Notes to Condensed Consolidated Financial Statements
Unaudited

Description of Business

eSilicon Corporation (the Company) was incorporated in the state of Delaware in November 1999 and commenced operations in January 2000.  The Company is an independent designer and provider of complex application-specific integrated circuit (ASIC) solutions, high-performance intellectual property (IP) solutions, including memories, high performance input/output interfaces, and advanced packaging solutions. The Company offers a collaborative, transparent customer experience using a leading-edge advanced workflow and a knowledge base and optimization toolset to develop and produce semiconductor solutions for the high-bandwidth communications, networking, high-performance computing, artificial intelligence, and 5G infrastructure markets. 

The Company’s headquarters is in San Jose, California and has offices in the U.S., China, India, Italy, Malaysia, Romania, Spain and Vietnam.

In November 2019, Inphi Corporation (Inphi) and the Company entered into an Agreement and Plan of Merger pursuant to which Inphi agreed to acquire the Company for $214.8 million in cash. In January 2020, Inphi consummated the acquisition of the Company. Concurrent with the acquisition, the Company sold its Embedded Memory IP and Interface IP assets to Synopsys Incorporated.

Basis of Presentation

The interim unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended March 31, 2019 filed herewith.

The interim condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to state fairly the Company’s consolidated financial position as of September 30, 2019, and its consolidated results of operations and cash flows for the six months ended September 30, 2019 and 2018.

Liquidity and Going Concern

As of September 30, 2019, the Company had an accumulated deficit of $217.4 million. From incorporation through September 30, 2019, the Company financed its operations, capital expenditures, and working capital needs through its cash from its operating activities, issuance of convertible preferred stock, and debt financing.

The Company is subject to risks and uncertainties traditionally encountered by companies operating in the semiconductor industry. These risks include, but are not limited to, the uncertainty of availability of additional financing, and the uncertainty of achieving future profitability. In January 2020, the Company became a wholly-owned subsidiary of Inphi whereby Inphi acquired all assets and assumed all liabilities of the Company.

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eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

The Company determines fair value measurements used in its consolidated financial statements based upon the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs), and (ii) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The three levels of the fair value hierarchy are described below:

This hierarchy requires the Company to use observable market data, when available and to minimize the use of unobservable inputs when determining fair value.

The following describes the Company’s fair value hierarchy for its financial assets and liabilities (in thousands):

The Company used the Black-Scholes option pricing model to determine the fair value of the convertible preferred stock warrants, including the consideration of the fair value of the underlying stock, a risk-free interest rate, expected term and expected volatility. Certain inputs used in the model are unobservable. As a result, the valuation of the warrants is categorized as Level 3. The fair values could change significantly based on future market conditions.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

The following table presents the fair value activity for the convertible preferred stock warrant liability (in thousands):

The convertible preferred stock warrants are subject to remeasurement at each balance sheet date, and any change in fair value is recognized as a component of other income, net in the consolidated statements of operations.

Litigation and Indemnification

From time to time, the Company is a party to litigation and subject to claims that arise in the normal course of business. Significant judgment is required when the Company assesses the likelihood of any adverse judgments or outcomes to a potential claim or legal proceeding, as well as potential ranges of probable losses and when the outcomes of the claims or proceedings are probable and reasonably estimable. Because of uncertainties related to these matters, the Company bases its estimates on the information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation and may revise its estimates. Any revisions in the estimates of potential liabilities could have a material impact on the Company’s financial position, results of operations or cash flows.

The Company enters into agreements with its customers in the ordinary course of business that include standard provisions for indemnifying the customer against third-party IP claims. The agreements generally limit the scope of the available remedies in a variety of customary methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim and a right to replace or modify the infringing products to make them non-infringing.

Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, line of credit and term loans. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying value due to the nature of these instruments and short-term maturities. The Company estimates the fair value of its line of credit and term loans by considering the current rates available to the Company for debt of the same remaining maturities and with similar characteristics, structure and terms.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

Fair values of financial instruments. The fair values of the line of credit and long-term debt were as follows (in thousands):

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company deposits cash and cash equivalents with high-quality financial institutions and, at times, balances may exceed federally insured limits. Accounts receivable are typically unsecured and are derived from sales of ASIC and IP solutions. The Company performs ongoing credit evaluations of its customers’ financial condition and has not experienced any material credit losses in the past.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

There were no impairment charges during the six months ended September 30, 2019 or 2018.

As of September 30, 2019, the net carrying value of mask sets was $3.9 million. During the six months ended September 30, 2019, the Company did not capitalize any new mask set costs. As of March 31, 2019, the net carrying value of mask sets was $5.7 million. During the six months ended September 30, 2018, the Company capitalized $0.9 million of mask set costs.     

