UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)
☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
Or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-34942

Inphi Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware	77-0557980
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

2953 Bunker Hill Lane, Suite 300,

Santa Clara, California 95054

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 217-7300

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	IPHI	The New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☑      No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☑      No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer  ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in 12b-2 of the Exchange Act).  Yes  ☐      No  ☑

The total number of shares outstanding of the Registrant’s common stock, $0.001 par value per share, as of August 1, 2019 was 45,416,197.

INPHI CORPORATION

QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2019

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION		2
Item 1.	Financial Statements	2
	Unaudited Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018	2
	Unaudited Condensed Consolidated Statements of Income (Loss) for the Three and Six Months Ended June 30, 2019 and 2018	3
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2019 and 2018	4
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.	Controls and Procedures	27
PART II. OTHER INFORMATION		28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
Signatures

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	June 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	159,624		$	172,018
Investments in marketable securities		253,910			235,339
Accounts receivable, net		67,008			61,271
Inventories		44,095			33,052
Prepaid expenses and other current assets		8,626			9,600
Total current assets		533,263			511,280
Property and equipment, net		71,635			70,740
Goodwill		104,502			104,502
Intangible assets, net		147,355			180,447
Right of use assets, net		8,960			—
Other assets, net		24,425			22,904
Total assets	$	890,140		$	889,873
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	22,635		$	15,891
Deferred revenue		6,245			5,432
Accrued employee expenses		11,157			11,206
Other accrued expenses		7,700			7,595
Other current liabilities		21,571			24,319
Total current liabilities		69,308			64,443
Convertible debt		461,630			447,825
Other long-term liabilities		15,798			10,911
Total liabilities		546,736			523,179
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued		—			—
Common stock, $0.001 par value; 500,000,000 shares authorized; 45,401,399 and 44,292,722 issued and outstanding at June 30, 2019 and December 31, 2018, respectively		46			44
Additional paid-in capital		555,082			536,157
Accumulated deficit		(213,219	)		(169,896	)
Accumulated other comprehensive income		1,495			389
Total stockholders’ equity		343,404			366,694
Total liabilities and stockholders’ equity	$	890,140		$	889,873

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

2

INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(in thousands, except share and per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenue	$	86,285		$	69,814		$	168,508		$	129,950
Cost of revenue		37,176			30,203			71,768			57,793
Gross profit		49,109			39,611			96,740			72,157
Operating expenses:
Research and development		44,705			42,804			89,104			85,742
Sales and marketing		11,154			10,311			23,033			21,653
General and administrative		7,480			8,415			14,313			14,633
Total operating expenses		63,339			61,530			126,450			122,028
Loss from operations		(14,230	)		(21,919	)		(29,710	)		(49,871	)
Interest expense		(8,552	)		(7,953	)		(16,975	)		(15,668	)
Other income, net		1,617			1,466			3,995			5,881
Loss before income taxes		(21,165	)		(28,406	)		(42,690	)		(59,658	)
Provision (benefit) for income taxes		(587	)		58			633			(8,203	)
Net loss	$	(20,578	)	$	(28,464	)	$	(43,323	)	$	(51,455	)
Earnings per share:
Basic earnings per share	$	(0.46	)	$	(0.65	)	$	(0.97	)	$	(1.19	)
Diluted earnings per share	$	(0.46	)	$	(0.65	)	$	(0.97	)	$	(1.19	)
Weighted-average shares used in computing earnings per share:
Basic		45,191,674			43,661,325			44,823,562			43,331,906
Diluted		45,191,674			43,661,325			44,823,562			43,331,906

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

3

INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net loss	$	(20,578	)	$	(28,464	)	$	(43,323	)	$	(51,455	)
Other comprehensive income (loss):
Available for sale investments:
Change in unrealized gain or loss, net of tax		566			137			1,106			(135	)
Realized loss (gain) reclassified into earnings, net of tax		—			1			—			(1	)
Comprehensive loss	$	(20,012	)	$	(28,326	)	$	(42,217	)	$	(51,591	)

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

4

INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

Six Months Ended June 30, 2019

	Common Stock				Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income		Total Stock- holders’ Equity
	Shares		Amount
Balance at December 31, 2018		44,292,722	$	44	$	536,157		$	(169,896	)	$	389	$	366,694
Issuance of common stock from exercise of stock options		78,205		—		646			—			—		646
Issuance of common stock from restricted stock unit grant, net of shares withheld for tax		168,227		1		(4,017	)		—			—		(4,016	)
Issuance of common stock from employee stock purchase plan purchases		121,549		—		3,477			—			—		3,477
Stock-based compensation expense		—		—		18,758			—			—		18,758
Net loss		—		—		—			(22,745	)		—		(22,745	)
Other comprehensive income, net		—		—		—			—			540		540
Balance at March 31, 2019		44,660,703	$	45	$	555,021		$	(192,641	)	$	929	$	363,354
Issuance of common stock from exercise of stock options		45,317		—		486			—			—		486
Issuance of common stock from restricted stock unit grant, net of shares withheld for tax		695,379		1		(18,386	)		—			—		(18,385	)
Stock-based compensation expense		—		—		17,961			—			—		17,961
Net loss		—		—		—			(20,578	)		—		(20,578	)
Other comprehensive income, net		—		—		—			—			566		566
Balance at June 30, 2019		45,401,399	$	46	$	555,082		$	(213,219	)	$	1,495	$	343,404

Six Months Ended June 30, 2018

	Common Stock				Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Total Stock- holders’ Equity
	Shares		Amount
Balance at December 31, 2017		42,780,229	$	43	$	484,934		$	(74,145	)	$	569		$	411,401
Issuance of common stock from exercise of stock options		136,690		—		291			—			—			291
Issuance of common stock from restricted stock unit grant, net of shares withheld for tax		102,702		—		(1,923	)		—			—			(1,923	)
Issuance of common stock from employee stock purchase plan purchases		177,771		—		3,704			—			—			3,704
Stock-based compensation expense		—		—		14,553			—			—			14,553
Net loss		—		—		—			(22,991	)		—			(22,991	)
Other comprehensive loss, net		—		—		—			—			(275	)		(275	)
Balance at March 31, 2018		43,197,392	$	43	$	501,559		$	(97,136	)	$	294		$	404,760
Issuance of common stock from exercise of stock options		21,614		—		198			—			—			198
Issuance of common stock from restricted stock unit grant, net of shares withheld for tax		595,337		1		(10,398	)		—			—			(10,397	)
Stock-based compensation expense		—		—		16,216			—			—			16,216
Net loss		—		—		—			(28,464	)		—			(28,464	)
Other comprehensive income, net		—		—		—			—			139			139
Balance at June 30, 2018		43,814,343	$	44	$	507,575		$	(125,600	)	$	433		$	382,452

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

5

INPHI CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities
Net loss	$	(43,323	)	$	(51,455	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		48,518			37,445
Stock-based compensation		36,719			30,769
Deferred income taxes		446			(8,598	)
Accretion of convertible debt and amortization of debt issuance costs		13,805			12,853
Net unrealized (gain) loss on equity investments		75			(2,857	)
Amortization of discount on marketable securities		(516	)		(190	)
Other noncash items		302			373
Changes in assets and liabilities:
Accounts receivable		(5,737	)		13,906
Inventories		(11,043	)		(2,128	)
Prepaid expenses and other assets		(469	)		(4,160	)
Income tax payable/receivable		126			(1,420	)
Accounts payable		7,130			316
Accrued expenses		194			(6,408	)
Deferred revenue		813			(118	)
Other liabilities		2,362			7,784
Net cash provided by operating activities		49,402			26,112
Cash flows from investing activities
Purchases of property and equipment		(12,610	)		(17,718	)
Purchases of marketable securities		(141,764	)		(124,826	)
Sales of marketable securities		15,029			3,681
Maturities of marketable securities		109,352			134,155
Payments related to purchase of intangible assets		(13,608	)		(11,259	)
Purchases of equity investments		—			(12,811	)
Proceeds from sale of equity investment		—			2,414
Other investing activity		—			125
Net cash used in investing activities		(43,601	)		(26,239	)
Cash flows from financing activities
Proceeds from exercise of stock options		1,132			489
Proceeds from employee stock purchase plan purchases		3,477			3,704
Payment of obligations related to equipment financing		(238	)		(296	)
Repayment of long-term loan		—			216
Minimum tax withholding paid on behalf of employees for net share settlement		(22,566	)		(12,294	)
Net cash used in financing activities		(18,195	)		(8,181	)
Net decrease in cash and cash equivalents		(12,394	)		(8,308	)
Cash and cash equivalents at beginning of period		172,018			163,450
Cash and cash equivalents at end of period	$	159,624		$	155,142
Supplemental cash flow information:
Interest paid	$	3,196		$	2,837
Income taxes paid		126			1,808
Supplemental disclosure of non-cash investing and financing activities:
Software license intangible assets acquired		2,433			18,468

