Edgar Filing: MAXLINEAR INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission file number: 001-34666

MaxLinear, Inc.

(Exact name of Registrant as specified in its charter)



Delaware		14-1896129
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5966 La Place Court, Suite 100 Carlsbad, California		92008
(Address of principal executive offices)		(Zip Code)

(760) 692-0711

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 þ 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 þ 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.

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 Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of April 24, 2019, the registrant had 70,603,629 shares of common stock, par value $0.0001, outstanding.

Table of Contents

MAXLINEAR, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS



		Page
Part I	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (unaudited)	4
	Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	4
	Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018	5
	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018	6
	Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2019 and 2018	7
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
Item 4.	Controls and Procedures	41
Part II	OTHER INFORMATION	42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3.	Defaults Upon Senior Securities	65
Item 4.	Mine Safety Disclosures	65
Item 5.	Other Information	65
Item 6.	Exhibits	66
	Signatures	67

Table of Contents

PART I — FINANCIAL INFORMATION

Table of Contents


ITEM 1.	FINANCIAL STATEMENTS

MAXLINEAR, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited; in thousands, except par value amounts)



	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	71,102		$	73,142
Short-term restricted cash	347			645
Accounts receivable, net	59,639			59,491
Inventory	42,753			41,738
Prepaid expenses and other current assets	5,479			5,595
Total current assets	179,320			180,611
Long-term restricted cash	418			404
Property and equipment, net	16,987			18,404
Leased right-of-use assets	21,543			—
Intangible assets, net	230,634			244,900
Goodwill	238,330			238,330
Deferred tax assets	58,067			51,518
Other long-term assets	3,583			4,664
Total assets	$	748,882		$	738,831
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	13,306		$	15,588
Accrued price protection liability	18,943			16,454
Accrued expenses and other current liabilities	32,707			23,520
Accrued compensation	8,527			15,005
Total current liabilities	73,483			70,567
Long-term lease liabilities	18,132			4,097
Long-term debt	241,044			255,757
Other long-term liabilities	8,019			8,474
Total liabilities	340,678			338,895

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.0001 par value; 25,000 shares authorized, no shares issued or outstanding	—			—
Common stock, $0.0001 par value; 550,000 shares authorized, 70,532 shares issued and outstanding at March 31, 2019 and 550,000 shares authorized, 69,551 shares issued and outstanding December 31, 2018, respectively	7			7
Additional paid-in capital	506,649			493,287
Accumulated other comprehensive income	297			272
Accumulated deficit	(98,749		)	(93,630		)
Total stockholders’ equity	408,204			399,936
Total liabilities and stockholders’ equity	$	748,882		$	738,831

See accompanying notes.

Table of Contents

MAXLINEAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited; in thousands, except per share data)



	Three Months Ended March 31,
	2019			2018
Net revenue	$	84,635		$	110,827
Cost of net revenue	39,558			48,159
Gross profit	45,077			62,668
Operating expenses:
Research and development	27,399			31,121
Selling, general and administrative	23,591			27,117
Restructuring charges	1,917			—
Total operating expenses	52,907			58,238
Income (loss) from operations	(7,830		)	4,430
Interest income	147			18
Interest expense	(2,975		)	(3,894		)
Other income (expense), net	(655		)	(571		)
Total interest and other income (expense), net	(3,483		)	(4,447		)
Loss before income taxes	(11,313		)	(17		)
Income tax benefit	(6,462		)	(1,864		)
Net income (loss)	$	(4,851	)	$	1,847
Net income (loss) per share:
Basic	$	(0.07	)	$	0.03
Diluted	$	(0.07	)	$	0.03
Shares used to compute net income (loss) per share:
Basic	69,968			67,674
Diluted	69,968			70,440

See accompanying notes.

Table of Contents

MAXLINEAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited; in thousands)



	Three Months Ended March 31,
	2019			2018
Net income (loss)	$	(4,851	)	$	1,847
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax benefit of $1 and $29 for the three months ended March 30, 2019 and 2018, respectively	513			393
Unrealized gain (loss) on interest rate swap, net of tax benefit of $130 and tax expense of $188 for the three months ended March 31, 2019 and 2018, respectively	(488		)	1,196
Other comprehensive income	25			1,589
Total comprehensive income (loss)	$	(4,826	)	$	3,436

See accompanying notes.

Table of Contents

MAXLINEAR, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

THREE MONTHS ENDED MARCH 31, 2019

(unaudited; in thousands, except share amounts)



	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2018	69,551	$	7	$	493,287	$	272	$	(93,630	)	$	399,936
Common stock issued pursuant to equity awards, net	981	—		5,615		—		—			5,615
Stock-based compensation	—	—		7,747		—		—			7,747
Cumulative effect of adoption of new accounting principle	—	—		—		—		(268		)	(268		)
Other comprehensive income	—	—		—		25		—			25
Net loss	—	—		—		—		(4,851		)	(4,851		)
Balance at March 31, 2019	70,532	$	7	$	506,649	$	297	$	(98,749	)	$	408,204

See accompanying notes.

Table of Contents

MAXLINEAR, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

THREE MONTHS ENDED MARCH 31, 2018

(unaudited; in thousands, except share amounts)



	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2017	67,400	$	7	$	455,497	$	1,039	$	(69,119	)	$	387,424
Common stock issued pursuant to equity awards, net	691	—		5,586		—		—			5,586
Stock-based compensation	—	—		8,473		—		—			8,473
Cumulative effect of adoption of new accounting principles	—	—		—		—		1,529			1,529
Other comprehensive income	—	—		—		1,589		—			1,589
Net income	—	—		—		—		1,847			1,847
Balance at March 31, 2018	68,091	$	7	$	469,556	$	2,628	$	(65,743	)	$	406,448

See accompanying notes.

Table of Contents

MAXLINEAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands)



	Three Months Ended March 31,
	2019			2018
Operating Activities
Net income (loss)	$	(4,851	)	$	1,847
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Amortization and depreciation	16,863			20,084
Amortization of debt issuance costs and accretion of discount on debt and leases	402			287
Stock-based compensation	7,747			8,473
Deferred income taxes	(6,476		)	(2,332		)
Loss on disposal of property and equipment	35			—
Impairment of leasehold improvements	1,442			—
Impairment of long-lived assets	2,182			—
Gain on extinguishment of lease liabilities	(2,880		)	—
Loss on foreign currency	567			471
Excess tax benefits on stock-based awards	(1,737		)	(797		)
Changes in operating assets and liabilities:
Accounts receivable	(142		)	(24,533		)
Inventory	(1,015		)	7,676
Prepaid expenses and other assets	604			1,003
Leased right-of-use assets	645			—
Accounts payable, accrued expenses and other current liabilities	1,921			(421		)
Accrued compensation	893			2,502
Deferred revenue and deferred profit	—			(138		)
Accrued price protection liability	2,489			(1,359		)
Lease liabilities	(2,125		)	—
Other long-term liabilities	(519		)	(792		)
Net cash provided by operating activities	16,045			11,971

Investing Activities
Purchases of property and equipment	(2,155		)	(2,381		)
Net cash used in investing activities	(2,155		)	(2,381		)

Financing Activities
Repayment of debt	(15,000		)	(25,000		)
Net proceeds from issuance of common stock	2,628			980
Minimum tax withholding paid on behalf of employees for restricted stock units	(4,419		)	(2,391		)
Net cash used in financing activities	(16,791		)	(26,411		)
Effect of exchange rate changes on cash and cash equivalents	577			(258		)
Decrease in cash, cash equivalents and restricted cash	(2,324		)	(17,079		)
Cash, cash equivalents and restricted cash at beginning of period	74,191			74,412
Cash, cash equivalents and restricted cash at end of period	$	71,867		$	57,333

Supplemental disclosures of cash flow information:
Cash paid for interest	$	3,099		$	3,546
Cash paid for income taxes	$	872		$	203

Supplemental disclosures of non-cash activities:
Issuance of shares for payment of bonuses	$	7,406		$	6,997

See accompanying notes.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Organization and Summary of Significant Accounting Policies

Description of Business

MaxLinear, Inc. was incorporated in Delaware in September 2003. MaxLinear, Inc., together with its wholly owned subsidiaries, collectively referred to as MaxLinear, or the Company, is a provider of radio-frequency, or RF, high-performance analog, and mixed-signal communications system-on-chip solutions for the connected home, wired and wireless infrastructure, and industrial and multi-market applications. MaxLinear's customers include electronics distributors, module makers, original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs, who incorporate the Company’s products in a wide range of electronic devices, including cable DOCSIS broadband modems and gateways, wireline connectivity devices for in-home networking applications, RF transceivers and modems for wireless carrier access and backhaul infrastructure, fiber-optic modules for data center, metro, and long-haul transport networks, video set-top boxes and gateways, hybrid analog and digital televisions, direct broadcast satellite outdoor and indoor units, and power management and interface products used in these and a range of other markets. The Company is a fabless integrated circuit design company whose products integrate all or a substantial portion of a broadband communication system.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of MaxLinear, Inc. and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. All intercompany transactions and investments have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current period presentation. Such reclassifications include the separate presentation of long-term lease liabilities on the consolidated balance sheets.

In the opinion of management, the Company’s unaudited consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to present fairly the Company’s consolidated financial position, results of operations, comprehensive income (loss), stockholders’ equity, and cash flows.

The consolidated balance sheet as of December 31, 2018 was derived from the Company’s audited consolidated financial statements at that date. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission, or the SEC, on February 5, 2019, or the Annual Report. Interim results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes to unaudited consolidated financial statements. Actual results could differ from those estimates.

Summary of Significant Accounting Policies

Refer to the Company’s Annual Report for a summary of significant accounting policies. On January 1, 2019, the Company adopted Financial Accounting Standards Board, or FASB, Accounting Standards Codification Topic 842, Leases, or ASC 842, using the modified retrospective transition method with a cumulative effect adjustment to accumulated deficit as of January 1, 2019, and accordingly, modified its policy on accounting for leases as stated below. As described under “Recently Adopted Accounting Pronouncements,” below, the primary impact of adopting ASC 842 for the Company was the recognition in the consolidated balance sheet of certain lease-related assets and liabilities for operating leases with terms longer than 12 months. Such amounts were not previously accounted for in the Company's consolidated balance sheets.