For the six months ended September 30, 2019 and 2018, the Company recorded a loss on the revision of capitalized mask sets of nil and $0.4 million, respectively. There were no impairments recorded for mask sets due to cancellation of projects or non-recoverability of the carrying value of the mask due to reductions in projected future revenues for the underlying ASIC product.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

For the six months ended September 30, 2019 and 2018, depreciation and amortization expense of property and equipment was $2.7 million and $2.9 million, respectively.

There were no impairment charges during the six months ended September 30, 2019 or 2018.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

For the six months ended September 30, 2019, the total amortization expense for intangible assets was nil. For the six months ended September 30, 2018, the total amortization expense for intangible assets was $22 thousand.

There were no impairment charges during the six months ended September 30, 2019 or 2018.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The carrying value of goodwill as of September 30, 2019 and March 31, 2019 was $11.4 million. There were no impairment indicators during the six months ended September 30, 2019 or 2018. There was no impairment recorded on goodwill during the six months ended September 30, 2019 or 2018. The Company performed a qualitative and quantitative analysis and determined that the fair value of the entity exceeded the carrying value of the Company’s net assets as of March 31, 2019.

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

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

The Company recorded an income tax expense of $0.6 million and $0.7 million for the six months ended September 30, 2019 and September 30, 2018, respectively. The effective tax rates were -5.2% and -3.1% for the nine months ended September 30, 2019 and September 30, 2018, respectively. The difference between the effective tax rates and the 21% federal statutory rate resulted primarily due to change in valuation allowance and foreign taxes.

The Company had unrecognized tax benefits of approximately $0.5 million as of September 30, 2019 and 2018. These unrecognized tax benefits relate to deferred tax assets which are offset by a full valuation allowance after consideration of the reserve. These unrecognized tax benefits, if recognized, would not affect the Company’s effective tax rate. No interest or penalties have been accrued as of September 30, 2019 or 2018. The Company does not expect any material changes to the estimated amount of liability associated with its uncertain tax positions within the next 12 months.

RGC Agreement. In July 2017, pursuant to a loan and security agreement with Runway Growth Credit Fund, Inc. (RGC Agreement), a debt venture fund of Runway Growth Capital LLC (RGC), the Company borrowed a total of $15.0 million, in two tranches of $10.0 million in July 2017 and $5.0 million in February 2018, each with a 36-month term and each with interest-only payments for the first 12 months.  The July 2017 tranche matures in July 2020 and the February 2018 tranche matures in January 2021.  Interest on outstanding balance is calculated on a LIBOR plus a margin and was 12.59% as of September 30, 2019 for both the July 2017 tranche and February 2018 tranche.

The RGC Agreement contained restrictive covenants, including covenants requiring the Company to maintain certain level of cash six months forward, and limiting its ability to incur additional debt, pay dividends, make investments and engage in mergers and acquisitions or the sale of its business. It also contains usual and customary events of default, such as payment default, covenant default, or a material adverse change in the Company’s business.

In June 2019, RGC and the Company entered into an amendment (RGC Amendment) which added a third borrowing tranche of $10 million. In connection with the RGC Amendment, Company borrowed an additional $10.0 million, due June 15, 2020 with interest-only payments for the first six months. The outstanding balance at September 30, 2019 was $10.0 million. Interest on outstanding balance is calculated on a LIBOR plus a margin and was 12.59% as of September 30, 2019.

The RCG Amendment also provides for a revolving line of credit, up to $12.0 million, which is due and payable on June 15, 2020. Interest on the outstanding balance is due monthly and is calculated on a LIBOR plus a margin and was 12.59% as of September 30, 2019. In June 2019, the Company borrowed $11.0 million against the line of credit which was outstanding as of September 30, 2019.

In addition to the restrictive covenants in the RGC Agreement, the RGC Amendment contains a new covenant that the Company shall enter into a definitive agreement to be acquired no later than July 31, 2019. The Company did not enter into a definitive agreement to be acquired by July 31, 2019 and RGC provided a Notice of Event of Default and Reservation of Rights which stated they were not taking action to enforce their rights under the RGC Agreement but specifically reserved the right to exercise their rights.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

In connection with the RGC Amendment, the Company granted the lender a continuing security interest in substantially all of its assets, including its intellectual property.

In connection with the RGC Amendment, the Company issued a warrant to the lender to purchase 990,099 shares of its Series H convertible preferred stock at an exercise price $1.01 per share. The warrants are exercisable in whole or in part at any time on or before the expiration date, 10 years from the issuance date. The fair value of the warrant to purchase 990,099 shares of Series H convertible preferred stock was $1.0 million.

