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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
20-F
 
 
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report: N/A
For the transition period from
    
    
    
        
to
    
    
    
        
Commission file number:
000-51380
 
Silicon Motion Technology Corporation
(Exact name of Registrant as specified in its charter)
 
 
Cayman Islands
(Jurisdiction of incorporation or organization)
Unit B, 16/F, Centre 600, 82 King Lam St,
Cheung Sha Wan, Kowloon,
Hong Kong
Tel: +
852 2307 4768
(Address of principal executive offices)
 
 
Riyadh Lai, Chief Financial Officer
Tel: +1 408 519 7200 / Fax: +1 408 519 7101
690 N. McCarthy Blvd. Suite 200,
Milpitas, CA 95035, USA
(Name, Telephone,
E-mail
and/or Facsimile number and Address of Company Contact Person)
 
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Ordinary shares, par value US$0.01 per share*
American Depositary Shares, each representing
four ordinary shares
 
SIMO
 
Nasdaq Global Select Market
 
 
*
Not for trading, but only in connection with the listing on the Nasdaq Global Select Market of American Depositary Shares, or ADSs, each representing four ordinary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities registered or to be registered pursuant to Section 15(d) of the Act:
None
 
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
138,167,852
ordinary shares as of December 31, 2020, US$0.01 par value per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer   
Non-accelerated
filer
     Emerging growth company   
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP  ☒
  
International Financial Reporting Standards as issued
by the International Accounting Standards Board  ☐
   Other  ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.  ☐  Item 17  ☐  Item  18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act):    Yes  ☐    No  
 
 
 

Table of Contents 
TABLE OF CONTENTS
 
  
 
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i

Table of Contents
CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT
Unless otherwise indicated, references in this annual report to:
 
   
“ADRs” are to the American depositary receipts that evidence our ADSs;
 
   
“ADSs” are to our American depositary shares, each of which represents four of our ordinary shares;
 
   
“CAGR” are to compound annual growth rate;
 
   
“China” or “PRC” are to the People’s Republic of China, excluding the special administrative regions of Hong Kong and Macau;
 
   
“Korea” are to the Republic of Korea, or South Korea;
 
   
“Nasdaq” are to the Nasdaq Global Select Stock Market;
 
   
“NT dollar,” “NT dollars” or “NT$” are to New Taiwan dollars, the legal currency of Taiwan;
 
   
“ROC” or “Taiwan” are to the Republic of China, the official name of Taiwan;
 
   
“shares” or “ordinary shares” are to our ordinary shares, with a par value US$0.01 per share;
 
   
“U.S. GAAP” are to generally accepted accounting principles in the United States;
 
   
“U.S. dollar,” “U.S. dollars” or “US$” are to United States dollars, the legal currency of the United States; and
 
   
“we,” “us,” “our company,” “our,” “SMTC” and “Silicon Motion” are to Silicon Motion Technology Corporation and its subsidiaries.
Silicon Motion, the Silicon Motion logo, NANDSustain, NANDXtend, SSDLifeGuard, SSDLifeSaver, TurboMLC, FerriSSD, Ferri-eMMC, the powered by SiliconMotion logo, InstantView, the Shannon Systems logo, PCIe-RAID,
DIRECT-IO,
Hyper-IO,
Bigtera, the Bigtera logo, VirtualStor, CloudStor, and StorVisor are our trademarks or registered trademarks. We may also refer to trademarks of other corporations and organizations in this document.
Unless otherwise indicated, our financial information presented in this annual report has been prepared in accordance with U.S. GAAP.
 
1

Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form
20-F
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. These forward-looking statements include statements regarding our financial position; our expectations concerning future operations, margins, profitability, liquidity and capital resources; our business strategy and other plans and objectives for future operations; and all other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “thinks,” “estimates,” “seeks,” “predicts,” “potential,” and similar expressions. Although we believe that these statements are based on reasonable assumptions, they are subject to numerous factors, risks and uncertainties, including, but are not limited to, those identified under “Risk Factors” and elsewhere in this annual report on Form
20-F
that could cause actual results and performance to be materially different from those projected. Given these factors, risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. Except as required by law, we assume no obligation to update these forward-looking statements, even if new information becomes available in the future.
 
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Table of Contents
PART I
 
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
 
ITEM 3.
KEY INFORMATION
Selected Consolidated Financial Data
You should read the following information with our consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.
The selected consolidated statements of income and cash flow data for the years ended December 31, 2018, 2019 and 2020 and the selected consolidated balance sheet data as of December 31, 2019 and 2020 are derived from our audited consolidated financial statements included elsewhere in this annual report and should be read in conjunction with, and are qualified in their entirety by reference to, these consolidated financial statements and related notes. The selected consolidated statements of income for the years ended December 31, 2016 and 2017 and the selected consolidated balance sheet data as of December 31, 2016, 2017 and 2018 are derived from our audited consolidated financial statements which are not included in this annual report. These consolidated financial statements are prepared in accordance with U.S. GAAP.
 
    
Year Ended December 31,
 
    
2016
    
2017
   
2018
    
2019
    
2020
 
    
US$
    
US$
   
US$
    
US$
    
US$
 
    
(in thousands, except for per share data)
 
Consolidated Statements of Income Data:
                         
Net sales
     556,146        523,404       530,348        457,253        539,521  
Cost of sales
     281,541        272,210       269,541        235,081        279,365  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Gross profit
     274,605        251,194       260,807        222,172        260,156  
Operating expenses:
                                           
Research and development
     92,405        102,053       102,028        110,305        121,784  
Sales and marketing
     25,765        25,868       29,279        25,108        24,805  
General and administrative
     17,072        16,933       17,633        17,878        15,604  
Impairment of goodwill and intangible assets
     —          10,337       4,069        15,970        17,489  
Amortization of intangible assets
     2,103        2,534       2,964        766        —    
Gain from disposal of noncurrent assets held for sale
     —          (1,880     —          —          —    
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Total operating expenses
     137,345        155,845       155,973        170,027        179,682  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Operating income
     137,260        95,349       104,834        52,145        80,474  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Total
non-operating
income
     1,370        3,652       5,027        19,929        5,084  
Income before income taxes
     138,630        99,001       109,861        72,074        85,558  
Income tax expense
     27,690        24,046       11,791        7,676        5,812  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Net income
     110,940        74,955       98,070        64,398        79,746  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Weighted average shares outstanding:
                                           
Basic
     140,919        142,738       144,123        140,708        139,421  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Diluted
     142,050        143,606       144,512        141,183        139,910  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Earnings per share:
                                           
Basic
     0.79        0.53       0.68        0.46        0.57  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Diluted
     0.78        0.52       0.68        0.46        0.57  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Earnings per ADS
(1)
:
                                           
Basic
     3.15        2.10       2.72        1.83        2.29  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Diluted
     3.12        2.09       2.71        1.82        2.28  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
 
(1)
Each ADS represents four ordinary shares.
 