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

6

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

1. Organization and Basis of Presentation

Inphi Corporation (the “Company”), a Delaware corporation, was incorporated in November 2000. The Company is a fabless provider of high-speed analog and mixed signal semiconductor solutions for the communications and data center markets. The Company’s semiconductor solutions are designed to address bandwidth bottlenecks in networks, maximize throughput and minimize latency in computing environments and enable the rollout of next generation communications and data center infrastructures. In addition, the semiconductor solutions provide a vital high-speed interface between analog signals and digital information in high-performance systems such as telecommunications transport systems, enterprise networking equipment and data centers.

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019.

The interim condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to state fairly the Company’s consolidated financial position as of June 30, 2019, its consolidated results of operations and stockholders’ equity for the three and six months ended June 30, 2019 and 2018, and cash flows for the six months ended June 30, 2019 and 2018. The results of operations for the three and six months ended June 30, 2019, are not necessarily indicative of the results to be expected for future quarters or the full year.

2. Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that requires companies that lease assets (lessees) to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. The FASB also issued additional updates. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The guidance requires entities to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach or allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted this guidance on January 1, 2019. See note 7 to the condensed consolidated financial statements for further details.

In June 2016, the FASB issued guidance which requires entities to estimate an expected lifetime credit loss on certain financial assets. This guidance is effective for the annual and interim periods of the Company beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued guidance to simplify the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted.  The Company adopted this guidance on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In February 2018, the FASB issued guidance that allows an option to reclassify from accumulated other comprehensive income to retained earnings any stranded tax effects resulting from the Tax Cuts and Jobs Act. The guidance is effective for fiscal years beginning after December 15, 2018. The Company adopted this guidance on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

7

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

In June 2018, the FASB issued guidance to eliminate the separate guidance applicable to share-based payments to nonemployees. Under the new guidance, equity-classified share-based payment awards issued to nonemployees will be measured on the grant date, instead of being remeasured through the performance completion date (generally the vesting date), as required under the current guidance. The new guidance will also require recognition of compensation cost for awards with performance conditions when achievement of those conditions are probable, rather than upon their achievement. Further, the new guidance will eliminate the requirement to reassess the classification of nonemployee awards under the financial instruments literature upon vesting. The guidance is effective for fiscal years beginning after December 15, 2018. The Company adopted this guidance on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued guidance that eliminates certain disclosure requirements for fair value measurements for all entities, requiring public entities to disclose certain new information and modifies some disclosure requirements. The new guidance will no longer require disclosure of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will require disclosure of the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements, with early adoption permitted. The guidance will be effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued guidance requiring a customer in a cloud computing arrangement under a service contract to follow the internal use software guidance in Accounting Standards Codification (“ASC”) 350-40 to determine which implementation costs to capitalize as assets. Capitalized implementation costs are expensed over the term of the hosting arrangement beginning when the module or component of the hosting arrangement is ready for its intended use. The guidance will be effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements and related disclosures.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule became effective on November 5, 2018. The Company adopted the rule in the fourth quarter of 2018.  The adoption on this standard requires the Company to present comparative consolidated statements of stockholders’ equity as part of the interim period financial statements.

In November 2018, the FASB issued amendments to guidance on “Collaborative Arrangements” and “Revenue from Contracts with Customers”, that require transactions in collaborative arrangements to be accounted for under “Revenue from Contracts with Customers” if the counterparty is a customer for a good or service (or bundle of goods and services) that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers.  The amendments to the guidance are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, though early adoption is permitted, including adoption in any interim period.  The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements and related disclosures.

3. Investments

The following table summarizes the investments in marketable securities by investment category:

	June 30, 2019				December 31, 2018
	Cost		Fair Value		Cost		Fair Value
Available-for-sale securities:
U.S. Treasury securities	$	1,970		1,971	$	—	$	—
Municipal bonds		7,655		7,693		6,751		6,733
Corporate notes/bonds		166,813		167,400		146,466		146,126
Variable rate demand notes		12,900		12,900		8,900		8,900
Asset backed securities		22,059		22,110		32,986		32,923
Commercial paper		41,228		41,240		39,707		39,701
Certificate of deposit		596		596		956		956
Total investments	$	253,221	$	253,910	$	235,766	$	235,339

8

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

As of June 30, 2019, the Company had 21 investments that were in an unrealized loss position. The gross unrealized losses on these investments at June 30, 2019 of $23 were determined to be temporary in nature. The Company reviews the investments to identify and evaluate investments that have an indication of possible other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

The contractual maturities of available-for-sale securities at June 30, 2019 are presented in the following table:

	Cost		Fair Value
Due in one year or less	$	138,924	$	139,094
Due between one and five years		98,291		98,813
Due after five years		16,006		16,003
	$	253,221	$	253,910

The Company has a marketable equity investment in a company located in Taiwan. The fair value of the investment and unrealized loss as of June 30, 2019 was $1,311 and $682, respectively. This investment is included in Other assets, net on the condensed consolidated balance sheets.

The Company has non-marketable equity investments in privately held companies without readily determinable market values. The Company adjusts the carrying value of non-marketable equity investments to fair value upon observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). All gains and losses on non-marketable equity investments, realized and unrealized, are recognized in Other income, net. As of June 30, 2019, non-marketable equity investments had a carrying value of approximately $16,866, of which $6,066 was remeasured to fair value based on observable transaction during the three months ended March 31, 2018. These investments are included in Other assets, net on the condensed consolidated balance sheets. An unrealized gain of $3,066 was recorded in other income and included as an adjustment to the carrying value of non-marketable equity investments for the three months ended March 31, 2018.

4. Inventories

Inventories consist of the following:

	June 30, 2019		December 31, 2018
Raw materials	$	14,963	$	12,435
Work in process		17,832		13,602
Finished goods		11,300		7,015
	$	44,095	$	33,052

5. Property and Equipment, net

Property and equipment consist of the following:

	June 30, 2019			December 31, 2018
Laboratory and production equipment	$	130,392		$	121,716
Office, software and computer equipment		33,255			30,190
Furniture and fixtures		1,739			1,558
Leasehold improvements		7,623			7,609
		173,009			161,073
Less accumulated depreciation and amortization		(101,374	)		(90,333	)
	$	71,635		$	70,740

9

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

Depreciation and amortization expense of property and equipment for the three and six months ended June 30, 2019 was $5,566 and $11,058, respectively. Depreciation and amortization expense of property and equipment for the three and six months ended June 30, 2018 was $4,753 and $9,796, respectively.

As of June 30, 2019 and December 31, 2018, computer software costs included in property and equipment were $6,921 and $6,879, respectively. Amortization expense of capitalized computer software costs was $86 and $186 for the three and six months ended June 30, 2019, respectively. Amortization expense of capitalized computer software costs was $159 and $345 for the three and six months ended June 30, 2018, respectively.

Property and equipment not yet paid in cash as of June 30, 2019 and December 31, 2018 was $2,220 and $2,580, respectively.