The RGC Amendment was accounted for as a debt extinguishment under FASB ASC 470-50. The difference between the carrying value of all RGC debt and the fair value of RGC debt on the date of the RGC Amendment, including the fair value of the warrant to purchase shares of Series H convertible preferred stock, resulted in a gain on extinguishment of $0.3 million which is recorded as other income in the condensed consolidated statements of operations.

SVB Agreement. In May 2010, the Company entered into a loan and security agreement with Silicon Valley Bank (SVB). In March 2019, SVB and the Company entered into an amendment to extend the maturity date of the SVB Agreement to March 15, 2020. The SVB Agreement provided for a $25.0 million line of credit.

In connection with the RGC Amendment, the Company terminated the SVB Agreement in June 2019, and paid all outstanding amounts due, as well as the applicable early termination fee of $0.3 million.

Long-term debt consists of the following (in thousands):

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

7.   Commitments and Contingencies

Purchase Commitments

The Company has entered into time-based third-party IP and software license arrangements requiring quarterly payments through 2022. The future minimum payments under these arrangements as of September 30, 2019 were as follows (in thousands):

Standby Letter of Credit

As of September 30, 2019, the Company had one outstanding letter of credit secured by restricted cash, in the amount of $2.0 million, for the benefit of a supplier.

Facility Leases

The Company rents facilities under non-cancellable operating leases with terms through 2021. The future minimum payments under these arrangements as of September 30, 2019 are as follows (in thousands):

For the six months ended September 30, 2019 and 2018, rent expense for all operating leases was $0.8 million.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

IT Service Agreement

In April 2019, the Company entered into a cloud platform service agreement with Google LLC to migrate its on-premise data center to the Google Cloud Platform.

In September 2019, the Company entered into a managed service agreement with Wipro, LLC outsourced managed services on the Google Cloud Platform over a period of five years until August 31, 2024.

The future minimum payments under these arrangement as of September 30, 2019 are as follows (in thousands):

On June 11, 2019, the Company restated its certificate of incorporation to increase its total authorized convertible preferred stock to 230,666,791 shares at a par value of $0.0005 per share, 72,000,000 shares of which are designated as Series H convertible preferred stock.

As of September 30, 2019, convertible preferred stock consists of the following (in thousands, except share and per share data):

The rights, preferences and privileges of the Series A, B, C, D, E-1, F, G-1 and H convertible preferred stock of the Company are as follows:

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

Dividends. Holders of Series A, B, C, D, E-1, F and H convertible preferred stock are entitled to receive annual dividends of $0.04, $0.172, $0.0448, $0.0448, $0.0476, $0.0741 and $0.0808 per share, respectively, prior and in preference to payment of any dividends on the common stock of the Company. Such dividends are payable only when, as and if declared by the board of directors and are not cumulative. Holders of Series G-1 convertible preferred stock are entitled to receive annual dividends of $0.0505 per share prior and in preference to payment of any dividends on Series A, B, C, D, E-1, F and H convertible preferred and common stock of the Company (the Accruing Dividends). The Accruing Dividends are payable whether or not declared by the board of directors, and are cumulative. Such Accruing Dividends shall accrue daily and shall be payable (i) semi-annually on the last business day of the first and third fiscal quarters of the Company, and (ii) on the earlier to occur of (a) the closing of a liquidation event (as defined), and the Company’s first underwritten public offering of its common stock (the Final G-1 Dividend Date). Such Accruing Dividends may be paid in either cash or shares of Series G-1 convertible preferred stock, at the election of the Company, and shall cease to accrue from and after the Final G-1 Dividend Date. In 2019, the Company issued 787,094 shares of Series G-1 convertible preferred stock as stock dividends. For the six months ended September 30, 2019, the Company issued 389,339 shares of Series G-1 convertible preferred stock as stock dividends. As of September 30, 2019, the Company has issued a total of 2,052,780 shares of Series G-1 convertible preferred stock as stock dividends.