There have been no other material changes to the Company's significant accounting policies during the three months ended March 31, 2019.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Leases

The Company’s leases primarily consist of facility leases which are classified as operating leases. The Company assesses whether an arrangement contains a lease at inception. The Company recognizes a lease liability to make contractual payments under all leases with terms greater than twelve months and a corresponding right-of-use asset, representing its right to use the underlying asset for the lease term. The lease liability is initially measured at the present value of the lease payments over the lease term using the collateralized incremental borrowing rate since the implicit rate is unknown. Options to extend or terminate a lease are included in the lease term when it is reasonably certain that the Company will exercise such an option. The right-of-use asset is initially measured as the contractual lease liability plus any initial direct costs and prepaid lease payments made, less any lease incentives. Upon adoption of ASC 842 on January 1, 2019, the carrying value of lease-related restructuring liability for certain restructured leases existing at that date, has been offset against the related right-of-use asset. Lease expense is recognized on a straight-line basis over the lease term.

On January 1, 2019, the Company adopted ASC 842 using the modified retrospective transition method with a cumulative adjustment to accumulated deficit at the beginning of the period of adoption. Upon adoption, the Company elected certain practical expedients and accordingly has (1) carried forward its prior assessments of (a) whether existing contracts on the January 1, 2019 adoption date contain leases, (b) classification of leases as operating or financing and (c) initial direct costs for existing leases and (2) considered hindsight in determining the lease term and assessing impairment of the right-of-use-asset. In addition, the Company used a portfolio approach for its facility leases when making judgments and estimates, such as the discount rate (Note 12).

Leased right-of-use assets are subject to impairment testing as a long-lived asset at the asset-group level. The Company monitors its long-lived assets for indicators of impairment. As the Company's leased right-of-use assets relate to facility leases, early abandonment of all or part of facility as part of a restructuring plan is typically an indicator of impairment. If impairment indicators are present, the Company tests whether the carrying amount of the leased right-of-use asset is recoverable including consideration of sublease income, and if not recoverable, measures impairment loss for the right-of-use asset or asset group. Impairment charges on leased right-of-use assets are included in restructuring charges in the statement of operations (Note 3).

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update require a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize right-of-use 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. Also, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, to provide an additional transition method. An entity can elect not to present comparative financial information under Topic 842 if it recognizes a cumulative-effect adjustment to retained earnings upon adoption. The Company also made this election. Further, in January 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which clarified that post-adoption interim transition disclosures normally required in the year of adoption for the effect of a change in accounting principle on an entity’s financial statements are not required for the adoption of ASC 842. The amendments in these updates are effective for the Company for fiscal years beginning with 2019, including interim periods within those years, with early adoption permitted. The Company has completed its assessment of the impact of the adoption of ASC 842. Upon adoption, the Company recognized approximately $24.8 million of right-of-use assets and a net increase of $25.1 million in lease-related liabilities at January 1, 2019. Also, the impact of the adoption of ASC 842 on the Company’s accumulated deficit and deferred tax assets at January 1, 2019 was not material. Lastly, the impact of the adoption of ASC 842 on the Company's consolidated results of operations for the year ending December 31, 2019 is not expected to be material.

In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, to clarify on how to apply certain aspects of the new lease accounting standard. The amendments in this update, among other things, better articulates the requirement for a lessee’s reassessment of lease classification as of the effective date of a modification, clarifies that a change to an index or rate for variable lease payments does not constitute a resolution of a contingency that would result in the remeasurement of lease payments, and requires entities that apply Topic 842 retrospectively to each reporting period and do not adopt the practical expedients to write off any prior unamortized initial direct costs that do not meet the definition under Topic 842 to equity. The amendments in this update have the same effective date and transition requirements as the new lease standard summarized above. The Company has disclosed the impact of adoption of Topic 842 on the Company’s consolidated financial position and results of operations as stated above.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements, to clarify the Codification and prevent unintended application of the guidance. An amendment to ASC 718-740, Compensation—Stock Compensation—Income Taxes, clarifies that excess tax benefits should be recognized in the period in which the amount of the deduction is determined. The transition and effective date guidance is based on the facts and circumstances of each amendment. The amendment identified above became effective for the Company beginning with fiscal year 2019. The adoption of the amendments in this update in the three months ended March 31, 2019 did not have a material impact on the Company's consolidated financial position and results of operations.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), which is intended to improve accounting for hedging activities by expanding and refining hedge accounting for both nonfinancial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update became effective for the Company for fiscal years beginning with fiscal year 2019, including interim periods within those years, with early adoption permitted in any interim period. The amendments in this update were required to be applied prospectively. The adoption of the amendments in this update in the three months ended March 31, 2019 did not have a material impact on the Company's consolidated financial statements.

Recently Issued Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this update are effective for the Company beginning with fiscal year 2020, including interim periods, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of the amendments in this update is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement, to improve the fair value measurement reporting of financial instruments. The amendments in this update require, among other things, added disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update eliminate, among other things, disclosure of the reasons for and amounts of transfers between Level 1 and Level 2 for assets and liabilities that are measured at fair value on a recurring basis and an entity's valuation processes for Level 3 fair value measurements. The amendments in this update will be effective for the Company beginning with fiscal year 2020, with early adoption permitted. Retrospective application is required for all amendments in this update except the added disclosures, which should be applied prospectively. The adoption of the amendments in this update is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles- Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, to provide additional guidance on the accounting for costs of implementing cloud computing arrangements that are service contracts. The amendments in this update require the capitalization of implementation costs during the application development stage of such hosting arrangements and amortization of the expense over the term of the arrangement including any option to extend reasonably certain to be exercised or option to terminate reasonably certain not to be exercised. Capitalized implementation costs and amortization thereof are also required to be classified in the same line item in the statements of financial position, operations and cash flows associated with the hosting service fees. The amendments in this update will be effective for the Company beginning with fiscal year 2020, with early adoption permitted. Entities may select retrospective or prospective application to all implementation costs incurred after the adoption date. The adoption of the amendments in this update is not expected to have a material impact on the Company’s consolidated financial position and results of operations.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

2. Net Income (Loss) Per Share

Basic earnings per share, or EPS, is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period and the weighted-average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock options, restricted stock units and restricted stock awards are considered to be common stock equivalents and are only included in the calculation of diluted EPS when their effect is dilutive. In periods in which the Company has a net loss, dilutive common stock equivalents are excluded from the calculation of diluted EPS.

The table below presents the computation of basic and diluted EPS:



	Three Months Ended March 31,
	2019			2018
	(in thousands, except per share amounts)
Numerator:
Net income (loss)	$	(4,851	)	$	1,847
Denominator:
Weighted average common shares outstanding—basic	69,968			67,674
Dilutive common stock equivalents	—			2,766
Weighted average common shares outstanding—diluted	69,968			70,440
Net income (loss) per share:
Basic	$	(0.07	)	$	0.03
Diluted	$	(0.07	)	$	0.03

For the three months ended March 31, 2019, the Company incurred a net loss and accordingly excluded common stock equivalents for outstanding stock-based awards, which represented all potentially dilutive securities, of 2.9 million from the calculation of diluted net loss per share due to their anti-dilutive nature. For the three months ended March 31, 2018, the Company excluded 1.0 million of common stock equivalents for outstanding stock-based awards from the calculation of diluted net income per share due to their anti-dilutive nature.

3. Restructuring Activity

From time to time, the Company approves and implements restructuring plans as a result of acquisitions, internal resource alignment, and cost saving measures. Such restructuring plans include vacating certain leased facilities, terminating employees, and cancellation of contracts.

The following table presents the activity related to the restructuring plans, which is included in restructuring charges in the consolidated statements of operations:



	Three Months Ended March 31,
	2019		2018
	(in thousands)
Employee separation expenses	$	472	$	—
Lease related charges	1,345		—
Other	100		—
	$	1,917	$	—

Lease-related charges for the three months ended March 31, 2019 primarily related to exiting certain facilities and includes the impairment of long-lived assets (right-of-use assets) and leasehold improvements of $2.2 million and $1.4 million, respectively, partially offset by a gain on the extinguishment of lease liabilities of $2.9 million following the release from such liability by the landlord. The Company does not expect to incur additional material costs related to current restructuring plans.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents a roll-forward of the Company's restructuring liability for the three months ended March 31, 2019. The restructuring liability is included in accrued expenses and other current liabilities in the consolidated balance sheets.



	Employee Separation Expenses			Lease Related Charges			Other			Total
	(in thousands)
Liability as of December 31, 2018	$	409		$	1,490		$	47		$	1,946
Restructuring charges	472			1,345			100			1,917
Transfer to right-of-use asset	—			(299		)	—			(299		)
Cash payments	(662		)	(1,445		)	(59		)	(2,166		)
Non-cash charges	—			12			—			12
Liability as of March 31, 2019	$	219		$	1,103		$	88		$	1,410

Remaining lease related charges as of March 31, 2019 primarily consist of common area maintenance obligations.

4. Goodwill and Intangible Assets

Goodwill

Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. The fair values of net tangible assets and intangible assets acquired are based upon preliminary valuations and the Company's estimates and assumptions are subject to change within the measurement period (potentially up to one year from the acquisition date).

During the three months ended March 31, 2019, there were no changes in the carrying amount of goodwill.

The Company performs an annual goodwill impairment assessment on October 31st each year, using a two-step quantitative assessment. Step one is the identification of potential impairment. This involves comparing the fair value of each reporting unit, which the Company has determined to be the entity itself, with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds the carrying amount, the goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any.

