10-Q
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, 2016
OR
¨ 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨ 
 
Accelerated filer
 
þ
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨ 
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 May 4, 2016, the registrant has 56,378,170 shares of Class A common stock, par value $0.0001, and 6,666,777 shares of Class B common stock, par value $0.0001, outstanding.


Table of Contents

MAXLINEAR, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

 
 
Page
Part I
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



2

Table of Contents

PART I — FINANCIAL INFORMATION


3

Table of Contents

ITEM 1.
FINANCIAL STATEMENTS

MAXLINEAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par amounts)
 
March 31,
 
December 31,
 
2016
 
2015
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
76,840

 
$
67,956

Short-term investments, available-for-sale
73,210

 
43,300

Accounts receivable, net
41,040

 
42,399

Inventory
29,421

 
32,443

Prepaid expenses and other current assets
6,185

 
3,904

Total current assets
226,696

 
190,002

Property and equipment, net
21,538

 
21,858

Long-term investments, available-for-sale
16,782

 
19,242

Intangible assets, net
49,293

 
51,355

Goodwill
49,779

 
49,779

Other long-term assets
2,169

 
2,269

Total assets
$
366,257

 
$
334,505

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,818

 
$
6,389

Deferred revenue and deferred profit
6,523

 
4,066

Accrued price protection liability
18,443

 
20,026

Accrued expenses and other current liabilities
17,269

 
15,368

Accrued compensation
13,221

 
9,983

Total current liabilities
63,274

 
55,832

Deferred rent
10,195

 
11,427

Other long-term liabilities
4,773

 
4,322

 
 
 
 
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, no shares issued or outstanding

 

Class A common stock, $0.0001 par value; 500,000 shares authorized, 56,322 and 55,737 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
6

 
5

Class B common stock, $0.0001 par value; 500,000 shares authorized, 6,665 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
1

 
1

Additional paid-in capital
390,704

 
384,961

Accumulated other comprehensive loss
(588
)
 
(822
)
Accumulated deficit
(102,108
)
 
(121,221
)
Total stockholders’ equity
288,015

 
262,924

Total liabilities and stockholders’ equity
$
366,257

 
$
334,505

See accompanying notes.

4

Table of Contents

MAXLINEAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

 
Three Months Ended March 31,
 
2016
 
2015
Net revenue
$
102,685

 
$
35,396

Cost of net revenue
41,515

 
13,725

Gross profit
61,170

 
21,671

Operating expenses:
 
 
 
Research and development
23,752

 
15,281

Selling, general and administrative
13,610

 
10,944

Restructuring charges
2,106

 

Total operating expenses
39,468

 
26,225

Income (loss) from operations
21,702

 
(4,554
)
Interest income
170

 
70

Other expense, net
(198
)
 
(34
)
Income (loss) before income taxes
21,674

 
(4,518
)
Provision for income taxes
2,558

 
204

Net income (loss)
$
19,116

 
$
(4,722
)
Net income (loss) per share:
 
 
 
Basic
$
0.31

 
$
(0.12
)
Diluted
$
0.29

 
$
(0.12
)
Shares used to compute net income (loss) per share:
 
 
 
Basic
62,585

 
38,015

Diluted
65,818

 
38,015


See accompanying notes.

5

Table of Contents

MAXLINEAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)


 
Three Months Ended March 31,
 
2016
 
2015
Net income (loss)
$
19,116

 
$
(4,722
)
Other comprehensive income, net of tax:
 
 
 
Unrealized gain on investments, net of tax of $0 for the three months ended March 31, 2016 and 2015, respectively
126

 
35

Unrealized gain on investments, net of tax
126

 
35

Foreign currency translation adjustments, net of tax of $0 for the three months ended March 31, 2016 and 2015
108

 
12

Foreign currency translation adjustments, net of tax
108

 
12

Other comprehensive income
234

 
47

Total comprehensive income (loss)
$
19,350

 
$
(4,675
)


See accompanying notes.

6

Table of Contents

MAXLINEAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Three Months Ended March 31,
2016
 
2015
Operating Activities
 
 
 
Net income (loss)
$
19,116

 
$
(4,722
)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Amortization and depreciation
5,772

 
1,639

Provision for inventory reserves
38

 

Amortization of investment premiums, net
149

 
149

Stock-based compensation
5,109

 
3,719

Deferred income taxes
233

 

Change in fair value of contingent consideration
86

 
(183
)
Loss on foreign currency
124

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
1,359

 
(2,143
)
Inventory
2,984

 
(1,991
)
Prepaid and other assets
(2,416
)
 
(416
)
Accounts payable, accrued expenses and other current liabilities
3,080

 
3,015

Accrued compensation
3,231

 
1,874

Deferred revenue and deferred profit
2,457

 
21

Accrued price protection liability
(1,583
)
 
2,647

Other long-term liabilities
(785
)
 
159

Net cash provided by operating activities
38,954

 
3,768

Investing Activities
 
 
 
Purchases of property and equipment
(3,222
)
 
(1,024
)
Purchases of available-for-sale securities
(37,773
)
 
(16,153
)
Maturities of available-for-sale securities
10,300

 
16,190

Net cash used in investing activities
(30,695
)
 
(987
)
Financing Activities
 
 
 
Repurchases of common stock
(3
)
 

Net proceeds from issuance of common stock
1,727

 
248

Minimum tax withholding paid on behalf of employees for restricted stock units
(1,092
)
 
(265
)
Equity issuance costs

 
(697
)
Net cash provided by (used in) financing activities
632

 
(714
)
Effect of exchange rate changes on cash and cash equivalents
(7
)
 
6

Increase in cash and cash equivalents
8,884

 
2,073

Cash and cash equivalents at beginning of period
67,956

 
20,696

Cash and cash equivalents at end of period
$
76,840

 
$
22,769

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes
$
30

 
$
55

Supplemental disclosures of non-cash activities:
 
 
 
Accrued purchases of property and equipment
$
165

 
$
87

See accompanying notes.

7

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 


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 and mixed-signal integrated circuits for cable and satellite broadband communications and the connected home, and for data center, metro, and long-haul transport network applications. MaxLinear's customers include 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 Pay-TV operator set-top boxes, DOCSIS data and voice gateways, hybrid analog and digital televisions and consumer terrestrial set-top boxes, Direct Broadcast Satellite outdoor units, and optical modules for data center, metro, and long-haul transport network applications. The Company is a fabless semiconductor company focusing its resources on the design, sale and marketing of its products.
Acquisition of Certain Assets and Assumption of Certain Liabilities of the Broadband Wireless Division of Microsemi Storage Solutions, Inc. (formerly known as PMC-Sierra, Inc.)
On April 28, 2016, the Company entered into an asset purchase agreement with Microsemi Storage Solutions, Inc., formerly known as PMC-Sierra, Inc., or Microsemi, and consummated the transactions contemplated by the asset purchase agreement. The Company paid cash consideration of $21.0 million for the purchase of certain wireless access assets of Microsemi's Broadband Wireless Division, and assumed certain liabilities. The assets acquired include, among other things, radio frequency and analog/mixed signal patents and other intellectual property, in-production and next-generation RF transceiver designs, a workforce-in-place, and other intangible assets, as well as tangible assets that include but are not limited to production masks and other production related assets, inventory, and other property, plant, and equipment. The liabilities assumed include, among other things, product warranty obligations and accrued vacation and severance obligations for employees of the Broadband Wireless Division that were rehired by the Company. The acquired assets and liabilities, together with the rehired employees, represent a business as defined in ASC 805, Business Combinations. The Company intends to integrate the acquired assets and rehired employees into the Company's existing business. The asset purchase agreement also contains customary representations, warranties and covenants, including non-competition, non-solicitation, and indemnification provisions set forth therein. In connection with the acquisition, the Company entered into a transition services agreement with Microsemi for the purpose of Microsemi providing interim operations, engineering and general and administrative support to the Company.
The Company has not made all of the remaining disclosures required by ASC 805-10-50-2, Business Combinations, as it is currently in the process of completing the purchase accounting for the acquisition. The Company used cash and cash equivalents on hand of $21.0 million to fund the acquisition.
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. 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) and cash flows.
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, 2015 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 17, 2016, as amended by Amendment No. 1 filed with the SEC on April 28, 2016, or the Annual Report. Certain prior period amounts have been reclassified to conform with current period presentation. Interim results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016.

8

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

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. There have been no material changes to our significant accounting policies during the three months ended March 31, 2016.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning in the first quarter of fiscal year 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of adopting this new accounting standard on its consolidated financial position and results of operations.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which requires inventory to be subsequently measured using the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments in this Update are effective for the Company beginning in the first quarter of fiscal 2017 and should be applied prospectively. The Company is currently evaluating the impact that this guidance will have on the Company's consolidated financial position and results of operations.

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 the lease term for all leases with terms greater than twelve months. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this Update are effective for the Company for fiscal years beginning with fiscal year 2019, including interim periods within those years, with early adoption permitted. The Company is currently in the process of evaluating the impact of adoption of the amendments in this Update on the Company’s consolidated financial position and results of operations; however, adoption of the amendments in this Update are expected to be material for most entities who have a material lease greater than twelve months.

In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to clarify the revenue recognition implementation guidance on principal versus agent considerations. The amendments in this Update clarify that when another party is involved in providing goods or services to a customer, an entity that is the principal has obtained control of a good or service before it is transferred to a customer, and provides indicators to assist an entity in determining whether it controls a specified good or service prior to the transfer to the customer. An entity that is the principal recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer, whereas an agent recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. The amendments in this Update are effective for the Company beginning in the first quarter of fiscal year 2018, concurrent with the new revenue recognition standard. The Company is currently evaluating the impact of adopting the new revenue recognition accounting standard, including this Update, on its consolidated financial position and results of operations.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Share-Based Compensation to simplify certain aspects of accounting for share-based payment transactions associated with income taxes, classification as equity or liabilities, and classification on the statement of cash flows. The amendments in this Update are effective for the Company for fiscal years beginning with fiscal year 2017, including interim periods within those years, with early adoption permitted. Early adoption, if elected, must be completed for all of the amendments in the same period. Amendments related to the timing of when excess tax

9

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the consolidated statement of cash flows using either a prospective transition method or a retrospective transition method. The Company is currently in the process of evaluating the full impact of adoption of the amendments in this Update on the Company’s consolidated financial position and results of operations, but believes that the amendments that require that all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement will reduce income tax expense on the consolidated financial statements.
2. Net Income (Loss) Per Share
Net income (loss) per share is computed as required by the accounting standard for earnings per share, or EPS. Basic 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 (loss) 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.
The Company has two classes of stock outstanding, Class A common stock and Class B common stock. The economic rights of the Class A common stock and Class B common stock, including rights in connection with dividends and payments upon a liquidation or merger are identical, and the Class A common stock and Class B common stock will be treated equally, identically and ratably, unless differential treatment is approved by the Class A common stock and Class B common stock, each voting separately as a class. The Company computes basic earnings per share by dividing net income (loss) by the weighted average number of shares of Class A and Class B common stock outstanding during the period. For diluted earnings per share, the Company divides net income (loss) by the sum of the weighted average number of shares of Class A and Class B common stock outstanding and the potential number of shares of dilutive Class A and Class B common stock outstanding during the period.
 
Three Months Ended March 31,
 
2016
 
2015
Numerator:
 
 
 
Net income (loss)
$
19,116

 
$
(4,722
)
Denominator:
 
 
 
Weighted average common shares outstanding—basic
62,585

 
38,015

Dilutive common stock equivalents
3,233

 

Weighted average common shares outstanding—diluted
65,818

 
38,015

Net income (loss) per share:
 
 
 
Basic
$
0.31

 
$
(0.12
)
Diluted
$
0.29

 
$
(0.12
)
The Company excluded 0.2 million and 3.3 million common stock equivalents for the three months ended March 31, 2016 and 2015, respectively, resulting from outstanding equity awards for the calculation of diluted net income (loss) per share due to their anti-dilutive nature.


10

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

3. Business Combination
Acquisition of Entropic Communications, Inc.
On April 30, 2015, the Company completed its acquisition of Entropic Communications, Inc., or Entropic, for aggregate consideration of $289.4 million, which was comprised of the equity value of shares of the Company's common stock that were issued in the transaction of $173.8 million, the portion of outstanding equity awards deemed to have been earned as of April 30, 2015 of $4.5 million and cash of $111.1 million.
Refer to Note 4 for disclosures following this acquisition for the three months ended March 31, 2016 and 2015.
Acquisition of Physpeed, Co., Ltd.
On October 31, 2014, the Company acquired 100% of the outstanding common shares of Physpeed Co., Ltd., or Physpeed, a privately held developer of high-speed physical layer interconnect products addressing enterprise and telecommunications infrastructure market applications. The Company paid $9.3 million in cash in exchange for all outstanding shares of capital stock and equity of Physpeed. Consideration payable of $1.1 million to the former shareholders of Physpeed was placed into escrow pursuant to the terms of the definitive merger agreement.
The following disclosures regarding this acquisition are for the three months ended March 31, 2016.
Compensation Arrangements
In connection with the acquisition of Physpeed, the Company agreed to pay additional consideration in future periods. The definitive merger agreement provided for potential consideration of $1.7 million of held back merger proceeds for the former principal shareholders of Physpeed which will be paid over a two year period contingent upon continued employment. Quarterly payments of $0.2 million began on January 31, 2015 and will end on October 31, 2016. Certain employees of Physpeed will be paid a total of $0.1 million of which $0.07 million was paid in 2015 and $0.05 million will be paid in 2016. These payments are accounted for as transactions separate from the business combination as the payments are contingent upon continued employment and will be recorded as post-combination compensation expense in the Company's financial statements during the service period.
Earn-Out
The definitive merger agreement also provides for potential earn-out consideration of up to $0.75 million to the former shareholders of Physpeed for the achievement of certain 2015 and 2016 revenue milestones. The contingent earn-out consideration had an estimated fair value of $0.3 million at the date of acquisition. The 2015 earn-out amount is determined by multiplying the based amount of $0.375 million by a 2015 revenue percentage that is defined in the definitive merger agreement. The 2016 earn-out amount is determined by multiplying $0.375 million by a 2016 revenue percentage that is defined in the definitive merger agreement. Subsequent changes to the fair value are recorded through earnings. The fair value of the earn-out was $0.2 million and $0.4 million at March 31, 2016 and December 31, 2015, respectively. During the three months ended March 31, 2016, the Company paid $0.2 million related to this earn-out (Note 6).
Restricted Stock Units
The Company agreed to grant restricted stock units, or RSUs, under its equity incentive plan to Physpeed continuing employees if certain 2015 and 2016 revenue targets are met contingent upon continued employment. Qualifying revenues are the net revenues recognized directly attributable to sales of Physpeed products or the Company’s provision of non-recurring engineering services exclusively with respect to the Physpeed products.
The Company recorded compensation expense for the 2015 RSUs, over a 14 month service period from October 31, 2014 through December 31, 2015. The Company records compensation expense for the 2016 RSUs over a 26 month service period, which had started from October 31, 2014 and running through December 31, 2016. The Company has recorded an accrual for the stock-based compensation expense for the 2015 and 2016 RSUs of $1.0 million and $1.9 million at March 31, 2016 and December 31, 2015, respectively. The Company had issued the 2015 RSUs at February 2016 and no related accrual for the 2015 revenue period was outstanding at March 31, 2016.