Liquidation. In the event of any liquidation, dissolution or winding up of the Company, holders of Series A, B, C, D, E-1, F, G-1 and H convertible preferred stock are entitled to receive, prior and in preference to any distribution to common stockholders, liquidation preferences of $0.50, $2.15, $0.560088, $0.560088, $0.5949, $0.9263, $1.01 and $1.5150 per share, respectively, plus all declared but unpaid dividends for Series A, B, C, D, E-1, F and H convertible preferred stock, and all Accruing Dividends accrued and unpaid and all other declared but unpaid dividends for Series G-1 convertible preferred stock. Series H convertible preferred stock has a liquidation preference senior to Series A, B, C, D, E-1, F and G-1 convertible preferred stock. Series G-1 convertible preferred stock has a liquidation preference senior to Series A, B, C, D, E-1, and F convertible preferred stock. Series F convertible preferred stock has a liquidation preference senior to Series A, B, C, D and E-1 convertible preferred stock. Series E-1 convertible preferred stock has a liquidation preference senior to Series A, B, C and D convertible preferred stock. Series C and D convertible preferred stock have a liquidation preference senior to Series A and B convertible preferred stock. Upon liquidation, any assets and funds of the Company remaining after payment of liquidation preferences to holders of Series A, B, C, D, E-1, F, G-1 and H convertible preferred stock are to be distributed on a pro rata basis among the holders of common stock. A reorganization, merger or similar transaction, as described in the Company’s certificate of incorporation, or a sale by the stockholders to a third party of shares representing at least a majority of the voting power, is considered to be a liquidation, dissolution or winding up of the Company, which entitles each holder of Series A, B, C, D, E-1, F, G-1 and H convertible preferred stock to receive cash or other property equal to their liquidation preference.

After payment of the above preferential amounts, any remaining assets of the Company available for distribution to its stockholders shall be distributed on a pro rata basis among the holders of the then outstanding common stock and Series H convertible preferred stock on an as-converted basis.

Redemption. The convertible preferred stock is not mandatorily redeemable as it does not have a set redemption date or a date after which the shares may be redeemed by the holders. The holders of the convertible preferred stock control a majority of the votes of the board of directors. As such, the decision to redeem the convertible preferred stock is not solely within the control of the Company. Therefore, the Company has classified the convertible preferred stock within temporary or mezzanine equity.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

Conversion. Each share of convertible preferred stock is convertible at the option of the holder into one share of common stock. Each share of Series A, B, C, D, E-1, F, G-1 and H convertible preferred stock shall automatically convert into common stock either immediately prior to an initial public offering of the Company in which the Company has an implied valuation of at least $275.0 million and with proceeds of at least $30.0 million or upon the written consent of the holders of at least 66²/3% of the then-outstanding shares of convertible preferred stock acting together on an as- converted basis, and a majority in interest of the Series H convertible preferred stock, provided that if the conversion is to be by written consent, the Series E-1 convertible preferred stock shall not be converted without the written consent of the holders of 60% of the then-outstanding shares of Series E-1 convertible preferred stock, the Series F convertible preferred stock shall not be converted without the written consent of the holders of 60% of the then-outstanding shares of Series F convertible preferred stock, and the Series G-1 convertible preferred stock shall not be converted without the written consent of the holders of at least a majority of the then outstanding shares of Series G-1 convertible preferred stock.

Voting. Each holder of Series A, B, C, D, E-1, F, G-1 and H convertible preferred stock has voting rights equal to the holders of common stock on an as if converted basis.

The Company has issued convertible preferred stock warrants in conjunction with various debt instruments. These warrants are detachable, are classified as freestanding warrant liabilities under FASB ASC 480-10, and are measured at fair value on a recurring basis.

Term loan warrants. In June 2012, in connection with the SVB Agreement described in Note 6, the Company issued a warrant to the lender to purchase 412,371 shares of its Series F convertible preferred stock at an exercise price of $0.97 per share. The warrants expired in June 2019.

In August 2012, in connection with a debt financing agreement, the Company issued warrants to the two lenders to purchase 377,847 shares each of its Series F convertible preferred stock at an exercise price equal to the lower of $0.9263 per share or the price per share of the next series of preferred stock. The warrants expired in August 2019.

In December 2013, in connection a debt financing agreement, the Company issued warrants to the lenders to purchase a total of 485,803 shares of its Series F convertible preferred stock at an exercise price equal to the lower of $0.9263 per share or the price per share of the next series of preferred stock. The warrants are exercisable in whole or in part at any time on or before the expiration date, 12 years from the issuance date.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

In July 2017, in connection with the RGC Agreement described in Note 6, the Company issued a warrant to the lender to purchase 1,485,148 shares of its Series H convertible preferred stock at an exercise price $1.01 per share. The warrants are exercisable in whole or in part at any time on or before the expiration date, 10 years from the issuance date.

In June 2019, in connection with the RGC Amendment described in Note 6, the Company issued a warrant to the lender to purchase 990,099 shares of its Series H convertible preferred stock at an exercise price $1.01 per share. The warrants are exercisable in whole or in part at any time on or before the expiration date, 10 years from the issuance date.

The fair value of the above term loan warrants was estimated using the following assumptions.