In addition to its annual review, the Company performs a test of impairment when indicators of impairment are present. During the three months ended March 31, 2019 and 2018, no indications of impairment of the Company's goodwill balances were identified and, as a result, no goodwill impairment was recognized.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Acquired Intangibles

Finite-lived Intangible Assets

The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions and other purchases:



		March 31, 2019							December 31, 2018
	Weighted Average Useful Life (in Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Value		Accumulated Amortization			Net Carrying Amount
		(in thousands)
Licensed technology	3.7	$	2,070	$	(1,265	)	$	805	$	2,070	$	(1,130	)	$	940
Developed technology	6.9	240,461		(83,055		)	157,406		238,961		(74,630		)	164,331
Trademarks and trade names	6.1	13,800		(4,816		)	8,984		13,800		(4,252		)	9,548
Customer relationships	4.6	121,100		(60,697		)	60,403		121,100		(55,647		)	65,453
Non-compete covenants	3.0	1,100		(964		)	136		1,100		(872		)	228
	6.1	$	378,531	$	(150,797	)	$	227,734	$	377,031	$	(136,531	)	$	240,500

The following table sets forth amortization expense associated with finite-lived intangible assets, which is included in the consolidated statements of operations as follows:



	Three Months Ended March 31,
	2019		2018
	(in thousands)
Cost of net revenue	$	8,434	$	8,978
Research and development	34		42
Selling, general and administrative	5,798		7,994
	$	14,266	$	17,014

Amortization of finite-lived intangible assets in cost of net revenue in the consolidated statements of operations results primarily from acquired developed technology.

The following table sets forth the activity related to finite-lived intangible assets:



	Three Months Ended March 31,
	2019			2018
	(in thousands)
Beginning balance	$	240,500		$	310,645
Transfers to developed technology from IPR&D	1,500			—
Amortization	(14,266		)	(17,014		)
Ending balance	$	227,734		$	293,631

The Company regularly reviews the carrying amount of its long-lived assets subject to depreciation and amortization, as well as the related useful lives, to determine whether indicators of impairment may exist that warrant adjustments to carrying values or estimated useful lives. An impairment loss is recognized when the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset. Should impairment exist, the impairment loss is measured based on the excess of the carrying amount of the asset over the asset’s fair value. During the three months ended March 31, 2019 and 2018, no impairment losses related to finite-lived intangible assets were recognized.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents future amortization of the Company’s finite-lived intangible assets at March 31, 2019:



	Amount
	(in thousands)
2019 (9 months)	$	42,715
2020	56,168
2021	55,385
2022	37,855
2023	25,660
Thereafter	9,951
Total	$	227,734

Indefinite-lived Intangible Assets

Indefinite-lived intangible assets consist entirely of acquired in-process research and development technology, or IPR&D. The following table sets forth the Company’s activities related to the indefinite-lived intangible assets:



	Three Months Ended March 31,
	2019			2018
	(in thousands)
Beginning balance	$	4,400		$	4,400
Transfers to developed technology from IPR&D	(1,500		)	—
Ending balance	$	2,900		$	4,400

The Company performs its annual assessment of indefinite-lived intangible assets on October 31 each year or more frequently if events or changes in circumstances indicate that the asset might be impaired utilizing a qualitative test as a precursor to the quantitative test comparing the fair value of the assets with their carrying amount. Based on the qualitative test, if it is more likely than not that indicators of impairment exists, the Company proceeds to perform a quantitative analysis. During the three months ended March 31, 2019 and 2018, no indicators of impairment were identified and, as a result, no IPR&D impairment losses were recorded.

5. Financial Instruments

The composition of financial instruments is as follows:



	March 31, 2019		December 31, 2018
	(in thousands)
Assets
Interest rate swap	$	1,005	$	1,623

The fair value of the Company’s financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants and is recorded using a hierarchical disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The levels are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The Company classifies its financial instrument within Level 2 of the fair value hierarchy on the basis of models utilizing market observable inputs. The interest rate swap has been valued on the basis of valuations provided by third-party pricing services, as derived from standard valuation or pricing models. Market-based observable inputs for the interest rate swap include one month LIBOR-based yield curves over the term of the swap. The Company reviews third-party pricing provider models, key inputs and assumptions and understands the pricing processes at its third-party providers in determining the overall reasonableness of the fair value of its Level 2 financial instruments. The Company also considers the risk of nonperformance by assessing the swap counterparty's credit risk in the estimate of fair value of the interest rate swap. As of March 31, 2019 and December 31, 2018, the Company has not made any adjustments to the valuations obtained from its third-party pricing providers.

The following table presents a summary of the Company’s financial instruments that are measured on a recurring basis:



			Fair Value Measurements
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets
Interest rate swap, March 31, 2019	$	1,005	$	—	$	1,005	$	—
Interest rate swap, December 31, 2018	$	1,623	$	—	$	1,623	$	—

The following table summarizes activity for the interest rate swap:



	Three Months Ended
	March 31, 2019			March 31, 2018
	(in thousands)
Interest rate swap asset
Beginning balance	$	1,623		$	734
Unrealized gain (loss) recognized in other comprehensive income (loss)	(618		)	1,384
Ending balance	$	1,005		$	2,118

There were no transfers between Level 1, Level 2 or Level 3 financial instruments in the three months ended March 31, 2019 and 2018.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

Some of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature. Such financial assets and financial liabilities include: cash and cash equivalents, restricted cash, net receivables, certain other assets, accounts payable, accrued price protection liability, accrued expenses, accrued compensation costs, and other current liabilities.

The Company’s long-term debt is not recorded at fair value on a recurring basis, but is measured at fair value for disclosure purposes (Note 7).

6. Balance Sheet Details

Cash, cash equivalents and restricted cash consist of the following:



	March 31, 2019		December 31, 2018
	(in thousands)
Cash and cash equivalents	$	71,102	$	73,142
Short-term restricted cash	347		645
Long-term restricted cash	418		404
Total cash, cash equivalents and restricted cash	$	71,867	$	74,191



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

As of March 31, 2019 and December 31, 2018, cash and cash equivalents included $20.0 million and $0 of money market funds, respectively. As of March 31, 2019 and December 31, 2018, the Company has restricted cash of $0.8 million and $1.0 million, respectively. The cash is restricted in connection with guarantees for certain import duties and office leases.

Inventory consists of the following:



	March 31, 2019		December 31, 2018
	(in thousands)
Work-in-process	$	15,365	$	17,618
Finished goods	27,388		24,120
	$	42,753	$	41,738

Property and equipment, net consists of the following:



	Useful Life (in Years)	March 31, 2019			December 31, 2018
		(in thousands)
Furniture and fixtures	5	$	2,183		$	2,020
Machinery and equipment	3-5	34,710			34,225
Masks and production equipment	2-5	12,645			12,645
Software	3	5,677			5,675
Leasehold improvements	1-5	16,199			17,493
Construction in progress	N/A	360			133
		71,774			72,191
Less accumulated depreciation and amortization		(54,787		)	(53,787		)
		$	16,987		$	18,404

Depreciation expense for the three months ended March 31, 2019 and 2018 was $2.1 million and $3.1 million, respectively.

Accrued price protection liability consists of the following activity:



	Three Months Ended March 31,
	2019			2018
	(in thousands)
Beginning balance	$	16,454		$	21,571
Charged as a reduction of revenue	10,508			10,744
Reversal of unclaimed rebates	—			(2,367		)
Payments	(8,019		)	(9,736		)
Ending balance	$	18,943		$	20,212



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Accrued expenses and other current liabilities consist of the following:



	March 31, 2019		December 31, 2018
	(in thousands)
Accrued technology license payments	$	4,500	$	4,500
Accrued professional fees	1,428		1,270
Accrued engineering and production costs	2,590		646
Accrued restructuring	1,410		1,946
Accrued royalty	923		980
Short-term lease liabilities	8,033		1,214
Accrued customer credits	556		1,204
Income tax liability	3,846		1,642
Customer contract liabilities	71		71
Accrued obligations to customers for price adjustments	7,317		7,558
Accrued obligations to customers for stock rotation rights	1,980		1,494
Other	53		995
	$	32,707	$	23,520

The following table summarizes the change in balances of accumulated other comprehensive income (loss) by component:



	Cumulative Translation Adjustments			Interest Rate Hedge			Total
	(in thousands)
Balance at December 31, 2018	$	(907	)	$	1,179		$	272
Current period other comprehensive income (loss)	513			(488		)	25
Balance at March 31, 2019	$	(394	)	$	691		$	297

7. Debt and Interest Rate Swap

Debt

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



	March 31, 2019			December 31, 2018
	(in thousands)

Principal	$	247,000		$	262,000
Less:
Unamortized debt discount	(1,555		)	(1,630		)
Unamortized debt issuance costs	(4,401		)	(4,613		)
Net carrying amount of long-term debt	241,044			255,757
Less: current portion of long-term debt	—			—
Long-term debt, non-current portion	$	241,044		$	255,757

On May 12, 2017, the Company entered into a credit agreement with certain lenders and a collateral agent in connection with the acquisition of Exar Corporation. The credit agreement provides for an initial secured term B loan facility, or the “Initial Term Loan,” in an aggregate principal amount of $425.0 million. The credit agreement permits the Company to request incremental loans in an aggregate principal amount not to exceed the sum of $160.0 million (subject to adjustments for any voluntary prepayments), plus an unlimited amount that is subject to pro forma compliance with certain secured leverage ratio



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

and total leverage ratio tests. Incremental loans are subject to certain additional conditions, including obtaining additional commitments from the lenders then party to the credit agreement or new lenders.

Loans under the credit agreement bear interest, at the Company’s option, at a rate equal to either (i) a base rate equal to the highest of (x) the federal funds rate, plus 0.50%, (y) the prime rate then in effect and (z) an adjusted LIBOR rate determined on the basis of a one- three- or six-month interest period, plus 1.0% or (ii) an adjusted LIBOR rate, subject to a floor of 0.75%, in each case, plus an applicable margin of 2.50% in the case of LIBOR rate loans and 1.50% in the case of base rate loans. Commencing on September 30, 2017, the Initial Term Loan amortizes in equal quarterly installments equal to 0.25% of the original principal amount of the Initial Term Loan, with the balance payable on the maturity date. The Initial Term Loan has a term of seven years and will mature on May 12, 2024, at which time all outstanding principal and accrued and unpaid interest on the Initial Term Loan is due. The Company is also required to pay fees customary for a credit facility of this size and type.

