primarily due to increases in telecommunication and cloud products as well as the inclusion of eSilicon revenues. Sales to customers inAsia accounted for 69%, 64% and 57% of our total revenue in 2020, 2019 and 2018, respectively. Because many of our customers or their OEM manufacturers are located inAsia , we anticipate that a majority of our future revenue will continue to come from sales to that region. Although a large percentage of our sales are made to customers inAsia , we believe that a significant number of the systems designed by these customers are then sold to end-users outsideAsia . InApril 2010 , we received approval from the government ofSingapore to set up an international headquarters from which to conduct our international operations. Because of its geographic alignment with suppliers and customers, we established our operations inSingapore to become a new international headquarters office for receiving and fulfilling orders for product shipped to locations outsidethe United States . In addition, we built a team of engineering capability inSingapore both for development as well as testing associated with manufacturing. International operations inSingapore commenced onMay 1, 2010 and during 2010, we transitioned our international operations fromthe United States to ourSingapore subsidiary. Demand for new features changes rapidly. It is difficult for us to forecast the demand for our products, in part because of the complex supply chain between us and the end-user markets that incorporate our products. Due to our lengthy product development cycle, it is critical for us to anticipate changes in demand for our various product features and the applications they serve to allow sufficient time for product development and design. Our failure to accurately forecast demand can lead to product shortages that can impede production by our customers and harm our customer relationships. Conversely, our failure to forecast declining demand or shifts in product mix can result in excess or obsolete inventory. Although revenue generated by each design win and the timing of the recognition of that revenue can vary significantly, we consider ongoing design wins to be a key factor in our future success. We consider a design win to occur when an OEM or contract manufacturer notifies us that it has selected our products to be incorporated into a product or system under development. The design win process is typically lengthy, and as a result, our sales cycles will vary based on the market served, whether the design win is with an existing or new customer and whether our product is under consideration for inclusion in a first or subsequent generation product. In addition, our customers' products that incorporate our semiconductors can be complex and can require a substantial amount of time to define, design and produce in volume. As a result, we can incur significant design and development expenditures in circumstances where we do not ultimately recognize, or experience delays in recognizing revenue. Our customers generally order our products on a purchase order basis. We do not have any long-term purchase commitments (in excess of one year) from any of our customers. Once our product is incorporated into a customer's design, however, we believe that our product is likely to continue to be purchased for that design throughout that product's life cycle because of the time and expense associated with redesigning the product or substituting an alternative semiconductor. Our design cycle from initial engagement to volume shipment is typically two to three years. Product life cycles in the markets we serve typically range from five to 10 years or more and vary by application.
Pending Merger with Marvell Technology Group Ltd. ("Marvell")
OnOctober 29, 2020 , we entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement") with Marvell Technology Group Ltd., aBermuda exempted company ("Marvell"),Maui HoldCo, Inc. , aDelaware corporation and a wholly-owned subsidiary of Marvell ("HoldCo"),Maui Acquisition Company Ltd , aBermuda exempted company and a wholly-owned subsidiary ofHoldCo ("Bermuda Merger Sub"), andIndigo Acquisition Corp. , aDelaware corporation and a wholly-owned subsidiary ofHoldCo ("Delaware Merger Sub"), pursuant to which, subject to the terms and conditions of the Merger Agreement, Bermuda Merger Sub would merge with and into Marvell, with Marvell surviving the merger as a wholly-owned subsidiary ofHoldCo (the "Bermuda Merger"), followed immediately by the merger of Delaware Merger Sub with and into Inphi, with Inphi surviving the merger as a wholly-owned subsidiary ofHoldCo (the "Delaware Merger" and, together with the Bermuda Merger, the "Mergers"). The Mergers would result in a combined company domiciled inthe United States , with Marvell shareholders owning approximately 83% of the combined company, and our stockholders owning approximately 17% of the combined company. 37
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Summary of Consolidated Financial Results
As discussed in more detail below, for the year ended
? Total revenue increased by$317.3 million , or 87% to$683.0 million . ? Gross profit as a percentage of revenue decreased from 58% to 54%. ? Total operating expenses increased by$125.7 million , or 48% to$388.0 million . ? Loss from operations decreased by$32.6 million to$16.8 million .
? During the year ended
our Convertible Notes 2015 and Convertible Notes 2016 which resulted in a loss
on early extinguishment of
? Provision for income taxes increased by
? Loss per share decreased by
The increase in our revenue for the year endedDecember 31, 2020 was primarily the result of increases in telecommunication and cloud products as well as the inclusion of eSilicon revenues.
Gross profit as a percentage of revenue decreased from 58% to 54% due mainly to amortization of inventory fair value step-up related to acquired eSilicon inventories and amortization of acquired intangibles.
Total operating expenses increased in 2020 due primarily to an increase in headcount and stock-based compensation expense as a result of new equity grants. Our expenses mainly consist of personnel costs, which include compensation, benefits, payroll related taxes and stock-based compensation. FromDecember 31, 2019 toDecember 31, 2020 , our headcount increased by 90, mostly in the engineering department. In addition, the acquisitions of eSilicon and Arrive added 311 employees, including transition employees. We expect expenses to continue to increase in absolute dollars as we continue to invest resources to develop more products, to support the growth of our business. Our loss per share decreased primarily due to higher gross profit, partially offset by higher operating expenses, loss on early extinguishment of debt and provision for income taxes. Our cash and cash equivalents were$103.5 million atDecember 31, 2020 , compared with$282.7 million atDecember 31, 2019 . Cash provided by operating activities was$155.6 million during the year endedDecember 31, 2020 compared to$96.9 million during the year endedDecember 31, 2019 . Cash used in investing activities was$213.6 million compared to cash provided by investing activities was$63.0 million during the year endedDecember 31, 2019 . Cash used in financing activities was$121.2 million during the year endedDecember 31, 2020 compared to$49.3 million during the year endedDecember 31, 2019 .