Design win warrants. In May 2016, the Company entered into an arrangement with an existing customer (the Customer), whereby each time the Company was awarded a CoASIC development program by this Customer (a Design Win), the Company would issue the Customer a performance-based warrant to purchase its Series G-1 convertible preferred stock (the May 2016 Customer Agreement). The warrant was exercisable in whole or in part on or before the expiration date, 10 years from the issuance date. The number of shares subject to the warrant was based on the forecasted units of ASIC products over a three-year period, from first commercial shipment (the Revenue Period). Vesting of such warrant was earned quarterly based on actual ASIC products purchased by the Customer over the Revenue Period.

In November 2016, pursuant to a Design Win, the Company issued a warrant to the Customer to purchase 4,294,060 shares of its Series G-1 convertible preferred stock at an exercise price of $0.0005 per share (November 2016 Design Win Warrant). In February 2017, pursuant to a Design Win, the Company issued a warrant to the Customer to purchase 860,000 shares of its Series G-1 convertible preferred stock at an exercise price of $0.0005 per share (February 2017 Design Win Warrant). During the fiscal year ended March 31, 2017, the performance condition was not met on either warrant, accordingly, no expense was recognized on such warrants.

In July 2017, the May 2016 Customer Agreement was amended such that any warrant for future CoASIC Design Wins will be fully vested at grant date to purchase common stock, instead of a performance-based warrant to purchase Series G-1 convertible preferred stock. The Company shall have the right, at its option, to repurchase all or a portion of the shares of common stock issued upon exercise of such warrant if the Design Win is not released to production.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

In July 2017, the November 2016 Design Win Warrant was cancelled and replaced with a fully vested warrant to purchase 2,700,000 shares of Series G-1 convertible preferred stock of the Company at an exercise price of $0.0005 per share. Further, the February 2017 Design Win Warrant was modified to a fully vested warrant to purchase 860,000 shares of Series G-1 convertible preferred stock of the Company at an exercise price of $0.0005 per share. The Customer exercised both warrants in July 2017, subject to repurchase at the Company’s election if the Design Win is not released to production. The Company determined the fair values of the two warrants replacing the November 2016 and February 2017 Design Win Warrants using the Black-Scholes option pricing model, assuming a fair value for Series G-1 of $0.89 per share, risk-free interest rate of 1.0%, volatility of 35%, no dividends, and a contractual life of zero. The resulting total value of $3.2 million was recorded as R&D expense in the consolidated statements of operations in 2018.

In October 2017, pursuant to a Design Win, the Company issued a warrant to the Customer to purchase 1,299,122 shares of its common stock at an exercise price of $0.0005 per share. The Company determined the fair value of the Design Win warrant using the Black-Scholes option pricing model, assuming a fair value for common of $0.56 per share, risk-free interest rate of 2.37%, volatility of 45%, no dividends, and a contractual life of 10 years. The resulting value of $0.7 million was recorded as R&D expense in the consolidated statements of operations in 2018.

In March 2019, pursuant to a Design Win project cancellation, the Company exercised its right to repurchase the 860,000 shares of Series G-1 convertible preferred stock of the Company purchased by the Customer under the February 2017 Design Win Warrant. The Company paid $430 to repurchase the 860,000 shares of Series G-1 convertible preferred stock based on the exercise price of $0.0005. The difference between the carrying value of the repurchased stock of $0.9 million and the fair value of the consideration paid was accounted for as a deemed dividend in 2019.

Common stock

On February 12, 2018, the Company restated its certificate of incorporation to increase its total authorized common stock to 345,000,000 shares at a par value of $0.0005 per share.

As of September 30, 2019, the Company had authorized 345,000,000 shares of common stock, of which: (i) 43,467,519 shares were issued and outstanding; (ii) 206,620,849 shares were reserved for issuance upon conversion of the Company’s outstanding Series A, B, C, D, E-1, F, G-1 and H convertible preferred stock; (iii) 59,742,731 shares were reserved for issuance upon exercise of options granted or available for grant under the equity incentive plans described below; and (iv) 4,260,172 shares were reserved for issuance upon exercise of convertible preferred and common stock warrants.

In March 2010, the Company adopted the 2010 Equity Incentive Plan (2010 Plan), which replaced the 2000 Equity Incentive Plan and provides for the issuance of incentive stock options for employees including officers and directors who are also employees of the Company, and nonqualified stock options, restricted stock, restricted stock units and stock appreciation rights, which may be granted to employees, officers, directors and consultants of the Company. The Company had available 14,941,528 shares of common stock for future issuance under the 2010 Plan as of September 30, 2019.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

Under the 2010 Plan, incentive stock options may be granted to employees at exercise prices not lower than the fair value of the stock at the date of grant as determined by the board of directors, or the committee appointed by the board of directors to administer the 2010 Plan. For incentive stock options granted to a person who, at the time of the grant, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company, the per share exercise price must be no less than 110% of the fair value on the date of the grant as determined by the board of directors.