11

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

4. Restructuring Activity
In connection with the Company's acquisition of Entropic, the Company entered into a restructuring plan to address matters primarily relating to the integration of the Company and Entropic businesses. In connection with this plan, the Company has terminated the employment of 87 Entropic employees since the acquisition closing date. The Company did not incur any associated employee separation charges for the three months ended March 31, 2016, as the Company did not have such terminations during the quarter.
Additionally, in connection with the restructuring plan, the Company ceased use of the former Entropic headquarters in 2015. During the three months ended March 31, 2016, the Company recognized lease charges of $2.0 million based on the adjustment to the net present value of the remaining lease obligation on the cease of use date as well as the execution of the final sublease. The Company believes all charges have been incurred related to restructuring as of March 31, 2016.
The following table presents the activity related to the plan, which is included in restructuring charges in the Consolidated Statements of Operations:
 
Three Months Ended March 31, 2016
 
(in thousands)
Lease related charges (1)
$
1,976

Other
130

 
$
2,106

____________________________
(1)
Includes $0.4 million in offsets to restructuring charges related to an Entropic lease that was restructured prior to the completion of the acquisition by MaxLinear. The Company recorded an adjustment to the lease restructuring due to changes in market conditions.
The following table presents a roll-forward of the Company's restructuring liability as of March 31, 2016, which 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, 2015
$
75

 
$
1,557

 
$
1

 
$
1,633

Restructuring charges (1)

 
1,976

 
130

 
2,106

Cash payments
(8
)
 
(1,323
)
 
(20
)
 
(1,351
)
Liability as of March 31, 2016
$
67

 
$
2,210

 
$
111

 
$
2,388

____________________________
(1)
Includes $0.4 million in offsets to restructuring charges related to an Entropic lease that was restructured during to the completion of the acquisition by MaxLinear. The Company recorded an adjustment to the lease restructuring due to changes in market conditions.

5. Goodwill and Intangible Assets

Goodwill

We had no changes in the carrying amount of goodwill in the three months ended March 31, 2016. The carrying value of goodwill was $49.8 million as of March 31, 2016.    

Goodwill is not amortized, but is tested for impairment using a two-step method on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair market value of the reporting unit. No goodwill impairment was recognized as of March 31, 2016.

12

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

Acquired Intangibles
Finite-lived Intangible Assets
The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions and technology licenses purchased, which continue to be amortized:
 
 
 
March 31, 2016
 
December 31, 2015
 
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
 
$
2,921

 
$
(2,813
)
 
$
108

 
$
2,921

 
$
(2,725
)
 
$
196

Developed technology
7
 
47,000

 
(6,331
)
 
40,669

 
47,000

 
(4,652
)
 
42,348

Trademarks and trade names
7
 
1,700

 
(222
)
 
1,478

 
1,700

 
(162
)
 
1,538

Customer relationships
5
 
4,700

 
(862
)
 
3,838

 
4,700

 
(627
)
 
4,073

Backlog
1
 
24,200

 
(24,200
)
 

 
24,200

 
(24,200
)
 

 
 
 
$
80,521

 
$
(34,428
)
 
$
46,093

 
$
80,521

 
$
(32,366
)
 
$
48,155


The amortization expense related to intangible assets in the three months ended March 31, 2016 and 2015 was $2.1 million and $0.2 million, respectively. There were no additions to intangible assets or impairments of intangible assets in the three months ended March 31, 2016.

The following table presents future amortization of the Company’s intangible assets at March 31, 2016:
 
Amortization
(in thousands)
2016 (nine months)
$
5,981

2017
7,931

2018
7,914

2019
7,897

2020
7,270

Thereafter
9,100

Total
$
46,093


Indefinite-lived Intangible Assets
In the three months ended March 31, 2016, there were no additions to, impairments of, or transfers of acquired indefinite-lived intangible assets, or IPR&D. The carrying value of IPR&D was $3.2 million at March 31, 2016.



13

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

6. Financial Instruments
The composition of financial instruments is as follows:
 
March 31, 2016
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
Gains
 
Losses
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
Money market funds
$
29,828

 
$

 
$

 
$
29,828

Government debt securities
35,332

 
9

 
(3
)
 
35,338

Corporate debt securities
54,649

 
18

 
(13
)
 
54,654

 
119,809

 
27

 
(16
)
 
119,820

Less amounts included in cash and cash equivalents
(29,828
)
 

 

 
(29,828
)
 
$
89,981

 
$
27

 
$
(16
)
 
$
89,992

 
Fair Value at March 31, 2016
 
(in thousands)
Liabilities
 
Contingent Consideration
$
241

Total
$
241

 
December 31, 2015
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
Gains
 
Losses
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
Money market funds
$
17,144

 
$

 
$

 
$
17,144

Government debt securities
17,303

 

 
(30
)
 
17,273

Corporate debt securities
45,353

 

 
(84
)
 
45,269

 
79,800

 

 
(114
)
 
79,686

Less amounts included in cash and cash equivalents
(17,144
)
 

 

 
(17,144
)
 
$
62,656

 
$

 
$
(114
)
 
$
62,542

 
Fair Value at December 31, 2015
 
(in thousands)
Liabilities
 
Contingent Consideration
$
395

Total
$
395


14

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

At March 31, 2016, the Company held 24 government and corporate debt securities with an aggregate fair value of $38.0 million that were in an unrealized loss position for less than 12 months. The gross unrealized losses of $0.02 million at March 31, 2016 represent temporary impairments on government and corporate debt securities related to multiple issuers, and were primarily caused by fluctuations in U.S. interest rates. The Company evaluates securities for other-than-temporary impairment on a quarterly basis. Impairment is evaluated considering numerous factors, and their relative significance varies depending on the situation. Factors considered include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer; including changes in the financial condition of the security’s underlying collateral; any downgrades of the security by a rating agency; nonpayment of scheduled interest, or the reduction or elimination of dividends; as well as our intent and ability to hold the security in order to allow for an anticipated recovery in fair value.
All of the Company’s long-term available-for-sale securities were due between 1 and 2 years as of March 31, 2016.
The fair values of the Company’s financial instruments are the amounts that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants and are recorded using a hierarchal 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.
The Company classifies its financial instruments within Level 1 or Level 2 of the fair value hierarchy on the basis of valuations using quoted market prices or alternate pricing sources and models utilizing market observable inputs, respectively. The Company’s money market funds were valued based on quoted prices for the specific securities in an active market and were therefore classified as Level 1. The government and corporate debt securities have been valued on the basis of valuations provided by third-party pricing services, as derived from such services’ pricing models. The pricing services may use a consensus price which is a weighted average price based on multiple sources or mathematical calculations to determine the valuation for a security, and have been classified as Level 2. The Company reviews Level 2 inputs and fair value for reasonableness and the values may be further validated by comparison to independent pricing sources. In addition, 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. As of March 31, 2016, the Company has not made any adjustments to the prices obtained from its third party pricing providers. The contingent liability is classified as Level 3 as of March 31, 2016 and December 31, 2015 and is valued using an internal rate of return model. The assumptions used in preparing the internal rate of return model include estimates for future revenues related to Physpeed products and services and a discount factor of 0.64 at March 31, 2016 and 0.41 at December 31, 2015. The assumptions used in preparing the internal rate of return model include estimates for outcome if milestone goals are achieved, the probability of achieving each outcome and discount rates. Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration in isolation could result in a significantly lower or higher fair value. A change in estimated future revenues would be accompanied by a directionally similar change in fair value.

15

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

The following table presents a summary of the Company’s financial instruments that are measured on a recurring basis:
 
 
 
Fair Value Measurements at March 31, 2016
 
Balance at March 31, 2016
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Assets
 
 
 
 
 
 
 
Money market funds
$
29,828

 
$
29,828

 
$

 
$

Government debt securities
35,338

 

 
35,338

 

Corporate debt securities
54,654

 

 
54,654

 

 
$
119,820

 
$
29,828

 
$
89,992

 
$

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
241

 
$

 
$

 
$
241

 
$
241

 
$

 
$

 
$
241

 
 
 
Fair Value Measurements at December 31, 2015
 
Balance at December 31, 2015
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Assets
 
 
 
 
 
 
 
Money market funds
$
17,144

 
$
17,144

 
$

 
$

Government debt securities
17,273

 

 
17,273

 

Corporate debt securities
45,269

 

 
45,269

 

 
$
79,686

 
$
17,144

 
$
62,542

 
$

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
395

 
$

 
$

 
$
395

 
$
395

 
$

 
$

 
$
395


16

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

The following summarizes the activity in Level 3 financial instruments:
 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands)
Contingent Consideration (1)
 
 
 
Beginning balance
$
395

 
$
265

Physpeed earn-out payment
(240
)
 

(Gain) loss recognized in earnings (2)
86

 
(183
)
Ending balance
$
241

 
$
82

Net gain (loss) for the period included in earnings attributable to contingent consideration held at the end of the period:
$
(86
)
 
$
183

(1)
In connection with the acquisition of Physpeed, the Company recorded contingent consideration based upon the expected achievement of 2016 revenue milestones. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the valuation model are recorded in selling, general and administrative expense in the statement of operations.
(2)
Changes to the estimated fair value of contingent consideration for the three months ended March 31, 2016 were primarily due to updates to present value discount factors. Changes to the estimated fair value of contingent consideration for the three months ended March 31, 2015 were primarily due to revisions to the Company's expectations of earn-out achievement.
There were no transfers between Level 1, Level 2 or Level 3 financial instruments in three months ended March 31, 2016.
7. Balance Sheet Details
Cash and cash equivalents and investments consist of the following:
 
March 31, 2016
 
December 31, 2015
 
(in thousands)
Cash and cash equivalents
$
76,840

 
$
67,956

Short-term investments
73,210

 
43,300

Long-term investments
16,782

 
19,242

 
$
166,832

 
$
130,498

Inventory consists of the following:
 
March 31, 2016
 
December 31, 2015
 
(in thousands)
Work-in-process
$
14,866

 
$
15,713

Finished goods
14,555

 
16,730

 
$
29,421

 
$
32,443


17

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

Property and equipment consist of the following:
 
Useful Life
(in Years)
 
March 31, 2016
 
December 31, 2015
 
 
 
(in thousands)
Furniture and fixtures
5
 
$
2,494

 
$
2,458

Machinery and equipment
3 -5
 
23,914

 
23,679

Masks and production equipment
2
 
8,084

 
8,062

Software
3
 
3,022

 
3,017

Leasehold improvements
4 -5
 
11,363

 
9,573

Construction in progress
N/A
 
377

 
62

 
 
 
49,254

 
46,851

Less accumulated depreciation and amortization
 
 
(27,716
)
 
(24,993
)
 
 
 
$
21,538

 
$
21,858

Deferred revenue and deferred profit consist of the following:
 
March 31, 2016
 
December 31, 2015
 
(in thousands)
Deferred revenue—rebates
$
122

 
$
118

Deferred revenue—distributor transactions
9,162

 
5,695

Deferred cost of net revenue—distributor transactions
(2,761
)
 
(1,747
)
 
$
6,523

 
$
4,066

Accrued price protection liability consists of the following activity:
 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands)
Beginning balance
$
20,026

 
$
10,018

Charged as a reduction of revenue
10,243

 
6,009

Reversal of unclaimed rebates
(1,302
)
 
(12
)
Payments
(10,524
)
 
(3,350
)
Ending balance
$
18,443

 
$
12,665

Accrued expenses and other current liabilities consist of the following:
 
March 31, 2016
 
December 31, 2015
 
(in thousands)
Accrued technology license payments
$
3,000

 
$
3,000

Accrued professional fees
786

 
1,196

Accrued restructuring
2,388

 
1,633

Accrued litigation costs
85

 
534

Accrued royalty
2,453

 
2,042

Accrued leases - other
1,306

 

Other
7,251

 
6,963

 
$
17,269

 
$
15,368



18

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

8. Stock-Based Compensation and Employee Benefit Plans
Refer to the Company’s Annual Report for a summary of the stock-based compensation and equity plans. There have been no material changes to such plans during the three months ended March 31, 2016.
Stock-Based Compensation
The Company uses the Black-Scholes valuation model to calculate the fair value of stock options and employee stock purchase rights granted to employees. The Company calculates the fair value of RSUs, and restricted stock awards, or RSAs, based on the fair market value of our Class A common stock on the grant date. The weighted-average grant date fair value per share of the RSUs and RSAs granted in the three months ended March 31, 2016 was $14.04. The weighted-average grant date fair value per share of the RSUs and RSAs granted in the three months ended March 31, 2015 was $8.22. No stock options were granted during the three months ended March 31, 2016 and 2015.
The Company recognized 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,
 
2016
 
2015
 
(in thousands)
Cost of net revenue
$
43

 
$
35

Research and development
3,279

 
2,340

Selling, general and administrative
1,787

 
1,344

 
$
5,109

 
$
3,719

The total unrecognized compensation cost related to unvested stock options as of March 31, 2016 was $1.3 million, and the weighted average period over which these equity awards are expected to vest is 1.18 years. The total unrecognized compensation cost related to unvested RSUs and RSAs as of March 31, 2016 was $30.7 million, and the weighted average period over which these equity awards are expected to vest is 2.63 years.
The Company records equity instruments issued to non-employees as expense at their fair value over the related service period as determined in accordance with the authoritative guidance and periodically revalues the equity instruments as they vest. Stock-based compensation expense related to non-employee consultants totaled $0.1 million in the three months ended March 31, 2016 and 2015.
In connection with the acquisition of Entropic, the Company assumed stock options and RSUs originally granted by Entropic. Stock-based compensation expense in the three months ended March 31, 2016 included $0.3 million in assumed Entropic stock options and RSUs.
Employee Incentive Bonus
At March 31, 2016, an accrual of $3.5 million was recorded for bonus awards for employees for the July 1, 2015 - December 31, 2015 performance period, which the Company intends to settle in shares of its Class A common stock issued in May 2016 under its 2010 Equity Incentive Plan, as amended, with the number of shares issuable to plan participants determined based on the closing sales price of the Company’s Class A common stock as determined in trading on the New York Stock Exchange at a date to be determined. The Company's compensation committee retains discretion to effect payment in cash, stock, or a combination of cash and stock.
Restricted Stock Units and Restricted Stock Awards
The Company calculates the fair value of restricted stock units and restricted stock awards based on the fair market value of the Company’s Class A common stock on the grant date. Stock-based compensation expense is recognized over the vesting period using the straight-line method and is classified in the consolidated statements of operations based on the department to which the related employee reports.