Critical Accounting Policies and Significant Management Estimates
Our consolidated financial statements are prepared in accordance withU.S. Generally Accepted Accounting Principles (GAAP). In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. InMarch 2020 , the outbreak of COVID-19 was declared a pandemic by theWorld Health Organization . While the nature of the situation is dynamic, we considered the impact when developing our estimates and assumptions noted above. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. Our significant accounting policies are discussed in Note 1 of the Notes to our Consolidated Financial Statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with our audit committee. Revenue Recognition
We recognize revenue when the control of the promised goods or services is transferred to customers in an amount that reflects the consideration we expect to receive in exchange for such goods or services.
Our products are fully functional at the time of shipment and do not require additional production, modification, or customization. We recognize revenue upon transfer of control at a point in time when title transfers either upon shipment to or receipt by the customer, net of accruals for estimated sales returns and allowances. Sales and other taxes we collect are excluded from revenue. The fee is based on specific products and quantities to be delivered at specified prices, which is evidenced by a customer purchase order or other persuasive evidence of an arrangement. Certain distributors may receive a credit for the price discounts associated with the distributors' customers that purchased those products. We estimate the extent of these distributor price discounts at each reporting period to reduce accounts receivable and revenue. Although we accrue an estimate of distributor price discount, we do not issue these discounts to the distributor until the inventory is sold to the distributors' customers. As ofDecember 31, 2020 and 2019, the estimated price discount was$0.4 million and$0.7 million , respectively. Payment terms of customers are typically 30 to 60 days after invoice date. Our products are under warranty against defects in material and workmanship generally for a period of one or two years. We accrue for estimated warranty cost at the time of sale based on anticipated warranty claims and actual historical warranty claims experience including knowledge of specific product failures that are outside of our typical experience. 38
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Occasionally, we enter into license and development agreements with some of our customers and recognize revenue from these agreements upon completion and acceptance by the customer of contract deliverables by milestones or as services are provided, depending on the terms of the arrangement. Revenue is deferred for any amounts billed or received prior to completion of milestones or delivery of services. We believe the milestone method or input method based on costs incurred best depict efforts expended to transfer services to the customers under most of our development agreements. Certain contracts may include multiple performance obligations in which we allocate revenues to each performance obligation based on observable evidence. When stand-alone selling prices are not directly observable, we use the adjusted market assessment approach or residual approach, if applicable. We perform ongoing credit evaluations of our customers and assesses each customer's credit worthiness. We monitor collections and payments from our customers and maintain an allowance for credit loss 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. As ofDecember 31, 2020 , our allowance for credit loss was$0.2 million . As ofDecember 31, 2019 , our allowance for doubtful accounts was$1.2 million . If actual results are not consistent with the assumptions and estimates used, for example, if the financial condition of the customer deteriorated, we may be required to record additional expense that could materially negatively impact our operating results. To date, however, substantially all of our receivables have been collected within the following quarter. Inventory Valuation We value our inventory, which includes materials, labor and overhead, at the lower of cost and net realizable value. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. We periodically write-down our inventory to the lower of cost and net realizable value based on our estimates that consider historical usage and future demand. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction. The calculation of our inventory valuation, specifically the write-down for excess or obsolete inventories, requires management to make assumptions and to apply judgment regarding forecasted customer demand and technological obsolescence that may turn out to be inaccurate. Inventory valuation reserves, once established, are not reversed until the related inventory has been sold or scrapped. We have not made any material changes in the accounting methodology we use to record inventory reserves during the past three years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that we use to calculate our inventory reserve. However, if estimates regarding customer demand are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses or gains that could be material. Product Warranty Our products are under warranty against defects in material and workmanship generally for a period of one or two years. We accrue for estimated warranty cost at the time of sale based on anticipated warranty claims and actual historical warranty claims experience including knowledge of specific product failures that are outside of our typical experience. The warranty obligation is determined based on product failure rates, cost of replacement and failure analysis cost. We monitor product returns for warranty-related matters and monitor both a specific and general accrual for the related warranty expense based on specific circumstances and general historical experience. Our warranty obligation requires management to make assumptions regarding failure rates and failure analysis costs. If actual warranty costs differ significantly from these estimates, adjustments may be required in the future, which would adversely affect our gross margins and operating results. The warranty liability as ofDecember 31, 2020 and 2019 was immaterial. Business Combinations We use the acquisition method of accounting for business combinations and recognize assets acquired and liabilities assumed measured at their fair values on the date acquired. This requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values.Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may adjust the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of income (loss). Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed and pre-acquisition contingencies, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include, but are not limited to: future expected cash flows from product sales, customer contracts and acquired technologies, expected costs to develop in-process research and development into commercially viable products, estimated cash flows from the projects when completed, and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. 39
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Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. We evaluate goodwill on an annual basis in the fourth quarter or more frequently if we believe indicators of impairment exist. Significant management judgment is required in performing periodic impairment tests. To review for impairment, we first assess qualitative factors to determine whether events or circumstances lead to a determination that it is more likely than not that the fair value of any of our reporting unit is less than its carrying amount. Our qualitative assessment of the recoverability of goodwill, whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific factors. Those factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below our net book value. After assessing the totality of events and circumstances, if we determine that it is not more likely than not that the fair value of any of our reporting unit is less than its carrying amount, no further assessment is performed. If, however, we determine that it is more likely than not that the fair value of any of our reporting unit is less than its carrying amount, an impairment loss is recognized in an amount equal to the excess. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges. We assess the impairment of long-lived assets, which consist primarily of property and equipment and intangible assets, including purchased in-process research and development, whenever events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. Events or changes in circumstances that may indicate that an asset is impaired include significant decreases in the market value of an asset, significant underperformance relative to expected historical or projected future results of operations, a change in the extent or manner in which an asset is utilized, significant declines in our overall estimated fair value for a sustained period, shifts in technology, loss of key management or personnel, changes in our operating model or strategy and competitive forces. If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset are less than the carrying amount of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Fair value is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending on the nature of the assets. Assumptions and estimates about future values and remaining useful lives are complex and often subjective.