Options vest at a rate determined by the board of directors and will expire no later than 10 years from the date of grant. Options granted to newly hired employees typically vest over 48 months with 25% vesting after 12 months and 75% vesting ratably over the following 36 months. Grants to existing employees typically vest in equal amounts monthly over a term of 48 months.

The 2010 Plan allows for the issuance of restricted common stock upon early exercise of non-vested stock options subject to the repurchase right of the Company. The repurchase right lapses in accordance with the vesting schedule of the original option. To date, the Company has not issued any restricted stock, restricted stock units, or stock appreciation rights under the 2010 Plan.

A summary of activity under both plans for the six months ended September 30, 2019 is presented below (unaudited):

The aggregate intrinsic value of options outstanding as of September 30, 2019 was nil. The aggregate intrinsic value of options vested and expected to vest as of September 30, 2019 was nil. The intrinsic value of exercisable stock options as of September 30, 2019 was nil.

The weighted-average grant date fair value of the stock options granted during the six months ended September 30, 2019 was $0.27. The employee stock options exercised during the six months ended September 30, 2019 had aggregate intrinsic values of $2,000.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

The Company estimates the fair value of each option award on the date of grant using the Black-Scholes option-pricing model with the assumptions noted in the following table. Expected volatility was calculated based on the historical volatility of a peer group of publicly traded comparable companies over the expected terms of the option. The expected term of options granted is derived by using the simplified method, as described in SEC Staff Accounting Bulletin No. 107, Share-Based Payment. Under the simplified method, the expected term is equal to the average of the stock-based award’s vesting period and its contractual term. The Company expects to continue using the simplified method until sufficient information is available. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield is set at 0% as the Company does not expect to pay dividends during the term of the option, and historically has not paid any dividends to the holders of common stock. The Company accounts for forfeitures when they occur. The assumptions used to value options granted were as follows:

As of September 30, 2019, there was approximately $2.7 million of total unrecognized compensation cost related to stock-based payments granted under the Company’s stock-based compensation plans that will be recognized over a remaining weighted-average period of approximately 1.71 years.

On August 29, 2018, Company’s board of directors approved the repricing of all outstanding stock options held by current employees, directors of the board and certain terminated employees who were in their post termination exercise period, with an exercise price above $0.36 per share, to a new exercise price of $0.36 per share. Except for the change in exercise price, the repriced options have the same terms and conditions as the original options, including the contractual terms, vesting start date and vesting schedule. The Company recorded $2.0 million of stock-based compensation expense for vested shares and an additional $1.0 million will be recognized over the vesting period for unvested shares.

Stock-based compensation expense included in the consolidated statements of operations is as follows (in thousands):

One member of the Company’s board of directors is also a member of one of the Company customers’ board of directors. The director owns more than 5% of the Company’s outstanding stock. For the six months ended September 30, 2018 and 2019, the Company’s total revenues from the customer were nil. As of March 31, 2019 and September 30, 2019, the outstanding accounts receivable balance from the customer was nil.

eSilicon Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited

In May 2016, pursuant to the Company’s Series G-1 convertible preferred stock financing, two of the Company’s existing customers participated in the preferred stock financing. For the six months ended September 30, 2019 and 2018, total revenues from the first customer were $2.5 million and $2.6 million, respectively. As of September 30, 2019, and March 31, 2019, the outstanding accounts receivable balance from this first customer was nil and $0.2 million, respectively. As of September 30, 2019, and March 31, 2019, total advances from this first customer, as a collaborator, were $0.1 million and $0.4, respectively. During 2019, the Company’s total revenues and outstanding accounts receivable balance from the second customer were nil. During the six months ended September 30, 2019 and 2018, the Company purchased from the second customer, also a supplier, certain IP licenses amounting to $1.6 million and $2.5 million. As of September 30, 2019, and March 31, 2019, the outstanding accounts payable balance to the second customer was $0.8 million and $1.7 million, respectively.

As of September 30, 2019, the founder and CEO of RGC, has an ownership interest of less than 10% in the Company’s outstanding stock and is a member of the Company’s board of directors.

The Company purchased certain IP licenses from a supplier, also an investor, for a total contract price of $5.5 million in 2018. As of September 30, 2019, the outstanding accounts payable balance to this supplier was $2.8 million.

In November 2019, Inphi Corporation (Inphi) and the Company entered into an Agreement and Plan of Merger pursuant to which Inphi agreed to acquire the Company for $214.8 million in cash. In January 2020, Inphi consummated the acquisition of the Company. Concurrent with the acquisition, the Company sold its Embedded Memory IP and Interface IP assets to Synopsys Incorporated.

