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, 2016

The composition of financial instruments is as follows:



	September 30, 2016
	Amortized Cost			Gross Unrealized					Fair Value
	Amortized Cost			Gains		Losses			Fair Value
	(in thousands)
Assets
Money market funds	$	115		$	—	$	—		$	115
Government debt securities	24,031			5		(3		)	24,033
Corporate debt securities	30,133			2		(2		)	30,133
	54,279			7		(5		)	54,281
Less amounts included in cash and cash equivalents	(115		)	—		—			(115		)
	$	54,164		$	7	$	(5	)	$	54,166



	Fair Value at September 30, 2016
	(in thousands)
Liabilities
Contingent Consideration	$	364
Total	$	364



	December 31, 2015
	Amortized Cost			Gross Unrealized					Fair Value
	Amortized Cost			Gains		Losses			Fair Value
	(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

At September 30, 2016, the Company held 15 government and corporate debt securities with an aggregate fair value of $26.6 million that were in an unrealized loss position for less than 12 months. No securities have been in unrealized loss positions for greater than 12 months. Gross unrealized losses were immaterial at September 30, 2016, and represented temporary impairments on government agency 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; 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 September 30, 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 September 30, 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 September 30, 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 0.04 at September 30, 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.

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



			Fair Value Measurements at September 30, 2016
	Balance at September 30, 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	$	115	$	115	$	—	$	—
Government debt securities	24,033		—		24,033		—
Corporate debt securities	30,133		—		30,133		—
	$	54,281	$	115	$	54,166	$	—
Liabilities
Contingent consideration	$	364	$	—	$	—	$	364
	$	364	$	—	$	—	$	364



			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

The following summarizes the activity in Level 3 financial instruments:



	Nine Months Ended September 30,
	2016			2015
	(in thousands)
Contingent Consideration ⁽¹⁾
Beginning balance	$	395		$	265
Physpeed earn-out payment	(240		)	—
Loss (gain) recognized in earnings ⁽²⁾	209			(123		)
Ending balance	$	364		$	142
Net (loss) gain for the period included in earnings attributable to contingent consideration held at the end of the period	$	(209	)	$	123

____________________________

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

- 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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