There was no evidence of impairment based on the annual impairment testing for
the year ended
Stock-Based Compensation We account for stock-based compensation in accordance with authoritative guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on the grant date fair values of the awards. The fair value of stock option awards is estimated using the Black-Scholes option pricing model. The fair value of restricted stock units is based on the fair market value of our common stock on the date of grant. The performance-based stock units are subject to the achievement of a pre-established revenue goal and earnings per share on a non-GAAP basis. Once the goals are met, the performance-based stock units are subject to four years of vesting from the original grant date, contingent upon continuous service. The fair value of the performance-based stock units is calculated using the same method as our standard restricted stock units described above. The value of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of income (loss). If the award has a market condition, we estimate the fair value using Monte Carlo simulation model and recognize compensation ratably over the service period unless the award also has a graded vesting feature, in which case, we recognize compensation using graded vesting method. We elected to treat share-based payment awards with graded vesting schedules and time-based service conditions as a single award and recognize stock-based compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. Stock-based compensation expenses are classified in the consolidated statements of income (loss) based on the department to which the related employee reports. We account for stock options or awards issued to non-employees in accordance with the guidance consistent with our accounting of stock-based compensation awards to employees. Stock options or awards to non-employees are accounted for at grant date fair value using the Black-Scholes option pricing model or fair value of our stock. We recognize compensation cost for awards with performance conditions when achievement of those conditions are probable, rather than upon their achievement.
The Black-Scholes option pricing model requires management to make assumptions and to apply judgment in determining the fair value of our awards. The most significant assumptions and judgments include estimating the fair value of underlying stock, expected volatility and expected term. In addition, the recognition of stock-based compensation expense is impacted by estimated forfeiture rates.
We do not believe there is a reasonable likelihood that there will be material
changes in the estimates and assumptions we use to determine stock-based
compensation expense. In the future, if we determine that other valuation models
are more reasonable, the stock-based compensation expense that we record in the
future may differ significantly from what we have recorded using the
Black-Scholes option or Monte Carlo simulation pricing models.
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Table of Content Income Taxes Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when and where the differences are expected to reverse. We recognize the deferred income tax effects of a change in tax rates in the period of enactment. We record a valuation allowance to reduce deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, historical levels of income, projections of future income, expectations and risk associated with estimates of future taxable income and ongoing prudent and practical tax planning strategies. To the extent that we believe it is more likely than not that some portion of our deferred tax assets will not be realized, we would increase the valuation allowance against deferred tax assets. The determination of recording or releasing a tax valuation allowance is made, in part, pursuant to an assessment performed by management regarding the likelihood that we will generate sufficient future taxable income against which the benefits of our deferred tax assets may or may not be realized. This assessment requires management to exercise significant judgment and make estimates with respect to our ability to generate revenue, gross profits, operating income and taxable income in future periods. Among other factors, management must make assumptions regarding current and projected overall business and semiconductor industry conditions, operating efficiencies, our ability to timely develop, introduce and consistently manufacture new products to meet our customers' needs and specifications, our ability to adapt to technological changes and the competitive environment, which may impact our ability to generate taxable income and, in turn, realize the value of our deferred tax assets. Although we believe that the judgment we used is reasonable, actual results can differ due to a change in market conditions, changes in tax laws and other factors. We have valuation allowance against deferred tax assets in certain tax jurisdictions for the years endedDecember 31, 2020 , 2019 and 2018. The valuation allowance was established due to negative evidence that included our cumulative losses in theU.S. and various foreign subsidiaries, after considering permanent tax differences. During the year endedDecember 31, 2018 , we released a portion of the federal valuation allowance against deferred tax assets as a result of the transfer of an acquired in-process research and development to developed technology in 2018, which allowed the related deferred tax liability to be considered a source of income for realizing deferred tax assets. In accordance with theFinancial Accounting Standards Board's (FASB) guidance on Accounting for Uncertainty in Income Taxes, we perform a comprehensive review of uncertain tax positions regularly. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. We determine the tax liability for uncertain tax positions based on a two-step process. The first step is to determine whether it is more likely than not based on technical merits that each income tax position would be sustained upon examination. The second step is to measure the tax benefit as the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement with a tax authority that has full knowledge of all relevant information. The assessment of each tax position requires significant judgment and estimates. We believe our tax return positions are fully supported, but tax authorities could challenge certain positions, which may not be fully sustained. All tax positions are periodically analyzed and adjusted as a result of events, such as the resolution of tax audits, issuance of new regulations or new case law, negotiations with tax authorities, and expiration of statutes of limitations. The income tax expense for the year endedDecember 31, 2020 included a reversal of certain unrecognized tax benefit as a result of the Internal Revenue Service exam conclusion with a no change report. The reversal of the unrecognized tax benefit had no impact on the Company's income tax provision as a result of the full federal valuation allowance. The income tax expense for the year endedDecember 31, 2020 included an accrual for unrecognized tax benefit for foreign taxes and an income tax benefit for the remeasurement of certain net foreign deferred tax liability based on the renewed tax holiday period inSingapore . OnDecember 22, 2017 , Public Law 115-97, informally referred to as the Tax Cuts and Jobs Act (Tax Reform Act) was signed into law. The Tax Reform Act contains significant changes toU.S. federal corporate income taxation, including a reduction of the corporate tax rate from 35% to 21% effectiveJanuary 1, 2018 , a one-time transition tax on deemed mandatory repatriation of accumulated earnings and profits of foreign subsidiaries in conjunction with the elimination ofU.S. tax on dividend distributions from foreign subsidiaries, and a temporary 100% first-year depreciation deduction for certain capital investments. The effect of the tax law changes must be recognized in the period of enactment. As a result of the change in tax rate, our deferred tax assets and liabilities are required to be remeasured to reflect their value at a lower tax rate of 21%.SAB 118 allows for a measurement period of up to one year after the enactment date of the new tax legislation to finalize the recording of the related tax impacts. In accordance withSAB 118, as ofDecember 31, 2017 , we made a provisional estimate of the remeasurement of the federal deferred tax assets and liabilities as ofDecember 31, 2017 to reflect the reducedU.S. statutory corporate tax rate to 21%, the mandatory repatriation income which was fully absorbed by theU.S. net operating loss, the related valuation allowance offset, and valuation allowance release on deferred tax assets for the federal alternative minimum tax credit that was made refundable by the Tax Reform Act. During 2018, we elected to account for GILTI as a period cost in the year the tax is incurred and made changes to its provisional estimates previously recorded for the mandatory repatriation upon filing of its 2017 U.S. income tax return. The change in the mandatory repatriation income was fully absorbed by theU.S. net operating loss, which is subject to valuation allowance, and resulted in no current tax liability. This measurement period adjustment had no net tax effect after the offsetting change to the valuation allowance. AtDecember 31, 2018 , we completed the accounting for all of the enactment-date income tax effects of the Tax Reform Act. 41
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Results of Operations and Key Operating Metrics
The following describes the line items in the statements of operations, which we consider to be our key operating metrics.
Revenue. We generate revenue from sales of our semiconductor products to end
customers. A portion of our products is sold indirectly to customers through
distributors. Occasionally, we enter into license and development agreements
with some of our customers and recognize revenue from these agreements upon
completion and acceptance by the customer of contract deliverables by milestones
or as services are provided, depending on the terms of the arrangement.
We design and develop high-speed analog and mixed signal semiconductor solutions
for the communications and cloud markets. Our revenue is driven by various
trends in these markets. These trends include the deployment and broader market
adoption of next generation 400G technologies in communications and enterprise
networks and the timing of next generation network.
Our revenue is also impacted by changes in the number and average selling prices
of our semiconductor products. Our products are typically characterized by a
life cycle that begins with higher average selling prices and lower volumes,
followed by broader market adoption, higher volumes, and average selling prices
that are lower than initial levels.
We operate in industries characterized by rapidly changing technologies and
industry standards as well as technological obsolescence. Our revenue growth is
dependent on our ability to continually develop and introduce new products to
meet the changing technology and performance requirements of our customers,
diversify our revenue base and generate new revenue to replace, or build upon,
the success of previously introduced products which may be rapidly maturing. As
a result, our revenue is impacted to a more significant extent by product life
cycles for a variety of products and to a much lesser extent, if any, by any
single product. We introduced ColorZ® in 2016 and began to ship in commercial
volume in 2017. Sales of ColorZ® comprised 13%, 15% and 18% of our total revenue
in 2020, 2019 and 2018, respectively. There were no other products that
generated more than 10% of our total revenue in 2020, 2019 and 2018.
The following table is based on the geographic location to which our product is
initially shipped. In most cases this will differ from the ultimate location of
the end-user of a product containing our technology. For sales to our
distributors, their geographic location may be different from the geographic
locations of the ultimate end customer. Sales by geography for the periods
indicated were:
Year Ended December 31,
2020 2019 2018
(in thousands)
China $ 365,170 $ 164,715 $ 113,684
United States 162,978 103,402 87,545
Thailand 70,771 54,468 40,884
Other 84,035 43,050 52,377
$ 682,954 $ 365,635 $ 294,490
Cost of revenue. Cost of revenue includes cost of materials such as wafers
processed by third-party foundries, costs associated with packaging and
assembly, testing and shipping, cost of personnel, including stock-based
compensation, as well as equipment associated with manufacturing support,
logistics and quality assurance, warranty costs, write-down of inventories,
amortization of production mask costs, amortization and impairment of developed
technology and contract manufacturing rights, amortization of step-up values of
inventory, overhead and other indirect costs, such as allocated occupancy and
information technology costs.