The Company is required to make mandatory prepayments of the outstanding principal amount of term loans under the credit agreement with the net cash proceeds from the disposition of certain assets and the receipt of insurance proceeds upon certain casualty and condemnation events, in each case, to the extent not reinvested within a specified time period, from excess cash flow beyond stated threshold amounts, and from the incurrence of certain indebtedness. The Company has the right to prepay its term loans under the credit agreement, in whole or in part, at any time without premium or penalty, subject to certain limitations and a 1.0% soft call premium applicable during the first six months of the loan term. The Company exercised its right to prepay and made aggregate prepayments of principal of $178.0 million from origination through March 31, 2019.

The Company’s obligations under the credit agreement are required to be guaranteed by certain of its domestic subsidiaries meeting materiality thresholds set forth in the credit agreement. Such obligations, including the guaranties, are secured by substantially all of the assets of the Company and the subsidiary guarantors pursuant to a security agreement with the collateral agent.

The credit agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company and its restricted subsidiaries to, among other things, incur debt, grant liens, undergo certain fundamental changes, make investments, make certain restricted payments, and sell assets, in each case, subject to limitations and exceptions. As of March 31, 2019, the Company was in compliance with such covenants. The credit agreement also contains customary events of default that include, among other things, certain payment defaults, cross defaults to other indebtedness, covenant defaults, change in control defaults, judgment defaults, and bankruptcy and insolvency defaults. If an event of default exists, the lenders may require immediate payment of all obligations under the credit agreement, and may exercise certain other rights and remedies provided for under the credit agreement, the other loan documents and applicable law.

As of March 31, 2019 and December 31, 2018, the weighted average effective interest rate payable on the long-term debt was approximately 4.8% and 4.6%, respectively.

The debt is carried at its principal amount, net of unamortized debt discount and issuance costs, and is not adjusted to fair value each period. The issuance date fair value of the liability component of the debt in the amount of $398.5 million was determined using a discounted cash flow analysis, in which the projected interest and principal payments were discounted back to the issuance date of the term loan at a market interest rate for nonconvertible debt of 4.6%, which represents a Level 3 fair value measurement. The debt discount of $2.1 million and debt issuance costs of $6.0 million are being amortized to interest expense using the effective interest method from the issuance date through the contractual maturity date of the term loan of May 12, 2024.

During both the three months ended March 31, 2019 and 2018, the Company recognized total amortization of debt discount and debt issuance costs of $0.3 million to interest expense.

The approximate fair value of the term loan as of March 31, 2019 and December 31, 2018 was $250.2 million and $268.1 million, respectively, which was estimated on the basis of inputs that are observable in the market and which is considered a Level 2 measurement method in the fair value hierarchy.

As of March 31, 2019 and December 31, 2018, the remaining principal balance on the term loan was $247.0 million and $262.0 million, respectively. The remaining principal balance is due on May 12, 2024 at the maturity date on the term loan.

Interest Rate Swap

In November 2017, the Company entered into a fixed-for-floating interest rate swap with an amortizing notional amount to swap a substantial portion of variable rate LIBOR interest payments under its term loans for fixed interest payments bearing an interest rate of 1.74685%. The Company's outstanding debt is still subject to a 2.5% fixed applicable margin during the term



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

of the loan. The interest rate swap is designated as a cash flow hedge of a portion of floating rate interest payments on long-term debt and effectively fixes the interest rate on a substantial portion of the Company’s long-term debt at approximately 4.25%. Accordingly, the Company applies cash flow hedge accounting to the interest rate swap and it is recorded at fair value as an asset or liability and the effective portion of changes in the fair value of the interest rate swap, as measured quarterly, are reported in other comprehensive income (loss). As of March 31, 2019 and December 31, 2018, the fair value of the interest rate swap asset was $1.0 million and $1.6 million (Note 5), respectively, and is included in other long-term assets in the consolidated balance sheets. The decrease in fair value related to the interest rate swap asset included in other comprehensive loss for the three months ended March 31, 2019 was $0.6 million. The interest rate swap expires in October 2020 and the total $1.0 million of unrealized gain recorded in accumulated other comprehensive income at March 31, 2019 is not expected to be recorded against interest expense over the next twelve months.

8. Stock-Based Compensation and Employee Benefit Plans

Employee Stock-Based Benefit Plans

At March 31, 2019, the Company had stock-based compensation awards outstanding under the following plans: the 2004 Stock Plan, the 2010 Equity Incentive Plan, as amended, or 2010 Plan, the 2010 Employee Stock Purchase Plan, or ESPP, and plans under which equity incentive awards were assumed in connection with the acquisitions of Entropic in 2015 and Exar Corporation in 2017. Refer to the Company’s Annual Report for a summary of the Company's stock-based compensation and equity plans as of December 31, 2018. There have been no material changes to the terms of the Company's equity incentive plans during the three months ended March 31, 2019. All current stock awards are issued under the 2010 Plan and ESPP.

As of March 31, 2019, the number of shares of common stock available for future issuance under the 2010 Plan and awards outstanding under the 2004 Plan was 14,636,122 shares and 416,007 shares, respectively. As of March 31, 2019, the number of shares of common stock available for future issuance under the ESPP was 3,000,253 shares.

Stock-Based Compensation

The Company recognizes stock-based compensation in the consolidated statements of operations, based on the department to which the related employee reports, as follows:



	Three Months Ended March 31,
	2019		2018
	(in thousands)
Cost of net revenue	$	130	$	106
Research and development	4,213		4,374
Selling, general and administrative	3,404		3,993
	$	7,747	$	8,473

The total unrecognized compensation cost related to unvested restricted stock units and restricted stock awards as of March 31, 2019 was $46.3 million, and the weighted average period over which these equity awards are expected to vest is 2.49 years. The total unrecognized compensation cost related to unvested stock options as of March 31, 2019 was $3.7 million, and the weighted average period over which these equity awards are expected to vest is 2.71 years.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Restricted Stock Units and Restricted Stock Awards

The Company calculates the fair value of restricted stock units based on the fair market value of the Company's common stock on the grant date. Stock based compensation is recognized over the vesting period using the straight-line method.

A summary of the Company’s restricted stock unit and restricted stock award activity is as follows:



	Number of Shares (in thousands)		Weighted-Average Grant-Date Fair Value per Share
Outstanding at December 31, 2018	3,263		$	20.23
Granted	367		23.51
Vested	(636	)	20.83
Canceled	(99	)	21.00
Outstanding at March 31, 2019	2,895		20.49

Employee Stock Purchase Rights and Stock Options

The Company uses the Black-Scholes valuation model to calculate the grant-date fair value of employee stock purchase rights and stock options. Stock based compensation expense is recognized over the vesting period using the straight-line method.

Employee Stock Purchase Rights

During the three months ended March 31, 2019, there were no shares of common stock purchased under the ESPP.

The fair values of employee stock purchase rights were estimated using the Black-Scholes option pricing model at their respective grant date using the following assumptions:



	Three Months Ended March 31,
	2019			2018
Weighted-average grant date fair value per share	$	5.01		$	6.51
Risk-free interest rate	2.51		%	1.39		%
Dividend yield	—		%	—		%
Expected life (in years)	0.50			0.50
Volatility	38.82		%	36.97		%

The risk-free interest rate assumption was based on rates for United States (U.S.) Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The expected term is the duration of the offering period for each grant date. In addition, the estimated volatility incorporates the historical volatility over the expected term based on the Company's daily closing stock prices.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Stock Options

A summary of the Company’s stock options activity is as follows:



	Number of Options (in thousands)		Weighted-Average Exercise Price		Weighted-Average Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2018	2,659		$	10.27
Exercised	(609	)	7.08
Canceled	(7	)	20.50
Outstanding at March 31, 2019	2,043		$	11.19	2.43	$	29,376
Vested and expected to vest at March 31, 2019	2,020		$	11.11	2.39	$	29,206
Exercisable at March 31, 2019	1,602		$	9.41	1.50	$	25,893

No stock options were granted by the Company during the three months ended March 31, 2019.

The intrinsic value of stock options exercised was $9.8 million and $2.1 million in the three months ended March 31, 2019 and 2018, respectively.

Cash received from exercise of stock options was $2.6 million and $1.0 million during the three months ended March 31, 2019 and 2018, respectively.

The tax benefit from stock options exercised was $9.0 million and $2.1 million during the three months ended March 31, 2019 and 2018, respectively.

Employee Incentive Bonus

The Company settles a majority of bonus awards for its employees, including executives, in shares of common stock under the 2010 Equity Incentive Plan. When bonus awards are settled in common stock issued under the 2010 Equity Incentive Plan, the number of shares issuable to plan participants is determined based on the closing price of the Company's common stock as determined in trading on the New York Stock Exchange on a date approved by the Board of Directors. In connection with the Company's bonus programs, in February 2019, the Company issued 0.3 million freely-tradable shares of the Company's common stock in settlement of bonus awards to employees, including executives, for the 2018 performance period. At March 31, 2019, the Company has an accrual of $2.4 million for bonus awards for employees for year-to-date achievement in the 2019 performance period. The Company's compensation committee retains discretion to effect payment in cash, stock, or a combination of cash and stock.

9. Income Taxes

The provision for income taxes primarily relates to projected federal, state, and foreign income taxes. To determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is generally based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates. In addition, the tax effects of certain significant or unusual items are recognized discretely in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the temporary differences reverse. The Company records a valuation allowance to reduce its deferred taxes to the amount it believes is more likely than not to be realized. In making such determination, the Company considers all available positive and negative evidence quarterly, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. Based upon the Company's review of all positive and negative evidence, the Company continues to have a valuation allowance on its state deferred taxes, certain of its federal deferred tax assets, and certain foreign deferred tax assets in jurisdictions where the Company has cumulative losses or otherwise is not expected to utilize certain tax attributes. The Company does not incur expense or benefit in certain tax free jurisdictions in which it operates.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The Company recorded an income tax benefit of $6.5 million in the three months ended March 31, 2019 and an income tax benefit of $1.9 million for the three months ended March 31, 2018.