19

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

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, 2015
3,642

 
$
9.19

Granted
751

 
14.04

Vested
(471
)
 
9.70

Canceled
(58
)
 
10.56

Outstanding at March 31, 2016
3,864

 
10.06

The intrinsic value of restricted stock units and restricted stock awards vested during the three months ended March 31, 2016 was $71.4 million. The intrinsic value of restricted stock units and restricted stock awards outstanding at March 31, 2016 was $7.4 million.
Shares Reserved for Future Issuance
As of March 31, 2016, common stock reserved for future issuance is as follows:
 
Number of Shares
(in thousands)
Stock options outstanding
3,359

Restricted stock units and restricted stock awards outstanding
3,864

Authorized for future grants under 2010 Equity Incentive Plan
6,556

Authorized for future issuance under 2010 Employee Stock Purchase Plan
1,247

Total
15,026

On January 1, 20162.5 million shares of Class A common stock were automatically added to the shares authorized for issuance under the 2010 Equity Incentive Plan pursuant to an “evergreen” provision contained in the 2010 Equity Incentive Plan. In addition, 0.8 million shares of Class A common stock were automatically added to the shares authorized for issuance under the 2010 Employee Stock Purchase Plan pursuant to an “evergreen” provision contained in the 2010 Employee Stock Purchase Plan.

9. Income Taxes
In order to determine the quarterly provision for income taxes, the Company used an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates. The provision for income taxes primarily relates to projected current federal and state income taxes and income taxes in certain foreign jurisdictions. Certain significant or unusual items are separately recognized 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. The Company records deferred tax assets to the extent it believes these assets will more likely than not 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.  Based upon the Company's review of all positive and negative evidence, including its three year U.S. cumulative pre-tax book loss and taxable loss, the Company concluded that a full valuation allowance should continue to be recorded against its U.S. net deferred tax assets at March 31, 2016. Additionally, the Company completed the acquisition of Entropic in the second quarter 2015. As a result of the acquisition, there was a valuation allowance release that resulted in a tax benefit of $1.8 million due to the purchase accounting adjustment for the net deferred tax liability. Furthermore, the Company does not incur expense or benefit in the certain tax free jurisdictions in which it operates.

20

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

The Company recorded a provision for income taxes of $2.6 million and $0.2 million for the three months ended March 31, 2016 and 2015, respectively. The provision for income taxes for the three months ended March 31, 2016 primarily relates to federal alternative minimum tax due to the Company’s limitation on use of net operating losses, state income taxes, and income taxes in certain foreign jurisdictions. The impact of the federal alternative minimum tax will be reduced when the Company adopts ASU No. 2016-09, Improvements to Share-Based Compensation, since net excess tax benefits will then be recognized in income tax expense or benefit in the statement of operations (Note 1). The provision for income taxes for the three months ended March 31, 2015 primarily relates to income taxes in certain foreign jurisdictions.
During the three months ended March 31, 2016, the Company’s unrecognized tax benefits increased by $0.3 million. The Company expects decreases to its unrecognized tax benefits of $0.1 million within twelve months, due to the lapse of statutes of limitations. Accrued interest and penalties associated with uncertain tax positions as of March 31, 2016 were $0.1 million and $0.05 million, respectively.
The Company is not currently under examination in any jurisdictions.

10. Concentration of Credit Risk and Significant Customers
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. 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.
The Company markets its products and services to manufacturers of wired and wireless communications equipment throughout the world. The Company makes periodic evaluations of the credit worthiness of its customers and does not require collateral for credit sales.
Customers greater than 10% of net revenues for each of the periods presented are as follows:
 
Three Months Ended March 31,
 
2016
 
2015
Percentage of total net revenue
 
 
 
Arris
24
%
 
29
%
Cisco(1)
18
%
 
14
%
WNC Corporation
14
%
 
*

                                        
* Represents less than 10% of the net revenue for the respective period.
(1) In November 2015, Technicolor completed its purchase of Cisco’s connected devices business. In the three months ended March 31, 2015, the revenue percentage above does not include the 2% revenue from Technicolor.
Products shipped to international destinations representing greater than 10% of net revenue for each of the periods presented are as follows:
 
Three Months Ended March 31,
 
2016
 
2015
Percentage of total net revenue
 
 
 
China
81
%
 
71
%
The determination of which country a particular sale is allocated to is based on the destination of the product shipment.
Balances greater than 10% of accounts receivable are as follows:

21

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

 
March 31,
 
December 31,
 
2016
 
2015
Percentage of gross accounts receivable
 
 
 
WNC Corporation
19
%
 
16
%
Pegatron Corporation
16
%
 
17
%
Sernet Technologies Corporation
13
%
 
14
%
MTI Jupiter Technologies
*

 
13
%
                                        
* Represents less than 10% of the gross accounts receivable for the respective period end.

11. Commitments and Contingencies
Lease Commitments and Other Contractual Obligations
The Company leases facilities and certain equipment under operating lease arrangements expiring at various years through fiscal 2022. As of March 31, 2016, future minimum payments under non-cancelable operating leases, other obligations, and inventory purchase obligations are as follows:
 
Operating Leases
 
Other Obligations
 
Inventory Purchase Obligations
 
Total
 
(in thousands)
2016 (nine months)
$
5,991

 
$
5,708

 
$
19,297

 
$
30,996

2017
6,809

 
4,948

 

 
11,757

2018
6,001

 
830

 

 
6,831

2019
5,678

 

 

 
5,678

2020
6,024

 

 

 
6,024

Thereafter
7,590

 

 

 
7,590

Total minimum payments
$
38,093

 
$
11,486

 
$
19,297

 
$
68,876


On May 6, 2015, the Company amended a lease arrangement with The Campus Carlsbad, LLC, so that the current Carlsbad office space of approximately 45,000 square feet will be expanded to include an additional 24,000 square feet of space. The original lease, which had a term of three years and seven months with an original expiration date of November 30, 2019, was extended to an expiration date of June 30, 2022. During 2015, the Company has begun significant tenant improvement activities to expand into this office space. The Company was provided a tenant improvement allowance of approximately $1,543,000 for tenant improvement costs and related fees and expenses.

On November 11, 2015, the Company entered into a real property lease with The Northwestern Mutual Life Insurance Company, a Wisconsin corporation, with respect to the lease of approximately 50,235 square feet of office and laboratory space located at 50 Parker in Irvine, California. The Company expects to relocate current operations in Irvine, California to the new facility in May 2016.

The lease has an initial term of six years and two months, commencing on the later of (i) April 1, 2016 or (i) the date upon which certain building and tenant improvements have been substantially completed and possession of the substantially completed premises has been tendered by the landlord to the Company. The base monthly rent under the lease is approximately $68,000 per month during the first year of the initial lease term, increasing to approximately $86,000 per month during the last year of the initial lease term. The lease contains an option to extend the lease term for a single, five-year period. If the lease term is extended for the optional five-year period, the monthly base rent will be adjusted based on the fair market rental value. In addition to base rent, the Company has agreed to pay for a proportional share of the common area operating expenses and real property taxes. The lease includes customary provisions providing for late fees for unpaid rent, landlord access to the property, insurance obligations and events of default. In addition, this agreement includes tenant improvement incentives of $2.7 million.

22

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

Entropic Communications Merger Litigation
Between February 9, 2015 and February 18, 2015, eleven stockholder class action complaints (captioned Langholz v. Entropic Communications, Inc., et al., C.A. No. 10631-VCP (filed Feb. 9, 2015); Tomblin v. Entropic Communications, Inc., C.A. No. 10632-VCP (filed Feb. 9, 2015); Crill v. Entropic Communications, Inc., et al., C.A. No. 10640-VCP (filed Feb. 11, 2015); Wohl v. Entropic Communications, Inc., et al., C.A. No. 10644-VCP (filed Feb. 11, 2015); Parshall v. Entropic Communications, Inc., et al., C.A. No. 10652-VCP (filed Feb. 12, 2015); Saggar v. Padval, et al., C.A . No. 10661-VCP (filed Feb. 13, 2015); Iyer v. Tewksbury, et al., C.A. No. 10665-VCP (filed Feb. 13, 2015); Respler v. Entropic Communications, Inc., et al., C.A. No. 10669-VCP (filed Feb. 17, 2015); Gal v. Entropic Communications, Inc., et al., C.A. No. 10671-VCP (filed Feb. 17, 2015); Werbowsky v. Padval, et al., C.A. No. 10673-VCP (filed Feb. 18, 2015); and Agosti v. Entropic Communications, Inc., C.A. No. 10676-VCP (filed Feb. 18, 2015)) were filed in the Court of Chancery of the State of Delaware, or the Court, on behalf of a putative class of Entropic stockholders alleging that the board of directors of Entropic breached its fiduciary duties in connection with the then-proposed acquisition of Entropic by the Company and that the Company aided and abetted such breaches. Plaintiffs in the complaints sought, among other things, to enjoin the defendants from consummating the proposed transaction.
On April 16, 2015, the Court entered an order consolidating the Delaware actions, captioned In re Entropic Communications, Inc. Consolidated Stockholders Litigation, C.A. No. 10631-VCP , or the Consolidated Action.
On April 24, 2015, the parties to the Consolidated Action entered into a memorandum of understanding regarding a proposed settlement of the Delaware actions. As part of the proposed settlement, on April 27, 2015, Entropic filed a Form 8-K containing supplemental disclosures in connection with the acquisition. On April 30, 2015, Entropic’s stockholders voted to approve the acquisition, which closed later that same day. The parties to the Consolidation Action subsequently agreed not to proceed with the settlement and, instead, on February 23, 2016, entered into a stipulation and proposed order dismissing the Consolidated Action as moot and setting a briefing schedule for plaintiffs’ counsel to make an application for an award of attorneys’ fees and expenses from the Court, which the Court entered on February 25, 2016. After negotiations, the Company agreed to pay fees and expenses to plaintiffs’ counsel in the amount of $150,000. On March 18, 2016, the Court entered an order vacating the briefing schedule for plaintiffs’ counsel’s application for an award of attorneys’ fees and expenses and providing that dismissal of the Consolidated Action was final.
CrestaTech Litigation
On January 21, 2014, CrestaTech Technology Corporation, or CrestaTech, filed a complaint for patent infringement against us in the United States District Court of Delaware, or the District Court Litigation. In its complaint, CrestaTech alleges that we infringe U.S. Patent Nos. 7,075,585, or the ’585 Patent, and 7,265,792. In addition to asking for compensatory damages, CrestaTech alleges willful infringement and seeks a permanent injunction. CrestaTech also names Sharp Corporation, Sharp Electronics Corp. and VIZIO, Inc. as defendants based upon their alleged use of our television tuners.
On January 28, 2014, CrestaTech filed a complaint with the U.S. International Trade Commission, or ITC, again naming, among others, MaxLinear, Sharp, Sharp Electronics, and VIZIO, or the ITC Investigation. On May 16, 2014, the ITC granted CrestaTech’s motion to file an amended complaint adding six OEM Respondents, namely, SIO International, Inc., Hon Hai Precision Industry Co., Ltd., Wistron Corp., Wistron Infocomm Technology (America) Corp., Top Victory Investments Ltd. and TPV International (USA), Inc. MaxLinear, Sharp and VIZIO, are collectively referred to as the Company Respondents. CrestaTech’s ITC complaint alleged a violation of 19 U.S.C. § 1337 through the importation into the United States, the sale for importation, or the sale within the United States after importation of the Company’s accused products that CrestaTech alleged infringe the same two patents asserted in the Delaware action. Through its ITC complaint, CrestaTech sought an exclusion order preventing entry into the United States of certain of the Company's television tuners and televisions containing such tuners from Sharp, Sharp Electronics, and VIZIO. CrestaTech also sought a cease and desist order prohibiting the Company Respondents from engaging in the importation into, sale for importation into, the sale after importation of, or otherwise transferring within the United States certain of the Company's television tuners or televisions containing such tuners.
On March 10, 2014, the court stayed the District Court Litigation pending resolution of the ITC Investigation.
On December 15, 2014, the ITC held a trial in the ITC Investigation. On February 27, 2015, the Administrative Law Judge issued a written Initial Determination, or ID, ruling that the Company Respondents do not violate Section 1337 in connection with CrestaTech’s asserted patents because CrestaTech failed to satisfy the economic prong of the domestic industry requirement pursuant to Section 1337(a)(2). In addition, the ID stated that certain of the Company's television tuners and televisions incorporating those tuners manufactured and sold by certain customers infringe three claims of the ‘585 Patent, and

23

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

these three claims were not determined to be invalid. On April 30, 2015, the ITC issued a notice indicating that it intended to review portions of the ID finding no violation of Section 1337, including the ID’s findings of infringement with respect to, and validity of, the ‘585 Patent, and the ID’s finding that CrestaTech failed to establish the existence of a domestic industry within the meaning of Section 1337.
The ITC has subsequently issued its opinion, which terminated its investigation. The opinion affirmed the findings of the administrative law judge that no violation of Section 1337 had occurred because CrestaTech had failed to establish the economic prong of the domestic industry requirement. The ITC also affirmed the administrative law judge's finding of infringement with respect to the three claims of the '585 Patent that were not held to be invalid.
On November 30, 2015, CrestaTech filed an appeal of the ITC decision with the United States Court of Appeals for the Federal Circuit, or the Federal Circuit. On March 7, 2016, CrestaTech voluntarily dismissed its appeal.
In addition, the Company has filed four petitions for inter partes review, or IPR, by the US Patent Office, two for each of the CrestaTech patents asserted against the Company. The Patent Trial and Appeal Board, or the PTAB, did not institute two of these IPRs as being redundant to IPRs filed by another party that are already underway for the same CrestaTech patent.  The remaining two petitions were instituted or instituted-in-part and, together with the IPRs filed by third parties, there are currently six IPR proceedings filed involving the two CrestaTech patents asserted against the Company.  In October 2015, the PTAB issued final decisions in two of the six IPR proceedings (one for each of the two asserted patents), holding that all of the reviewed claims are unpatentable. Included in these decisions was one of the three claims of the ‘585 Patent mentioned above in connection with the ITC’s final decision. CrestaTech is appealing the PTAB’s decisions at the Federal Circuit. The remaining two claims of the ‘585 Patent are included in at least one of the four IPR proceedings instituted and currently pending before the PTAB against CrestaTech.
On March 18, 2016, CrestaTech filed a petition for Chapter 7 bankruptcy in the Northern District of California. The PTAB has temporarily suspended the IPR proceedings while the parties and the PTAB assess the impact of this petition on the pending IPRs. In parallel, the petitioners are working with the bankruptcy trustee to obtain court approval for lifting the stay of the IPRs. The PTAB has suggested that it hopes to resume these proceedings shortly and has tentatively scheduled the oral arguments for the four remaining IPRs for May 19 and 20, 2016.
The Company cannot predict the outcome of any appeal by CrestaTech, the District Court Litigation, or the IPRs. Any adverse determination in the District Court Litigation could have a material adverse effect on the Company's business and operating results.