As some semiconductor products mature and unit volumes increase, their average
selling prices may decline. These declines are often paired with improvements in
manufacturing yields and lower wafer, assembly and test costs, which offset some
of the margin reduction that results from lower prices. However, our gross
profit, period over period, may fluctuate as a result of changes in average
selling prices due to new product introductions or existing product transitions
into larger scale commercial volumes, manufacturing costs as well as our product
and customer mix.
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Research and development. Research and development expense includes personnel-related expenses, including salaries, stock-based compensation and employee benefits. It also includes pre-production engineering mask costs, software license expenses, prototype wafer, packaging and test costs, design and development costs, testing and evaluation costs, third-party fees paid to consultants, depreciation expense, impairment of in-process research and development, allocated facilities costs and other indirect costs. All research and development costs are expensed as incurred. We enter into development agreements with some of our customers. Recoveries from nonrecurring engineering services related to early stage technology are recorded as an offset to product development expense incurred in support of this effort and serve as a mechanism to partially recover development expenditures. These reimbursements are recognized upon completion and acceptance by the customer of contract deliverables or milestones. We expect research and development expense to increase in absolute dollars as we continue to invest resources to develop more products and enhance our existing product portfolio. Sales and marketing. Sales and marketing expense consists primarily of salaries, stock-based compensation, employee benefits, travel, promotions, trade shows, marketing and customer support, commission payments to employees, depreciation expense and other indirect costs. We expect sales and marketing expense to increase in absolute dollars to support the growth of our business and promote our products to current and potential customers. General and administrative. General and administrative expense consists primarily of salaries, stock-based compensation, employee benefits and expenses for executive management, legal, and finance. In addition, general and administrative expenses include fees for professional services and other indirect costs. We expect general and administrative expense to increase in absolute dollars due to the general growth of our business and the costs associated with continuing to be a public company for, among other things,SEC reporting and compliance, director fees, insurance, transfer agent fees and similar expenses. Provision (benefit) for income taxes. For the year endedDecember 31, 2018 , we recorded an income tax benefit of$8.2 million , which reflects an effective tax rate of 8%. The effective tax rate for the year endedDecember 31, 2018 differed from the statutory rate of 21% primarily due to the change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in operating results, unrecognized tax benefits, recognition of federal and state research and development credits, and windfall tax benefits from stock-based compensation. In addition, the income tax benefit for the year endedDecember 31, 2018 included the partial release of federal valuation allowance resulting from the transfer of an acquired in-process research and development to developed technology in 2018 which allowed the related deferred tax liability to be considered a source of income for realizing deferred tax assets, as well as the revaluation of the foreign deferred tax liability on the in-process research and development based on the foreign tax rates applicable to the anticipated reversal periods, partially offset by income tax expense for the accrual of unrecognized tax benefit for foreign taxes. For the year endedDecember 31, 2019 , we recorded an income tax expense of$0.4 million , which reflects an effective tax rate of (0.5%). The effective tax rate for the year endedDecember 31, 2019 differed from the statutory rate of 21% primarily due to the change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in operating results, unrecognized tax benefits, recognition of federal and state research development credits, and windfall tax benefits from stock-based compensation. For the year endedDecember 31, 2020 , we recorded an income tax expense of$4.5 million , which reflects an effective tax rate of (8.1%). The effective tax rate for the year endedDecember 31, 2020 differed from the statutory rate of 21% primarily due to the change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in operating results, unrecognized tax benefits, recognition of federal and state research development credits, windfall tax benefits from stock-based compensation and global intangible low-taxed income ("GILTI") inclusion. The income tax expense for the year endedDecember 31, 2020 included an income tax benefit for the reversal of certain unrecognized tax benefits as a result of the Internal Revenue Service exam conclusion with a no change report, substantially offset by income tax expense for the accrual of certain federal unrecognized tax benefit. The change in the unrecognized tax benefit had no impact on the Company's income tax provision as a result of the full federal valuation allowance. In addition, the income tax expense for the year endedDecember 31, 2020 included an accrual for unrecognized tax benefit for foreign income taxes and an income tax benefit for the remeasurement of certain net foreign deferred tax liability based on the renewed tax holiday period inSingapore . 43
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The following table sets forth a summary of our statement of income (loss) for
the periods indicated:
Year Ended December 31,
2020 2019 2018
(in thousands)
Revenue $ 682,954 $ 365,635 $ 294,490
Cost of revenue 311,823 152,814 129,345
Gross profit 371,131 212,821 165,145
Operating expenses:
Research and development 269,147 183,875 167,924
Sales and marketing 61,290 47,722 43,080
General and administrative 57,519 30,672 28,302
Total operating expenses 387,956 262,269 239,306
Loss from operations (16,825 ) (49,448 ) (74,161 )
Interest expense (35,221 ) (34,920 ) (32,209 )
Loss on early extinguishment of debt (13,539 ) - -
Other income, net 10,295 11,853 2,408
Loss before income taxes (55,290 ) (72,515 ) (103,962 )
Provision (benefit) for income taxes 4,454 396 (8,211 )
Net loss $ (59,744 ) $ (72,911 ) $ (95,751 ) The following table sets forth a summary of our statement of income (loss) as a percentage of each line item to the revenue:
Year Ended December 31,
2020 2019 2018
Revenue 100 % 100 % 100 %
Cost of revenue 46 42 44
Gross profit 54 58 56
Operating expenses:
Research and development 39 50 57
Sales and marketing 9 13 14
General and administrative 8 9 10
Total operating expenses 56 72 81
Loss from operations (2 ) (14 ) (25 )
Interest expense (5 ) (9 ) (11 )
Loss on early extinguishment of debt (2 ) - -
Other income, net 1 3 1
Loss before income taxes (8 ) (20 ) (35 )
Provision (benefit) for income taxes 1 - (3 )
Net loss (9 )% (20 )% (32 )%
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Comparison of the Years Ended
Revenue
Change
Year Ended December 31, 2020 2019
2020 2019 2018 Amount % Amount %
(dollars in thousands)
Revenue $ 682,954 $ 365,635 $ 294,490 $ 317,319 87 % $ 71,145 24 %
Revenue for the year ended December 31, 2020 increased by $317.3 million
primarily due to an increase in the number of units sold, partially offset by a
decrease in average selling price ("ASP"). Revenue for the year ended December
31, 2020 increased primarily due to increases in revenue from cloud products by
$162.0 million , telecommunication products by $81.7 million and legacy products
by $73.6 million . The number of units increased by 658% primarily due to
eSilicon products sold. The ASP decreased by 75% due to an increase in the
number of units sold of lower ASP eSilicon products. In addition, non-product
revenue increased by $20.2 million due to transfer of manufacturing rights, new
license and nonrecurring engineering development agreements.