6. Intangible Assets

The following table presents details of intangible assets:

	June 30, 2019						December 31, 2018
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Developed technology	$	186,800	$	105,826	$	80,974	$	186,800	$	86,378	$	100,422
Customer relationships		70,540		26,545		43,995		70,540		21,681		48,859
Trade name		2,310		1,581		729		2,310		1,350		960
Patents		1,579		948		631		1,579		881		698
Software		62,224		41,198		21,026		61,406		31,898		29,508
	$	323,453	$	176,098	$	147,355	$	322,635	$	142,188	$	180,447

The following table presents amortization of intangible assets for the three and six months ended June 30, 2019 and 2018:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Cost of goods sold	$	9,724	$	6,699	$	19,448	$	13,398
Research and development		5,514		4,524		10,916		9,079
Sales and marketing		2,432		2,432		4,864		4,864
General and administrative		148		152		298		308
	$	17,818	$	13,807	$	35,526	$	27,649

Based on the amount of intangible assets subject to amortization at June 30, 2019, the expected amortization expense for each of the next five fiscal years and thereafter is as follows:

2019 (remaining)	$	33,733
2020		39,567
2021		33,410
2022		24,346
2023		15,460
Thereafter		839
	$	147,355

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

Developed technology	3.3
Customer relationship	4.5
Trade name	2.3
Patents	7.8
Software	1.4

10

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

7. Leases

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), using the modified retrospective method through a cumulative adjustment to the beginning accumulated deficit balance. Prior comparative periods have not been restated under this method. The adoption of this guidance resulted in no cumulative effect adjustment as of January 1, 2019.  However, total assets and liabilities increased by $10,670 as a result of the adoption. Based on the new guidance, for leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The Company made this election, along with other available practical expedients. This guidance had a material impact on the condensed consolidated balance sheet as of January 1, 2019, but did not have an impact on the condensed consolidated statements of income (loss) and cash flows. The most significant impact was the recognition of right of use (“ROU”) asset and lease liabilities for operating leases related to facility leases.

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, other current liabilities and other long-term liabilities on the condensed consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on the condensed consolidated balance sheets. As of the adoption date and June 30, 2019, the Company does not have material finance leases.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments and initial direct costs incurred, net of lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.

The Company has operating leases for office facilities. The leases have remaining lease terms of 1 year to 7 years and some may include options to extend the lease for up to 5 years.

Information related to operating leases for the three and six months ended June 30, 2019 are as follows:

	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Operating lease cost	$	1,044	$	2,098
Cash paid for leases		927		2,191
Right of use assets obtained in exchange for lease obligations		—		224

Weighted average remaining lease term and weighted average discount as of June 30, 2019 are as follows:

Weighted average remaining lease term (years)	4.45
Weighted average discount rate	3.5	%

Future minimum lease payments under non-cancellable leases as of June 30, 2019 are as follows:

2019 (remaining)	$	635
2020		2,481
2021		2,278
2022		2,176
2023		2,098
Thereafter		2,071
Total future minimum lease payments		11,739
Less imputed interest		1,071
Present value of lease obligations	$	10,668

11

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

As of June 30, 2019, the Company has an additional operating lease for an office facility that has not yet commenced of $1,227. This operating lease will commence in the second half of 2019 with a lease term of 5 years.

As previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and under legacy lease accounting (ASC 840), future minimum lease payments under non-cancelable leases and service agreements as of December 31, 2018 are as follows:

2019	$	4,588
2020		2,252
2021		1,883
2022		1,722
2023		1,615
2024 and thereafter		1,698
Total	$	13,758

For the three and six months ended June 30, 2018, operating lease expense was $1,708 and $3,448, respectively.

8. Product Warranty Obligation

As of June 30, 2019 and December 31, 2018, the product warranty liability was $110. There was nochange in product warranty liability during the three and six months ended June 30, 2019 and 2018.

9. Convertible debt 

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

	June 30, 2019			December 31, 2018
Principal	$	517,500		$	517,500
Less:
Unamortized debt discount		(51,505	)		(64,222	)
Unamortized debt issuance costs		(4,365	)		(5,453	)
Net carrying amount of long-term debt		461,630			447,825
Less current portion of long-term debt		—			—
Long-term debt, non-current portion	$	461,630		$	447,825

In December 2015, the Company issued $230,000 of 1.125% convertible senior notes due 2020 (the “Convertible Notes 2015”). The Convertible Notes 2015 will mature December 1, 2020, unless earlier converted or repurchased. Interest on the Convertible Notes 2015 is payable on June 1 and December 1 of each year, beginning on June 1, 2016. The initial conversion rate is 24.8988 shares of common stock per $1 principal amount of Convertible Notes 2015, which represents an initial conversion price of approximately $40.16 per share. The total interest expense recognized for the three months ended June 30, 2019 was $3,782, which consists of $646 of contractual interest expense, $2,877 of amortization of debt discount and $259 of amortization of debt issuance costs. The total interest expense recognized for the six months ended June 30, 2019 was $7,463, which consists of $1,286 of contractual interest expense, $5,667 of amortization of debt discount and $510 of amortization of debt issuance costs. The total interest expense recognized for the three months ended June 30, 2018 was $3,564, which consists of $646 of contractual interest expense, $2,677 of amortization of debt discount and $241 of amortization of debt issuance costs. The total interest expense recognized for the six months ended June 30, 2018 was $7,033, which consists of $1,286 of contractual interest expense, $5,272 of amortization of debt discount and $475 of amortization of debt issuance costs.

In connection with the issuance of the Convertible Notes 2015, the Company entered into capped call transactions (the “Capped Call 2015”) in private transactions. Under the Capped Call 2015, the Company purchased capped call options that in aggregate relate to 100% of the total number of shares of the Company's common stock underlying the Convertible Notes 2015, with a strike price equal to the conversion price of the Convertible Notes 2015 and with a cap price equal to 52.06 per share.

12

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

In September 2016, the Company issued $287,500 of 0.75% convertible senior notes due 2021 (the “Convertible Notes 2016”, and together with the Convertible Notes 2015, the “Convertible Notes”). The Convertible Notes 2016 will mature on September 1, 2021, unless earlier converted or repurchased. Interest on the Convertible Notes 2016 is payable on March 1 and September 1 of each year, beginning on March 1, 2017. The initial conversion rate is 17.7508 shares of common stock per $1 principal amount of the Convertible Notes 2016, which represents an initial conversion price of approximately $56.34 per share.  The total interest expense recognized for the three months ended June 30, 2019 was $4,403, which consists of $533 of contractual interest expense, $3,577 of amortization of debt discount and $293 of amortization of debt issuance costs. The total interest expense recognized for the six months ended June 30, 2019 was $8,694, which consists of $1,066 of contractual interest expense, $7,050 of amortization of debt discount and $578 of amortization of debt issuance costs. The total interest expense recognized for the three months ended June 30, 2018 was $4,138, which consists of $533 of contractual interest expense, $3,332 of amortization of debt discount and $273 of amortization of debt issuance costs. The total interest expense recognized for the six months ended June 30, 2018 was $8,172, which consists of $1,066 of contractual interest expense, $6,568 of amortization of debt discount and $538 of amortization of debt issuance costs.  

In connection with the issuance of the Convertible Notes 2016, the Company entered into capped call transactions (the “Capped Call 2016”) in private transactions. Under the Capped Call 2016, the Company purchased capped call options that in aggregate relate to 100% of the total number of shares of the Company's common stock underlying the Convertible Notes 2016, with a strike price approximately equal to the conversion price of the Convertible Notes 2016 and with a cap price equal to approximately 73.03 per share.

10. Other liabilities

Other current liabilities consist of the following:

	June 30, 2019		December 31, 2018
Intangible asset liability	$	13,747	$	21,945
Operating lease liability		1,652		—
Others		6,172		2,374
	$	21,571	$	24,319

Other long-term liabilities consist of the following:

	June 30, 2019		December 31, 2018
Deferred rent	$	36	$	1,100
Income tax payable		742		706
Intangible asset liability		4,984		7,961
Operating lease liability		9,016		—
Others		1,020		1,144
	$	15,798	$	10,911

11. Income Taxes

The Company normally determines its interim income tax provision using an estimated single annual effective tax rate for all tax jurisdictions. ASC 740 provides that when an entity operates in a jurisdiction that has generated ordinary losses on a year-to-date basis or on the basis of the results anticipated for the full fiscal year and no benefit can be recognized on those losses, a separate effective tax rate should be computed and applied to ordinary income (or loss) in that jurisdiction. The Company incurred pretax loss during the three and six months ended June 30, 2019 and 2018 from its U.S. operations and will not recognize a tax benefit of the losses due to the full valuation allowance established against deferred tax assets. Thus, a separate effective tax rate was applied to losses from the U.S. jurisdiction to compute the Company’s June 30, 2019 and 2018 interim tax provision.