24

MAXLINEAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and percentage data)
 

12. Subsequent Events
Acquisition of Certain Assets and Assumption of Certain Liabilities of the Broadband Wireless Division of Microsemi Storage Solutions, Inc. (formerly known as PMC-Sierra, Inc.)
On April 28, 2016, MaxLinear completed its acquisition of certain assets and assumption of certain liabilities of the Broadband Wireless Division of Microsemi Storage Solutions, Inc., formerly known as PMC-Sierra, Inc., for aggregate cash consideration of $21.0 million. For further information, please refer to the information presented in Note 1 - Organization and Summary of Significant Accounting Policies of these unaudited consolidated financial statements.
Agreement to Acquire Certain Assets and Assume Certain Liabilities of the Wireless Infrastructure Backhaul Business of Broadcom Corporation
On May 9, 2016, the Company entered into a material definitive agreement to purchase certain assets and assume certain liabilities of the wireless infrastructure backhaul business of Broadcom Corporation, or Broadcom, for aggregate cash consideration of $80.0 million. The acquisition is expected to be consummated on or about July 1, 2016, subject to the receipt of regulatory approvals, and other customary closing conditions. The Company intends to rehire certain employees of Broadcom's wireless infrastructure backhaul business after close of the acquisition. The assets and liabilities to be acquired, together with the rehired employees, represent a business as defined in ASC 805, Business Combinations.

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, and mixed-signal integrated circuits for cable and satellite broadband communications and the connected home, and for data center, metro, and long-haul fiber networks. Our high performance RF receiver products capture and process digital and analog broadband signals to be decoded for various applications. These products include both RF receivers and RF receiver systems-on-chip (SoCs), which incorporate our highly integrated radio system architecture and the functionality necessary to receive and demodulate broadband signals, and physical medium devices that provide a constant current source, current-to-voltage regulation, and data alignment and retiming functionality in optical interconnect applications. Through our acquisition of Entropic Communications, Inc., or Entropic, in April of 2015, we provide semiconductor solutions for the connected home, ranging from MoCA® (Multimedia over Coax Alliance) solutions that transform how traditional HDTV broadcast and Internet Protocol- (IP) based streaming video content is seamlessly, reliably, and securely delivered, processed, and distributed into and throughout the home. Our products enable the reception, distribution and display of broadband video and data content in a wide range of consumer, operator, and infrastructure platforms, including Pay-TV operator set-top boxes and voice and data gateways, hybrid analog and digital televisions and consumer terrestrial set-top boxes, Direct Broadcast Satellite outdoor units, optical modules for data center, metro, and long-haul transport network applications, and RF transceivers for wireless infrastructure markets.

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Our net revenue has grown from approximately $0.6 million in fiscal 2006 to $300.4 million in fiscal 2015. In fiscal 2015, our net revenue was derived primarily from sales of RF receivers and RF receiver systems-on-chip and MoCA connectivity solutions into operator voice and data modems and gateways and global analog and digital RF receiver products for analog and digital television applications. These analog and digital television applications include Direct Broadcast Satellite outdoor unit (DBS ODU) solutions, which consist of our translation switch (BTS) and channel stacking switch (CSS) products. These products simplify the installation required to support simultaneous reception of multiple channels from multiple satellites over a single cable. 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 Cable infrastructure market, and manufacturers of optical module and telecommunications infrastructure equipment.
Products shipped to Asia accounted for 94% and 91% of net revenue in the three months ended March 31, 2016 and 2015, respectively. A significant but declining portion of these sales in Asia is through distributors. Although a large percentage of our products are 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 in the three months ended March 31, 2016 and 2015 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 in the three months ended March 31, 2016 and 2015 related principally to sales to Asian ODMs and contract manufacturers delivering products into European and North American markets. To date, most of our sales have been denominated in United States dollars.
A significant portion of our net revenue has historically been generated by a limited number of customers. In the three months ended March 31, 2016, one of our customers, Arris Group, Inc., or Arris, accounted for 24% of our net revenue, and our ten largest customers collectively accounted for 79% of our net revenue. In the three months ended March 31, 2015, one of our customers, Arris, accounted for 29% of our net revenue, and our ten largest customers collectively accounted for 74% of our net revenue. For certain customers, we sell multiple products into disparate end user applications such as cable modems and cable and satellite cable 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 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 satellite operator gateway and DBS ODU sectors, a design-in can have a product life cycle of 24 months to 60 months and beyond.
On April 30, 2015, we completed our acquisition of Entropic. Pursuant to the terms of the merger agreement or merger agreements dated as of February 3, 2015, by and among MaxLinear, Entropic, and two wholly-owned subsidiaries of MaxLinear, all of the Entropic outstanding shares were converted into the right to receive consideration consisting of cash and shares of our Class A common stock. We paid an aggregate of $111.1 million in cash and issued an aggregate of 20.4 million shares of our Class A common stock to the stockholders of Entropic. In addition, we assumed all outstanding Entropic stock options and unvested restricted stock units that were held by continuing service providers (as defined in the merger agreement). We used Entropic’s cash and cash equivalents to fund a significant portion of the cash portion of the merger consideration and, to a lesser extent, our own cash and cash equivalents.
Recent Developments
On April 28, 2016, we entered into an asset purchase agreement with Microsemi Storage Solutions, Inc., formerly known as PMC-Sierra, Inc., or Microsemi, and consummated the transactions contemplated by the asset purchase agreement. We paid cash consideration of $21.0 million for the purchase of certain wireless access assets of Microsemi's Broadband Wireless Division, and assumed certain specified liabilities. The assets acquired include, among other things, radio frequency and analog/

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mixed signal patents and other intellectual property, in-production and next-generation RF transceiver designs, a workforce-in-place, and other intangible assets, as well as tangible assets that include but are not limited to production masks and other production related assets, inventory, and other property, plant, and equipment. The liabilities assumed include, among other things, product warranty obligations and accrued vacation and severance obligations for employees of the Broadband Wireless Division that were rehired by the Company.
On May 9, 2016, we entered into a material definitive agreement to purchase certain assets and assume
certain liabilities of the wireless infrastructure backhaul business of Broadcom Corporation, or Broadcom, for aggregate cash consideration of $80.0 million. The acquisition is expected to be consummated on or about July 1, 2016, subject to the receipt of regulatory approvals, and other customary closing conditions. We intend to rehire certain employees of Broadcom's wireless infrastructure backhaul business after close of the acquisition.
The acquired assets and liabilities, together with the rehired employees for each of these acquisitions, represent a business as defined in ASC 805, Business Combinations. We intend to integrate the acquired assets and rehired employees into our existing business.

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, 2015, which we filed with the Securities and Exchange Commission, or SEC, on February 17, 2016, as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on April 28, 2016, or our Annual Report. There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2016.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for us beginning in the first quarter of fiscal year 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the impact of adopting this new accounting standard on our consolidated financial position and results of operations.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which requires inventory to be subsequently measured using the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments in this Update are effective for us beginning in the first quarter of fiscal 2017 and should be applied prospectively. We are currently evaluating the impact that this guidance will have on our consolidated financial position and results of operations.

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 the lease term for all leases with terms greater than twelve months. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not

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to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this Update are effective for us for fiscal years beginning with fiscal year 2019, including interim periods within those years, with early adoption permitted. We are currently in the process of evaluating the impact of adoption of the amendments in this Update on our consolidated financial position and results of operations; however, adoption of the amendments in this Update are expected to be material for most entities who have a material lease greater than twelve months.

In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to clarify the revenue recognition implementation guidance on principal versus agent considerations. The amendments in this Update clarify that when another party is involved in providing goods or services to a customer, an entity that is the principal has obtained control of a good or service before it is transferred to a customer, and provides indicators to assist an entity in determining whether it controls a specified good or service prior to the transfer to the customer. An entity that is the principal recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer, whereas an agent recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. The amendments in this Update are effective for us beginning in the first quarter of fiscal year 2018, concurrent with the new revenue recognition standard. We are currently evaluating the impact of adopting the new revenue recognition accounting standard, including this Update, on its consolidated financial position and results of operations.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Share-Based Compensation to simplify certain aspects of accounting for share-based payment transactions associated with income taxes, classification as equity or liabilities, and classification on the statement of cash flows. The amendments in this Update are effective for us for fiscal years beginning with fiscal year 2017, including interim periods within those years, with early adoption permitted. Early adoption, if elected, must be completed for all of the amendments in the same period. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the consolidated statement of cash flows using either a prospective transition method or a retrospective transition method. We are currently in the process of evaluating the full impact of adoption of the amendments in this Update on our consolidated financial position and results of operations, but we believe that the amendments that require that all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement will reduce income tax expense on our consolidated financial statements.
Results of Operations
The following describes the line items set forth in our consolidated statements of operations.
Net Revenue. Net revenue is generated from sales of integrated radio frequency analog and mixed signal semiconductor solutions for broadband communication applications. A significant but declining portion of our end customers purchases products indirectly from us through distributors. Although we actually sell the products to, and are paid by, the distributors, we refer to these end customers as our customers.
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 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, distributor and other third-party sales commissions, field application engineering support, travel costs, professional and consulting fees, legal fees, depreciation expense and allocated occupancy costs.

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Restructuring Charges. Restructuring charges consist of employee severance and stock-based compensation expenses, and lease and leasehold impairment charges related to our restructuring plan entered into as a result of our acquisition of Entropic, and an adjustment related to restructuring plan implemented by Entropic prior to our acquisition.
Interest Income. Interest income consists of interest earned on our cash, cash equivalents and investment balances.
Other Income (Expense). Other income (expense) generally consists of income (expense) generated from non-operating transactions.
Provision for Income Taxes. We make certain estimates and judgments in determining income tax expense 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.
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,
 
2016
 
2015
Net revenue
100
%
 
100
%
Cost of net revenue
40

 
39

Gross profit
60

 
61

Operating expenses:
 
 
 
Research and development
23

 
43

Selling, general and administrative
13

 
31

Restructuring charges
2

 

Total operating expenses
38

 
74

Income (loss) from operations
22

 
(13
)
Interest income

 

Other income (expense), net

 

Income (loss) before income taxes
22

 
(13
)
Provision for income taxes
3

 
1

Net income (loss)
19
 %
 
(14
)%
Net Revenue
 
Three Months Ended March 31,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
Operator
$
76,140

 
$
28,868

 
$
47,272

 
164
%
% of net revenue
74
%
 
82
%
 
 
 
 
Infrastructure and other
9,888

 
6,528

 
3,360

 
51
%
% of net revenue
10
%
 
18
%
 
 
 
 
Legacy video SoC
16,657

 

 
16,657

 
N/A

% of net revenue
16
%
 

 
 
 
 
Total net revenue
$
102,685

 
$
35,396

 
$
67,289

 
190
%

Net revenue increased $67.3 million from $35.4 million in the three months ended March 31, 2015 to $102.7 million in the three months ended March 31, 2016. The increase in net revenue was due to $47.3 million of increased revenue from operator applications, related primarily to analog channel-stacking, or aCSS, and MoCA products from the Entropic acquisition and $16.7 million of increased revenue from our legacy video SoC products also attributable to our acquisition of Entropic. In addition, we had a $3.4 million increase related to infrastructure and other revenues due to an increase in high-speed interconnect product shipments and, to a lesser extent, increases in retail MoCA and high-speed access products from the Entropic acquisition and growth in consumer digital-to-analog terrestrial set-top box applications. Operator-based terrestrial set-

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top box deployments declined by approximately $1.4 million in the quarter ended March 31, 2016 as compared to the quarter ended March 31, 2015. We do not currently expect to maintain the year-over-year revenue growth rates that we have recently experienced as we begin to compare future results against periods occurring after our acquisition of Entropic. In addition, we believe the legacy video SoC and aCSS products we acquired are near the end of their life cycles, which along with other factors such as operator consolidation could adversely affect future revenues for these product categories.
Cost of Net Revenue and Gross Profit
 
Three Months Ended March 31,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
Cost of net revenue
$
41,515

 
$
13,725

 
$
27,790

 
202
%
% of net revenue
40
%
 
39
%
 
 
 
 
Gross profit
61,170

 
21,671

 
39,499

 
182
%
% of net revenue
60
%
 
61
%
 
 
 
 
The decrease in gross profit percentages in the three months ended March 31, 2016, as compared to the three months ended March 31, 2015, was primarily due to amortization of intellectual property costs of $1.6 million related to the Entropic acquisition. The gross margin decline was also driven by the significant increase in Entropic-related product revenue, which has historically generated lower gross margins than our previous corporate average.
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,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
Research and development
$
23,752

 
$
15,281

 
$
8,471

 
55
%
% of net revenue
23
%
 
43
%
 
 
 
 
The increase in research and development expense in the three months ended March 31, 2016, as compared to the three months ended March 31, 2015, was primarily due to increases in headcount-related expense (including stock-based compensation) of $4.2 million and increases in engineering-related expense of $2.3 million. In addition, we had increases related to occupancy expense, depreciation expense, and outside services of $2.0 million, all of which were substantially affected by our acquisition of Entropic.
We expect our research and development expenses to increase as we continue to focus on expanding our product portfolio and enhancing existing products.
Selling, General and Administrative
 
Three Months Ended March 31,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
Selling, general and administrative
$
13,610

 
$
10,944

 
$
2,666

 
24
%
% of net revenue
13
%
 
31
%
 
 
 
 
The increase in selling, general and administrative expense in the three months ended March 31, 2016, as compared to the three months ended March 31, 2015, was primarily due to increases in headcount-related expense of $1.9 million, depreciation expense of $1.5 million, and increases in occupancy, travel, commission, and outside services expenses of $1.5 million, all of which were substantially affected by our acquisition of Entropic. These increases were partially offset by decreases in legal expense of $2.2 million, as the prior period included transaction costs associated with our Entropic acquisition.
We expect selling, general and administrative expenses to increase in the future as we expand our sales and marketing organization to enable expansion into existing and new markets and continue to build our international administrative infrastructure.

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Restructuring charges
 
Three Months Ended March 31,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
Restructuring charges
$
2,106

 
$

 
$
2,106

 
100
%
% of net revenue
2
%
 
%
 
 
 
 
Restructuring charges for the three months ended March 31, 2016 primarily consisted of restructuring expenses related to lease arrangements assumed in connection with the Entropic acquisition.
Interest and Other Expense, Net
 
Three Months Ended March 31,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
Interest income
$
170

 
$
70

 
$
100

 
143
%
Other expense, net
(198
)
 
(34
)
 
(164
)
 
482
%
The increase in interest income in the three months ended March 31, 2016, as compared to the three months ended March 31, 2015, was due to higher cash and cash equivalent and investment balances. The increase in other expense, net was primarily due to fluctuations in foreign currency transactions at the Entropic Asia subsidiaries.
Provision for Income Taxes
 
Three Months Ended March 31,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
Provision for income taxes
$
2,558

 
$
204

 
$
2,354

 
1,154
%
% of net revenue
2
%
 
1
%
 
 
 
 
The provision for income taxes in the three months ended March 31, 2016 was $2.6 million or approximately 2% of pre-tax income compared to a provision for income taxes of $0.2 million or approximately 1% of pre-tax loss in the three months ended March 31, 2015.
The provision for income taxes for the three months ended March 31, 2016 primarily relates to federal alternative minimum tax due to our limitation on use of net operating losses, state income taxes, and income taxes in certain foreign jurisdictions. Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter. For example, the impact of the federal alternative minimum tax will be reduced when we adopt ASU No. 2016-09, Improvements to Share-Based Compensation, since net excess tax benefits will then be recognized in income tax expense or benefit in the statement of operations. The provision for income taxes for the three months ended March 31, 2015 primarily relates to income taxes in certain foreign jurisdictions.
We continue to maintain a valuation allowance to offset the federal and California 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, including our three year U.S. cumulative pre-tax book loss and taxable loss, we concluded that a full valuation allowance should continue to be recorded against our U.S. net deferred tax assets at March 31, 2016. We will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating positive and negative evidence that may exist. Until such time that we remove the valuation allowance against our federal and California deferred tax assets, our provision for income taxes will primarily consist of federal and state income taxes and income taxes in certain foreign jurisdictions.  Furthermore, we do not incur expense or benefit in certain tax free jurisdictions in which we operate.