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As of December 31,
 
    
2016
    
2017
    
2018
    
2019
    
2020
 
    
US$
    
US$
    
US$
    
US$
    
US$
 
    
(in thousands)
 
Consolidated Balance Sheet Data:
                 
Cash and cash equivalents
     274,483        359,453        284,989        323,166        342,961  
Other current assets
     202,417        209,344        213,501        242,033        275,132  
Working capital
     330,914        391,553        384,839        433,711        459,349  
Long-term investments
     120        —          4,242        3,000        5,000  
Property and equipment, net
     47,892        51,370        101,410        98,488        105,496  
Goodwill and intangible assets, net
     73,883        66,393        59,352        17,489        —    
Other
non-current
assets
     7,231        7,172        9,120        13,553        13,471  
Total assets
     606,026        693,732        672,614        697,729        742,060  
Total liabilities
     163,263        199,681        140,337        160,945        184,318  
Total shareholders’ equity
     442,763        494,051        532,277        536,784        557,742  
 
    
As of December 31,
 
    
2016
   
2017
   
2018
   
2019
   
2020
 
    
US$
   
US$
   
US$
   
US$
   
US$
 
    
(in thousands)
 
Consolidated Cash Flow Data:
                
Net cash provided by operating activities
     125,568       103,881       108,242       77,695       117,229  
Net cash provided by (used in) investing activities
     (8,220     (14,548     (79,568     34,668       (21,545
Net cash provided by (used in) financing activities
     2,194       (31,740     (101,820     (70,260     (73,914
Depreciation and amortization
     11,585       13,133       14,796       13,213       13,562  
Capital expenditures
     (12,220     (11,683     (74,853     (11,015     (19,545
Risk Factors
Our business, operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations and cash flows and the trading price of our ADSs could decline. These risk factors do not identify all risks that we face; our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. The following factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us in filings with the SEC, press releases, communications with investors and oral statements. You should also refer to the other information set forth in this Form
20-F,
including in the Financial Statements.
Below is a summary of the principal risks we face, followed by a more detailed description of the risk factors being set forth in summary fashion.
 
   
Our results of operations are subject to substantial quarterly and annual fluctuations due to a number of factors that could adversely affect our business and the price of our ADSs.
 
   
The COVID-19 pandemic continues to impact our business and could materially adversely affect our financial condition and results of operations.
 
   
We are subject to the cyclical nature of the semiconductor industry, which has been subject to significant fluctuations.
 
   
We are subject to order and shipment uncertainties and our results of operations could be materially adversely affected if we are unable to accurately forecast customer demand.
 
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The demand for our products depends in part on the market conditions in the industries into which they are sold. Fluctuations in demand for our products or a market decline in any of these industries could have a material adverse effect on our results of operations.
 
   
We may pursue acquisitions, investments and dispositions, which could adversely affect our results of operations.
 
   
We depend on a few large customers for a significant portion of our revenues and a loss of some of these customers would result in the loss of a significant portion of our revenues.
 
   
NAND industry cyclicality could adversely affect our growth and profitability.
 
   
If we fail to accurately anticipate and respond to market trends or fail to develop and introduce new or enhanced products to address these trends on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be harmed.
 
   
Our gross margin and results of operations may be adversely affected in the future by a number of factors, including decreases in average selling prices of products over time and shifts in our product mix.
 
   
Our SSD solutions product performance could continue to adversely affect our results of operations.
 
   
The loss of any of our key personnel or the failure to attract or retain specialized technical and management personnel could impair our ability to grow our business.
 
   
We rely on independent semiconductor foundries and subcontractors for the fabrication, assembly and testing of our integrated circuits, and any limitation of their available capacity to us or failure to fulfill our orders satisfactorily could damage our relationships with our customers, decrease our sales or limit our ability to grow our business.
 
   
Failure to protect our intellectual properties or maintain the right to certain other technologies may negatively affect our ability to compete.
 
   
Failure to successfully defend against intellectual property lawsuits brought against us may adversely affect our business.
 
   
Because the markets in which we compete are highly competitive and many of our competitors have greater resources than we have, we cannot be certain that our products will compete favorably in the marketplace.
 
   
Our products must meet exacting specifications and undetected defects and failures may occur, which may cause customers to return or stop buying our products and may expose us to product liability risk and risks of indemnification against defects in our products.
 
   
Our intellectual property indemnification practices may adversely impact our business.
 
   
We are exposed to potential impairment on investments.
 
   
Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, results of operations and the market price of our ADSs.
 
   
We are subject to cybersecurity risk.
 
   
Our business is subject to various governmental regulations, and compliance with these regulations may cause us to incur significant expense.
 
   
Our stock price has been, and may continue to be, volatile, which could result in investors losing all or part of their investments.
 
   
There can be no assurance that we will continue to declare cash dividends, if at all, or in any particular amounts.
 
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If we are characterized as a passive foreign investment company, U.S. Holders may experience adverse tax consequences. 
 
   
Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.
 
   
We operate primarily in regions that are susceptible to natural disasters.

   
We face substantial risks associated with doing business in Taiwan because of tense regional geopolitical risk.
 
   
The enactment of legislation implementing changes in taxation of international business activities, the adoption of other tax reform policies or changes in tax legislation or policies could materially impact our financial position and results of operations.
 
   
A substantial amount of our stock is held by a small number of large investors and significant sales of our ADSs in the public market by one or more of these holders could cause our stock price to fall.
 