The income tax benefit in the three months ended March 31, 2019 and 2018, each primarily relates to the mix of pre-tax income among jurisdictions, discrete tax benefits related to stock-based compensation, and release of uncertain tax positions under ASC 740-10.

Income tax positions must meet a more-likely-than-not threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first financial reporting period in which that threshold is no longer met. The Company records potential penalties and interest accrued related to unrecognized tax benefits within the consolidated statements of operations as income tax expense.

During the three months ended March 31, 2019, the increase in unrecognized tax benefits was not material. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. Accrued interest and penalties associated with uncertain tax positions as of March 31, 2019 were approximately $0.7 million and $0.1 million, respectively.

The Company is subject to federal and state income tax in the United States and is also subject to income tax in various states and foreign tax jurisdictions. At March 31, 2019, the Company’s tax years for 2014, 2013, and 2010 and forward are subject to examination by federal, state, and foreign tax authorities, respectively. The Company is under a routine compliance review by the Inland Revenue Authority of Singapore for its 2016 and 2017 tax years. The Company does not expect these reviews to have a material effect on its consolidated financial position or results of operations. In addition, the examination by the California Franchise Tax Board for the 2014 and 2015 tax years was closed during the quarter ended March 31, 2019 without any adjustments.

The Company's subsidiary in Singapore operates under certain tax incentives in Singapore, which are generally effective through March 2022, and are conditional upon meeting certain employment and investment thresholds in Singapore. Under the incentives, qualifying income derived from certain sales of the Company's integrated circuits is taxed at a concessionary rate over the incentive period, and there are reduced Singapore withholding taxes on certain intercompany royalties during the incentive period. Primarily because of the Company's Singapore net operating losses and a full valuation allowance in Singapore, the incentives did not have a material impact on the Company's income tax benefit in the three months ended March 31, 2019.

10. Concentration of Credit Risk, Significant Customers and Revenue by Geographic Region

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. Collateral is generally not required for customer receivables. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions. At times, such deposits may be in excess of insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.

Significant Customers

The Company markets its products and services to manufacturers of a wide range of electronic devices (Note 1). The Company makes periodic evaluations of the credit worthiness of its customers.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Customers comprising greater than 10% of net revenues for each of the periods presented are as follows:



	Three Months Ended March 31,
	2019		2018
Percentage of total net revenue
Customer A	12	%	27	%

Balances that are 10% or greater of accounts receivable, based on the Company's billings to the contract manufacturer customers, are as follows:



	March 31,		December 31,
	2019		2018
Percentage of gross accounts receivable
Customer B	*		10	%
Customer C	11	%	*

____________________________


*	Represents less than 10% of the gross accounts receivable as of the respective period end.

Significant Suppliers

Suppliers comprising greater than 10% of total inventory purchases are as follows:



	Three Months Ended March 31,
	2019		2018
Vendor A	19	%	14	%
Vendor B	14	%	19	%
Vendor C	13	%	16	%
Vendor D	*		21	%

____________________________


*	Represents less than 10% of the inventory purchases for the respective period.

Geographic Information

The Company's consolidated net revenues by geographic area based on ship-to location are as follows (in thousands):



	Three Months Ended March 31,
	2019				2018
	Amount		% of total net revenue		Amount		% of total net revenue
Asia	$	71,548	85	%	$	84,814	77	%
United States	4,352		5	%	5,195		5	%
Rest of world	8,735		10	%	20,818		19	%
Total	$	84,635	100	%	$	110,827	100	%

The products shipped to individual countries representing greater than 10% of net revenue for each of the periods presented are as follows:



	Three Months Ended March 31,
	2019		2018
Percentage of total net revenue
China	67	%	61	%



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The determination of which country a particular sale is allocated to is based on the destination of the product shipment. No other individual country accounted for more than 10% of net revenue during these periods.

Long-lived assets, which consists of property and equipment, net, leased right-of-use assets, intangible assets, net, and goodwill by geographic area are as follows (in thousands):



	March 31,				December 31,
	2019				2018⁽¹⁾
	Amount		% of total		Amount		% of total
United States	$	430,879	85	%	$	426,321	85	%
Singapore	70,289		14	%	71,945		14	%
Rest of world	6,326		1	%	3,368		1	%
Total	$	507,494	100	%	$	501,634	100	%

_____________

(1) Amounts do not include leased right-of-use assets in the prior period due to the adoption of ASC 842 under the modified retrospective method with a cumulative effect adjustment to accumulated deficit as of January 1, 2019.

11. Revenue from Contracts with Customers

Revenue by Market

The table below presents disaggregated net revenues by market (in thousands):



	Three Months Ended
	March 31,
	2019			2018

Connected home	$	43,432		$	65,658
% of net revenue	51		%	59		%
Infrastructure	22,102			20,490
% of net revenue	26		%	19		%
Industrial and multi-market	19,101			24,679
% of net revenue	23		%	22		%
Total net revenue	$	84,635		$	110,827

Revenues from sales through the Company’s distributors accounted for 41% and 39% of net revenue for the three months ended March 31, 2019 and 2018, respectively.

Contract Liabilities

As of March 31, 2019, customer contract liabilities consist of estimates of obligations to deliver rebates to customers in the form of units of products and were approximately $0.1 million. Revenue recognized in the three months ended March 31, 2019 that was included in the contract liability balance as of December 31, 2018 was immaterial.

There were no material changes in the contract liabilities balance during the three months ended March 31, 2019.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Obligations to Customers for Price Adjustments and Returns and Assets for Right-of-Returns

As of March 31, 2019, obligations to customers consisting of estimates of price protection rights offered to the Company's end customers totaled $18.9 million and are included in accrued price protection liability in the consolidated balance sheets. For activity in this account, including amounts included in net revenue, refer to Note 6. Other obligations to customers representing estimates of price adjustments to be claimed by distributors upon sell-through of their inventory to their end customer and estimates of stock rotation returns to be claimed by distributors on products sold as of March 31, 2019 were $7.3 million and $2.0 million, respectively, and are included in accrued expenses and other current liabilities in the consolidated balance sheets (Note 6). The increase in revenue from net changes in transaction prices for amounts included in obligations to customers for price adjustments as of January 1, 2018 was not material. As of March 31, 2019, right of return assets under customer contracts representing the estimates of product inventory the Company expects to receive from customers in stock rotation returns were approximately $0.3 million. Right of return assets are included in inventory in the consolidated balance sheets (Note 6).

As of March 31, 2019, there were no impairment losses recorded on customer accounts receivable.

12. Leases

The Company primarily leases office facilities under operating lease arrangements expiring at various years through 2023. These leases often have original terms of 3 to 5 years and contain options to extend the lease up to 5 years or terminate the lease, which are included in right-of-use assets and lease liabilities when the Company is reasonably certain it will renew the underlying leases. Since the implicit rate of such leases is unknown and the Company is not reasonably certain to renew its leases, the Company has elected to apply a collateralized incremental borrowing rate to facility leases on the original lease term in calculating the present value of future lease payments. As of March 31, 2019, the weighted average discount rate for operating leases was 5.0% and the weighted average remaining lease term for operating leases was 3.3 years.

The table below presents aggregate future minimum payments due under leases for the next five years and beyond, reconciled to total lease liabilities included in the consolidated balance sheet as of March 31, 2019:



	Operating Leases
	(in thousands)
2019 (9 months)	$	6,484
2020	8,853
2021	8,595
2022	3,784
2023	1,021
Thereafter	—
Total minimum payments	28,737
Less: imputed interest	(2,336		)
Less: unrealized translation loss	(236		)
Total lease liabilities	26,165
Less: short-term lease liabilities	(8,033		)
Long-term lease liabilities	$	18,132

Operating lease cost was $0.9 million and $1.2 million for the three months ended March 31, 2019 and 2018, respectively. Short-term lease costs for the three months ended March 31, 2019 were not material. There were no right-of-use assets obtained in exchange for new liabilities for the three months ended March 31, 2019.



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The Company has subleased certain facilities that it ceased using in connection with prior years' restructuring plans (Note 3). Such subleases expire at various years through fiscal 2023. As of March 31, 2019, future minimum rental income under non-cancelable subleases is as follows:



	Amount
	(in thousands)
2019 (9 months)	$	2,946
2020	4,036
2021	4,057
2022	782
2023	291
Thereafter	—
Total minimum rental income	$	12,112

Total sublease income related to leased facilities the Company ceased using in connection with a restructuring plan for the three months ended March 31, 2019 and 2018 was approximately $0.6 million and $0.7 million, respectively (Note 3).

13. Commitments and Contingencies

Inventory Purchase and Other Contractual Obligations

As of March 31, 2019, future minimum payments under inventory purchase and other obligations are as follows:



	Inventory Purchase Obligations		Other Obligations		Total
2019 (9 months)	$	68,866	$	6,122	$	74,988
2020	—		4,574		4,574
2021	—		843		843
2022	—		425		425
2023	—		447		447
Thereafter	—		—		—
Total minimum payments	$	68,866	$	12,411	$	81,277

Other obligations consist of contractual payments due for software licenses.