Revenue for the year ended December 31, 2019 increased by $71.1 million mainly
due to increases in the number of units sold and average selling price (ASP).
Revenue for the year ended December 31, 2019 increased primarily due to
increases in revenue from cloud products by $61.0 million and
telecommunication products by $21.0 million , partially offset by decreases in
revenue from legacy products by $10.9 million . The number of units sold
increased for the year ended December 31, 2019 by 9% due to higher cloud
products sold. The ASP increased by 8% due to decreases in the number of units
sold of lower ASP products, such as legacy products, because of larger shipments
to customers in the first quarter of 2018 due to an end of life program
initiated in 2017. In addition, non-product revenue increased by $18.0 million
due to new license and nonrecurring engineering development agreements.
The U.S. government export restrictions on Huawei were implemented in the middle
of our third quarter of 2019, limiting revenue from that customer. However, the
effect of this restriction was not material to our overall revenue in 2020 and
2019. Such restrictions have affected our revenue from Huawei in 2020 and
may continue to inhibit growth in the future, we expect such restrictions to
dampen potential growth between Huawei and us, as well as other U.S. suppliers,
as Huawei has established internal goals to reduce its dependency on U.S.
suppliers for any given product to less than 50%. In addition, the outbreak of
the coronavirus may affect our business and our international operations.
However, the potential impact is difficult to estimate.
Cost of Revenue and Gross Profit
Change
Year Ended December 31, 2020 2019
2020 2019 2018 Amount % Amount %
(dollars in thousands)
Cost of revenue $ 311,823 $ 152,814 $ 129,345 $ 159,009 104 % $ 23,469 18 %
Gross profit 371,131 212,821 165,145 158,310 74 % 47,676 29 %
Gross profit as a
percentage of revenue 54 % 58 % 56 % - (4 %) - 2 %
Cost of revenue and gross profit for the year ended December 31, 2020 increased
by $159.0 million and $158.3 million , respectively, mainly due to higher revenue
as discussed above. Gross profit as a percentage of revenue decreased from 58%
to 54% due mainly to amortization of inventory fair value step-up related to
acquired eSilicon inventories of $4.6 million , and amortization of acquired
intangibles of $30.8 million during the year.
Cost of revenue and gross profit for the year ended December 31, 2019 increased
by $23.5 million and $47.8 million , respectively, mainly due to higher revenue
as discussed above. Gross profit as percentage of revenue slightly increased
from 56% to 58% due mainly to product and revenue mix.
Research and Development
Change
Year Ended December 31, 2020 2019
2020 2019 2018 Amount % Amount %
(dollars in thousands)
Research and development
9 %
Research and development expenses for the year ended December 31, 2020 increased
by $85.3 million . Personnel costs and stock-based compensation increased by
$34.8 million and $20.5 million , respectively, mainly as a result of the
eSilicon acquisition, new hires and new equity awards granted to employees. In
addition, software tools expense increased by$9.0 million mainly due to new software license subscriptions and cost of termination of eSilicon contracts. Foundry and allocated expenses increased by$3.6 million and$15.6 million , respectively, due to the eSilicon acquisition, increased design activities and higher engineering activities. Testing, laboratory supplies, packaging and pre-production engineering mask costs increased by$2.6 million due to increased research and development activities. Research and development expenses for the year endedDecember 31, 2019 increased by$16.0 million . Stock-based compensation increased by$4.9 million mainly due to an increase in equity awards. In addition, information technology (IT), software tools expenses and allocated expenses increased by$6.0 million due to increased design activities and higher engineering activities. Testing, laboratory supplies, packaging, outside services and pre-production engineering mask costs increased by$4.0 million due to an increase in research and development activities. We expect research and development expenses to increase due to our acquisition of eSilicon and our strategy to continue to expand our product offerings and enhance our existing product offerings. 45
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Sales and Marketing
Change
Year Ended December 31, 2020 2019
2020 2019 2018 Amount % Amount %
(dollars in thousands)
Sales and marketing
Sales and marketing expenses for the year endedDecember 31, 2020 increased by$13.6 million primarily due to increase in personnel costs and stock-based compensation by$4.8 million and$7.4 million , respectively, mainly as a result of the eSilicon acquisition, new hires and new equity awards granted to employees. In addition, commission expense increased by$1.1 million due to higher revenue.