The Company recorded an income tax provision (benefit) of ($587) and $633 in the three and six months ended June 30, 2019, respectively. The effective tax rates were 2.8% and (1.5%) in the three and six months ended June 30, 2019, respectively. The difference between the effective tax rates and the 21% federal statutory rate was primarily due to change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in expected operating results, unrecognized tax benefits, recognition of federal and state research and development credits and windfall tax benefits from stock-based compensation.

13

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

The Company recorded an income tax provision (benefit) of $58 and ($8,203) in the three and six months ended June 30, 2018, respectively. The effective tax rate for both the three and six months ended June 30, 2018 was (0.2%) and 13.7%, respectively. The difference between the effective tax rates and the 21% federal statutory rate was primarily due to change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in expected operating results, unrecognized tax benefits, recognition of federal and state research and development credits and windfall tax benefits from stock-based compensation. The income tax expense for the three months ended June 30, 2018, included an accrual for unrecognized tax benefit for foreign taxes. The income tax benefit for the six months ended June 30, 2018, primarily consisted of the partial release of federal valuation allowance resulting from the transfer of 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.

 During the three and six months ended June 30, 2019, the gross amount of the Company’s unrecognized tax benefits increased approximately $581 and $4,382, respectively, primarily as a result of tax positions taken during the current year. Substantially all of the unrecognized tax benefits as of June 30, 2019, if recognized, would affect the Company’s effective tax rate. 

The Company does not provide for U.S. income taxes on undistributed earnings of its controlled foreign corporations as the Company intends to reinvest these earnings indefinitely outside the U.S.

12. Earnings Per Share

The following securities were not included in the computation of diluted earnings per share as inclusion would have been anti-dilutive:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Common stock options		1,056,682		1,197,891		1,092,153		1,237,305
Unvested restricted stock units and market value stock units		2,772,493		2,993,650		2,790,574		2,857,301
Convertible debt		10,830,038		10,830,038		10,830,038		10,830,038
		14,659,213		15,021,579		14,712,765		14,924,644

13. Stock–Based Compensation

In June 2010, the Company's Board of Directors (the “Board”) approved the Company’s 2010 Stock Incentive Plan (the “2010 Plan”), which became effective in November 2010. The 2010 Plan provides for the grants of restricted stock, stock appreciation rights and stock unit awards to employees, non-employee directors, advisors and consultants. The compensation committee of the Board administers the 2010 Plan, including the determination of the recipient of an award, the number of shares subject to each award, whether an option is to be classified as an incentive stock option or nonstatutory option, and the terms and conditions of each award, including the exercise and purchase prices and the vesting or duration of the award. Options granted under the 2010 Plan are exercisable only upon vesting. At June 30, 2019, 5,124,906 shares of common stock have been reserved for future grants under the 2010 Plan.

Stock Option Awards 

The Company did not grant any stock options during the three and six months ended June 30, 2019 and 2018.

14

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

The following table summarizes information regarding options outstanding:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2018		1,159,121		$	12.94		2.62	$	22,267
Exercised		(123,522	)	$	9.17
Outstanding at June 30, 2019		1,035,599		$	13.39		2.19	$	38,017
Vested and Exercisable at June 30, 2019		1,035,599		$	13.39		2.19	$	38,017

The intrinsic value of options outstanding, exercisable and vested and expected to vest is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the respective balance sheet dates.

The total intrinsic value of options exercised during the six months ended June 30, 2019 and 2018 was $4,506 and $3,711, respectively. The intrinsic value of exercised options is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date. Cash received from the exercise of stock options was $1,132 and $489 for the six months ended June 30, 2019 and 2018, respectively.

Restricted Stock Units

The Company granted restricted stock units (“RSUs”) to members of the Board and its employees. Most of the Company’s outstanding RSUs vest over 4 years with vesting contingent upon continuous service. The Company estimates the fair value of RSUs using the market price of the common stock on the date of the grant. The fair value of these awards is amortized on a straight-line basis over the vesting period.

The following table summarizes information regarding outstanding RSUs:

	Number of Shares			Weighted Average Grant Date Fair Value Per Share
Outstanding at December 31, 2018		4,051,685		$	34.68
Granted		1,679,698		$	45.35
Vested		(1,352,508	)	$	32.18
Canceled		(309,831	)	$	37.17
Outstanding at June 30, 2019		4,069,044		$	39.72
Expected to vest at June 30, 2019		3,933,669

The RSUs include performance-based stock units subject to achievement of 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 4 years of vesting from the original grant date, contingent upon continuous service. The total performance-based units that vested for the six months ended June 30, 2019 was 54,759. As of June 30, 2019, the total performance-based units outstanding was 73,053.

Employee Stock Purchase Plan

In December 2011, the Company adopted the Employee Stock Purchase Plan (the “ESPP”). Participants purchase the Company's stock using payroll deductions, which may not exceed 15% of their total cash compensation. Pursuant to the terms of the ESPP, the "look-back" period for the stock purchase price is six months. Offering and purchase periods will begin on February 10 and August 10 of each year. Participants will be granted the right to purchase common stock at a price per share that is 85% of the lesser of the fair market value of the Company's common stock at the beginning or the end of each six-month period.

The ESPP imposes certain limitations upon an employee’s right to acquire common stock, including the following: (i) no employee shall be granted a right to participate if such employee would own stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company immediately after the election to purchase common stock, and (ii) no employee may be granted rights to purchase more than $25 of fair value of common stock in each calendar year. The maximum aggregate number of shares of common stock available for purchase under the ESPP is 2,750,000 shares. Total common stock issued under the ESPP during the six months ended June 30, 2019 and 2018 was 121,549 and 177,771, respectively.

15

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

The fair value of the ESPP purchases is estimated at the start of the offering period using the Black-Scholes option pricing model with the following assumptions:

	Six Months Ended June 30,
	2019			2018
Risk-free interest rate		2.50	%		1.79	%
Expected life (in years)		0.49			0.49
Dividend yield		—			—
Expected volatility		45	%		48	%
Estimated fair value	$	11.11		$	7.42

Stock-Based Compensation Expense

Stock-based compensation expense is included in the Company’s condensed consolidated statements of income (loss) as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Cost of goods sold	$	1,674	$	605	$	2,479	$	1,174
Research and development		9,925		9,741		20,657		18,239
Sales and marketing		3,269		3,241		7,417		6,483
General and administrative		3,093		2,629		6,166		4,873
	$	17,961	$	16,216	$	36,719	$	30,769

Total unrecognized compensation cost related to unvested restricted stock units at June 30, 2019, prior to the consideration of expected forfeitures, is approximately $148,962 and is expected to be recognized over a weighted-average period of 2.64 years.

14. Fair Value Measurements

The guidance on fair value measurements requires fair value measurements to be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The Company measures its investments in marketable securities at fair value using the market approach, which uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company has cash equivalents which consist of money market funds valued using the amortized cost method, in accordance with Rule 2a-7 under the 1940 Act which approximates fair value.

The Convertible Notes are carried on the condensed consolidated balance sheets at their original issuance value including accreted interest, net of unamortized debt discount and issuance cost. The Convertible Notes are not marked to fair value at the end of each reporting period. As of June 30, 2019 and December 31, 2018, the fair value of the Convertible Notes was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy. The fair value of the Convertible Notes as of June 30, 2019 and December 31, 2018 was $626,846 and $512,428, respectively.

16

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

The following table presents information about assets and liabilities required to be carried at fair value on a recurring basis:

June 30, 2019	Total		Level 1		Level 2
Assets
Cash equivalents:
Money market funds	$	1,328	$	41	$	1,287
Commercial paper		82,390		—		82,390
Investment in marketable debt securities:
Municipal bonds		7,693		—		7,693
Corporate notes/bonds		167,400		—		167,400
Variable rate demand notes		12,900		—		12,900
Asset backed securities		22,110		—		22,110
Commercial paper		41,240		—		41,240
U.S. Treasury securities		1,971		1,971		—
Certificate of deposit		596		596		—
	$	337,628	$	2,608	$	335,020

December 31, 2018	Total		Level 1		Level 2
Assets
Cash equivalents:
Money market funds	$	740	$	38	$	702
Commercial paper		96,759		—		96,759
Investment in marketable securities:
Municipal bonds		6,733		—		6,733
Corporate notes/bonds		146,126		—		146,126
Variable rate demand notes		8,900		—		8,900
Asset-backed securities		32,923		—		32,923
Commercial paper		39,701		—		39,701
Certificate of deposit		956		956		—
	$	332,838	$	994	$	331,844

As discussed in note 3, the Company has a marketable equity investment. This marketable equity investment is classified as Level 1 in the fair value hierarchy. As discussed in note 3, the Company has non-marketable equity investments, which are classified within Level 3 in the fair value hierarchy because the Company estimates the value based on valuation methods using the observable transaction price at the most recent transaction date. 