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Income tax expense in the foreign jurisdictions in which we are subject to tax is expected to remain relatively constant due to the cost plus nature of these entities and the relatively consistent operating expenses in each jurisdiction. Fluctuations in world-wide income occur mostly outside of these jurisdictions and therefore have an insignificant effect on our provision for income taxes. We expect this relationship to continue until the time that we either recognize all or a portion of our federal and California deferred tax assets or implement changes to our global operations.
Subsequent Events

Acquisition of Certain Assets and Assumption of Certain Liabilities of the Broadband Wireless Division of Microsemi Storage Solutions, Inc. (formerly known as PMC-Sierra, Inc.)
For information on this subsequent event, please refer to Notes 1 and 12 to our unaudited consolidated financial statements.
Agreement to Acquire Certain Assets and Assume Certain Liabilities of the Wireless Infrastructure Backhaul
Business of Broadcom Corporation
For information on this subsequent event, please refer to Note 12 to our unaudited consolidated financial statements.
Liquidity and Capital Resources
As of March 31, 2016, we had cash and cash equivalents of $76.8 million, short- and long-term investments of $90.0 million, and net accounts receivable of $41.0 million.
Our primary uses of cash are to fund operating expenses, purchases of inventory and the acquisition of businesses, property and equipment and intangible assets. Cash used to fund operating expenses in our consolidated statements of cash flows excludes the impact of non-cash items such as amortization and depreciation of acquired intangible assets and property and equipment, stock-based compensation, and impairment of lease and is impacted by the timing of when we pay these expenses as reflected in the change in our outstanding accounts payable and accrued expenses.
Our primary sources of cash are cash receipts on accounts receivable from our shipment of products to distributors and direct customers. Aside from the growth in amounts billed to our customers, net cash collections of accounts receivable are impacted by the efficiency of our cash collections process, which can vary from period to period depending on the payment cycles of our major distributor customers.
Following is a summary of our working capital and cash and cash equivalents for the periods indicated:
 
March 31,
 
December 31,
 
2016
 
2015
 
(in thousands)
Working capital
$
163,422

 
$
134,170

Cash and cash equivalents
$
76,840

 
$
67,956

Short-term investments
73,210

 
43,300

Long-term investments
16,782

 
19,242

Total cash and cash equivalents and investments
$
166,832

 
$
130,498

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,
 
2016
 
2015
 
(in thousands)
Net cash provided by operating activities
$
38,954

 
$
3,768

Net cash used in investing activities
(30,695
)
 
(987
)
Net cash provided by (used in) financing activities
632

 
(714
)
Effect of exchange rates on cash and cash equivalents
(7
)
 
6

Net increase in cash and cash equivalents
$
8,884

 
$
2,073


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Cash Flows from Operating Activities
Net cash provided by operating activities was $39.0 million for the three months ended March 31, 2016. Net cash provided by operating activities primarily consisted of net income of $19.1 million, $11.5 million in non-cash operating expenses, and $8.3 million in changes in operating assets and liabilities. Non-cash items included in net income for the three months ended March 31, 2016 primarily consisted of depreciation and amortization expense of $5.8 million and stock-based compensation of $5.1 million.

Net cash provided by operating activities was $3.8 million for the three months ended March 31, 2015. Net cash provided by operating activities primarily consisted of $5.3 million in non-cash operating expenses and $3.2 million in changes in operating assets and liabilities, partially offset by a net loss of $4.7 million. Non-cash items included in net loss for the three months ended March 31, 2015 primarily included depreciation and amortization expense of $1.6 million and stock-based compensation of $3.7 million.
Cash Flows from Investing Activities
Net cash used in investing activities was $30.7 million for the three months ended March 31, 2016. Net cash used in investing activities consisted of $37.8 million in purchases of securities, $3.2 million in purchases of property and equipment, offset by $10.3 million in maturities of securities.

Net cash used in investing activities was $1.0 million for the three months ended March 31, 2015. Net cash used in investing activities consisted of $16.2 million in purchases of securities and $1.0 million in purchases of property and equipment, offset by $16.2 million in maturities of securities.
Cash Flows from Financing Activities
Net cash provided by financing activities was $0.6 million for the three months ended March 31, 2016 consisted primarily of $1.7 million in net proceeds from issuance of common stock, offset by $1.1 million in minimum tax withholding paid on behalf of employees for restricted stock units.
Net cash used in financing activities for the three months ended March 31, 2015 consisted primarily of $0.7 million in equity issuance costs, $0.3 million in minimum tax withholding paid on behalf of employees for restricted stock units, offset by $0.2 million in net proceeds from issuance of common stock.
We believe that our $76.8 million of cash and cash equivalents and $90.0 million in short- and long-term investments at March 31, 2016 will be sufficient to fund our projected operating requirements for at least the next twelve months. Our cash and cash equivalents in recent years have been favorably affected by our Entropic acquisition and our implementation of an equity-based bonus program. In connection with that bonus program, in August 2015, we issued 0.3 million freely-tradable shares of our Class A common stock in settlement of bonus awards for the January 1, 2015 to June 30, 2015 performance period under our bonus plan. In May 2015, we issued 0.2 million freely-tradable shares of our Class A common stock in settlement of bonus awards for the fiscal 2014 performance period under our bonus plan. We expect to issue additional shares of Class A common stock in May 2016 for the second half 2015 fiscal performance period.
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.
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.

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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, 2016, we were not involved in any unconsolidated SPE transactions.
Contractual Obligations
As of March 31, 2016, future minimum payments under non-cancelable operating leases, other obligations, and inventory purchase obligations are as follows:
 
Operating Leases
 
Other Obligations
 
Inventory Purchase Obligations
 
Total
 
(in thousands)
2016 (nine months)
$
5,991

 
$
5,708

 
$
19,297

 
$
30,996

2017
6,809

 
4,948

 

 
11,757

2018
6,001

 
830

 

 
6,831

2019
5,678

 

 

 
5,678

2020
6,024

 

 

 
6,024

Thereafter
7,590

 

 

 
7,590

Total minimum payments
$
38,093

 
$
11,486

 
$
19,297

 
$
68,876



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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
To date, our international customer and vendor agreements have been denominated mostly in United States dollars. Accordingly, we have limited exposure to foreign currency exchange rates and do not enter into foreign currency hedging transactions. The functional currency of certain foreign subsidiaries is the local currency. Accordingly, the effects of exchange rate fluctuations on the net assets of these foreign subsidiaries’ operations are accounted for as translation gains or losses in accumulated other comprehensive income within stockholders’ equity. We do not believe that a change of 10% in such foreign currency exchange rates would have a material impact on our financial position or results of operations.
Interest Rate Risk
We had cash and cash equivalents of $76.8 million at March 31, 2016 which was held for working capital purposes. We do not enter into investments for trading or speculative purposes. We do not believe that we have any material exposure to changes in the fair value of our investments as a result of changes in interest rates due to their short-term nature. Declines in interest rates, however, will reduce future investment income.
Investments in fixed rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to rising interest rates. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates.
Investments Risk
Our investments, consisting of U.S. Treasury and agency obligations and corporate notes and bonds, are stated at cost, adjusted for amortization of premiums and discounts to maturity. In the event that there are differences between fair value and cost in any of our available-for-sale securities, unrealized gains and losses on these investments are reported as a separate component of accumulated other comprehensive income (loss).


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ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, prior to filing this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.
Changes in Internal Control over Financial Reporting
An evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to determine whether any change in our internal control over financial reporting occurred during the fiscal quarter ended March 31, 2016 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We did not identify any change in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2016 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




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PART II — FINANCIAL INFORMATION

ITEM 3.
LEGAL PROCEEDINGS
Entropic Communications Merger Litigation
Between February 9, 2015 and February 18, 2015, eleven stockholder class action complaints (captioned Langholz v. Entropic Communications, Inc., et al., C.A. No. 10631-VCP (filed Feb. 9, 2015); Tomblin v. Entropic Communications, Inc., C.A. No. 10632-VCP (filed Feb. 9, 2015); Crill v. Entropic Communications, Inc., et al., C.A. No. 10640-VCP (filed Feb. 11, 2015); Wohl v. Entropic Communications, Inc., et al., C.A. No. 10644-VCP (filed Feb. 11, 2015); Parshall v. Entropic Communications, Inc., et al., C.A. No. 10652-VCP (filed Feb. 12, 2015); Saggar v. Padval, et al., C.A . No. 10661-VCP (filed Feb. 13, 2015); Iyer v. Tewksbury, et al., C.A. No. 10665-VCP (filed Feb. 13, 2015); Respler v. Entropic Communications, Inc., et al., C.A. No. 10669-VCP (filed Feb. 17, 2015); Gal v. Entropic Communications, Inc., et al., C.A. No. 10671-VCP (filed Feb. 17, 2015); Werbowsky v. Padval, et al., C.A. No. 10673-VCP (filed Feb. 18, 2015); and Agosti v. Entropic Communications, Inc., C.A. No. 10676-VCP (filed Feb. 18, 2015)) were filed in the Court of Chancery of the State of Delaware, or the Court, on behalf of a putative class of Entropic stockholders alleging that the board of directors of Entropic breached its fiduciary duties in connection with the then-proposed acquisition of Entropic by MaxLinear and that the MaxLinear aided and abetted such breaches. Plaintiffs in the complaints sought, among other things, to enjoin the defendants from consummating the proposed transaction.
On April 16, 2015, the Court entered an order consolidating the Delaware actions, captioned In re Entropic Communications, Inc. Consolidated Stockholders Litigation, C.A. No. 10631-VCP , or the Consolidated Action.
On April 24, 2015, the parties to the Consolidated Action entered into a memorandum of understanding regarding a proposed settlement of the Delaware actions. As part of the proposed settlement, on April 27, 2015, Entropic filed a Form 8-K containing supplemental disclosures in connection with the acquisition. On April 30, 2015, Entropic’s stockholders voted to approve the acquisition, which closed later that same day. The parties to the Consolidation Action subsequently agreed not to proceed with the settlement and, instead, on February 23, 2016, entered into a stipulation and proposed order dismissing the Consolidated Action as moot and setting a briefing schedule for plaintiffs’ counsel to make an application for an award of attorneys’ fees and expenses from the Court, which the Court entered on February 25, 2016. After negotiations, we agreed to pay fees and expenses to plaintiffs’ counsel in the amount of $150,000. On March 18, 2016, the Court entered an order vacating the briefing schedule for plaintiffs’ counsel’s application for an award of attorneys’ fees and expenses and providing that dismissal of the Consolidated Action was final.
CrestaTech Litigation
On January 21, 2014, CrestaTech Technology Corporation, or CrestaTech, filed a complaint for patent infringement against us in the United States District Court of Delaware , or the District Court Litigation. In its complaint, CrestaTech alleges that we infringe U.S. Patent Nos. 7,075,585, or the ‘585 Patent, and 7,265,792. In addition to asking for compensatory damages, CrestaTech alleges willful infringement and seeks a permanent injunction. CrestaTech also names Sharp Corporation, Sharp Electronics Corp. and VIZIO, Inc. as defendants based upon their alleged use of our television tuners.
On January 28, 2014, CrestaTech filed a complaint with the U.S. International Trade Commission, or ITC, again naming, among others, us, Sharp, Sharp Electronics, and VIZIO, also referred to as the ITC Investigation. On May 16, 2014, the ITC granted CrestaTech’s motion to file an amended complaint adding six OEM Respondents, namely, SIO International, Inc., Hon Hai Precision Industry Co., Ltd., Wistron Corp., Wistron Infocomm Technology (America) Corp., Top Victory Investments Ltd. and TPV International (USA), Inc. Us, Sharp and VIZIO are collectively referred to as the Company Respondents. CrestaTech’s ITC complaint alleged a violation of 19 U.S.C. § 1337 through the importation into the United States, the sale for importation, or the sale within the United States after importation of Maxlinear’s accused products that CrestaTech alleged infringe the same two patents asserted in the Delaware action. Through its ITC complaint, CrestaTech sought an exclusion order preventing entry into the United States of certain of our television tuners and televisions containing such tuners from Sharp, Sharp Electronics, and VIZIO. CrestaTech also sought a cease and desist order prohibiting the Company Respondents from engaging in the importation into, sale for importation into, the sale after importation of, or otherwise transferring within the United States certain of our television tuners or televisions containing such tuners.
On March 10, 2014, the court stayed the District Court Litigation pending resolution of the ITC Investigation.

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On December 15, 2014, the ITC held a trial in the ITC Investigation. On February 27, 2015, the Administrative Law Judge issued a written Initial Determination, or ID, ruling that the Company Respondents do not violate Section 1337 in connection with CrestaTech’s asserted patents because CrestaTech failed to satisfy the economic prong of the domestic industry requirement pursuant to Section 1337(a)(2). In addition, the ID stated that certain of our television tuners and televisions incorporating those tuners manufactured and sold by certain customers infringe three claims of the ‘585 Patent, and these three claims were not determined to be invalid. On April 30, 2015, the ITC issued a notice indicating that it intended to review portions of the ID finding no violation of Section 1337, including the ID’s findings of infringement with respect to, and validity of, the ‘585 Patent, and the ID’s finding that CrestaTech failed to establish the existence of a domestic industry within the meaning of Section 1337.
The ITC has subsequently issued its opinion, which terminated its investigation. The opinion affirmed the findings of the administrative law judge that no violation of Section 1337 had occurred because CrestaTech had failed to establish the economic prong of the domestic industry requirement. The ITC also affirmed the administrative law judge's finding of infringement with respect to the three claims of the '585 Patent that were not held to be invalid.
On November 30, 2015, CrestaTech filed an appeal of the ITC decision with the United States Court of Appeals for the Federal Circuit, or the Federal Circuit. On March 7, 2016, CrestaTech voluntarily dismissed its appeal.
In addition, we have filed four petitions for inter partes review, or IPR, by the US Patent Office, two for each of the CrestaTech patents asserted against us. The Patent Trial and Appeal Board, or the PTAB, did not institute two of these IPRs as being redundant to IPRs filed by another party that are already underway for the same CrestaTech patent.  The remaining two petitions were instituted or instituted-in-part and, together with the IPRs filed by third parties, there are currently six IPR proceedings filed involving the two CrestaTech patents asserted against us.  In October 2015, the PTAB issued final decisions in two of the six IPR proceedings (one for each of the two asserted patents), holding that all of the reviewed claims are unpatentable. Included in these decisions was one of the three claims of the ‘585 Patent mentioned above in connection with the ITC’s final decision. CrestaTech is appealing the PTAB’s decisions at the Federal Circuit. The remaining two claims of the ‘585 Patent are included in at least one of the four IPR proceedings instituted and currently pending before the PTAB against CrestaTech.
On March 18, 2016, CrestaTech filed a petition for Chapter 7 bankruptcy in the Northern District of California. The PTAB has temporarily suspended the IPR proceedings while the parties PTAB assess the impact of this petition on the pending IPRs. In parallel, the petitioners are working with the bankruptcy trustee to obtain court approval for lifting the stay of the IPRs. The PTAB has suggested that it hopes to resume these proceedings shortly and has tentatively scheduled the oral arguments for the four remaining IPRs for May 19 and 20, 2016.
We cannot predict the outcome of any appeal by CrestaTech, the District Court Litigation, or the IPRs. Any adverse determination in the District Court Litigation could have a material adverse effect on our business and operating results.
Other Matters
In addition, from time to time, we are subject to threats of litigation or actual litigation in the ordinary course of business, some of which may be material. Other than the Entropic and CrestaTech litigation described above, we believe that there are no other currently pending matters that, if determined adversely to us, would have a material effect on our business or that would not be covered by our existing liability insurance maintained by us.