CrestaTech Litigation

As disclosed in the Annual Report, the Company was a defendant in patent litigation originally filed by CrestaTech Technology Corporation, or CrestaTech. On January 21, 2014, CrestaTech filed a complaint for patent infringement against the Company in the United States District Court of Delaware, or District Court Litigation, alleging that the Company infringed U.S. Patent Nos. 7,075,585, or the '585 Patent and 7,265,792, or the '792 Patent. In addition to asking for compensatory damages, CrestaTech alleged willful infringement and sought a permanent injunction. CrestaTech also named Sharp Corporation, Sharp Electronics Corp. and VIZIO, Inc. as defendants based upon their alleged use of the Company's television tuners. Following the litigation history described in the Company's prior filings on Form 10-K and Form 10-Q, the District Court dismissed the District Court Litigation in April 2018. While the successor plaintiff following a Chapter 7 bankruptcy proceeding of CrestaTech below has suggested that the dismissal may have been in error, it has taken no action to re-instate the case. In the related bankruptcy proceeding, the plaintiff stated that it “no longer has any valid patent claims that it is asserting in any of the proceedings purchased through the Sale Agreement,” which includes the District Court Litigation against the Company. In re Cresta Technology Corporation, Case No. 16-50808 (N.D. Cal. Bank. 2016) at Dkt. No. 270. At this time, the Company cannot predict whether the District Court litigation will be re-instated. In addition, outside the District Court Litigation, the Company and the successor to CrestaTech are continuing to dispute certain matters relating to the ‘585 Patent through the inter parties review (IPR) and potential appeal process. Any re-instatement of the District Court Litigation, material expenses associated with the IPR and potential appeal process, or other costs arising from the dispute between the parties could adversely affect the Company's operating results.



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Trango Systems, Inc. Litigation

On or about August 2, 2016, Trango Systems, Inc., or Trango, filed a complaint in the Superior Court of California, County of San Diego, Central Division, against defendants Broadcom Corporation, Inc., or Broadcom, and the Company, collectively, Defendants. Trango is a purchaser that alleges various fraud, breach of contract, and interference with economic relations claims in connection with the discontinuance of a chip line the Company acquired from Broadcom in 2016. Trango seeks unspecified general and special damages, pre-judgment interest, expenses and costs, attorneys’ fees, punitive damages, and unspecified injunctive and equitable relief. On June 23, 2017, the Court sustained the Company's demurrer to each cause of action in the second amended complaint filed on or about December 6, 2016. Trango filed its third amended complaint on or about July 13, 2017. On February 23, 2018, the Court sustained, in part, the Company's demurrer, dismissing with prejudice the cause of action for breach of a written contract, and Trango voluntarily dismissed its cause of action for breach of an implied-in-fact contract. The remaining causes of action have been permitted to proceed. On March 15, 2018, Trango filed its fourth amended complaint. The Company filed its answer on April 17, 2018. Also, on April 17, 2018, Broadcom filed a cross-complaint against the Company, alleging causes of action for indemnity, contribution and apportionment, and declaratory relief. Broadcom voluntarily dismissed the cross-complaint on June 8, 2018. On December 10, 2018, the Company filed a motion for summary judgment, or in the alternative summary adjudication concerning all of Trango’s causes of action asserted against the Company; on April 5, 2019, the Court granted that motion, in part, dismissing Trango’s fraud-based claims against the Company (specifically, claims for intentional fraud, promissory fraud/false promise, fraud by concealment, and negligent misrepresentation). The trial date has been continued and is now set for August 9, 2019. The Company intends to continue to vigorously defend against the lawsuit as it proceeds.

The Company cannot predict the outcome of the Trango Systems, Inc. litigation. Any adverse determination in the Trango Systems, Inc. litigation could have a material adverse effect on the Company's business and operating results.

Other Matters

In addition, from time to time, the Company is subject to threats of litigation or actual litigation in the ordinary course of business, some of which may be material. Other than the CrestaTech and Trango litigation described above, the Company believes that there are no other currently pending litigation matters that, if determined adversely to the Company's interests, would have a material effect on the Company's business or that would not be covered by the Company's existing liability insurance.


ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this report.

Overview

We are a provider of radio-frequency, or RF, high-performance analog, and mixed-signal communications systems-on-chip solutions for the connected home, wired and wireless infrastructure, and industrial and multi-market applications. We are a fabless integrated circuit design company whose products integrate all or substantial portions of a broadband communication system. In most cases, these products are designed on a single silicon-die, using standard digital CMOS processes and conventional packaging technologies. We believe this enables our solutions to achieve superior power, performance, and cost advantages relative to our industry competition. Our customers include electronics distributors, module makers, original equipment manufacturers (OEMs), and original design manufacturers (ODMs), who incorporate our products in a wide range of electronic devices. Examples of such end market electronic devices incorporating our products include cable DOCSIS broadband modems and gateways; wireline connectivity devices for in-home networking applications; RF transceivers and modems for wireless carrier access and backhaul infrastructure; fiber-optic modules for data center, metro, and long-haul transport networks; video set-top boxes and gateways; hybrid analog and digital televisions, direct broadcast satellite outdoor and indoor units; and power management and interface products used in these and a range of other markets.

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We combine our high-performance RF and mixed-signal semiconductor design skills with our expertise in digital communications systems, software, high-performance analog, and embedded systems to provide highly integrated semiconductor devices and platform-level solutions that are manufactured using a range of semiconductor manufacturing processes, including low-cost complementary metal oxide semiconductor, or CMOS, process technology, Silicon Germanium, Gallium Arsenide, BiCMOS and Indium Phosphide process technologies. Our ability to design analog and mixed-signal circuits in CMOS allows us to efficiently combine analog and digital signal processing functionality in the same integrated circuit. As a result, our solutions have high levels of functional integration and performance, small silicon die size, and low power consumption. Moreover, we are uniquely positioned to offer customers a combination of proprietary CMOS-based radio system architectures that provide the benefits of superior RF system performance, along with high-performance analog interface and power management solutions that enable shorter design cycles, significant design flexibility, and low system cost across a wide range of broadband communications, wired and wireless infrastructure, and industrial and multimarket applications.

Our net revenue has grown from approximately $119.6 million in fiscal 2013 to $385.0 million in fiscal 2018. In the three months ended March 31, 2019, revenues were $84.6 million. In fiscal 2018 and the three months ended March 31, 2019, our net revenue was derived primarily from sales of RF receivers and RF receiver systems-on-chip and connectivity solutions into broadband operator voice and data modems and gateways and connectivity adapters, global analog and digital RF receiver products for analog and digital pay-TV applications, radio and modem solutions into wireless carrier access and backhaul infrastructure platforms, high-speed optical interconnect solutions sold into optical modules for data-center, metro and long-haul networks, and high-performance interface and power management solutions into a broad range of communications, industrial, automotive and multi-market applications. Our ability to achieve revenue growth in the future will depend, among other factors, on our ability to further penetrate existing markets; our ability to expand our target addressable markets by developing new and innovative products; and our ability to obtain design wins with device manufacturers, in particular manufacturers of set-top boxes, data modems, and gateways for the broadband service provider and Pay-TV industries, manufacturers selling into the smartphone market, storage networking market, cable infrastructure market, industrial and automotive markets, and optical module and telecommunications infrastructure markets.

Products shipped to Asia accounted for 85% and 77% of net revenue during the three months ended March 31, 2019 and 2018, respectively, including 67% and 61%, respectively, from products shipped to China. Although a large percentage of our products is shipped to Asia, we believe that a significant number of the systems designed by these customers and incorporating our semiconductor products are then sold outside Asia. For example, we believe revenue generated from sales of our digital terrestrial set-top box products during the three months ended March 31, 2019 and 2018 related principally to sales to Asian set-top box manufacturers delivering products into Europe, Middle East, and Africa, or EMEA markets. Similarly, revenue generated from sales of our cable modem products during the three months ended March 31, 2019 and 2018 related principally to sales to Asian ODMs and contract manufacturers delivering products into European and North American markets. To date, all of our sales have been denominated in United States dollars. There is a growing portion of our business, related specifically to our high-speed optical interconnect products, that are shipped to, and are ultimately consumed in Asian markets, with the majority of these products being purchased by end customers in China.

A significant portion of our net revenue has historically been generated by a limited number of customers. In the three months ended March 31, 2019, one of our customers, Arris (which was recently acquired by CommScope Holding Company, Inc.) accounted for 12% of our net revenue, and our ten largest customers collectively accounted for 60% of our net revenue. In the three months ended March 31, 2018, one of our customers, Arris, accounted for 27% of our net revenue, and our ten largest customers collectively accounted for 63% of our net revenue. For certain customers, we sell multiple products into disparate end user applications such as cable modems, satellite set-top boxes and broadband gateways.

Our business depends on winning competitive bid selection processes, known as design wins, to develop semiconductors for use in our customers’ products. These selection processes are typically lengthy, and as a result, our sales cycles will vary based on the specific market served, whether the design win is with an existing or a new customer and whether our product being designed in our customer’s device is a first generation or subsequent generation product. Our customers’ products can be complex and, if our engagement results in a design win, can require significant time to define, design and result in volume production. Because the sales cycle for our products is long, we can incur significant design and development expenditures in circumstances where we do not ultimately recognize any revenue. We do not have any long-term purchase commitments with any of our customers, all of whom purchase our products on a purchase order basis. Once one of our products is incorporated into a customer’s design, however, we believe that our product is likely to remain a component of the customer’s product for its life cycle because of the time and expense associated with redesigning the product or substituting an alternative chip. Product life cycles in our target markets will vary by application. For example, in the hybrid television market, a design-in can have a

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product life cycle of 9 to 18 months. In the terrestrial retail digital set-top box market, a design-in can have a product life cycle of 18 to 24 months. In the cable operator modem and gateway sectors, a design-in can have a product life cycle of 24 to 48 months. In the industrial and wired and wireless infrastructure markets, a design-in can have a product life cycle of 24 to 60 months and beyond.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, allowance for doubtful accounts, inventory valuation, goodwill and other intangible assets valuation, income taxes and stock-based compensation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

We believe that accounting policies we have identified as critical involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

For a summary of our critical accounting policies and estimates, refer to Management's Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2018, which we filed with the Securities and Exchange Commission, or SEC, on February 5, 2019, or our Annual Report. There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2019.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update require a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize right-of-use 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. We have made this election. Also, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, to provide an additional transition method. An entity can elect not to present comparative financial information under Topic 842 if it recognizes a cumulative-effect adjustment to retained earnings upon adoption. We have also made this election. Further, in January 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which clarified that post-adoption interim transition disclosures normally required in the year of adoption for the effect of a change in accounting principle on an entity’s financial statements are not required for the adoption of ASC 842. The amendments in these updates are effective for us for fiscal years beginning with 2019, including interim periods within those years, with early adoption permitted. We have completed our assessment of the impact of the adoption of ASC 842. Upon adoption, we recognized approximately $24.8 million of right-of-use assets and a net increase of $25.1 million in lease-related liabilities at January 1, 2019. Also, the impact of the adoption of ASC 842 on our accumulated deficit and deferred tax assets at January 1, 2019 was not material. Lastly, the impact of the adoption of ASC 842 on our consolidated results of operations for the year ending December 31, 2019 is not expected to be material.