15. Segment and Geographic Information

The Company operates in one reportable segment. The Company’s Chief Executive Officer, who is considered to be the chief operating decision maker, manages the Company’s operations as a whole and reviews consolidated financial information for purposes of evaluating financial performance and allocating resources. Revenue by region is classified based on the locations to which the products are shipped, which may differ from the customer’s principal offices.

The following table sets forth the Company’s revenue by geographic region:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
China	$	38,449	$	25,304	$	76,266	$	38,987
United States		20,520		18,561		40,967		46,963
Thailand		14,225		12,895		26,844		16,120
Other		13,091		13,054		24,431		27,880
	$	86,285	$	69,814	$	168,508	$	129,950

17

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

As of June 30, 2019, $27,999 of long-lived tangible assets are located outside the United States, of which $22,088 are located in Taiwan. As of December 31, 2018, $32,631 of long-lived tangible assets are located outside the United States of which $28,428 are located in Taiwan.

16. Commitments and Contingencies

Noncancelable Purchase Obligations

 The Company has noncancelable service agreements, including software licenses, colocation and cloud services used in research and development activities expiring in various years through 2024. As of June 30, 2019, future minimum payments under the noncancelable agreements are as follows:

2019 (remaining)	$	893
2020		14,448
2021		13,869
2022		9,953
2023		7
Thereafter		3
Total	$	39,173

The Company depends upon third-party subcontractors to manufacture its wafers. The Company’s subcontractor relationships typically allow for the cancellation of outstanding purchase orders, but require payment of all expenses incurred through the date of cancellation. As of June 30, 2019, the total value of open purchase orders for wafers was approximately $24,522. As of June 30, 2019, the Company has a commitment to pay $393 for mask costs.

Legal Proceedings 

Netlist, Inc. v. Inphi Corporation, Case No. 09-cv-6900 (C.D. Cal.)

On September 22, 2009, Netlist filed suit in the United States District Court, Central District of California ( the “Court”), asserting that the Company infringes U.S. Patent No. 7,532,537. Netlist filed an amended complaint on December 22, 2009, further asserting that the Company infringes U.S. Patent Nos. 7,619,912 and 7,636,274, collectively with U.S. Patent No. 7,532,537, the patents-in-suit, and seeking both unspecified monetary damages to be determined and an injunction to prevent further infringement. These infringement claims allege that the iMB™ and certain other memory module components infringe the patents-in-suit. The Company answered the amended complaint on February 11, 2010 and asserted that the Company does not infringe the patents-in-suit and that the patents-in-suit are invalid. In 2010, the Company filed inter partes requests for reexamination with the United States Patent and Trademark Office (the “USPTO”), asserting that the patents-in-suit are invalid. As a result of the proceedings at the USPTO, the Court has stayed the litigation, with the parties advising the Court on status every 120 days.

As to the proceeding at the USPTO, reexamination has been ordered for all of the patents that Netlist alleged to infringe. At present, the USPTO has determined that almost all of the originally filed claims are not valid, and determined certain amended claims to be patentable. The Reexamination Certificate for U.S. Patent No. 7,532,537 was issued on August 2, 2016 based on amended claims. The Reexamination Certificate for U.S. Patent No. 7,636,274 was issued on November 5, 2018, indicating that all claims, 1 through 97, were cancelled. The parties continue to assert their respective positions with respect to the reexamination proceeding for U.S. Patent No. 7,619,912.

While the Company intends to defend the foregoing USPTO proceedings and lawsuit vigorously, the USPTO proceedings and litigation, whether or not determined in the Company’s favor or settled, could be costly and time-consuming and could divert management’s attention and resources, which could adversely affect the Company’s business.

Due to the nature of USPTO proceedings and litigation, the Company is currently unable to predict the final outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company’s business, financial condition, results of operations or cash flows could be materially and adversely affected.

18

Inphi Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands except share and per share amounts)

Claims Against ClariPhy

Certain customers of ClariPhy had made claims associated with matters occurring prior to the acquisition date, including a demand letter the Company received relating to products purchased by a customer from ClariPhy. A customer alleged that the products did not meet the specification or workmanship warranties provided in the agreement with ClariPhy, and requested reimbursement and damages. In July 2019, the Company settled the claim for an immaterial amount.

Indemnifications

In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third-parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnifications. Accordingly, the Company has noliabilities recorded for these agreements as of June 30, 2019 and December 31, 2018.

19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report. 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,” “will,” “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 anticipated trends and challenges in our business and the markets in which we operate, including the market for 25G to 600G high speed analog 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, 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 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 declines 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 II, “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.

All references to “Inphi,” “we,” “us” or “our” mean Inphi Corporation.

Inphi®, iKON™, InphiNityCore™, ColorZ®, ColorZ-Lite™, Polaris™, Vega™, M200 LightSpeed-III™, Porrima™ and the Inphi logo are among the trademarks, registered trademarks, or service marks owned by Inphi.

Overview

Our Company     

We are a fabless provider of high-speed analog and mixed signal semiconductor solutions for the communications and data center 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 data center 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 semiconductor solutions for the communications market.

          A detailed discussion of our business may be found in Part I, “Item 1. Business.” of our Annual Report on Form 10-K for the year ended December 31, 2018.

Quarterly Update

As discussed in more detail below, for the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018, we delivered the following financial performance:

• Revenue increased by $16.5 million, or 24%, to $86.3 million in the three months ended June 30, 2019. In the six months ended June 30, 2019, revenue increased by $38.6 million, or 30%, to $168.5 million.

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• Gross profit as a percentage of revenue was consistent at 57% in the three months ended June 30, 2019. In the six months ended June 30, 2019, gross profit as a percentage of revenue slightly increased from 56% to 57%.

• Total operating expenses increased by $1.8 million, or 3%, to $63.3 million in the three months ended June 30, 2019. In the six months ended June 30, 2019, total operating expenses increased by $4.4 million, or 4%, to $126.4 million.

• Loss from operations decreased by $7.7 million, to $14.2 million in the three months ended June 30, 2019. In the six months ended June 30, 2019, loss from operations decreased by $20.2 million to $29.7 million.

• Loss per share decreased to $0.46 from $0.65 in the three months ended June 30, 2019. In the six months ended June 30, 2019 loss per share decreased to $0.97 from $1.19.

The increase in our revenue for the three months ended June 30, 2019 was primarily a result of higher level of consumption of our data center products. In the six months ended June 30, 2019, the increase in revenue was due to higher consumption of both long haul metro and data center products.

The increase in gross profit as a percentage of revenue in the six months ended June 30, 2019 was due to product and revenue mix.

Total operating expenses for the three and six months ended June 30, 2019 increased year-over-year primarily due to an increase in stock-based compensation expense as a result of new equity grants. Our expenses primarily consist of personnel costs, which include compensation, benefits, payroll related taxes and stock-based compensation. We expect expenses to continue to increase in absolute dollars as we continue to invest resources to develop more products and to support the growth of our business. Our loss per share decreased primarily due to higher gross profit, partially offset by higher operating expenses and other expenses. In addition, in the six months ended June 30, 2019, provision for income tax increased due to benefit for income tax recognized in 2018 due to partial release of valuation allowance.