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ITEM 1A.
RISK FACTORS
This Quarterly Report on Form 10-Q, or Form 10-Q, including any information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, referred to as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These factors include those listed below in this Item 1A and those discussed elsewhere in this Form 10-Q. We encourage investors to review these factors carefully. We may from time to time make additional written and oral forward-looking statements, including statements contained in our filings with the SEC. However, we do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of us.
Before you invest in our securities, you should be aware that our business faces numerous financial and market risks, including those described below, as well as general economic and business risks. The following discussion provides information concerning the material risks and uncertainties that we have identified and believe may adversely affect our business, our financial condition and our results of operations. In addition to the other information set forth in this report, you should also consider the risk factors discussed in our Annual Report on Form 10-K, which we filed with the SEC on February 17, 2016, as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on April 28, 2016, or Annual Report, together with all of the other information included in this Quarterly Report on Form 10-Q, the Annual Report, and in our other public filings, which could materially affect our business, financial condition or future results.
For the risks relating to our recent acquisitions, please refer to the section of these risk factors captioned “Risks Relating to Our Recent Acquisitions.”
Risks Related to Our Business
We face intense competition and expect competition to increase in the future, which could have an adverse effect on our revenue, revenue growth rate, if any, and market share.
The global semiconductor market in general, and the RF receiver market in particular, are highly competitive. We compete in different target markets to various degrees on the basis of a number of principal competitive factors, including our products’ performance, features and functionality, energy efficiency, size, ease of system design, customer support, product roadmap, reputation, reliability and price, as well as on the basis of our customer support, the quality of our product roadmap and our reputation. We expect competition to increase and intensify as a result of industry consolidation and the resulting creation of larger semiconductor companies. In addition, we expect the internal resources of large, integrated original equipment manufacturers, or OEMs, may continue to enter our markets. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could materially and adversely affect our business, revenue, revenue growth rates and operating results.
As our products are integrated into a variety of electronic devices, we compete with suppliers of both can tuners and traditional silicon RF receivers, and with providers of physical medium devices for optical interconnect markets. Our competitors range from large, international companies offering a wide range of semiconductor products to smaller companies specializing in narrow markets and internal engineering groups within television, set-top box, data modems and gateway, satellite low-noise blocker, and optical module manufacturers, some of which may be our customers. Our primary competitors include Silicon Labs, NXP B.V., RDA Microelectronics, Inc., Broadcom Ltd (recently created through the merger of Broadcom Corporation and Avago Technologies Limited), and Rafael Microelectronics, Inc. Inphi Corporation, M/A-COM Technology Solutions Holdings, Inc., Semtech Corporation, Qorvo Inc., and Microsemi Corporation (which recently acquired PMC-Sierra, Inc.) are competitors. It is quite likely that competition in the markets in which we participate will increase in the future as existing competitors improve or expand their product offerings. In addition, it is quite likely that a number of other public and private companies are in the process of developing competing products for digital television and other broadband communication applications. Because our products often are building block semiconductors which provide functions that in some cases can be integrated into more complex integrated circuits, we also face competition from manufacturers of integrated circuits, some of which may be existing customers or platform partners that develop their own integrated circuit products. If we cannot offer an attractive solution for applications where our competitors offer more fully integrated tuner/demodulator/video processing products, we may lose significant market share to our competitors. Certain of our competitors have fully integrated

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tuner/demodulator/video processing solutions targeting high performance cable, satellite, or DTV applications, and thereby potentially provide customers with smaller and cheaper solutions. Some of our targeted customers for our optical interconnect solutions are module makers who are vertically integrated, where we compete with internally supplied components.
Our ability to compete successfully depends on factors both within and outside of our control, including industry and general economic trends. During past periods of downturns in our industry, competition in the markets in which we operate intensified as manufacturers of semiconductors reduced prices in order to combat production overcapacity and high inventory levels. Many of our competitors have substantially greater financial and other resources with which to withstand similar adverse economic or market conditions in the future. Moreover, the competitive landscape is changing as a result of consolidation within our industry as some of our competitors have merged with or been acquired by other competitors, and other competitors have begun to collaborate with each other. These developments may materially and adversely affect our current and future target markets and our ability to compete successfully in those markets.
We depend on a limited number of customers, that have undergone or are subject to pending consolidation and who themselves are dependent on a consolidating set of service provider customers, for a substantial portion of our revenue, and the loss of, or a significant reduction in orders from one or more of our major customers could have a material adverse effect on our revenue and operating results.
For the three months ended March 31, 2016, two customers accounted for 42% of our net revenue, and our ten largest customers accounted for 79% of our net revenue. We expect that our operating results for the foreseeable future will continue to depend on sales to a relatively small number of customers and on the ability of these customers to sell products that incorporate our RF receivers or RF receiver SoCs, digital STB video SoCs, DBS ODU, and MoCA® connectivity solutions. In the future, these customers may decide not to purchase our products at all, may purchase fewer products than they did in the past, or may defer or cancel purchases or otherwise alter their purchasing patterns. Factors that could affect our revenue from these large customers include the following:
substantially all of our sales to date have been made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us and without penalty;
some of our customers have sought or are seeking relationships with current or potential competitors which may affect their purchasing decisions; and
service provider and OEM consolidation across cable, satellite, and fiber markets could result in significant changes to our customers’ technology development and deployment priorities and roadmaps, which could affect our ability to forecast demand accurately and could lead to increased volatility in our business.
In addition, delays in development could impair our relationships with our strategic customers and negatively impact sales of the products under development. Moreover, it is possible that our customers may develop their own product or adopt a competitor’s solution for products that they currently buy from us. If that happens, our sales would decline and our business, financial condition and results of operations could be materially and adversely affected.
Our relationships with some customers may deter other potential customers who compete with these customers from buying our products. To attract new customers or retain existing customers, we may offer these customers favorable prices on our products. In that event, our average selling prices and gross margins would decline. The loss of a key customer, a reduction in sales to any key customer or our inability to attract new significant customers could seriously impact our revenue and materially and adversely affect our results of operations.
A significant portion of our revenue is attributable to demand for our products in markets for broadband and pay-TV operator applications, and development delays and consolidation trends among cable and satellite television operators could adversely affect our future revenues and operating results.
For the three months ended March 31, 2016, revenue directly attributable to operator applications accounted for approximately 74% of our net revenue. Delays in the development of, or unexpected developments in the operator applications markets could have an adverse effect on order activity by manufacturers in these markets and, as a result, on our business, revenue, operating results and financial condition. In addition, consolidation trends among television operators may continue, which could have a material adverse effect on our future operating results and financial condition. In particular, we expect that the pending acquisition of Time Warner Cable by Charter Communications, if consummated, could create additional revenue uncertainty or adversely affect our legacy video SoC revenues.

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If we fail to penetrate new markets, specifically the market for satellite set-top and gateway boxes and outdoor units, our revenue, revenue growth rate, if any, and financial condition could be materially and adversely affected.
Currently, we sell most of our products to manufacturers of applications for television to Chinese manufacturers of terrestrial set-top boxes for sale in various markets worldwide, broadband voice and data modems and gateways, and pay-TV set-top boxes and gateways, to manufacturers of satellite outdoor units or LNB’s, and to manufacturers of optical modules for long-haul and metro telecommunications markets. Our future revenue growth, if any, will depend in part on our ability to expand beyond these markets with analog and mixed-signal solutions targeting the markets for high-speed optical interconnects for datacenter, metro, and long-haul optical modules, telecommunications wireless infrastructure, and cable infrastructure products supporting future Cable operator deployments of DOCSIS 3.1. Each of these markets presents distinct and substantial risks. If any of these markets do not develop as we currently anticipate, or if we are unable to penetrate them successfully, it could materially and adversely affect our revenue and revenue growth rate, if any.
We expect broadband data modems/gateways and pay-TV and satellite set-top boxes and video gateways to represent our largest North American and European target market. The North American and European pay-TV market is dominated by only a few OEMs, including Cisco Systems, Inc. (whose connected devices business was acquired by Technicolor in November 2015), Arris Group, Inc. (includes Pace plc accquired by Arris Group, Inc. in January 2016), Humax Co., Ltd., Samsung Electronics Co., Ltd., and Technicolor S.A. These OEMs are large multinational corporations with substantial negotiating power relative to us and are undergoing significant consolidation. Securing design wins with any of these companies requires a substantial investment of our time and resources. Even if we succeed, additional testing and operational certifications will be required by the OEMs’ customers, which include large pay-TV television companies such as Comcast Corporation, Liberty Global plc, Time Warner Cable Inc., AT&T, and EchoStar Corporation. In addition, our products will need to be compatible with other components in our customers’ designs, including components produced by our competitors or potential competitors. There can be no assurance that these other companies will support or continue to support our products.
If we fail to penetrate these or other new markets upon which we target our resources, our revenue and revenue growth rate, if any, likely will decrease over time and our financial condition could suffer.
We may be unable to make the substantial and productive research and development investments which are required to remain competitive in our business.

The semiconductor industry requires substantial investment in research and development in order to develop and bring to market new and enhanced technologies and products. Many of our products originated with our research and development efforts and we believe have provided us with a significant competitive advantage. For the three months ended March 31, 2016, our research and development expense was $23.8 million. In the three months ended March 31, 2016, we continued to increase our research and development expenditures as part of our strategy of devoting focused research and development efforts on the development of innovative and sustainable product platforms. We are committed to investing in new product development internally in order to stay competitive in our markets and plan to maintain research and development and design capabilities for new solutions in advanced semiconductor process nodes such as 40nm and 28nm and beyond. We do not know whether we will have sufficient resources to maintain the level of investment in research and development required to remain competitive as semiconductor process nodes continue to shrink and become increasingly complex. In addition, we cannot assure you that the technologies which are the focus of our research and development expenditures will become commercially successful.
We may not sustain our growth rate, and we may not be able to manage future growth effectively.
We have been experiencing significant growth in a short period of time. Our net revenue increased from approximately $119.6 million in 2013, to $133.1 million in 2014 and $300.4 million in 2015. We may not achieve similar growth rates in future periods, particularly our growth rate between 2014 and 2015 which was largely attributable to our acquisition of Entropic, which included in particular legacy analog ODU and video-SoC products that are near the end of their product life cycles. You should not rely on our operating results for any prior quarterly or annual periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our financial results could suffer and our stock price could decline.
To manage our growth successfully and handle the responsibilities of being a public company, we believe we must effectively, among other things:
recruit, hire, train and manage additional qualified engineers for our research and development activities, especially in the positions of design engineering, product and test engineering and applications engineering;

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add sales personnel and expand customer engineering support offices;
implement and improve our administrative, financial and operational systems, procedures and controls; and
enhance our information technology support for enterprise resource planning and design engineering by adapting and expanding our systems and tool capabilities, and properly training new hires as to their use.
If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new products and we may fail to satisfy customer requirements, maintain product quality, execute our business plan or respond to competitive pressures.
In addition to our recent acquisitions, we may, from time to time, make additional business acquisitions or investments, which involve significant risks.
In addition to the acquisitions of certain assets of the Broadband Wireless Division of Microsemi Storage Solutions, Inc., formerly known as PMC-Sierra, Inc., which we completed in the second quarter of fiscal 2016, Entropic, which we completed in the second quarter of fiscal 2015, and Physpeed, which we completed in the fourth quarter of fiscal 2014, we may, from time to time, make acquisitions, enter into alliances or make investments in other businesses to complement our existing product offerings, augment our market coverage or enhance our technological capabilities. However, any such transactions could result in:
issuances of equity securities dilutive to our existing stockholders;
substantial cash payments;
the incurrence of substantial debt and assumption of unknown liabilities;
large one-time write-offs;
amortization expenses related to intangible assets;
a limitation on our ability to use our net operating loss carryforwards;
the diversion of management’s time and attention from operating our business to acquisition integration challenges;
stockholder or other litigation relating to the transaction;
adverse tax consequences; and
the potential loss of key employees, customers and suppliers of the acquired business.
Additionally, in periods subsequent to an acquisition, we must evaluate goodwill and acquisition-related intangible assets for impairment. If such assets are found to be impaired, they will be written down to estimated fair value, with a charge against earnings.
Integrating acquired organizations and their products and services, including the integration of completed acquisitions, may be expensive, time-consuming and a strain on our resources and our relationships with employees, customers, distributors and suppliers, and ultimately may not be successful. The benefits or synergies we may expect from the acquisition of complementary or supplementary businesses may not be realized to the extent or in the time frame we initially anticipate. Some of the risks that may affect our ability to successfully integrate acquired businesses, including the Broadband Wireless Division of Microsemi Storage Solutions, Inc., Entropic and Physpeed, include those associated with:
failure to successfully further develop the acquired products or technology;
conforming the acquired company’s standards, policies, processes, procedures and controls with our operations;
coordinating new product and process development, especially with respect to highly complex technologies;
loss of key employees or customers of the acquired company;
hiring additional management and other critical personnel;