   
We are subject to risks associated with development and construction of our office buildings.
Our results of operations are subject to substantial quarterly and annual fluctuations due to a number of factors that could adversely affect our business and the price of our ADSs.
Our 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, including, but not limited to:
 
   
the unpredictable consequences of public health emergencies such as
COVID-19,
further discussed in the following Risk Factor, and natural or
man-made
disasters;
 
   
business conditions, including downturns in market segments, such as the computing and mobile markets, in which we operate, or in global and regional economies;
 
   
the availability and pricing of third-party semiconductor foundry, assembly, packaging and testing services, including their yield, and related raw materials;
 
   
significant reduction, changes in timing or cancellation of customer orders;
 
   
changes in our customers’ sales outlook, purchasing patterns and inventory adjustments;
 
   
the loss of a
design-win
or key customer;
 
   
competitive and pricing pressures, including new product introductions and other actions taken by competitors;
 
   
availability and cost of NAND flash used in our and our customer’s products;
 
   
changes in our product mix, especially relating to the sales of our NAND flash controllers and SSD solutions, and their effect on our gross margin;
 
   
inventory impairment uncertainties relating to the effects of volatile NAND flash price and excess inventory;
 
   
our ability to develop, market and transition to volume production new or enhanced products and in a cost-effective and timely manner;
 
   
changes in the timing and number of tape-outs and other significant R&D expenses;
 
   
competitive pressure to attract, retain and motivate a highly skilled workforce, including R&D personnel;
 
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intellectual property disputes; and
 
   
changes in our effective tax rate.
These and other factors make it difficult for us to forecast and could materially adversely affect our quarterly or annual operating results. We could fail to achieve the operating targets that we have announced, such as revenue growth, gross margin, and operating margin. In addition, our operating results in the future may be below the expectations of securities analysts or investors, which would likely cause the market price of our ADSs to decline. Any variations in our
period-to-period
performance may also cause the market price of our ADSs to decline. Accordingly, you should not rely on the results of any prior periods as a reliable indicator of our future operating performance.
The
COVID-19
pandemic continues to impact our business and could materially adversely affect our financial condition and results of operations.
Our business has been, and will continue to be, adversely impacted by the effects of the
COVID-19
pandemic. The degree to which
COVID-19
impacts our results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and severity of the pandemic, the actions taken to contain the virus or treat its impact including the ongoing roll out of vaccinations, other actions taken by governments, businesses and individuals in response to the virus and resulting economic disruption and how quickly and to what extent normal economic and operating conditions can resume. We are similarly unable to predict the extent of the impact of the pandemic on our customers and suppliers and their financial conditions, but a material effect on them could also materially adversely affect us.
The pandemic has resulted in governments imposing and businesses implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines,
shelter-in-place,
social distancing and shutdowns. These measures have impacted and may further impact our workforce and operations, the operations of our customers and suppliers, including third-party manufacturers and supply chain, and our ability to conduct business with both our customers and suppliers.
The pandemic has caused us to modify our business practices, including restricting employee travel, enforcing work-from-home and social distancing and canceling physical meetings, events, and conferences. We may take further actions as required by government authorities, or that we determine are in the best interests of our employees, customers and suppliers. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our product development, validation and qualification, business development, sales and customer support, as well as other activities, which could have a material adverse effect on our operations. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions.
The pandemic has significantly increased economic and demand uncertainty. It has caused a significant contraction in the global economy, and there is considerable uncertainty as to the severity and duration of the contraction and the timing and strength of an economic recovery. Given the continued and substantial economic uncertainty and volatility created by the pandemic, it is more difficult than normal to forecast demand for our products. For example, the increased demand in 2020 and first half 2021 for notebook PCs, an important application that uses our SSD controllers, as a result of work- and learn-from-home dynamics may not continue as the pandemic progresses or begins to abate. Also, there can be no assurance that any decrease in demand for smartphones and other devices as a result of the
COVID-19
pandemic will be offset by increasing demand in subsequent periods. In addition, the impacts of the
COVID-19
pandemic will be exacerbated the longer the pandemic continues and makes it challenging for us to estimate the future performance of our business.
 
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We are subject to the cyclical nature of the semiconductor industry, which has been subject to significant fluctuations.
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. The industry has experienced significant fluctuations, often connected with, or in anticipation of, maturing product cycles and new product introductions of both semiconductor companies’ and their customers’ products and fluctuations in general economic conditions. Deteriorating general worldwide economic conditions, including reduced economic activity, concerns about credit and inflation, increased energy costs, decreased consumer confidence, reduced corporate profits, decreased spending and similar adverse business conditions, would make it very difficult for our customers, our suppliers, and us to accurately forecast and plan future business activities and could cause U.S. and foreign businesses to slow spending on our products. We cannot predict the timing, strength, or duration of any economic slowdown or economic recovery. If the economy or markets in which we operate deteriorate, our business, financial condition, and results of operations would likely be materially and adversely affected.
Downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Upturns have been characterized by increased product demand and production capacity constraints created by increased competition for access to third-party foundry, assembly and test capacity. We are dependent on the availability of such capacity to manufacture, assemble and test our products. Foundry, assembly and test capacity is currently limited due to a spike in semiconductor demand. None of our third-party foundry, assembly or test subcontractors have provided assurances that adequate capacity will be available to us.
In addition, the
COVID-19
pandemic has caused further global economic uncertainty. The impact from the rapidly changing market and economic conditions due to the
COVID-19
outbreak is uncertain, disrupting the business of our customers and suppliers, and could impact our business and operating results in the future.
We are subject to order and shipment uncertainties and our results of operations could be materially adversely affected if we are unable to accurately forecast customer demand.
We have limited sales visibility as our customers typically do not provide us with firm, long-term purchase commitments. Additionally, our customers may also have limited sales visibility because of the rapidly changing nature of the global economy, NAND supply and demand dynamics and the markets in which devices using our products are sold.
Substantially all of our sales are made on a purchase order basis, which permits our customers to cancel, change or delay their product purchase commitments with little or no notice to us and often without penalty to them, which limits our ability to accurately forecast sales and maintain adequate inventory levels, manufacturing capacity and operating infrastructure requirements. Our customers, most of whom are NAND flash makers and module makers, face difficulties in predicting demand for their storage devices using our products, which could result in the procurement forecast provided to us changing at short notice. The majority of our customers are building storage devices such as SSDs used in PCs and other client devices and eMMC and UFS mobile embedded storage used primarily in smartphones and are dependent on OEMs of smartphones, PCs and other client devices accurately anticipating
end-consumer
demand, which has historically been difficult and subject to unpredictable deviations from past sales patterns. Also, since a significant portion of our quarterly sales, especially from module maker customers targeting channel markets, are from orders received and fulfilled in that quarter, our visibility as to expected orders from these customers in subsequent periods and for any extended period of time is limited. The multiple layers of forecasts from other customers and from their customers may introduce other errors into our estimates of anticipated sales.
To ensure the availability of our products for our customers, we generally instruct our foundries to begin manufacturing our products based on forecasts provided by these customers in advance of receiving purchase
 