Sales and marketing expenses for the year ended
General and Administrative
Change
Year Ended December 31, 2020 2019
2020 2019 2018 Amount % Amount %
(dollars inthousands)
General and administrative
General and administrative expenses for the year endedDecember 31, 2020 increased by$26.8 million . Salaries and stock-based compensation increased by$9.3 million , as a result of the eSilicon and Arrive acquisitions, new hires and new equity awards granted to employees. Professional service fees increased by$11.4 million , due to the acquisitions, including expenses related to the potential merger with Marvell. In addition, allocated expenses such as facility, human resources and information technology expenses increased by$3.8 million due to the acquisition of eSilicon and new building lease for the Company's head office inCalifornia . General and administrative expenses for the year endedDecember 31, 2019 increased by$2.4 million . Salaries and stock-based compensation increased by$2.9 million , mainly due to higher equity awards. In addition, professional fees increased by$1.4 million due to higher outside legal fees in connection with the acquisition of eSilicon. The increases were partially offset by decreases in bad debts of$0.6 million and loss on settlement claims related to theClariPhy acquisition of$1.8 million .
Provision (benefit) for Income Taxes
Change
Year Ended December 31, 2020 2019
2020 2019 2018 Amount % Amount %
(dollars in thousands)
Provision (benefit) for
income taxes $ 4,454 $ 396 $ (8,211 ) $ 4,058 N/M $ 8,607 105 %
For the year ended December 31, 2020 , we recorded provision for income taxes of
$4.5 million , which reflects an effective tax rate of (8.1%). The effective tax
rate for the year ended December 31, 2020 differed from the statutory rate of
21% primarily due to the change in valuation allowance, foreign income taxes
paid at lower rates, geographic mix in operating results, unrecognized tax
benefits, recognition of federal and state research development credits,
windfall tax benefits from stock-based compensation and GILTI inclusion. In
addition, the income tax expense for the year ended December 31, 2020 included
an accrual for unrecognized tax benefit for foreign income taxes and an income
tax benefit for the remeasurement of certain net foreign deferred tax liability
based on the renewed tax holiday period in Singapore .
For the year ended December 31, 2019 , we recorded provision for income taxes of
$0.4 million , which reflects an effective tax rate of (0.5%). The effective tax
rate for the year ended December 31, 2019 differed from the statutory rate of
21% primarily due to the change in valuation allowance, foreign income taxes
provided at lower rates, geographic mix in operating results, unrecognized tax
benefits, recognition of federal and state research development credits, and
windfall tax benefits from stock-based compensation.
For the year ended December 31, 2018 , we recorded an income tax benefit of $8.2
million , which reflects an effective tax rate of 8%. The effective tax rate for
the year ended December 31, 2018 differed from the statutory rate of 21%
primarily due to the change in valuation allowance, foreign income taxes
provided at lower rates, geographic mix in operating results, unrecognized tax
benefits, recognition of federal and state research and development credits, and
windfall tax benefits from stock-based compensation. In addition, the income tax
benefit for the year ended December 31, 2018 included the partial release of
federal valuation allowance resulting from the transfer of an acquired
in-process research and development to developed technology in 2018 which
allowed the related deferred tax liability to be considered a source of income
for realizing deferred tax assets, as well as the revaluation of the foreign
deferred tax liability on the in-process research and development based on the
foreign tax rates applicable to the anticipated reversal periods, partially
offset by income tax expense for the accrual of unrecognized tax benefit for
foreign taxes.
Our effective tax rate in the future will depend upon the proportion of our
income before provision for income taxes earned in
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Liquidity and Capital Resources
As ofDecember 31, 2020 , we had cash and cash equivalents and investments in marketable securities of$166.9 million . Our primary uses of cash are to fund operating expenses, purchase inventory, acquire property, and equipment, tax payments associated with stock withholding, business acquisitions and convertible debt purchases or repayments. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the changes in our outstanding accounts payable and accrued expenses. Our primary sources of cash are cash receipts on accounts receivable from our revenue. In 2020, 2016 and 2015, we issued convertible debt, which resulted in an increase in cash and cash equivalents. Aside from the growth in amounts billed to our customers, net cash collections of accounts receivable are impacted by the efficiency of our cash collections process, which can vary from period to period, depending on the timing of shipments and payment cycles of our major customers.