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in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;
increasing the scope, geographic diversity and complexity of our operations;
consolidation of facilities, integration of the acquired company’s accounting, human resource and other administrative functions and coordination of product, engineering and sales and marketing functions;
the geographic distance between the companies;
liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and
litigation or other claims in connection with the acquired company, including claims for terminated employees, customers, former stockholders or other third parties.
The complexity of our products could result in unforeseen delays or expenses caused by undetected defects or bugs, which could reduce the market acceptance of our new products, damage our reputation with current or prospective customers and adversely affect our operating costs.
Highly complex products like our RF receivers and RF receiver SoCs and physical medium devices for optical modules may contain defects and bugs when they are first introduced or as new versions are released. We have previously experienced, and may in the future experience, defects and bugs and, in particular, have identified liabilities of several million dollars arising from warranty claims related to legacy Entropic products. Where any of our products, including legacy acquired products, contain defects or bugs, or have reliability, quality or compatibility problems, we may not be able to successfully correct these problems. Consequently, our reputation may be damaged and customers may be reluctant to buy our products, which could materially and adversely affect our ability to retain existing customers and attract new customers, and our financial results. In addition, these defects or bugs could interrupt or delay sales to our customers. If any of these problems are not found until after we have commenced commercial production of a new product (as in the case of the legacy Entropic products experiencing warranty claims), we may be required to incur additional development costs and product recall, repair or replacement costs, and our operating costs could be adversely affected. These problems may also result in warranty or product liability claims against us by our customers or others that may require us to make significant expenditures to defend these claims or pay damage awards. In the event of a warranty claim, we may also incur costs if we compensate the affected customer. We maintain product liability insurance, but this insurance is limited in amount and subject to significant deductibles. There is no guarantee that our insurance will be available or adequate to protect against all claims. We also may incur costs and expenses relating to a recall of one of our customers’ products containing one of our devices. The process of identifying a recalled product in devices that have been widely distributed may be lengthy and require significant resources, and we may incur significant replacement costs, contract damage claims from our customers and reputational harm. Costs or payments made in connection with warranty and product liability claims and product recalls could materially affect our financial condition and results of operations.
Average selling prices of our products could decrease rapidly, which could have a material adverse effect on our revenue and gross margins.
We may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling prices. From time to time, we have reduced the average unit price of our products due to competitive pricing pressures, new product introductions by us or our competitors, and for other reasons, and we expect that we will have to do so again in the future. If we are unable to offset any reductions in our average selling prices by increasing our sales volumes or introducing new products with higher margins, our revenue and gross margins will suffer. To support our gross margins, we must develop and introduce new products and product enhancements on a timely basis and continually reduce our and our customers’ costs. Our inability to do so would cause our revenue and gross margins to decline.
If we fail to develop and introduce new or enhanced products on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be harmed.
We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. To compete successfully, we must design, develop, market and sell new or enhanced products that provide increasingly higher levels of performance and reliability and meet the cost expectations of our customers. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies, or the emergence of new industry standards could render our existing or future products obsolete. Our failure to anticipate or

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timely develop new or enhanced products or technologies in response to technological shifts could result in decreased revenue and our competitors winning more competitive bid processes, known as “design wins.” In particular, we may experience difficulties with product design, manufacturing, marketing or certification that could delay or prevent our development, introduction or marketing of new or enhanced products. If we fail to introduce new or enhanced products that meet the needs of our customers or penetrate new markets in a timely fashion, we will lose market share and our operating results will be adversely affected.
In particular, we believe that we will need to develop new products in part to respond to changing dynamics and trends in our end user markets, including (among other trends) consolidation among cable and satellite operators, potential industry shifts away from the hardware devices and other technologies that incorporate our products, and changes in consumer television viewing habits and how consumers access and receive broadcast content and digital broadband services. We cannot predict how these trends will continue to develop or how or to what extent they may affect our future revenues and operating results. We believe that we will need to continue to make substantial investments in research and development in an attempt to ensure a product roadmap that anticipates these types of changes; however, we cannot provide any assurances that we will accurately predict the direction in which our markets will evolve or that we will be able to develop, market, or sell new products that respond to such changes successfully or in a timely manner, if at all.
We recently settled and are currently a party to intellectual property litigation and may face additional claims of intellectual property infringement. Current litigation and any future litigation could be time-consuming, costly to defend or settle and result in the loss of significant rights.
The semiconductor industry is characterized by companies that hold large numbers of patents and other intellectual property rights and that vigorously pursue, protect and enforce intellectual property rights. Third parties have in the past and may in the future assert against us and our customers and distributors their patent and other intellectual property rights to technologies that are important to our business. In particular, from time to time, we receive correspondence from competitors seeking to engage us in discussions concerning potential claims against us, and we receive correspondence from customers seeking indemnification for potential claims related to infringement claims asserted against down-stream users of our products. We investigate these requests as received and could be required to enter license agreements with respect to third party intellectual property rights or indemnify third parties, either of which could have an adverse effect on our future operating results.
On January 21, 2014, CrestaTech Technology Corporation, or CrestaTech, filed a complaint for patent infringement against us in the United States District Court of Delaware, or the District Court Litigation. In its complaint, CrestaTech alleges that we infringe U.S. Patent Nos. 7,075,585, or the ‘585 Patent, and 7,265,792. In addition to asking for compensatory damages, CrestaTech alleges willful infringement and seeks a permanent injunction. CrestaTech also names Sharp Corporation, Sharp Electronics Corp. and VIZIO, Inc. as defendants based upon their alleged use of our television tuners. On January 28, 2014, CrestaTech filed a complaint with the U.S. International Trade Commission, or ITC, again naming, among others, us, Sharp, Sharp Electronics, and VIZIO, as referred to as the ITC Investigation. On March 10, 2014, the court stayed the District Court Litigation pending resolution of the ITC Investigation.
On December 15, 2014, the ITC held a trial in the ITC Investigation. On February 27, 2015, the Administrative Law Judge issued a written Initial Determination, or ID, ruling that MaxLinear, Sharp, Sharp Electronics, and VIZIO did not violate 19 U.S.C § 1337 in connection with CrestaTech’s asserted patents because CrestaTech failed to satisfy the economic prong of the domestic industry requirement pursuant to Section 1337(a)(2). In addition, the ID stated that certain of our television tuners and televisions incorporating those tuners manufactured and sold by certain customers infringe three claims of the ‘585 Patent, and these three claims were not determined to be invalid. On April 30, 2015, the ITC issued a notice indicating that it intended to review portions of the ID finding no violation of Section 1337, including the ID’s findings of infringement with respect to, and validity of, the ‘585 Patent, and the ID’s finding that CrestaTech failed to establish the existence of a domestic industry within the meaning of Section 1337.
The ITC subsequently issued its opinion, which terminated its investigation. The opinion affirmed the findings of the administrative law judge that no violation of Section 1337 had occurred because CrestaTech had failed to establish the economic prong of the domestic industry requirement. The ITC also affirmed the administrative law judge's finding of infringement with respect to the three claims of the '585 Patent that were not held to be invalid.
On November 30, 2015, CrestaTech filed an appeal of the ITC decision with the United States Court of Appeals for the Federal Circuit, or the Federal Circuit. On March 7, 2016, CrestaTech voluntarily dismissed its appeal.

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In addition, we have filed four petitions for inter partes review, or IPR, by the US Patent Office, two for each of the CrestaTech patents asserted against us. The Patent Trial and Appeal Board, or the PTAB, did not institute two of these IPRs as being redundant to IPRs filed by another party that are already underway for the same CrestaTech patent.  The remaining two petitions were instituted or instituted-in-part and, together with the IPRs filed by third parties, there are currently six IPR proceedings filed involving the two CrestaTech patents asserted against us.  In October 2015, the PTAB issued final decisions in two of the six IPR proceedings (one for each of the two asserted patents), holding that all of the reviewed claims are unpatentable. Included in these decisions was one of the three claims of the ‘585 Patent mentioned above in connection with the ITC’s final decision. CrestaTech is appealing the PTAB’s decisions at the Federal Circuit. The remaining two claims of the ‘585 Patent are included in at least one of the four IPR proceedings instituted and currently pending before the PTAB against CrestaTech.
On March 18, 2016, CrestaTech filed a petition for Chapter 7 bankruptcy in the Northern District of California. The PTAB has temporarily suspended the IPR proceedings while the parties and PTAB assess the impact of this petition on the pending IPRs. In parallel, the petitioners are working with the bankruptcy trustee to obtain court approval for lifting the stay of the IPRs. The PTAB has suggested that it hopes to resume these proceedings shortly and has tentatively scheduled the oral arguments for the four remaining IPRs for May 19 and 20, 2016.
We cannot predict the outcome of the District Court Litigation or the IPRs. Any adverse determination in the District Court Litigation could have a material adverse effect on our business and operating results.
Claims that our products, processes or technology infringe third-party intellectual property rights, regardless of their merit or resolution and including the CrestaTech claims, are costly to defend or settle and could divert the efforts and attention of our management and technical personnel. In addition, many of our customer and distributor agreements require us to indemnify and defend our customers or distributors from third-party infringement claims and pay damages in the case of adverse rulings. Claims of this sort also could harm our relationships with our customers or distributors and might deter future customers from doing business with us. In order to maintain our relationships with existing customers and secure business from new customers, we have been required from time to time to provide additional assurances beyond our standard terms. If any future proceedings result in an adverse outcome, we could be required to:
cease the manufacture, use or sale of the infringing products, processes or technology;
pay substantial damages for infringement;
expend significant resources to develop non-infringing products, processes or technology;
license technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms, or at all;
cross-license our technology to a competitor to resolve an infringement claim, which could weaken our ability to compete with that competitor; or
pay substantial damages to our customers or end users to discontinue their use of or to replace infringing technology sold to them with non-infringing technology.
Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.
We utilize a significant amount of intellectual property in our business. If we are unable to protect our intellectual property, our business could be adversely affected.
Our success depends in part upon our ability to protect our intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, copyrights, trademarks and trade secrets in the United States and in selected foreign countries where we believe filing for such protection is appropriate. Effective patent, copyright, trademark and trade secret protection may be unavailable, limited or not applied for in some countries. Some of our products and technologies are not covered by any patent or patent application. We cannot guarantee that:
any of our present or future patents or patent claims will not lapse or be invalidated, circumvented, challenged or abandoned;
our intellectual property rights will provide competitive advantages to us;

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our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties;
any of our pending or future patent applications will be issued or have the coverage originally sought;
our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak;
any of the trademarks, copyrights, trade secrets or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned; or
we will not lose the ability to assert our intellectual property rights against or to license our technology to others and collect royalties or other payments.
In addition, our competitors or others may design around our protected patents or technologies. Effective intellectual property protection may be unavailable or more limited in one or more relevant jurisdictions relative to those protections available in the United States, or may not be applied for in one or more relevant jurisdictions. If we pursue litigation to assert our intellectual property rights, an adverse decision in any of these legal actions could limit our ability to assert our intellectual property rights, limit the value of our technology or otherwise negatively impact our business, financial condition and results of operations.
Monitoring unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual property may have occurred or may occur in the future. Although we have taken steps to minimize the risk of this occurring, any such failure to identify unauthorized use and otherwise adequately protect our intellectual property would adversely affect our business. Moreover, if we are required to commence litigation, whether as a plaintiff or defendant as has occurred with CrestaTech, not only will this be time-consuming, but we will also be forced to incur significant costs and divert our attention and efforts of our employees, which could, in turn, result in lower revenue and higher expenses.
We also rely on customary contractual protections with our customers, suppliers, distributors, employees and consultants, and we implement security measures to protect our trade secrets. We cannot assure you that these contractual protections and security measures will not be breached, that we will have adequate remedies for any such breach or that our suppliers, employees or consultants will not assert rights to intellectual property arising out of such contracts.
In addition, we have a number of third-party patent and intellectual property license agreements. Some of these license agreements require us to make one-time payments or ongoing royalty payments. Also, a few of our license agreements contain most-favored nation clauses or other price restriction clauses which may affect the amount we may charge for our products, processes or technology. We cannot guarantee that the third-party patents and technology we license will not be licensed to our competitors or others in the semiconductor industry. In the future, we may need to obtain additional licenses, renew existing license agreements or otherwise replace existing technology. We are unable to predict whether these license agreements can be obtained or renewed or the technology can be replaced on acceptable terms, or at all.
When we settled a trademark dispute with Linear Technology Corporation, we agreed not to register the “MAXLINEAR” mark or any other marks containing the term “LINEAR”. We may continue to use “MAXLINEAR” as a corporate identifier, including to advertise our products and services, but may not use that mark on our products. The agreement does not affect our ability to use our registered trademark “MxL”, which we use on our products. Due to our agreement not to register the “MAXLINEAR” mark, our ability to effectively prevent third parties from using the “MAXLINEAR” mark in connection with similar products or technology may be affected. If we are unable to protect our trademarks, we may experience difficulties in achieving and maintaining brand recognition and customer loyalty.
Our business, revenue and revenue growth, if any, will depend in part on the timing and development of the global transition from analog to digital television, which is subject to numerous regulatory and business risks outside our control.
In the three months ended March 31, 2016, sales of our RF receiver products used in digital terrestrial television applications, or DTT, including digital televisions, terrestrial set-top boxes, and terrestrial receivers in satellite video gateways represented a declining, but not insignificant, portion of our revenues. We expect a declining but not insignificant portion of our revenue in future periods to continue to depend on the demand for DTT applications. In contrast to the United States, where the transition from analog to digital television occurred on a national basis in June 2009, in Europe and other parts of the world, the digital transition is being phased in on a local and regional basis and is expected to occur over many years. Many countries in Eastern Europe and Latin America are expected to convert to digital television by the end of 2018, with other countries

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targeting dates as late as 2024. As a result, our future revenue will depend in part on government mandates requiring conversion from analog to digital television and on the timing and implementation of those mandates. If the ongoing global transition to digital TV standards does not continue to progress or experiences significant delays, our business, revenue, operating results and financial condition would be materially and adversely affected. If during the transition to digital TV standards, consumers disproportionately purchase TV’s with digital or hybrid tuning capabilities, this could diminish the size of the market for our digital-to-analog converter set-top box solutions, and as result our business, revenue, operating results and financial condition would be materially and adversely affected.
We rely on a limited number of third parties to manufacture, assemble and test our products, and the failure to manage our relationships with our third-party contractors successfully could adversely affect our ability to market and sell our products.
We do not have our own manufacturing facilities. We operate an outsourced manufacturing business model that utilizes third-party foundry and assembly and test capabilities. As a result, we rely on third-party foundry wafer fabrication and assembly and test capacity, including sole sourcing for many components or products. Currently, all of our products are manufactured by United Microelectronics Corporation, or UMC, Silterra Malaysia Sdn Bhd, Global Foundries, Semiconductor Manufacturing International Corporation, or SMIC, Taiwan Semiconductor Manufacturing Corp, or TSMC, Jazz Semiconductor, and WIN Semiconductor at foundries in Taiwan, Singapore, Malaysia, China, and the United States. We also use third-party contractors for all of our assembly and test operations.
Relying on third party manufacturing, assembly and testing presents significant risks to us, including the following:
failure by us, our customers, or their end customers to qualify a selected supplier;
capacity shortages during periods of high demand;
reduced control over delivery schedules and quality;
shortages of materials;
misappropriation of our intellectual property;
limited warranties on wafers or products supplied to us; and
potential increases in prices.
The ability and willingness of our third-party contractors to perform is largely outside our control. If one or more of our contract manufacturers or other outsourcers fails to perform its obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example, in the event that manufacturing capacity is reduced or eliminated at one or more facilities, including as a response to the recent worldwide decline in the semiconductor industry, manufacturing could be disrupted, we could have difficulties fulfilling our customer orders and our net revenue could decline. In addition, if these third parties fail to deliver quality products and components on time and at reasonable prices, we could have difficulties fulfilling our customer orders, our net revenue could decline and our business, financial condition and results of operations would be adversely affected.
Additionally, our manufacturing capacity may be similarly reduced or eliminated at one or more facilities due to the fact that our fabrication and assembly and test contractors are all located in the Pacific Rim region, principally in China, Taiwan, Singapore and Malaysia. The risk of earthquakes in these geographies is significant due to the proximity of major earthquake fault lines, and Taiwan in particular is also subject to typhoons and other Pacific storms. Earthquakes, fire, flooding, or other natural disasters in Taiwan or the Pacific Rim region, or political unrest, war, labor strikes, work stoppages or public health crises, such as outbreaks of H1N1 flu, in countries where our contractors’ facilities are located could result in the disruption of our foundry, assembly or test capacity. Any disruption resulting from these events could cause significant delays in shipments of our products until we are able to shift our manufacturing, assembly or test from the affected contractor to another third-party vendor. There can be no assurance that alternative capacity could be obtained on favorable terms, if at all.
We do not have any long-term supply contracts with our contract manufacturers or suppliers, and any disruption in our supply of products or materials could have a material adverse effect on our business, revenue and operating results.
We currently do not have long-term supply contracts with any of our third-party vendors, including UMC, Silterra Malaysia Sdn Bhd, Global Foundries, SMIC, TSMC, Jazz Semiconductor, and WIN Semiconductor. We make substantially all