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orders. However, these forecasts do not represent binding purchase commitments, and sales of our products are only recognized when they are shipped with ownership transferred to the customer. As a result, we incur inventory and manufacturing costs in advance of anticipated revenue. Because demand for our products may not materialize, manufacturing based on forecasts subjects us to risks of high inventory carrying costs and increased obsolescence and may increase our costs. If we overestimate customer demand for our products or if purchase orders are cancelled or shipments delayed, we may end up with excess or obsolete inventory, which could have a material and adverse effect on our financial results. The risk of obsolescence and/or excess inventory is heightened for devices designed for consumer electronics due to short product lifecycles for these types of products. Conversely, if we underestimate demand or if insufficient manufacturing capacity is available, we may not have sufficient product inventory, which could lead to missed revenue opportunities, loss of market share, damages to our customer relationships and other harm to our business. In addition, any future significant cancellations or deferrals of product orders or the return of previously sold products could materially and adversely affect our profit margins, increase product obsolescence and restrict our ability to fund our operations.
Because many of our expenses are fixed in the short term or are incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any shortfall of sales, or expand our R&D and other operating infrastructure in a timely manner to capture anticipated business opportunities. If we expand our business operations and demand for our products does not increase as we may have projected, our operating results could be affected by our higher operating expense levels. Conversely, if we maintain or reduce our business operations and related expenses in accordance with our projections and demand for our products increases more than expected, our operating results could be affected by lost business opportunities, less competitive economies of scale, and damaged relationships with our customers.
The demand for our products depends in part on the market conditions in the industries into which they are sold. Fluctuations in demand for our products or a market decline in any of these industries could have a material adverse effect on our results of operations.
Industry-wide fluctuations in the PC and smartphone markets could have a materially adverse affect on our operating results. A large portion of our controller sales are for the PC and smartphone markets, both of which have in recent years experienced
flat-to-declining
sales trends because of market saturation and longer replacement cycles. There is no assurance that strong demand for notebook PCs in 2020 and in the first half 2021 as a result of work- and learn-from-home dynamics will continue as the
COVID-19
pandemic progresses and weaker demand for smartphones as a result of the pandemic will be offset by increasing demand in subsequent periods as the pandemic begins to abate.
We have benefitted and should continue to benefit from technological changes in PCs and other client devices and in smartphone and tablets, such as the replacement of HDDs with SSDs in PCs and other client devices and the replacement of eMMC with UFS mobile embedded storage in smartphones and tablets. When a significant majority of PCs and client devices have adopted SSDs and smartphones and tablets have adopted UFS, we expect growth in demand for controllers for client SSDs and UFS will decelerate and stop. Smartphones and tablets have in recent years cannibalized the sale of PCs and it is possible smartphones and tablets could be replaced by other types of mobile computing and communications devices, and these changes could also lead to unfavorable demand for our products.
The market for storage devices using NAND flash components has experienced rapid technological changes, could be subject to industry consolidation and could face competition from new technologies. NAND flash technology will continue to evolve rapidly with continued cost reductions, which could lead to new types of solid state storage devices, new applications and new categories of customers and market segments where we could be comparatively disadvantaged. The market for solid state storage devices is relatively fragmented with many suppliers that include NAND flash makers, module makers and OEMs, and if the market were to consolidate, a trend experienced by other parts of the semiconductor and storage industries, we could face changing demand for our products, replacement of our products by those of our competitors or internal captive
 
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sources and reduced market opportunities. If solid state storage devices were to use other types of
non-volatile
memory technologies other than NAND flash and we do not have relevant and competitive controller technology, our addressable market for controllers could shrink.
The market for controllers is composed of the merchant market and captive market. We are an independent merchant supplier of controllers to NAND flash maker, module maker and OEM customers. All of the major NAND flash makers also have internal captive sources of controllers. The merchant market for controllers could shrink if the NAND flash makers were to expand their usage of captive sources of controllers. In the past, our operating results were negatively affected when NAND flash customers chose to insource controllers.
We may pursue acquisitions, investments and dispositions, which could adversely affect our results of operations.
Our growth strategy includes the acquisition of, and investment in, businesses that offer complementary products, services and technologies, augment our market coverage, or enhance our technological capabilities. Our recent acquisitions include Shannon Systems in 2015 and Bigtera in 2017. Our investments include Deep Vision in 2018 and 2020. We may not be able to identify suitable acquisition or investment opportunities, or to consummate any such transactions. In addition, our original estimates and assumptions used in assessing any transaction may be inaccurate and we may not realize the expected financial or strategic benefits of any such transaction.
Any acquisition we may undertake involves risks and uncertainties, such as unexpected delays, challenges and related expenses, and the associated diversion of management’s attention. We may become subject to legal proceedings relating to the acquisition and the integration of acquired businesses may not be successful. The integration of an acquired business involves significant challenges, including, among others: potential disruption of our business, diversion of management’s attention from daily operations and the pursuit of other opportunities, incurring significant restructuring charges and amortization expense, assuming liabilities and ongoing lawsuits, potential impairment of acquired goodwill and other intangible assets, increasing our expenses and working capital requirements, and implementing our management information systems, operating systems and internal controls for the acquired operations. In addition, our due diligence process may fail to identify significant issues with the acquired company’s products, financial disclosures, accounting practices, legal, tax and other contingencies and compliance with local laws and regulations. These difficulties may be complicated by factors such as the size of the business or entity acquired, geographic and cultural differences, lack of experience operating in the industry or geographic markets of the acquired business, potential loss of key employees and customers, the potential for deficiencies in internal controls at the acquired or combined business, performance problems with the acquired business’ technology, exposure to unanticipated liabilities of the acquired business, insufficient revenue to offset increased expenses associated with the acquisition, adverse tax consequences and our potential inability to achieve the growth prospects or synergies expected from any such acquisition. Failure to manage and successfully integrate the acquisitions we make, or to improve sales and margins of the acquired businesses, could materially harm our business, operating results and margins.
Any future acquisitions we make may require debt or equity financing, which, in the case of debt financing, would increase our leverage and interest expenses, and in the case of equity financing, would be dilutive to our existing stockholders. Acquisitions made with cash would reduce our cash reserves.
From time to time, we may also seek to divest or wind down portions of our business, either acquired or otherwise, or we may exit investments, each of which could materially affect our cash flows and results of operations. On May 31, 2019 we completed the sale of our FCI RF IC product line to Dialog Semiconductor. Any future disposition we may make could involve risks and uncertainties, including our ability to sell such business on terms acceptable to us, or at all as well as the additional legal expenses involved. In addition, any such disposition could result in disruptions to other parts of our business, potential loss of employees or customers, or exposure to unanticipated liabilities or ongoing obligations to us following any such disposition.
 