Our cash and cash equivalents were $159.6 million at June 30, 2019, compared with $172.0 million at December 31, 2018. Cash provided by operating activities was $49.4 million during the six months ended June 30, 2019 compared to $26.1 million during the six months ended June 30, 2018. Cash used in investing activities during the six months ended June 30, 2019 was $43.6 million due to purchases of marketable securities of $141.8 million and property and equipment of $12.6 million and payments related to the purchase of intangible assets of $13.6 million, partially offset by maturities and sales of marketable securities of $124.4 million. Cash used in financing activities during the six months ended June 30, 2019 was $18.2 million primarily due to minimum tax withholding paid on behalf of employees for net share settlement of $22.6 million and payments of obligations relating to equipment financing of $0.2 million, partially offset by proceeds from ESPP purchases and exercise of stock options of $4.6 million.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires us 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. We regularly evaluate our estimates and assumptions related to allowances for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, goodwill and intangible assets valuation, allowance for distributors’ price discounts, valuation of equity securities, recognition and disclosure of fair value of convertible debt, deferred income tax asset valuation allowances, uncertain tax positions, litigation, other loss contingencies and business combinations. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. 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. For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes in any of our critical accounting policies during the six months ended June 30, 2019. On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842). The effects of this adoption are discussed in note 7 of Notes to Unaudited Condensed Consolidated Financial Statements.

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Results of Operations

The following table sets forth a summary of our statements of income (loss) as a percentage of each line item to the revenue:

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenue		100	%		100	%		100	%		100	%
Cost of revenue		43			43			43			44
Gross profit		57			57			57			56
Operating expenses:
Research and development		52			61			53			66
Sales and marketing		13			15			14			17
General and administrative		9			12			8			11
Total operating expenses		74			88			75			94
Loss from operations		(17	)		(31	)		(18	)		(38	)
Interest expense		(10	)		(11	)		(10	)		(12	)
Other income, net		2			1			2			4
Loss before income taxes		(25	)		(41	)		(26	)		(46	)
Provision (benefit) for income taxes		(1	)		—			—			(6	)
Net loss		(24	%)		(41	%)		(26	%)		(40	%)

Comparison of Three and Six Months Ended June 30, 2019 and 2018

Revenue

	Three Months Ended June 30,				Change
	2019		2018		Amount		%
	(dollars in thousands)
Revenue	$	86,285	$	69,814	$	16,471		24	%

	Six Months Ended June 30,				Change
	2019		2018		Amount		%
	(dollars in thousands)
Revenue	$	168,508	$	129,950	$	38,558		30	%

Revenue for the three and six months ended June 30, 2019 increased by $16.5 million and $38.6 million, respectively. Revenue for the three months ended June 30, 2019 increased primarily due to the increase in number of units sold partially offset by decrease in average selling price (“ASP”). Revenue for the three months ended June 30, 2019 increased due to the increase in revenue from data center products by $21.4 million, partially offset by decreases in revenue from long haul and metro products by $3.0 million and Cortina legacy products by $1.9 million.  Number of units sold increased for the three months ended June 30, 2019 by 133% due to higher data center products sold, partially offset by decrease in telecom products sold due to trade restrictions imposed in May 2019 on shipping to one large customer in China.  Due primarily to the higher mix and higher volume of data center products sold, the ASP was lower by approximately 47%.  The majority of this change again was due to the change in mix of products sold in the second quarter of 2019 as compared to second quarter of 2018.

Revenue for the six months ended June 30, 2019 increased primarily due to increase in ASP partially offset by decrease in number of units sold. Revenue for the six months ended June 30, 2019 increased primarily due to the increase in revenue from data center products by $25.9 million and long haul and metro products by $19.3 million, partially offset by decline in revenue from Cortina legacy products by $6.6 million. The ASP for the six months ended June 30, 2019 increased by 48% and the number of units sold decreased due to product mix, mainly from a decrease 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 end of life programs initiated in 2017.

The US government export restrictions on Huawei were implemented in the middle our second quarter of 2019, limiting revenue from that customer.  However, the effect of this restriction was not material to our revenue for the second quarter of 2019.

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Cost of Revenue and Gross Profit

	Three Months Ended June 30,						Change
	2019			2018			Amount		%
	(dollars in thousands)
Cost of revenue	$	37,176		$	30,203		$	6,973		23	%
Gross profit	$	49,109		$	39,611		$	9,498		24	%
Gross profit as a percentage of revenue		57	%		57	%		—		—

	Six Months Ended June 30,						Change
	2019			2018			Amount		%
	(dollars in thousands)
Cost of revenue	$	71,768		$	57,793		$	13,975		24	%
Gross profit	$	96,740		$	72,157		$	24,583		34	%
Gross profit as a percentage of revenue		57	%		56	%		—		1	%

Cost of revenue and gross profit for the three and six months ended June 30, 2019 increased compared to the corresponding 2018 periods primarily due to a higher revenue as discussed above. Gross profit as a percentage of revenue for both the three and six months ended June 30, 2019 were comparable to corresponding 2018 periods.

Research and Development

	Three Months Ended June 30,				Change
	2019		2018		Amount		%
	(dollars in thousands)
Research and development	$	44,705	$	42,804	$	1,901		4	%

	Six Months Ended June 30,				Change
	2019		2018		Amount		%
	(dollars in thousands)
Research and development	$	89,104	$	85,742	$	3,362		4	%

Research and development expense for the three and six months ended June 30, 2019 increased compared to the corresponding 2018 periods primarily due to an increase in equity awards, which resulted in a $0.2 million and $2.4 million increase in stock-based compensation expense, respectively. Information technology and allocated expenses increased by $1.4 million and $0.8 million during the three and six months ended June 30, 2019, respectively, due to increased design activities and higher engineering activities of operations group. During the six months ended June 30, 2019, testing, laboratory supplies, packaging and pre-production engineering mask costs increased by $1.3 million due to an increase in research and development activities. These increases during the six months ended June 30, 2019 were partially offset by a decrease in salary and employee benefits by $2.5 million due to engineering time included in cost of revenue related to projects for customers in 2019 and severance payments and reduction in headcount during the three months ended March 31, 2018.

 Sales and Marketing

	Three Months Ended June 30,				Change
	2019		2018		Amount		%
	(dollars in thousands)
Sales and marketing	$	11,154	$	10,311	$	843		8	%

	Six Months Ended June 30,				Change
	2019		2018		Amount		%
	(dollars in thousands)
Sales and marketing	$	23,033	$	21,653	$	1,380		6	%

Sales and marketing expense for the three and six months ended June 30, 2019 increased primarily due to an increase in salary and stock-based compensation by $0.4 million and $0.8 million due to new equity grants and salary increases effective April 1, 2019. In addition, commission expense increased by $0.3 million and $0.5 million for the three and six months ended June 30, 2019, respectively, due to higher revenue.

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General and Administrative

	Three Months Ended June 30,				Change
	2019		2018		Amount			%
	(dollars in thousands)
General and administrative	$	7,480	$	8,415	$	(935	)		(11%	)

	Six Months Ended June 30,				Change
	2019		2018		Amount			%
	(dollars in thousands)
General and administrative	$	14,313	$	14,633	$	(320	)		(2%	)

General and administrative expenses for the three and six months ended June 30, 2019 decreased compared to the corresponding 2018 periods primarily due to a decrease in loss of $1.7 million related to settlement of claims related to the ClariPhy acquisition. The decrease was partially offset by an increase in stock-based compensation by $0.5 million and $1.3 million for the three and six months ended June 30, 2019, respectively, due to new equity awards.

Provision for Income Tax

	Three Months Ended June 30,					Change
	2019			2018		Amount			%
	(dollars in thousands)
Provision (benefit) for income taxes	$	(587	)	$	58	$	(645	)		N/M

	Six Months Ended June 30,					Change
	2019		2018			Amount		%
	(dollars in thousands)
Provision (benefit) for income taxes	$	633	$	(8,203	)	$	8,836		(108%	)

We normally determine our interim provision for income tax using an estimated single annual effective tax rate for all tax jurisdictions. ASC 740 provides that when an entity operates in a jurisdiction that has generated ordinary losses on a year-to-date basis or on the basis of the results anticipated for the full fiscal year and no benefit can be recognized on those losses, a separate effective tax rate should be computed and applied to ordinary income (or loss) in that jurisdiction. We incurred a pretax loss during the three and six months ended June 30, 2019 and 2018 from our U.S. operations and will not recognize tax benefit of the losses due to the full valuation allowance established against deferred tax assets. Thus, a separate effective tax rate was applied to losses from the U.S. jurisdiction to compute our June 30, 2019 and 2018 interim tax provision.