In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, to clarify on how to apply certain aspects of the new lease accounting standard. The amendments in this update, among other things, better articulates the requirement for a lessee's reassessment of lease classification as of the effective date of a modification, clarifies that a change to an index or rate for variable lease payments does not constitute a resolution of a contingency that would result in the remeasurement of lease payments, and requires entities that apply Topic 842 retrospectively to each reporting period and do not adopt the practical expedients to write off any prior unamortized initial direct costs that do not meet the definition under Topic 842 to equity. The amendments in this update have the same effective date and transition requirements as the new lease standard summarized above. We have disclosed the impact of adoption of Topic 842 on our consolidated financial position and results of operations as stated above.

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clarifies that excess tax benefits should be recognized in the period in which the amount of the deduction is determined. The transition and effective date guidance is based on the facts and circumstances of each amendment. The amendment identified above will be effective for us beginning with fiscal year 2019. The adoption of the amendments in this update in the three months ended March 31, 2019 did not have a material impact on our consolidated financial position and results of operations.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), which is intended to improve accounting for hedging activities by expanding and refining hedge accounting for both nonfinancial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update became effective for us for fiscal years beginning with fiscal year 2019, including interim periods within those years, with early adoption permitted in any interim period. The amendments in this update were required to be applied prospectively. The adoption of the amendments in this update in the three months ended March 31, 2019 did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this update are effective for us beginning with fiscal year 2020, including interim periods, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of the amendments in this update is not expected to have a material impact on our consolidated financial position and results of operations.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement, to improve the fair value measurement reporting of financial instruments. The amendments in this update require, among other things, added disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update eliminate, among other things, disclosure of the reasons for and amounts of transfers between Level 1 and Level 2 for assets and liabilities that are measured at fair value on a recurring basis and an entity's valuation processes for Level 3 fair value measurements. The amendments in this update will be effective for us beginning with fiscal year 2020, with early adoption permitted. Retrospective application is required for all amendments in this update except the added disclosures, which should be applied prospectively. The adoption of the amendments in this update is not expected to have a material impact on our consolidated financial position and results of operations.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles- Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, to provide additional guidance on the accounting for costs of implementing cloud computing arrangements that are service contracts. The amendments in this update require the capitalization of implementation costs during the application development stage of such hosting arrangements and amortization of the expense over the term of the arrangement including any option to extend reasonably certain to be exercised or option to terminate reasonably certain not to be exercised. Capitalized implementation costs and amortization thereof are also required to be classified in the same line item in the statements of financial position, operations and cash flows associated with the hosting service fees. The amendments in this update will be effective for us beginning with fiscal year 2020, with early adoption permitted. Entities may select retrospective or prospective application to all implementation costs incurred after the adoption date. The adoption of the amendments in this update is not expected to have a material impact on our consolidated financial position and results of operations.

Results of Operations

The following describes the line items set forth in our unaudited consolidated statements of operations.

Net Revenue. Net revenue is generated from sales of radio-frequency, analog and mixed signal integrated circuits for the connected home, wired and wireless infrastructure, and industrial and multi-market applications. A significant portion of our sales are to distributors, who then resell our products.

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Cost of Net Revenue. Cost of net revenue includes the cost of finished silicon wafers processed by third-party foundries; costs associated with our outsourced packaging and assembly, test and shipping; costs of personnel, including stock-based compensation, and equipment associated with manufacturing support, logistics and quality assurance; amortization of acquired developed technology intangible assets; amortization of certain production mask costs; cost of production load boards and sockets; and an allocated portion of our occupancy costs.

Research and Development. Research and development expense includes personnel-related expenses, including stock-based compensation, new product engineering mask costs, prototype integrated circuit packaging and test costs, computer-aided design software license costs, intellectual property license costs, reference design development costs, development testing and evaluation costs, depreciation expense and allocated occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications. All research and development costs are expensed as incurred.

Selling, General and Administrative. Selling, general and administrative expense includes personnel-related expenses, including stock-based compensation, amortization of certain acquired intangible assets, third-party sales commissions, field application engineering support, travel costs, professional and consulting fees, legal fees, depreciation expense and allocated occupancy costs.

Restructuring Charges. Restructuring charges consist of severance, lease and leasehold impairment charges, and other charges related to restructuring plans.

Interest and Other Income (Expense), Net. Interest and other income (expense), net includes interest income, interest expense and other income (expense). Interest income consists of interest earned on our cash, cash equivalents and restricted cash balances. Interest expense consists of interest accrued on debt. Other income (expense) generally consists of income (expense) generated from non-operating transactions.

Income Tax Benefit. We make certain estimates and judgments in determining income taxes for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expenses for tax and financial statement purposes and the realizability of assets in future years.

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The following table sets forth our consolidated statement of operations data as a percentage of net revenue for the periods indicated:



	Three Months Ended March 31,
	2019		2018
Net revenue	100	%	100	%
Cost of net revenue	47		43
Gross profit	53		57
Operating expenses:
Research and development	32		28
Selling, general and administrative	28		24
Restructuring charges	2		—
Total operating expenses	63		53
Income (loss) from operations	(9	)	4
Total interest and other income (expense), net	(4	)	(4	)
Loss before income taxes	(13	)	—
Income tax benefit	(8	)	(2	)
Net income (loss)	(6	)%	2	%

Net Revenue



	Three Months Ended March 31,
	2019			2018			$ Change			% Change
	(dollars in thousands)
Connected home	$	43,432		$	65,658		$	(22,226	)	(34	)%
% of net revenue	51		%	59		%
Infrastructure	22,102			20,490			1,612			8	%
% of net revenue	26		%	19		%
Industrial and multi-market	19,101			24,679			(5,578		)	(23	)%
% of net revenue	23		%	22		%
Total net revenue	$	84,635		$	110,827		$	(26,192	)	(24	%)

Net revenue decreased $26.2 million to $84.6 million for the three months ended March 31, 2019, as compared to $110.8 million for the three months ended March 31, 2018. The decrease in connected home net revenue of $22.2 million was driven by a slowdown in the cable market, which impacted both cable and related MoCA product shipments, owing to the market transition from DOCSIS 3.0 to DOCSIS 3.1 and related customer inventory reductions, partially offset by increased satellite product shipments. The increase in infrastructure revenues of $1.6 million was primarily driven by increased high performance analog shipments in this category. The decrease in industrial and multi-market revenue of $5.6 million was related to decreased shipments of high performance analog products in this category.

We currently expect that revenue will fluctuate in the future, from period-to-period, based on evolving customer demand for existing products, the pace of adoption of newer products, and macroeconomic conditions.

Cost of Net Revenue and Gross Profit



	Three Months Ended March 31,
	2019			2018			$ Change			% Change
	(dollars in thousands)
Cost of net revenue	$	39,558		$	48,159		$	(8,601	)	(18	)%
% of net revenue	47		%	43		%
Gross profit	45,077			62,668			(17,591		)	(28	)%
% of net revenue	53		%	57		%

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Cost of net revenue decreased $8.6 million to $39.6 million for the three months ended March 31, 2019, as compared to $48.2 million for the three months ended March 31, 2018. The decrease was primarily driven by lower sales. The decrease in gross profit percentage for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, was due to lower revenue and product mix.

We currently expect that gross profit percentage will fluctuate in the future, from period-to-period, based on changes in product mix, average selling prices, and average manufacturing costs.

Research and Development



	Three Months Ended March 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
Research and development	$	27,399		$	31,121		(3,722	)	(12	)%
% of net revenue	32		%	28		%

Research and development expense decreased $3.7 million to $27.4 million for the three months ended March 31, 2019 from $31.1 million in the three months ended March 31, 2018. The decrease was primarily due to decreases in payroll-related expenses of $2.0 million due to lower headcount, depreciation expense of $0.6 million as a result of certain machinery and equipment reaching the end of their useful lives, prototype expenses of $0.6 million, and occupancy expenses of $0.3 million due to termination of certain leases.

We expect our research and development expenses to decrease or remain flat in the near term; however our expenses are likely to increase in the future as we continue to grow our business in building follow up products and expanding our product portfolio.

Selling, General and Administrative



	Three Months Ended March 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
Selling, general and administrative	$	23,591		$	27,117		(3,526	)	(13	)%
% of net revenue	28		%	24		%

Selling, general and administrative expense decreased $3.5 million to $23.6 million for the three months ended March 31, 2019, as compared to $27.1 million for the three months ended March 31, 2018. The decrease was primarily due to a decrease in intangible asset amortization of $2.2 million as certain assets reached the end of their useful lives, as well as decreases in payroll-related expense of $0.8 million due to lower headcount and professional fees of $0.5 million.

We expect selling, general and administrative expenses to decrease or remain flat in the near-term; however, our expenses may increase in the future when we expand our sales and marketing organization to enable expansion into existing and new markets.

Restructuring charges



	Three Months Ended March 31,
	2019			2018			$ Change	% Change
	(dollars in thousands)
Restructuring charges	$	1,917		$	—		1,917	100	%
% of net revenue	2		%	—		%

Restructuring charges increased $1.9 million to $1.9 million for the three months ended March 31, 2019, compared to $0 for the three months ended March 31, 2018.