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31,
2020 2019 2018
(in thousands)
Net cash provided by operating
activities $ 155,585 $ 96,944 $ 78,159
Net cash provided by (used in)
investing activities (213,591 ) 63,017 (35,650 )
Net cash used in financing activities (121,188 ) (49,256 ) (33,941 )
Net increase (decrease) in cash and
cash equivalents $ (179,194 ) $ 110,705 $ 8,568 Net Cash Provided by Operating Activities
Net cash provided by operating activities in 2020 primarily reflected depreciation and amortization of$127.7 million , stock-based compensation expense of$111.2 million , accretion of convertible debt and amortization of issuance expenses of$29.3 million , loss on termination of software lease contracts of$3.4 million , loss on early extinguishment of debt of$13.5 million , deferred income taxes of$3.7 million , decrease in prepaid expenses and other assets of$28.4 million , and increase in accounts payable of$11.2 million , partially offset by a net loss of$59.7 million , net unrealized gain on equity investment of$2.0 million , realized gain on equity investments of$5.0 million , increases in accounts receivable of$50.8 million and inventories of$35.2 million and decreases in accrued expenses of$11.4 million , deferred revenue of$7.9 million and other liabilities of$1.9 million . Our prepaid expenses and other current assets decreased due to collection of receivables from eSilicon stockholders to pay eSilicon employees, settlement of receivable from eSilicon upon close of the acquisition, receipt of lease incentive allowance and usage of prepaid expenses. Our accounts payable and inventories increased due to build-up of inventories for future shipments and addition of eSilicon inventories. Our accounts receivable increased due to higher revenue. Accrued expenses decreased due to payment to eSilicon employees as part of the acquisition. Our deferred revenue decreased due to services provided or shipment of products. Other liabilities decreased due to payments. Net cash provided by operating activities in 2019 primarily reflected depreciation and amortization of$96.7 million , stock-based compensation expenses of$76.9 million , and accretion of convertible debt and amortization of issuance expenses of$28.4 million , partially offset by a net loss of$72.9 million , net unrealized gain on equity investment of$2.2 million , gain on sale of equity investment of$0.9 million , amortization of discount on marketable securities of$1.1 million , increases in accounts receivable of$1.5 million , inventories of$22.0 million and prepaid expenses and other assets of$2.7 million and decreases in deferred revenue of$1.7 million and accrued expenses of$0.8 million . Our accounts receivable increased due mainly to increase in revenue. Our inventories increased due to build-up of inventories for future shipments. Our prepaid expenses and other assets increased due to receivable from mask sharing arrangement. Our deferred revenue decreased due to services provided or milestone completions. Our accrued expenses decreased due to payments.
Net Cash Provided by (Used in) Investing Activities
Net cash used in investing activities during the year endedDecember 31, 2020 primarily consisted of acquisitions of businesses of$223.7 million , purchases of marketable securities of$41.9 million and equity investments of$6.0 million and purchases of property and equipment of$74.8 million , partially offset by proceeds from maturities and sales of marketable securities of$118.7 million and proceeds from eSilicon investment of$15.0 million . Net cash provided by investing activities in 2019 primarily consisted of sales and maturities of marketable securities of$371.5 million and proceeds from sale of an equity investment of$3.4 million , partially offset by purchases of marketable securities of$274.2 million , purchases of property and equipment of$29.5 million , purchases of intangible assets of$1.1 million and purchases of equity investments of$7.0 million . 47
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Net cash used in financing activities during the year endedDecember 31, 2020 primarily consisted of payment for debt repurchases and settlement of$461.2 million , minimum tax withholding paid on behalf of employees for net share settlement of$80.4 million , purchase of capped call options of$55.7 million , payment of obligations related to purchase of intangible assets and equipment financing of$35.5 million , partially offset by proceeds from convertible debt, net of issuance cost of$492.5 million , proceeds from the exercise of stock options and ESPP purchases of$19.1 million . Net cash used in financing activities in 2019 primarily consisted of minimum tax withholding paid on behalf of employees for net share settlement of$33.6 million , payments of obligations related to purchase of intangible assets of$24.2 million and payment of equipment financing obligations of$0.4 million , partially offset by proceeds from exercises of stock options and employee stock purchase plan purchases of$9.0 million .
Operating and Capital Expenditure Requirements
Our principal sources of liquidity as ofDecember 31, 2020 consisted of$166.9 million of cash, cash equivalents and investments in marketable securities. Based on our current operating plan, we believe that our existing cash and cash equivalents and investments in marketable securities from operations will be sufficient to finance our operational cash needs through at least the next 12 - 18 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities and grow our end customer base which will result in higher needs for working capital. Our ability to generate cash from operations is also subject to substantial risks described in Part I, "Item 1A, Risk Factors." If any of these risks occur, we may be unable to generate or sustain positive cash flow from operating activities. We would then be required to use existing cash and cash equivalents to support our working capital and other cash requirements. If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through equity or debt financing or from other sources. We currently plan to establish a small line of credit in the first quarter of 2021 to address potential temporary dislocations of geographic cash availability which may occur either from a timing of payment or collection point of view. We are also forecasting approximately$60 million in tax payments with respect to stock withholding in each of March andApril 2021 . In the future, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility, and would also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us.
Contractual Obligations, Commitments and Contingencies
The following table summarizes our outstanding contractual obligations as ofDecember 31, 2020 : Payments due by period Less Than 1 More Than 5 Total Year 1-3 Years 3-5 Years Years (in thousands) Convertible debt$ 566,517 $ 60,517 -$ 506,000 - Interest payable on convertible debt 17,530 4,248$ 7,590 5,692 - Operating lease obligations 51,980 7,045 14,193 10,951$ 19,791 Obligations related to software license intangibles 45,859 30,250 15,609 - - Obligations under service contract 640 391 166 83 - Obligations under equipment financing 94 94 - - - As ofDecember 31, 2020 , we recorded a liability for our uncertain tax position of$1.1 million . We are unable to reasonably estimate the timing of payments in individual years due to uncertainties in the timing of the effective settlement of tax positions. We depend upon third-party subcontractors to manufacture our wafers. Our subcontractor relationships typically allow for the cancellation of outstanding purchase orders, but require payment of all expenses incurred through the date of cancellation. As ofDecember 31, 2020 , the total value of open purchase orders for wafers was approximately$40.6 million . As ofDecember 31, 2020 , we have a commitment to pay$0.3 million of mask costs.
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, such as the use of structured finance, special purpose entities or variable interest entities.
Recent Authoritative Accounting Guidance
See Note 1 of the Notes to our Consolidated Financial Statements for information regarding recently issued accounting pronouncements.
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