The income tax expense (benefit) of ($0.6) million and $0.6 million for the three and six months ended June 30, 2019 reflects an effective tax rate of 2.8% and (1.5%), respectively. The effective tax rates for the three and six months ended June 30, 2019 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 and development credits, and windfall tax benefits from stock-based compensation.

The income tax provision (benefit) of $0.1 million and ($8.2) million for the three and six months ended June 30, 2018, reflects an effective tax rate of (0.2%) and 13.7%, respectively. The effective tax rate for the three and six months ended June 30, 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. The income tax expense for the three months ended June 30, 2018, included an accrual for unrecognized tax benefit for foreign taxes. The income tax benefit for the six months ended June 30, 2018, primarily consisted of the partial release of federal valuation allowance resulting from the transfer to developed technology in 2018 of an acquired in-process research and development asset 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. 

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Liquidity and Capital Resources

As of June 30, 2019, we had cash, cash equivalents and investments in marketable securities of $413.5 million. Our primary uses of cash are to fund operating expenses, purchase inventory and acquire property and equipment and business acquisitions. 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 2015 and 2016, we issued convertible debt, which resulted in an increase in cash, cash equivalents and investments in marketable securities. 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 payment cycles of our major customers.

The following table summarizes our cash flows for the periods indicated:

	Six Months Ended June 30,
	2019			2018
	(in thousands)
Net cash provided by operating activities	$	49,402		$	26,112
Net cash used in investing activities		(43,601	)		(26,239	)
Net cash used in financing activities		(18,195	)		(8,181	)
Net decrease in cash and cash equivalents	$	(12,394	)	$	(8,308	)

Net Cash Provided by Operating Activities

Net cash provided by operating activities during the six months ended June 30, 2019 primarily reflected depreciation and amortization of $48.5 million, stock-based compensation expense of $36.7 million, accretion of convertible debt and amortization of issuance expenses of $13.8 million, increases in accounts payable of $7.1 million, deferred revenue of $0.8 million and other liabilities of $2.4 million, partially offset by a net loss of $43.3 million, increases in accounts receivable of $5.7 million and inventories of $11.0 million. Our inventories and accounts payable increased due to build-up of inventories for future shipments. Our deferred revenue increased due to receipts from customers in which revenue is not yet recognized. Our other liabilities increased mainly from estimated liabilities due to sales channel pricing. Our accounts receivable increased due to higher product shipments to customers.

Net cash provided by operating activities during the six months ended June 30, 2018 primarily reflected depreciation and amortization of $37.4 million, stock-based compensation expense of $30.8 million, accretion of convertible debt and amortization of issuance expenses of $12.9 million, decrease in accounts receivable of $13.9 million and increase in other liabilities of $7.8 million, partially offset by a net loss of $51.5 million, deferred income taxes of $8.6 million, net unrealized gain on equity investments of $2.9 million, increases in inventory of $2.1 million, prepaid expenses and other assets of $4.2 million, a decrease in accrued expenses of $6.4 million, and a change in income tax payable/receivable of $1.4 million. Our accounts receivable mainly due to collections. Other liabilities increased mainly due to amounts payable related to settlement of claims related to the ClariPhy acquisition. Our inventory increased in the first quarter due to lower shipments, which was then partially absorbed by second quarter shipments. Our prepaid expenses and other assets increased due to receivable from escrow related to settlement of claims related to the ClariPhy acquisition. Our accrued expenses decreased mainly due to the timing of payments for employee-related expenses.

Net Cash Used in Investing Activities

Net cash used in investing activities during the six months ended June 30, 2019 primarily consisted of purchases of marketable securities of $141.8 million, purchases of property and equipment of $12.6 million and payments related to the purchase of intangible assets of $13.6 million, partially offset by proceeds from maturities and sales of marketable securities of $124.4 million.

Net cash used in investing activities during the six months ended June 30, 2018 primarily consisted of purchases of marketable securities of $124.8 million, purchases of property and equipment of $17.7 million, purchases of equity investments of $12.8 million, and payment of debt related to purchase of intangible assets of $11.3 million, partially offset by proceeds from maturities and sales of marketable securities of $137.8 million and proceeds from sale of equity investment of $2.4 million..

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Net Cash Used in Financing Activities

Net cash used in financing activities during the six months ended June 30, 2019 primarily consisted of minimum tax withholding paid on behalf of employees for net share settlement of $22.6 million and payment of obligations related to equipment financing of $0.2 million, partially offset by proceeds from the exercise of stock options and ESPP purchases of $4.6 million.

Net cash used in financing activities during the six months ended June 30, 2018 primarily consisted of minimum tax withholding paid on behalf of employees for restricted stock of $12.3 million and payment of obligations related to equipment financing of $0.3 million, partially offset by proceeds from exercise of stock options and employee stock purchase plan of $4.2 million.

 Operating and Capital Expenditure Requirements

Our principal source of liquidity as of June 30, 2019 consisted of $413.5 million of cash, cash equivalents and investments in marketable securities, of which $34.8 million is held by our foreign subsidiaries. Based on our current operating plan, we believe that our existing cash and cash equivalents from operations will be sufficient to finance our operational cash needs through at least the next 12 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 II, 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 debt financing or from other sources. 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.

We do not plan to repatriate cash balances from foreign subsidiaries to fund our operations in the United States. There may be adverse tax effects upon repatriation of these funds to the United States.

 Contractual Payment Obligations

Our outstanding contractual obligations as of December 31, 2018 are included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019. See note 16 in the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding certain contractual obligations as of June 30, 2019.

 Off-Balance Sheet Arrangements

 As of June 30, 2019, we had no material off-balance sheet arrangements, other than certain noncancelable purchase obligations as discussed in note 16 in the Notes to Unaudited Condensed Consolidated Financial Statements.

Recent Authoritative Accounting Guidance

See note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding recently issued accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

We had cash and cash equivalents and investments in marketable securities of $413.5 million and $407.4 million at June 30, 2019 and December 31, 2018, respectively, which were held for working capital purposes. Our exposure to market interest-rate risk relates primarily to our investment portfolio. We do not use derivative financial instruments to hedge the market risks of our investments. We manage our total portfolio to encompass a diversified pool of investment-grade securities to preserve principal and maintain liquidity. We place our investments with high-quality issuers, money market funds and debt securities. Our investment portfolio as of June 30, 2019 consisted of money market funds, U.S. treasury securities, municipal bonds, corporate bonds/notes, variable rate demand notes, commercial papers and asset-backed securities. Investments in both fixed rate and floating rate instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to an increase in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. However, because any debt securities we hold are classified as available-for-sale, no gains or losses are realized in the income statement due to changes in interest rates unless such securities are sold prior to maturity or unless declines in value are determined to be other-than-temporary. These securities are reported at fair value with the related unrealized gains and losses, net of applicable taxes, included in accumulated other comprehensive income (loss), reported in a separate component of stockholders' equity. Although we currently expect that our ability to access or liquidate these investments as needed to support our business activities will continue, we cannot ensure that this will not change.

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In a low interest rate environment, as short-term investments mature, reinvestment may occur at less favorable market rates. Given the short-term nature of certain investments, the current interest rate environment may negatively impact our investment income.

As of June 30, 2019, we had outstanding debt of $517.5 million of the Convertible Notes. The fair value of the Convertible Notes is subject to interest rate risk, market risk and other factors due to the convertible feature. The fair value of the Convertible Notes will generally increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of the Convertible Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines in value. The interest and market value changes affect the fair value of the Convertible Notes but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation.

Foreign Currency Risk

To date, our international customer and vendor agreements have been denominated almost exclusively in United States dollars. Accordingly, we have limited exposure to foreign currency exchange rates and currently enter into immaterial foreign currency hedging transactions.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that such controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards, but management does not expect that our disclosure controls and procedures will prevent or detect all error and all fraud. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer) have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

The information required by this Item 1 is set forth under note 16 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report, and is hereby incorporated by reference herein. For an additional discussion of certain risks associated with legal proceedings, see Item 1A. Risk Factors below.