Subsequent to the acquisition, Inphi and the Company have received written communications from certain former stockholders of the Company demanding to inspect the Company’s books and records and indicating that such stockholders will be seeking appraisal of shares they held in the Company. Certain of these former eSilicon stockholders also have stated that they may assert claims against eSilicon’s directors and senior officers for alleged breaches of fiduciary duty and other violations in connection with the acquisition.  The Company and Inphi are unaware of any petition for appraisal and/or lawsuit being filed by any former eSilicon stockholder.  The Company and Inphi believe that the claims in such written communications are without merit, and plan to vigorously defend against lawsuits arising out of or relating to the merger agreement and/or the merger that may be filed in the future.

26

Notes to Consolidated Financial Statements

Description of Business

eSilicon Corporation (the Company) was incorporated in the state of Delaware in November 1999 and commenced operations in January 2000.  The Company is an independent designer and provider of complex application-specific integrated circuit (ASIC) solutions, high-performance intellectual property (IP) solutions, including memories, high performance input/output interfaces, and advanced packaging solutions. The Company offers a collaborative, transparent customer experience using a leading-edge advanced workflow and a knowledge base and optimization toolset to develop and produce semiconductor solutions for the high-bandwidth communications, networking, high-performance computing, artificial intelligence, and 5G infrastructure markets. 

The Company’s headquarters is in San Jose, California and has offices in the U.S., China, India, Italy, Malaysia, Romania, Spain and Vietnam.

Basis of Presentation and Principles of Consolidation

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP) and include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company’s fiscal year ends March 31. References to 2019 refer to the Company’s fiscal year ended March 31, 2019.

Liquidity and Going Concern

As of March 31, 2019, the Company had an accumulated deficit of $204.6 million. From incorporation through March 31, 2019, the Company financed its operations, capital expenditures, and working capital needs through its cash from its operating activities, issuance of convertible preferred stock, and debt financing.

The Company is subject to risks and uncertainties traditionally encountered by companies operating in the semiconductor industry. These risks include, but are not limited to, the uncertainty of availability of additional financing, and the uncertainty of achieving future profitability. Management believes that the Company will be successful in raising additional financing from its stockholders or from other sources of capital funding, in expanding operations, and in gaining market share. However, there can be no assurance that in the event the Company requires additional financing, such financing will be available on terms which are favorable, if at all. Failure to generate sufficient cash flows from operations, raise additional capital or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These matters raise substantial doubt about the ability of the Company to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

eSilicon Corporation

Notes to Consolidated Financial Statements

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates and assumptions include percentage of completion or proportional performance for revenue arrangements with customers, the valuation of accounts receivable, inventories, goodwill, intangible assets, deferred tax assets and uncertain tax positions, the useful life of fixed assets and assumptions used in the calculation of fair value of common stock, warrant liability, and stock-based compensation expense. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, and adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Revenue Recognition

The Company earns revenues from the production of ASIC solutions, custom ASIC design and development solutions, custom IP development solutions, engineering services, IP support and maintenance and IP licensing. Such revenues are presented as follows in the consolidated statements of operations:

The Company recognizes revenues, net of any discounts, when there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured for all arrangements. The delivery criterion for each type of product and service is discussed below.

Production of ASIC solutions. Product revenues are generated from the sale of ASIC products and are recognized, together with the related cost of the product sold, when the related ASIC products are shipped or delivered to the customer. When the Company enters into a contract that includes both a custom ASIC design and development phase and an ASIC production phase, such ASIC production phase is considered a contingent deliverable at the time of entering into the contract, as the Company’s customers only make a purchasing decision for the production of ASIC solutions after the successful completion of the custom ASIC design and development phase. During 2019, ASIC product revenues were $89.2 million.

eSilicon Corporation

Notes to Consolidated Financial Statements

Custom ASIC design and development solutions. The Company performs design and development services of ASICs to a customer’s specifications and recognizes revenues and cost of service revenues using the percentage of completion method, based on the achievement of substantive design and development milestones.

At each reporting date, the Company measures custom ASIC service revenues earned by multiplying the total contract price by the percentage of completion of the contract, less amounts recognized in prior periods. The percentage of completion, which indicates the extent of progress made toward completion of the contract is measured based on milestones that correspond to substantive results of the completed work. Such substantive results are measured using labor hours incurred as a percentage of total estimated labor hours for the contract. If the achievement of a milestone is subject to a customer acceptance, such milestone is not considered achieved until such acceptance is received.

Revenues recognized in excess of billed amounts are recorded as unbilled receivables, and billings in excess of revenues recognized are recorded as deferred revenues.