Restructuring charges in 2019 primarily consisted of lease restructuring charges of $1.3 million related to exiting certain redundant facilities and severance-related charges of $0.5 million in connection with employee separation expenses.

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Interest and Other Income (Expense)



	Three Months Ended March 31,
	2019			2018			$ Change	% Change
	(dollars in thousands)
Interest and other income (expense), net	$	(3,483	)	$	(4,447	)	964	(22	)%
% of net revenue	(4		)%	(4		)%

Interest and other income (expense), net changed by $1.0 million from a net expense of $4.4 million in the three months ended March 31, 2018 to a net expense of $3.5 million for the three months ended March 31, 2019. The change in interest and other income (expense), net was primarily due to a decrease in interest expense of $0.9 million related to interest charges on a lower average balance of debt outstanding under our term loan facility during the period.

Income Tax Benefit



	Three Months Ended March 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
Income tax benefit	$	(6,462	)	$	(1,864	)	(4,598	)	247	%

The income tax benefit for the three months ended March 31, 2019 was $6.5 million or approximately 57% of pre-tax loss compared to an income tax benefit of $1.9 million for the three months ended March 31, 2018.

The income tax benefit for the three months ended March 31, 2019 and 2018 each primarily related to the mix of pre-tax income among jurisdictions, discrete tax benefits related to stock-based compensation, and release of certain foreign reserves for uncertain tax positions under ASC 740-10.

We continue to maintain a valuation allowance to offset state and certain federal and foreign deferred tax assets, as realization of such assets does not meet the more-likely-than-not threshold required under accounting guidelines. In making such determination, we consider all available positive and negative evidence quarterly, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon our review of all positive and negative evidence, we continue to have a valuation allowance on state deferred tax assets, certain federal deferred tax assets, and certain foreign deferred tax assets in jurisdictions where we have cumulative losses or otherwise are not expected to utilize certain tax attributes. We do not incur income tax expense or benefit in certain tax-free jurisdictions in which we operate.

Our subsidiary in Singapore operates under certain tax incentives in Singapore, which are generally effective through March 2022 and may be extended through March 2027. Under these incentives, qualifying income derived from certain sales of our integrated circuits is taxed at a concessionary rate over the incentive period. We also receive a reduced withholding tax rate on certain intercompany royalty payments made by our Singapore subsidiary during the incentive period. Such incentives are conditional upon our meeting certain minimum employment and investment thresholds within Singapore over time, and we may be required to return certain tax benefits in the event we do not achieve compliance related to that incentive period. We currently believe that we will be able to satisfy these conditions without material risk. Primarily because of our Singapore net operating losses and our full valuation allowance in Singapore, we do not believe the incentives will have a material impact on our income tax position in the year ending December 31, 2019.

Liquidity and Capital Resources

As of March 31, 2019, we had cash and cash equivalents of $71.1 million, restricted cash of $0.8 million and net accounts receivable of $59.6 million. Additionally, as of March 31, 2019, our working capital was $105.8 million.

Our primary uses of cash are to fund operating expenses, purchases of inventory, property and equipment, intangible assets, and from time to time, the acquisition of businesses. We also use cash to pay down outstanding debt. Our cash and cash equivalents are impacted by the timing of when we pay expenses as reflected in the change in our outstanding accounts payable and accrued expenses. Cash used to fund operating expenses in our consolidated statements of cash flows excludes the impact of non-cash items such as stock-based compensation, amortization and depreciation of acquired intangible assets and property and equipment, and impairment of intangible assets and long-lived assets. Cash used to fund capital purchases is included in investing activities in our consolidated statements of cash flows. Cash used to pay down outstanding debt is included in financing activities in our consolidated statements of cash flows.

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Our primary sources of cash are cash receipts on accounts receivable from our shipment of products to distributors and direct customers. Aside from the 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 distributor customers, and relative linearity of shipments period-to-period. Our credit agreement, under which we entered into a term loan to partially fund our acquisition of Exar, permits us to request incremental loans in an aggregate principal amount not to exceed the sum of $160.0 million (subject to adjustments for any voluntary prepayments), plus an unlimited amount that is subject to pro forma compliance with certain secured leverage ratio and total leverage ratio tests. We have not requested any incremental loans to date.

Following is a summary of our working capital, cash and cash equivalents, and restricted cash for the periods indicated:



	March 31,		December 31,
	2019		2018
	(in thousands)
Working capital	$	105,837	$	110,044
Cash and cash equivalents	$	71,102	$	73,142
Short-term restricted cash	347		645
Long-term restricted cash	418		404
Total cash, cash equivalents and restricted cash	$	71,867	$	74,191

Following is a summary of our cash flows provided by (used in) operating activities, investing activities and financing activities for the periods indicated:



	Three Months Ended March 31,
	2019			2018
	(in thousands)
Net cash provided by operating activities	$	16,045		$	11,971
Net cash used in investing activities	(2,155		)	(2,381		)
Net cash used in financing activities	(16,791		)	(26,411		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	577			(258		)
Decrease in cash, cash equivalents and restricted cash	$	(2,324	)	$	(17,079	)

Cash Flows from Operating Activities

Net cash provided by operating activities was $16.0 million for the three months ended March 31, 2019. Net cash provided by operating activities consisted of positive cash flow from $26.4 million in non-cash expenses and $2.8 million in changes in operating assets and liabilities, partially offset by deferred income taxes and excess tax benefits from stock-based compensation of $8.2 million and net loss of $4.9 million. Non-cash items included in net loss for the three months ended March 31, 2019 primarily included depreciation and amortization of property, equipment, acquired intangible assets and leased right-of-use assets of $16.9 million and stock-based compensation of $7.7 million. During the first quarter of 2019, we also exited certain leased facilities, which resulted in impairments of leased right-of-use assets of $2.2 million and leasehold improvements of $1.4 million, which was partially offset by a gain on extinguishment of related lease liabilities of $2.9 million.

Net cash provided by operating activities was $12.0 million for the three months ended March 31, 2018. Net cash provided by operating activities for this period primarily consisted of positive cash flow from adding back $29.3 million in non-cash operating expenses to net income of $1.8 million, partially offset by $16.1 million in changes in operating assets and liabilities, and $3.1 million in deferred income taxes and excess tax benefits on stock-based awards. Non-cash operating expense items included in net income for the three months ended March 31, 2018 primarily consisted of depreciation and amortization of property, equipment and acquired intangible assets of $20.1 million, stock-based compensation of $8.5 million, and losses on foreign currency of $0.5 million.

Cash Flows from Investing Activities

Net cash used in investing activities was $2.2 million for the three months ended March 31, 2019 and consisted entirely of purchases of property and equipment.

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Net cash used in investing activities was $2.4 million for the three months ended March 31, 2018 and consisted entirely of purchases of property and equipment.

Cash Flows from Financing Activities

Net cash used in financing activities was $16.8 million for the three months ended March 31, 2019. Net cash used in financing activities consisted primarily of cash outflows from aggregate principal prepayments of debt of $15.0 million and $4.4 million in minimum tax withholding paid on behalf of employees for restricted stock units, partially offset by cash inflows of $2.6 million in net proceeds from issuance of common stock upon exercise of stock options.

Net cash used in financing activities was $26.4 million for the three months ended March 31, 2018 and consisted primarily of cash outflows from aggregate prepayments of principal of $25.0 million on outstanding debt and $2.4 million in minimum tax withholding paid on behalf of employees related to vesting of restricted stock units and issuance of stock for bonus awards, partially offset by cash inflows from $1.0 million in net proceeds from issuance of common stock.

We believe that our $71.1 million of cash and cash equivalents at March 31, 2019 will be sufficient to fund our projected operating requirements for at least the next twelve months. We have repaid $178.0 million of debt to date. The credit agreement permits the Company to request incremental loans in an aggregate principal amount not to exceed the sum of $160.0 million (subject to adjustments for any voluntary prepayments), plus an unlimited amount that is subject to pro forma compliance with certain secured leverage ratio and total leverage ratio tests. Incremental loans are subject to certain additional conditions, including obtaining additional commitments from the lenders then party to the credit agreement or new lenders. The term loan facility has a seven-year term and bears interest at either an Adjusted LIBOR or an Adjusted Base Rate, at our option, plus a fixed applicable margin.

Our cash and cash equivalents in recent years have been favorably affected by our implementation of an equity-based bonus program for our employees, including executives. In connection with that bonus program, in February 2019, we issued 0.3 million freely-tradable shares of our common stock in settlement of bonus awards for the 2018 performance period. We expect to implement a similar equity-based plan for fiscal 2019, but our compensation committee retains discretion to effect payment in cash, stock, or a combination of cash and stock.

Notwithstanding the foregoing, we may need to raise additional capital or incur additional indebtedness to fund strategic initiatives or operating activities, particularly if we continue to pursue acquisitions. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our engineering, sales and marketing activities, the timing and extent of our expansion into new territories, the timing of introductions of new products and enhancements to existing products, the continuing market acceptance of our products and potential material investments in, or acquisitions of, complementary businesses, services or technologies. Additional funds may not be available on terms favorable to us or at all. If we are unable to raise additional funds when needed, we may not be able to sustain our operations or execute our strategic plans.

Warranties and Indemnifications

In connection with the sale of products in the ordinary course of business, we often make representations affirming, among other things, that our products do not infringe on the intellectual property rights of others, and agree to indemnify customers against third-party claims for such infringement. Further, our certificate of incorporation and bylaws require us to indemnify our officers and directors against any action that may arise out of their services in that capacity, and we have also entered into indemnification agreements with respect to all of our directors and certain controlling persons.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, or SPEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of March 31, 2019, we were not involved in any unconsolidated SPE transactions.

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Contractual Obligations

As of March 31, 2019, future minimum payments under long-term debt, non-cancelable operating leases, inventory purchase obligations and other obligations were as follows:



	Payments due
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(in thousands)
Long-term debt obligations	$	247,000	$	—	$	—	$	—