MaxLinear, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments

Financial Instruments

9 Months Ended

Sep. 30, 2017

As of September 30, 2017, the Company did not have any financial instruments that are required to be measured at fair value on a recurring basis. The composition of financial instruments as of December 31, 2016 is as follows:



	December 31, 2016
	Amortized Cost			Gross Unrealized					Fair Value
	Amortized Cost			Gains		Losses			Fair Value
	(in thousands)
Assets
Money market funds	$	39,181		$	—	$	—		$	39,181
Government debt securities	28,025			—		(32		)	27,993
Corporate debt securities	25,923			—		(7		)	25,916
	93,129			—		(39		)	93,090
Less amounts included in cash and cash equivalents	(39,181		)	—		—			(39,181		)
	$	53,948		$	—	$	(39	)	$	53,909



	Fair Value at December 31, 2016
	(in thousands)
Liabilities
Contingent consideration	$	375
Total	$	375

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 hierarchical disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The levels are described below:

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

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

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

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. 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 December 31, 2016 and is valued using an internal rate of return model. The assumptions used in preparing the internal rate of return model include revenues earned related to Physpeed products and services and a discount factor of 1 at December 31, 2016. The contingent liability was settled in the nine months ended September 30, 2017. The assumptions used in preparing the internal rate of return model included estimates for outcome if milestone goals were achieved, the probability of achieving each outcome and discount rates. There were no significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration, and the resultant fair value.

The following table presents a summary of the Company’s financial instruments that were measured at fair value on a recurring basis as of December 31, 2016:



			Fair Value Measurements at December 31, 2016
	Balance at December 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	$	39,181	$	39,181	$	—	$	—
Government debt securities	27,993		—		27,993		—
Corporate debt securities	25,916		—		25,916		—
	$	93,090	$	39,181	$	53,909	$	—
Liabilities
Contingent consideration	$	375	$	—	$	—	$	375

The following summarizes the activity in Level 3 financial instruments:



	Nine Months Ended September 30,
	2017			2016
	(in thousands)
Contingent Consideration ⁽¹⁾
Beginning balance	$	375		$	395
Physpeed earn-out payment	(375		)	(240		)
Loss recognized in net income⁽²⁾	—			209
Ending balance	$	—		$	364
Net loss for the period included in net income attributable to contingent consideration held at the end of the period	$	—		$	(209	)

____________________________

⁽¹⁾

In connection with the acquisition of Physpeed, the Company recorded contingent consideration based upon the expected achievement of 2015 and 2016 revenue milestones. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the valuation model were recorded in selling, general and administrative expense in the unaudited consolidated statements of operations.


⁽²⁾	Changes to the estimated fair value of contingent consideration for the three and nine months ended September 30, 2016 were primarily due to updates to present value discount factors.

There were no transfers between Level 1, Level 2 or Level 3 financial instruments in the three and nine months ended September 30, 2017.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

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

The Company’s long-term debt is not recorded at fair value on a recurring basis, but is measured at fair value for disclosure purposes (Note 8).

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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