Cost of custom ASIC service revenues recognized is equal to the estimated cost-to-complete multiplied by the percentage of completion, less amounts recognized in prior periods. At the inception of the contract, and at each reporting date thereafter, the Company estimates the total cost-to-complete of such contract. If the then estimated cost-to-complete exceeds the original contract price, a provision for the entire loss is recorded in cost of service revenues in the period. Any changes in the estimated cost-to-complete are recognized in the period in which such change is made.

Costs incurred relating to revenues that have been deferred are recorded as deferred costs. Cost of revenues in excess of actual costs incurred is recorded as accrued contract costs.

During 2019, custom ASIC design and development services revenues were $12.2 million, and the Company recognized provision for losses of nil. As of March 31, 2019, estimated loss reserves on custom ASIC design and development services were nil.

Custom IP development solutions. The Company performs custom design and development of IP, a software deliverable that involves significant customization to a customer’s specifications for its exclusive use.

Revenues and cost of service revenues from custom IP development services are recognized under the percentage of completion using the same method as described for custom ASIC design and development solutions.

During 2019, custom IP development revenues were $1.1 million, and the Company recognized a provision for losses of nil. As of March 31, 2019, estimated loss reserves on custom IP development services were nil.

Engineering services. Engineering services contracts, such as ASIC prototype services, ASIC packaging services and other ASIC solutions consulting services, are structured on either a fixed-fee or a time-and-materials basis.

Revenue for fixed-fee contracts is recognized under the proportional performance method, upon the achievement of substantive milestones with the associated costs included in cost of service revenues. The Company estimates the proportional performance of the contracts based on an analysis of progress toward completion. If the amount billed under a contract exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenues.

eSilicon Corporation

Notes to Consolidated Financial Statements

Revenue for time-and-materials contracts is recognized as the effort is incurred, with the associated costs included in cost of service revenues. During 2019, engineering services revenues were $1.6 million.

IP support and maintenance. The Company enters into support and maintenance contracts with customers that previously purchased custom IP development services and IP technology. The Company recognizes revenue ratably over the term of the support and maintenance periods which typically range from one to two years. During 2019, IP support and maintenance revenue was $1.3 million.

Licensing. The Company generates licensing revenue from its IP technology, such as high-bandwidth memory, ternary content addressable memory (TCAM), high performance input/output interfaces, and from licensing of its manufacturing rights.

The Company recognizes licensing revenue from off-the-shelf IP technology and manufacturing rights when all of the general revenue recognition criteria are met.

Licensing IP technology contracts may include light engineering development to configure the IP technology to the customer’s needs. The Company retains ownership of the IP technology and can subsequently license such IP technology to other customers. Revenue from such arrangements is recognized under the proportional performance method. The Company estimates the proportional performance of the contracts based on an analysis of progress toward completion. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenues.

During 2019, IP technology licensing revenues were $6.8 million. The Company did not license any manufacturing rights during 2019.

Collaborative ASIC (CoASIC) Arrangements

The Company enters into joint development arrangements with some of its customers, as collaborators, for the design and development of an ASIC. A CoASIC arrangement has the following characteristics:

Therefore, all costs related to these arrangements are included in research and development expense.

Any CoASIC funding from the customers as collaborators is considered as payment to defray a portion of the research and development costs. As CoASIC funding becomes due and payable without recourse, it is offset against research and development expense up to the amount of the related research and development costs incurred. If such due and payable CoASIC funding amount billed exceeds the amount of research and development cost incurred, the excess is recorded as deferred research and development reimbursement. During 2019, the Company recorded $13.5 million of the CoASIC funding as an offset against research and development expense. If a CoASIC project is cancelled by a customer and the amount paid without recourse exceeds costs incurred up to termination, the excess funding is accounted for as other operating income. During 2019, income from project terminations was $5.2 million.

eSilicon Corporation

Notes to Consolidated Financial Statements

Cash and Cash Equivalents

The Company considers investments with original maturities of three months or less from the date of purchase to be cash equivalents.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not accrue interest. The allowance for doubtful accounts is the Company’s estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines that allowance based upon a review of each receivable and all known factors that could affect collectability. These factors include but are not limited to customer past payment performance, customer financial condition, general economic or industry conditions and disputes regarding the invoiced amount or regarding the product or service rendered. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Inventories

Inventories are stated at the lower of cost or net realizable value which approximates actual cost on the first-in, first-out basis. The Company writes down excess and obsolete inventory based on its age and forecasted demand, generally over a 12-month period. Such forecasted demand estimate takes into consideration the Company’s outlook on uncertain events such as market and economic conditions, technology changes, new product introductions and changes in strategic direction. Actual demand may differ from forecasted demand and such differences may have a material effect on recorded inventory values.