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For example, in connection with such disposition, we may enter into transition services agreements or agree to provide certain indemnities to the purchaser, which may result in additional expenses and may adversely affect our financial condition and results of operations.
We depend on a few large customers for a significant portion of our revenues and a loss of some of these customers would result in the loss of a significant portion of our revenues.
We derived a substantial portion of our revenue from sales to a relatively small number of customers. As a result, the loss of any significant customer could materially and adversely affect our financial condition and results of operations. Sales to our five largest customers represented approximately 54%, 54% and 56% of our net revenue in 2018, 2019 and 2020, respectively. Sales to our significant customers represented 34%, 31% and 24% of our net revenue in 2018, 2019 and 2020, respectively. In 2020, the significant customer was Micron. In 2019, the significant customers were Intel and Micron and in 2018, were SK Hynix and Intel. The identities of our largest customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period.
We expect that we will continue to depend on a relatively limited number of customers for a substantial portion of our net sales and our ability to maintain good relationships with these customers will be important to the ongoing success of our business. We cannot assure you that revenues generated from these customers, individually or in the aggregate, will reach or exceed historical levels in any future period. Our failure to meet the demands of these customers could lead to cancellation or reduction of businesses from these customers. In addition, any loss, cancellation or reduction of businesses from, significant change in scheduled deliveries to, or decrease in the prices of products sold to any of these customers could significantly reduce our revenues and adversely affect our financial condition and operating results. Moreover, any difficulty in collecting outstanding amounts due from our customers particularly customers who place large orders, would harm our financial performance. In addition, if our relationships with our largest customers are disrupted for any reason, it could have a significant impact on our business.
NAND industry cyclicality could adversely affect our growth and profitability.
The NAND industry is highly capital intensive and regularly experiences cycles of shortages and excess supply and related rapid increases and sharp decreases in NAND component prices. The price of solid state storage devices, such as SSDs and eMMC and UFS devices, in which NAND accounts for a significant portion of material cost, could also rise and fall with NAND component prices. Falling prices for solid state storage devices could trigger stronger market demand for these devices as well as controllers used in them, and conversely, rising prices for solid state storage devices could cause demand for these devices as well as controllers used in them to fall, which could negatively affect our sales and profitability.
Additionally, during periods of NAND shortage, our sales and profitability could be negatively affected in other ways, including, but are not limited to: (i) our module maker and OEM storage customers may not be able to procure sufficient supplies of NAND components, which could lead to reduced demand for our controllers; (ii) we may not be able to procure sufficient supplies of NAND components for our Shannon data center SSDs and Ferri industrial SSDs, which could lead to reduced sales of our SSD solutions, and furthermore, to higher cost of procured NAND components and reduced SSD solutions profitability; (iii) NAND manufacturers may divert NAND supply away from their own storage products that use our controllers towards other customers or products that do not use our controllers, and our sales could be reduced.
During periods of NAND excess supply when NAND prices are falling sharply, our sales and profitability could also be negatively affected, including, but are not limited to: (i) NAND manufacturers facing reduced demand for NAND components and storage devices may temporarily build NAND inventory instead of selling at lower prices, and this may cause a reduction in controller demand; (ii) module maker customers that are exposed to volatile NAND pricing conditions may temporarily become more cautious in procuring NAND components,
 
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which could lead to reduced levels of controller procurement and storage device production; (iii) OEMs may temporarily limit procurement of storage devices in expectation of procuring more at a later date and at a lower price, which could restrain storage device and associated controller procurement; and (iv) NAND vendor and module maker customers that are under margin pressure because of falling NAND prices may seek price concessions from their controller suppliers.
If we fail to accurately anticipate and respond to market trends or fail to develop and introduce new or enhanced products to address these trends on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be harmed.
Our success depends to a significant extent on the development, qualification, implementation and acceptance of new product designs and improvements that provide value to our customers. Our ability to develop, qualify and distribute, and have manufactured, new products and related technologies to meet evolving industry requirements, at prices acceptable to our customers and on a timely basis are significant factors in determining our competitiveness in our target markets. For example, for our products addressing the SSD market, we must successfully identify customer requirements and design, develop and produce products on time that compete effectively as to price, functionality and performance. We sell products in markets that are characterized by rapid technological change, evolving industry standards, frequent new product introductions, smaller process geometries and other factors. We cannot assure you that our efforts to execute our product roadmap will result in innovative products and technologies that provide value to our customers. If we fail to or are delayed in developing, qualifying or shipping new products or technologies that provide value to our customers and address these new trends and adjust our business accordingly, we may lose competitive positioning, which could cause us to lose market share and require us to discount the selling prices of our products. Although we make substantial investments in research and development, we cannot be certain that we will be able to develop and successfully bring to market new products and technologies on a timely basis or that they will be well-received by our customers. Moreover, our investments in new products and technologies involve certain risks and uncertainties and could disrupt our ongoing business. New investments may not generate sufficient revenue, may incur unanticipated liabilities and may divert our limited resources and distract management from our current operations. We cannot be certain that our ongoing investments in new products and technologies will be successful, will meet our expectations and will not adversely affect our reputation, financial condition and operating results.
We believe that our future success depends on our ability to develop and introduce new technologies and products for new applications to generate new sources of revenue to replace, or build upon, existing product revenue for applications that are mature or in secular decline. If we are not able to repeatedly introduce, in successive years, new products for new applications that ship in volume, our revenue will likely not grow and may decline significantly and rapidly. In the past, we were able to successfully grow our revenue by adding over time successive categories of new controller technologies for new applications, such as memory card and flash drive controllers for external storage, eMMC and UFS mobile embedded memory controllers for smartphones and SSD controllers for PCs and other client devices. If we are unable to successfully expand our sales of SSD controllers for data center and enterprise applications, our prospects for continued revenue growth could be adversely affected.
Our gross margin and results of operations may be adversely affected in the future by a number of factors, including decreases in average selling prices of products over time and shifts in our product mix.
Our gross margin is highly dependent on product mix, especially the mix of higher gross margin controller sales and lower gross margin SSD solutions sales. A shift in sales mix away from our higher margin products could adversely affect our gross profitability as a percentage of sales and could also adversely affect our operating profitability. The primary elements of our controller cost of sales are IC fabrication at our foundries, assembly and testing, and in contrast, the primary cost of sales of our SSD solutions, which are our Shannon data center SSDs and Ferri industrial SSDs, is NAND flash components. Our SSD solutions gross margin is lower
 