Item 1A.   Risk Factors

You should carefully consider the risks described in Part I, Item 1A. Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2018, which are incorporated by reference herein, as our business, financial condition and results of operations could be adversely affected by any of the risks and uncertainties described therein. 

Changes in current or future laws or regulations or the imposition of new laws or regulations, including new or changed tax regulations, environmental laws, export control laws, anti-corruption laws and conflict minerals rules or new interpretations thereof, by federal or state agencies or foreign governments could impair our ability to compete in international markets.

Changes in current laws or regulations applicable to us, the imposition of new laws and regulations in the United States or other jurisdictions in which we do business, such as Argentina, Canada, China, Germany, Japan, Malaysia, Singapore, Taiwan and United Kingdom, any changes or uncertainties with respect to such laws or regulations or with respect to trade relations between the United States and any such jurisdictions or any adverse outcome as a result of a review or examination by the applicable taxing authority, could materially and adversely affect our business, financial condition and results of operations. For example, we have entered into agreements with local governments to provide us with, among other things, favorable local tax rates if certain minimum criteria are met, as discussed in our risk factor entitled “Tax benefits that we receive may be terminated or reduced in the future, which would increase our costs.” These agreements may require us to meet several requirements as to investment, headcount and activities to retain this status. If we fail to otherwise meet the conditions of the local agreements, we may be subject to additional taxes, which in turn would increase our costs. In addition, potential future U.S. tax legislation could impact the tax benefits we effectively realize under these agreements.

Due to environmental concerns, the use of lead and other hazardous substances in electronic components and systems is receiving increased attention. In response, the European Union passed the Restriction on Hazardous Substances (RoHS) Directive, legislation that limits the use of lead and other hazardous substances in electrical equipment. The RoHS Directive became effective July 1, 2006. We believe that our current product designs and material supply chains are in compliance with the RoHS Directive. If our product designs or material supply chains are deemed not to be in compliance with the RoHS Directive, we and our third-party manufacturers may need to redesign products with components meeting the requirements of the RoHS Directive and we may incur additional expense as well as loss of market share and damage to our reputation.

We are also subject to export control laws, regulations and requirements that limit which products we sell and where and to whom we sell our products. In some cases, it is possible that export licenses would be required from U.S. government agencies for some of our products in accordance with the Export Administration Regulations and the International Traffic in Arms Regulations. We may not be successful in obtaining the necessary export licenses in all instances. Any limitation on our ability to export or sell our products imposed by these laws would adversely affect our business, financial condition and results of operations. For example, in April 2018, the U.S. Department of Commerce banned all exports to ZTE, a Chinese technology company, and in May 2019, to entities affiliated with Huawei Technologies Co., Ltd., a Chinese technology company. ZTE and Huawei have been our customers, with Huawei accounting for approximately 14% of our total revenue in the year ended December 31, 2018, and we expect a reduction in revenue as a result of these bans, at least in the short-term. We are currently assessing the long-term impact of these bans. In addition, changes in our products or changes in export and import laws and implementing regulations may create delays in the introduction of new products in international markets, prevent our customers from deploying our products internationally or, in some cases, prevent the export or import of our products to certain countries altogether. While we are not aware of any other current or proposed export or import regulations which would materially restrict our ability to sell our products in other countries, any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by these regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. In such event, our business and results of operations could be adversely affected. In addition, we are subject to economic and trade sanctions programs that are administered by the U.S. Treasury Department’s Office of Foreign Assets Control, that prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers and terrorists or terrorist organizations. Violations of these trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts, and revocations or restrictions of licenses, as well as criminal fines and imprisonment.

We are also subject to risks associated with compliance with applicable anti-corruption laws, including the Foreign Corrupt Practices Act (FCPA), which generally prohibits companies and their employees and intermediaries from making payments to foreign officials for the purpose of obtaining or keeping business, securing an advantage, or directing business to another, and requires public companies to maintain accurate books and records and a system of internal accounting controls. Under the FCPA, companies may be held liable for actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. If we or our intermediaries fail to comply with the requirements of the FCPA or similar laws, governmental authorities in the United States and elsewhere could seek to impose civil and criminal fines and penalties which could have a material adverse effect on our business, results of operations and financial condition.

Our product or manufacturing standards could also be impacted by new or revised environmental rules and regulations or other social initiatives. For instance, the SEC adopted disclosure requirements in 2012 relating to the sourcing of certain minerals from the Democratic Republic of Congo and certain other adjoining countries. These rules, which required reporting starting in 2014, could adversely affect our costs, the availability of minerals used in our products and our relationships with customers and suppliers. Also, since our supply chain is complex, we may face reputational challenges with our customers, stockholders, and other stakeholders if we are unable to sufficiently verify the origins for any conflict minerals used in the products that we sell.

Item 5.   Other Information

Amendments to Change of Control Severance Agreements

On August 1, 2019, the Compensation Committee of our Board of Directors approved amended and restated change of control agreements for our executive officers Ford Tamer, John Edmunds, Charlie Roach, Ron Torten and Richard Ogawa (collectively, the “Executive Officers”).  The new agreements are substantially similar to, and supersede and replace, the existing change of control agreements with each of the Executive Officers effective as of August 1, 2019. The material changes are described below.

For each Executive Officer, we specified how performance stock awards will be treated upon a change of control. 

For stock price performance awards, such as our market value stock unit awards (MVSUs), shares will be earned based on performance during a truncated performance period that ends on the change of control. The number of shares earned will be based on performance measured upon the change in control, using the transaction price to measure our stock price performance.  The portion of the award that does not vest based on this formula will be forfeited.  This modifies the terms of our existing MVSU awards, which previously were subject to further pro rata reduction based upon the portion of the original performance period that had been completed, plus six (6) additional months (not to exceed the total performance period).

For non-stock price performance awards, performance will be deemed achieved at target for unfinished performance periods, and the award will convert to time-vest restricted stock units (RSUs) for such target number of shares which continue to vest in accordance with any service-based vesting condition specified in the award agreement, subject to acceleration on involuntary termination within twelve (12) months following the change of control.

In addition, for Messrs. Roach, Torten and Ogawa, we increased the amount of cash severance payable upon an involuntary termination on or within twelve (12) months following, or within three (3) months prior to, a change of control to one times the sum of their annual base salary plus annual target bonus.  Prior to this amendment, each was entitled to 50% of annual base salary, and Mr. Roach was also entitled to 50% of annual target bonus.  In addition, we increased the period during which we will pay monthly COBRA premium costs (up to the monthly amount the Company was paying as the employer-portion of health care premiums prior to termination) from six (6) to twelve (12) months.  

The foregoing summary of the amended and restated change of control agreements is not complete and is qualified in its entirety by reference to the full text of such amendments, which are attached hereto as Exhibits 10.1 through 10.4 respectively, and are incorporated herein by reference.

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Item 6. Exhibits

     (a)  Exhibits. The following Exhibits are attached hereto and incorporated herein by reference:

Exhibit
Number	Description
3(i)	Restated Certificate of Incorporation of the Registrant (incorporated by reference to exhibit 3(i) of the Registrant’s annual report on Form 10-K filed with the SEC on March 7, 2011).
3(ii)	Amended and Restated Bylaws of the Registrant (incorporated by reference to exhibit 3.1 of the Registrant’s current report on Form 8-K filed with the SEC on October 20, 2015).
10.1	Amended and Restated Severance and Change of Control Agreement, effective as of August 1, 2019, by and between Ford Tamer and the Registrant.
10.2	Amended and Restated Change of Control Severance Agreement, effective as of August 1, 2019, by and between John Edmunds and the Registrant.
10.3	Amended and Restated Severance and Change of Control Agreement, effective as of August 1, 2019, by and between Charlie Roach and the Registrant.
10.4	Form of Change of Control Severance Agreement for Executive Officers.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(1)	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
32.2(1)	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

101.INS	XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

(1) The material contained in Exhibit 32.1 and Exhibit 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically incorporates it by reference.

Exhibit

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

INPHI CORPORATION,

(Registrant)

By: /s/ Ford Tamer

Ford Tamer        

President and Chief Executive Officer

(Principal Executive Officer)

By: /s/ John Edmunds

John Edmunds        

Chief Financial Officer and Chief Accounting Officer 

(Principal Financial Officer and Principal Accounting Officer)

August 5, 2019

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