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of our purchases on a purchase order basis, and neither UMC nor our other contract manufacturers are required to supply us products for any specific period or in any specific quantity. Foundry capacity may not be available when we need it or at reasonable prices. Availability of foundry capacity has in the past been reduced from time to time due to strong demand. Foundries can allocate capacity to the production of other companies’ products and reduce deliveries to us on short notice. It is possible that foundry customers that are larger and better financed than we are, or that have long-term agreements with our foundry, may induce our foundry to reallocate capacity to them. This reallocation could impair our ability to secure the supply of components that we need. We expect that it would take approximately nine to twelve months to transition performance of our foundry or assembly services to new providers. Such a transition would likely require a qualification process by our customers or their end customers. We generally place orders for products with some of our suppliers approximately four to five months prior to the anticipated delivery date, with order volumes based on our forecasts of demand from our customers. Accordingly, if we inaccurately forecast demand for our products, we may be unable to obtain adequate and cost-effective foundry or assembly capacity from our third-party contractors to meet our customers’ delivery requirements, or we may accumulate excess inventories. On occasion, we have been unable to adequately respond to unexpected increases in customer purchase orders and therefore were unable to benefit from this incremental demand. None of our third-party contractors has provided any assurance to us that adequate capacity will be available to us within the time required to meet additional demand for our products.
To address capacity considerations, we are in the process of qualifying additional semiconductor fabricators. Qualification will not occur if we identify a defect in a fabricator’s manufacturing process or if our customers choose not to invest the time and expense required to qualify the proposed fabricator. If full qualification of a fabricator does not occur, we may not be able to sell all of the materials produced by this fabricator or to fulfill demand for our products, which would adversely affect our business, revenue and operating results. In addition, the resulting write-off of unusable inventories would have an adverse effect on our operating results.
We may have difficulty accurately predicting our future revenue and appropriately budgeting our expenses particularly as we seek to enter new markets where we may not have prior experience.
Our recent operating history has focused on developing integrated circuits for specific terrestrial, cable and satellite television, and broadband voice and data applications, and as part of our strategy, we seek to expand our addressable market into new product categories. For example, we have recently expanded into the market for and physical medium devices for the optical interconnect markets, and are attempting to enter the markets for telecommunications wireless infrastructure and cable infrastructure. Our limited operating experience in new markets or potential markets we may enter, combined with the rapidly evolving nature of our markets in general, substantial uncertainty concerning how these markets may develop and other factors beyond our control, reduces our ability to accurately forecast quarterly or annual revenue. We are currently expanding our staffing and increasing our expense levels in anticipation of future revenue growth. If our revenue does not increase as anticipated, we could incur significant losses due to our higher expense levels if we are not able to decrease our expenses in a timely manner to offset any shortfall in future revenue.
If we are unable to attract, train and retain qualified personnel, especially our design and technical personnel, we may not be able to execute our business strategy effectively.
Our future success depends on our ability to retain, attract and motivate qualified personnel, including our management, sales and marketing and finance, and especially our design and technical personnel. We do not know whether we will be able to retain all of these personnel as we continue to pursue our business strategy. Historically, we have encountered difficulties in hiring and retaining qualified engineers because there is a limited pool of engineers with the expertise required in our field. Competition for these personnel is intense in the semiconductor industry. As the source of our technological and product innovations, our design and technical personnel represent a significant asset. The loss of the services of one or more of our key employees, especially our key design and technical personnel, or our inability to retain, attract and motivate qualified design and technical personnel, could have a material adverse effect on our business, financial condition and results of operations.
Our business would be adversely affected by the departure of existing members of our senior management team.
Our success depends, in large part, on the continued contributions of our senior management team. None of our senior management team is bound by written employment contracts to remain with us for a specified period. In addition, we have not entered into non-compete agreements with members of our senior management team. The loss of any member of our senior management team could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate.

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Our customers require our products and our third-party contractors to undergo a lengthy and expensive qualification process which does not assure product sales.
Prior to purchasing our products, our customers require that both our products and our third-party contractors undergo extensive qualification processes, which involve testing of the products in the customer’s system and rigorous reliability testing. This qualification process may continue for six months or more. However, qualification of a product by a customer does not assure any sales of the product to that customer. Even after successful qualification and sales of a product to a customer, a subsequent revision to the RF receiver or RF receiver SoC and physical medium devices for optical modules, changes in our customer’s manufacturing process or our selection of a new supplier may require a new qualification process, which may result in delays and in us holding excess or obsolete inventory. After our products are qualified, it can take six months or more before the customer commences volume production of components or devices that incorporate our products. Despite these uncertainties, we devote substantial resources, including design, engineering, sales, marketing and management efforts, to qualifying our products with customers in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, sales of this product to the customer may be precluded or delayed, which may impede our growth and cause our business to suffer.
We are subject to risks associated with our distributors’ product inventories and product sell-through. Should any of our distributors cease or be forced to stop distributing our products, our business would suffer.
We currently sell a significant but declining portion of our products to customers through our distributors, who maintain their own inventories of our products. For the three months ended March 31, 2016, sales through distributors accounted for 6% of our net revenue. For these distributor transactions, revenue is not recognized until product is shipped to the end customer and the amount that will ultimately be collected is fixed or determinable. Upon shipment of product to these distributors, title to the inventory transfers to the distributor and the distributor is invoiced, generally with 30 day terms. On shipments to our distributors where revenue is not recognized, we record a trade receivable for the selling price as there is a legally enforceable right to payment, relieving the inventory for the carrying value of goods shipped since legal title has passed to the distributor, and record the corresponding gross profit in the consolidated balance sheet as a component of deferred revenue and deferred profit, representing the difference between the receivable recorded and the cost of inventory shipped. Future pricing credits and/or stock rotation rights from our distributors may result in the realization of a different amount of profit included our future consolidated statements of operations than the amount recorded as deferred profit in our consolidated balance sheets.
If our distributors are unable to sell an adequate amount of their inventories of our products in a given quarter to manufacturers and end users or if they decide to decrease their inventories of our products for any reason, our sales through these distributors and our revenue may decline. In addition, if some distributors decide to purchase more of our products than are required to satisfy end customer demand in any particular quarter, inventories at these distributors would grow in that quarter. These distributors likely would reduce future orders until inventory levels realign with end customer demand, which could adversely affect our product revenue in a subsequent quarter.
Our reserve estimates with respect to the products stocked by our distributors are based principally on reports provided to us by our distributors, typically on a weekly basis. To the extent that this resale and channel inventory data is inaccurate or not received in a timely manner, we may not be able to make reserve estimates for future periods accurately or at all.
We are subject to order and shipment uncertainties, and differences between our estimates of customer demand and product mix and our actual results could negatively affect our inventory levels, sales and operating results.
Our revenue is generated on the basis of purchase orders with our customers rather than long-term purchase commitments. In addition, our customers can cancel purchase orders or defer the shipments of our products under certain circumstances. Our products are manufactured using a silicon foundry according to our estimates of customer demand, which requires us to make separate demand forecast assumptions for every customer, each of which may introduce significant variability into our aggregate estimate. We have limited visibility into future customer demand and the product mix that our customers will require, which could adversely affect our revenue forecasts and operating margins. Moreover, because our target markets are relatively new, many of our customers have difficulty accurately forecasting their product requirements and estimating the timing of their new product introductions, which ultimately affects their demand for our products. Historically, because of this limited visibility, actual results have been different from our forecasts of customer demand. Some of these differences have been material, leading to excess inventory or product shortages and revenue and margin forecasts above those we were actually able to achieve. These differences may occur in the future, and the adverse impact of these differences between forecasts and actual results could grow if we are successful in selling more products to some customers. In addition, the rapid pace of innovation in our industry could render significant portions of our inventory obsolete. Excess or obsolete

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inventory levels could result in unexpected expenses or increases in our reserves that could adversely affect our business, operating results and financial condition. Conversely, if we were to underestimate customer demand or if sufficient manufacturing capacity were unavailable, we could forego revenue opportunities, potentially lose market share and damage our customer relationships. In addition, any significant future cancellations or deferrals of product orders or the return of previously sold products due to manufacturing defects could materially and adversely impact our profit margins, increase our write-offs due to product obsolescence and restrict our ability to fund our operations.
Winning business is subject to lengthy competitive selection processes that require us to incur significant expenditures. Even if we begin a product design, customers may decide to cancel or change their product plans, which could cause us to generate no revenue from a product and adversely affect our results of operations.
We are focused on securing design wins to develop RF receivers and RF receiver SoCs, MoCA SoCs, DBS-ODU SoCs, physical medium devices for optical modules, and SoC solutions targeting infrastructure opportunities within the telecommunications, wireless, and cable operator markets for use in our customers’ products. These selection processes typically are lengthy and can require us to incur significant design and development expenditures and dedicate scarce engineering resources in pursuit of a single customer opportunity. We may not win the competitive selection process and may never generate any revenue despite incurring significant design and development expenditures. These risks are exacerbated by the fact that some of our customers’ products likely will have short life cycles. Failure to obtain a design win could prevent us from offering an entire generation of a product, even though this has not occurred to date. This could cause us to lose revenue and require us to write off obsolete inventory, and could weaken our position in future competitive selection processes. After securing a design win, we may experience delays in generating revenue from our products as a result of the lengthy development cycle typically required. Our customers generally take a considerable amount of time to evaluate our products. The typical time from early engagement by our sales force to actual product introduction runs from nine to twelve months for the consumer market, to as much as 36 months for the cable operator market. The delays inherent in these lengthy sales cycles increase the risk that a customer will decide to cancel, curtail, reduce or delay its product plans, causing us to lose anticipated sales. In addition, any delay or cancellation of a customer’s plans could materially and adversely affect our financial results, as we may have incurred significant expense and generated no revenue. Finally, our customers’ failure to successfully market and sell their products could reduce demand for our products and materially and adversely affect our business, financial condition and results of operations. If we were unable to generate revenue after incurring substantial expenses to develop any of our products, our business would suffer.
Our operating results are subject to substantial quarterly and annual fluctuations and may fluctuate significantly due to a number of factors that could adversely affect our business and our stock price.
Our revenue and operating results have fluctuated in the past and are likely to fluctuate in the future. These fluctuations may occur on a quarterly and on an annual basis and are due to a number of factors, many of which are beyond our control. These factors include, among others:
changes in end-user demand for the products manufactured and sold by our customers;
the receipt, reduction or cancellation of significant orders by customers;
fluctuations in the levels of component inventories held by our customers;
the gain or loss of significant customers;
market acceptance of our products and our customers’ products;
our ability to develop, introduce and market new products and technologies on a timely basis;
the timing and extent of product development costs;
new product announcements and introductions by us or our competitors;
incurrence of research and development and related new product expenditures;
seasonality or cyclical fluctuations in our markets;
currency fluctuations;

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fluctuations in IC manufacturing yields;
significant warranty claims, including those not covered by our suppliers;
changes in our product mix or customer mix;
intellectual property disputes;
loss of key personnel or the shortage of available skilled workers;
impairment of long-lived assets, including masks and production equipment; and
the effects of competitive pricing pressures, including decreases in average selling prices of our products.
These factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly or annual operating results. We typically are required to incur substantial development costs in advance of a prospective sale with no certainty that we will ever recover these costs. A substantial amount of time may pass between a design win and the generation of revenue related to the expenses previously incurred, which can potentially cause our operating results to fluctuate significantly from period to period. In addition, a significant amount of our operating expenses are relatively fixed in nature due to our significant sales, research and development costs. Any failure to adjust spending quickly enough to compensate for a revenue shortfall could magnify its adverse impact on our results of operations.
We are subject to the cyclical nature of the semiconductor industry.
The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. Any future downturns may result in diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Furthermore, any upturn in the semiconductor industry could result in increased competition for access to third-party foundry and assembly capacity. We are dependent on the availability of this capacity to manufacture and assemble our all of our products. None of our third-party foundry or assembly contractors has provided assurances that adequate capacity will be available to us in the future. A significant downturn or upturn could have a material adverse effect on our business and operating results.
The use of open source software in our products, processes and technology may expose us to additional risks and harm our intellectual property.
Our products, processes and technology sometimes utilize and incorporate software that is subject to an open source license. Open source software is typically freely accessible, usable and modifiable. Certain open source software licenses require a user who intends to distribute the open source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on unfavorable terms or at no cost. This can subject previously proprietary software to open source license terms.
While we monitor the use of all open source software in our products, processes and technology and try to ensure that no open source software is used in such a way as to require us to disclose the source code to the related product, processes or technology when we do not wish to do so, such use could inadvertently occur. Additionally, if a third party software provider has incorporated certain types of open source software into software we license from such third party for our products, processes or technology, we could, under certain circumstances, be required to disclose the source code to our products, processes or technology. This could harm our intellectual property position and have a material adverse effect on our business, results of operations and financial condition.
We rely on third parties to provide services and technology necessary for the operation of our business. Any failure of one or more of our partners, vendors, suppliers or licensors to provide these services or technology could have a material adverse effect on our business.
We rely on third-party vendors to provide critical services, including, among other things, services related to accounting, billing, human resources, information technology, network development, network monitoring, in-licensing and intellectual property that we cannot or do not create or provide ourselves. We depend on these vendors to ensure that our corporate infrastructure will consistently meet our business requirements. The ability of these third-party vendors to successfully provide reliable and high quality services is subject to technical and operational uncertainties that are beyond our control. While we may

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be entitled to damages if our vendors fail to perform under their agreements with us, our agreements with these vendors limit the amount of damages we may receive. In addition, we do not know whether we will be able to collect on any award of damages or that these damages would be sufficient to cover the actual costs we would incur as a res