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than our controller gross margin because these products are generally less differentiated and dependent on the capacity of the storage device, with higher capacity device gross margin lower than lower capacity devices because more NAND flash components are used.
The controllers we develop and sell are used for high volume applications and their average selling prices have historically decreased over time, and we believe that it is possible they may also fall in the future. We may experience
period-to-period
fluctuations in future operating results if our average selling prices decline. We may be forced to reduce the average unit price of our products in response to new product introductions by our competitors, competitive pricing pressures and other factors. Also, we often provide large customers with volume-related price-discount incentives relating to their orders of specific products; if customer procurements that benefit from these incentives scale significantly, they could led to downward pressure on our gross margins. The mobile and computing devices markets are extremely competitive, which may result in rapidly declining average selling prices of electronic devices and components, such as those made by us, and create downward pressure on our average selling prices and operating results. To maintain acceptable operating results, we will need to develop and introduce new products and product enhancements on a timely basis and continue to reduce our costs. If we are unable to offset any reductions in our average selling prices by increasing our sales volumes or reducing corresponding production costs or if we fail to develop and introduce new products and enhancements on a timely basis, our sales and operating results will be materially and adversely affected.
We have changed our commercial arrangement with a few of our SSD solutions customers to a NAND consignment arrangement, where our customers procure and maintain ownership of the NAND flash components used in the SSD solutions that we design and build for them, and the gross margins of these types of sales are higher than the sales of products where we are responsible for procuring NAND flash components. We cannot assure you that in the future, we can increase the proportion of SSD solutions sales using a NAND consignment arrangement and if more sales are conducted using a NAND consignment arrangement, this will lead to improvements in our operating results.
Our SSD solutions product performance could continue to adversely affect our results of operations.
We are primarily a fabless semiconductor company focused on NAND flash controllers and the sales of these controllers account for a significant majority of our overall sales. In addition, we also sell SSD solutions, mostly Ferri industrial SSDs and Shannon enterprise SSDs, but also Bigtera software-defined storage solutions and appliances. We introduced our Ferri products in 2011, acquired Shannon in 2015 for US$45.6 million, acquired Bigtera in 2017 for US$4.7 million and are developing our FlashGo
all-flash
array. Both our Shannon and Bigtera acquisitions have not met financial expectations to date, have been dilutive to our gross margins, operating margins and earnings per ADS, and had led to US$16.0 million and US$17.5 million write-down of Shannon goodwill and intangible assets in 2019 and 2020, and US$4.1 million write-down of Bigtera goodwill and intangible assets in 2018; we cannot provide assurance that in the future, we will be able to sell our Shannon and Bigtera products profitably or if we will incur further write downs. If we are able to expand the sales of our SSD solutions, we cannot provide assurance that expanded sales of these products will not negatively affect our gross margin and operating margin, which could negatively affect the market price of our ADSs. Furthermore, even if we are able to sell our SSD solutions to customers profitably, our return on invested capital for SSD solutions will likely be materially lower than corporate average primarily because of lower product profitability and higher investments, mainly for working capital necessary for financing NAND and other inventory, and this could negatively affect our overall financial return and the market price of our ADSs.
Our SSD solutions are modules, software and appliances, are different from our primary products, controllers which are integrated circuits, and have different financial characteristics. Our SSD solutions gross margin is materially lower than our controller gross margin because these products are generally less differentiated and, in the case of our Ferri and Shannon SSDs, dependent on the capacity of the storage devices, with higher capacity device gross margin lower than lower capacity devices because more NAND flash components are used. We are also subject to NAND price volatility with our Ferri and Shannon SSDs; in 2019,
 
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because of rapidly falling NAND prices, we wrote-down US$8.4 million of NAND components and SSDs in inventory. With our Bigtera products, we have had issues with sales returns, with US$2.5 million in 2019. We cannot assure you that in the future our results of operations will not be negatively affected by further NAND component and SSD inventory write-downs and Bigtera sales returns.
The loss of any of our key personnel or the failure to attract or retain specialized technical and management personnel could impair our ability to grow our business.
We rely heavily on the services of our key employees, including Wallace C. Kou, our President and Chief Executive Officer. In addition, our engineers and other highly skilled personnel are a significant asset and are the source of our technological and product innovations. We believe our future success will depend upon our ability to attract and retain skilled managerial, engineering and sales and marketing personnel. The competition for such personnel, particularly engineering personnel, is intense in our industry. We may not be successful in attracting and retaining sufficient numbers of engineering personnel to support our anticipated growth. These personnel are required to design and develop integrated circuits, including firmware, and to introduce product enhancements for use in future applications. Despite the incentives we provide, our current employees may not continue to work for us, and if additional personnel were required for our operations, we may not be able to obtain the services of additional personnel necessary for our growth. In addition, we do not maintain “key person” life insurance for any of our senior executives or other key employees. The loss of any of our key employees or our inability to attract or retain qualified personnel, including engineers, could delay the development and introduction of, and have an adverse effect on our ability to sell, our products as well as have an adverse effect on our overall growth. In addition, if any other members of our senior management or any of our other key personnel join a competitor or form a competing company, we may not be able to replace them easily and we may lose customers, business partners, key professionals and staff members. Substantially all of our senior executives and key personnel have entered into confidentiality and
non-disclosure
agreements. In the event of a dispute between any of our senior executives or key personnel and our operating companies in Taiwan and other foreign countries, we cannot assure you the extent, if any, to which these provisions may be enforceable in Taiwan or other foreign countries due to the constantly evolving nature of their respective legal systems.
We rely on independent semiconductor foundries and subcontractors for the fabrication, assembly and testing of our integrated circuits, and any limitation of their available capacity to us or failure to fulfill our orders satisfactorily could damage our relationships with our customers, decrease our sales or limit our ability to grow our business.
We do not own or operate semiconductor fabrication facilities. Instead, we rely on third parties to manufacture our semiconductors. Two outside foundries, primarily Taiwan Semiconductor Manufacturing Company (“TSMC”) and secondarily Semiconductor Manufacturing International Corporation (“SMIC”), with fabrication facilities in Taiwan, Singapore and China currently manufacture our semiconductors. As a result, we face several significant risks, including wafer cost, availability of wafers and other raw materials, manufacturing capacity, quality assurance, manufacturing yields and production costs, control over delivery schedules and product quality, control of our intellectual property, labor availability or strikes and actions taken by third party contractors that breach our agreements.
The ability of each foundry to provide us with semiconductors is limited by its available capacity and access to wafers, and the ability of each subcontractor to assemble and test our products is limited by available capacity and substrates and other raw materials. We do not have long-term agreements with any of these foundries and subcontractors and we place orders on a purchase order basis. We place our orders based on our customers’ purchase orders and sales forecasts. However, the foundries and subcontractors can allocate capacity to the fabrication, assembly and testing of the products of their other customers and reduce deliveries to us on short notice or increase the price they charge us. It is possible that other foundry and subcontractor customers that are larger and better financed than we are, or have long-term agreements with these foundries and subcontractors, may induce these foundries and subcontractors to reallocate capacity to them which could impair our ability to
 
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secure manufacturing, assembly and testing capacity that we need for our products. Other factors that could materially adversely affect our business and results of operation include, but are not limited to, our foundries and subcontractors being unable to secure the necessary raw materials from their suppliers, experience power outages, lack sufficient capacity to manufacture our products or suffer other disruption or reduction in efficiency. If our foundries fail to deliver fabricated silicon wafers of satisfactory quality in the volume and at the price we require, or if our assembly and testing subcontractors fail to efficiently and accurately assemble and test our products, we will be unable to meet our customers’ demand for our products or to sell those products at an acceptable profit margin, which would have a material and adverse effect on our sales and margins and damage our customer relationships.
Currently, the global supply of semiconductor industry fabrication capacity is not sufficient to meet the demand for semiconductor products. Our primary foundry TSMC expects its capacity to remain tight in 2021 and the global chip shortage to extend into 2022. SMIC is also experiencing a shortage of capacity. We do not expect to have sufficient foundry capacity to meet all of our customers’ demand for our products in 2021 and there is no assurance we will have sufficient foundry capacity in 2022. This shortage of foundry capacity will limit our ability to grow our business and could damage our customer relationships.
In addition, interruptions to the wafer manufacturing processes caused by a natural disaster or human error could result in partial or complete disruption in supply until manufacturing is
re-started
or we are able to shift manufacturing to another fabrication facility. It may not be possible to obtain sufficient capacity or comparable production costs at another foundry. Migrating our design methodology to a new third-party foundry could involve increased costs, resources and development time comparable to a new product development effort. Any reduction in the supply of semiconductors for our products could significantly delay our ability to ship our products and potentially have negative effects on our relationships with existing customers and our results of operations. In addition, if our subcontractors terminate their relationships with us, we would be required to qualify new subcontractors, which could take at least six months, resulting in unforeseen operating problems, and our operating results may be materially and adversely affected.
The manufacture of semiconductors is a highly complex process. Minor deviations in the manufacturing process can cause substantial decreases in yield. In some situations, such deviations may cause production to be suspended. The foundries that manufacture our semiconductors have from time to time experienced lower than anticipated manufacturing yields, including yields for our semiconductors, typically during the production of new products or architectures or during the installation and
start-up
and
ramp-up
of new process technologies or equipment. If the foundries that manufacture our semiconductors do not achieve planned yields, our product costs could increase and product availability would decrease.
After the wafer fabrication processes, our wafers are shipped to our assembly and testing subcontractors. We have a system to maximize consistent product quality, reliability and yield that involves our quality assurance team working closely with subcontractors in the various phases of the assembly and testing processes. Our supplier quality management includes procedures such as processes to
pre-qualify
our manufacturing suppliers and subcontractors. If our subcontractors do not achieve planned product quality, reliability and yield during the assembly and testing processes, our product cost could increase, product availability could decrease, or our customers may not accept products manufactured for them.
Failure to protect our intellectual properties or maintain the right to certain other technologies may negatively affect our ability to compete.
We believe that the protection of our intellectual property rights and continued access to certain third-party technology are and will continue to be important to the success of our business. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, business partners and other third parties, and have implemented procedures to control access to and distribution of our
 
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documentation and other proprietary information. Despite these efforts, we cannot assure you that these measures will provide meaningful protection of our intellectual property rights. Further, these agreements do not prevent others from independently developing technologies that are equivalent to or superior to our technology. In addition, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries such as Taiwan and China where the laws may not protect our proprietary rights as fully as do the laws of the United States. In addition, if the foundries that manufacture our semiconductors lose control of our intellectual property, it could be more difficult for us to take remedial measures because our foundries are located in countries that do not have the same protection for intellectual property that is provided in the United States. Also, some of our contracts, including license agreements, are subject to termination upon certain types of
change-of-control
transactions.
As of March 31, 2021, we have 1,829 patents and 1,323 pending applications worldwide. We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid or unenforceable or provide only limited protection for our technologies. We also cannot be certain that others will not design around our patented technology, independently develop our unpatented proprietary technology or develop effective competing technologies on their own.
Failure to successfully defend against intellectual property lawsuits brought against us may adversely affect our business.
Companies in and related to the semiconductor industry often aggressively protect and pursue their intellectual property rights. From time to time, we have received, and may continue to receive, notices that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights. Moreover, in the past we were in litigation with parties that claimed that we infringed their patents or misappropriated or misused their trade secrets. In addition, we or our customers may be sued by other parties that claim that our products have infringed their patents or misappropriated or misused their trade secrets, or that may seek to invalidate one or more of our patents. An adverse determination in any of these types of disputes could prevent us from manufacturing or selling some of our products, increase our costs of revenue and expose us to significant liability. Any of these claims may materially and adversely affect our business, financial condition and results of operations. For example, in a patent or trade secret action, a court could issue a preliminary or permanent injunction that would require us or our customer(s) to withdraw or recall certain products from the market or redesign certain products offered for sales or under development. We may also be liable for damages for past infringement and royalties for future use of certain technologies. See “Legal Proceedings” below.
In addition, any litigation to defend ourselves against claims that we have infringed the intellectual property rights of others, could, regardless of the ultimate outcome, materially and adversely affect our operating results by requiring us to incur significant legal expenses and diverting the resources of the company and the attention of our management team.
Because the markets in which we compete are highly competitive and many of our competitors have greater resources than we have, we cannot be certain that our products will compete favorably in the marketplace.
We face competition from a number of competitors, including Marvell, our flash memory customers and smaller merchant suppliers in Taiwan. We expect to face competition in the future from our current and potential competitors. In addition, some of our flash memory customers have developed products and technologies that could replace their need for our products or otherwise reduce their demand for our products.
Some of our current and potential competitors have longer operating histories, greater name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing,
 
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distribution, technical and other resources than we have. As a result, they may be able to respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sales of their products than we can. Our current and potential competitors may develop and introduce new products that will be priced lower, provide superior performance or achieve greater market acceptance than our products. For our SSD solutions, if we are unable to procure sufficient supplies of flash memory or develop competitive products, our customers may seek to purchase SSD solutions from other suppliers.
Our products must meet exacting specifications and undetected defects and failures may occur, which may cause customers to return or stop buying our products and may expose us to product liability risk and risks of indemnification against defects in our products.
Our products are complex and may contain undetected hardware or software defects or failures, especially when first introduced or when new versions are released. These errors could cause us to incur significant
re-engineering
costs, divert the attention of our engineering personnel from product development efforts and materially affect our customer relations and business reputation. If we deliver products with errors or defects, our credibility and the market acceptance and sales of our products could be harmed. Defects could also lead to liability for defective products as a result of lawsuits against us or against our customers. We have agreed to indemnify some of our customers in some circumstances against liability from defects in our products. A successful warranty or product liability claim could require us to make significant payments.
Our intellectual property indemnification practices may adversely impact our business.
We may be required to indemnify our customers and our third-party intellectual property providers for certain costs and damages of intellectual property infringement in circumstances where our products are a factor in creating infringement exposure. In the contracts under which we sell semiconductor products, we may have agreed to indemnify our customers against losses arising out of claims of unauthorized use of intellectual property. In some of our licensing agreements, we have agreed to indemnify the licensee against losses arising out of or related to our conduct or services. We cannot assure you that claims for indemnification will not be made or that these claims would not have a material and adverse effect on our business, operating results or financial condition.
We are exposed to potential impairment on investments.
We have made investments in private companies and had approximately US$5 million of investments as of December 31, 2020. If the companies that we invested in are unable to execute their plans and succeed in their respective markets, we may not benefit from such investments, and we could potentially lose the amounts we invested. We evaluate our investment portfolio on a regular basis to determine if impairments have occurred. If the operations of any businesses that we have invested decline significantly, we could incur impairment charges that could have a material impact on our results of operations.
Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, results of operations and the market price of our ADSs.
We are subject to reporting obligations under securities laws of the United States. The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include in its annual report management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness of the company’s internal controls over financial reporting.
Our management and independent registered public accounting firm have concluded that our internal controls as of December 31, 2020 are effective. However, we cannot assure you that in the future we or our
 
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independent registered public accounting firm will not identify material weakness during the audit process or for other reasons. In addition, because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. As a result, if we fail to maintain effective internal controls over financial reporting or should we be unable to prevent or detect material misstatements due to error or fraud on a timely basis, investors could lose confidence in the reliability of our financial statements, which in turn could harm our business and results of operations, negatively impact the market price of our ADSs and harm our reputation.
We are subject to cybersecurity risk.
We experience cyberattacks of varying degrees on our technology infrastructure and systems and, as a result, unauthorized parties have obtained in the past, and may in the future obtain, access to our computer systems and networks. The technology infrastructure and systems of our suppliers, vendors and partners may also experience such attacks. Cyberattacks are external and internal threats that include, but are not limited to, malware, phishing, advanced persistent threats, denial of service attacks, malicious software downloads, insider security breaches, and hardware and software vulnerabilities. We believe cyberattack attempts are increasing in number and that cyberattackers are developing increasingly sophisticated systems and means to not only attack systems, but also to evade detection or to obscure their activities.
We have controls and policies in place, will continue to enhance our capabilities and upgrade our protective solutions to guard against known and emerging threats, detect malicious or unauthorized activities, and have recovery systems to minimize business disruptions. If efforts to breach our infrastructure and systems are successful or we are unable to protect against these risks, we could suffer interruptions, delays, or cessation of operations of our systems, and loss or misuse of proprietary or confidential information, intellectual property, or sensitive or personal information. Breaches of our infrastructure and systems could also cause our customers and other affected third parties to suffer loss or misuse of proprietary or confidential information, intellectual property, or sensitive or personal information, and could harm our relationships with customers and other third parties. As a result, we could experience additional costs, indemnification claims, litigation, and damage to our brand and reputation. All of these consequences could harm our reputation and our business and materially and adversely affect our operating results and financial condition.
Our business is subject to various governmental regulations, and compliance with these regulations may cause us to incur significant expense.
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in electronic products. In addition, we are also subject to various industry requirements restricting the presence of certain substances in electronic products. Although our management systems are designed to maintain compliance, we cannot assure you that we have been or will be at all times in complete compliance with such laws and regulations. If we violate or fail to comply with any of them, a range of consequences could result, including fines, import/export restrictions, sales limitations, criminal and civil liabilities or other sanctions.
Recently there has been increased focus on environmental protection and social responsibility initiatives, which are subject to change, can be unpredictable, and may be difficult for us to comply with, given the complexity of our supply chain and our significant outsourced manufacturing. We are required to implement various standards or processes due to the adoption of rules or regulations that result from these initiatives, such as the SEC rules on the disclosure of the use of “conflict minerals.” If we are unable to comply, or ensure that our suppliers or contract manufacturers comply, with such standards or processes, customers may stop purchasing from us, which could adversely affect our sales and results of operations.
Our business is subject to various other international laws and other legal requirements, including packaging, product content, labor and international trade regulations, such as the U.S. Export Administration
 
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Regulations and sanctions against Huawei, and applicable executive orders. These laws, regulations and orders are complex, change frequently and with limited notice, have generally become more stringent over time and have intensified as U.S.-China geopolitical tensions worsen. Although we have policies, controls, and procedures designed to help ensure compliance with applicable laws, there can be no assurance that our employees, contractors, suppliers, or agents will not violate such laws or our policies. Violations of trade laws, restrictions, or regulations can result in fines; criminal sanctions against us or our officers, directors, or employees; prohibitions on the conduct of our business; and damage to our reputation. We may be required to incur significant expense to comply with, or to remedy violations of, these regulations and laws. In addition, if our customers fail to comply with these regulations and laws, we may be required to suspend sales to these customers, which could damage our reputation and negatively impact our results of operations. The technology industry is subject to intense media, political, and regulatory scrutiny, which can increase our exposure to government investigations, legal actions, and penalties.
Our stock price has been, and may continue to be, volatile, which could result in investors losing all or part of their investments.
Since we completed our initial public offering in June 2005, the market price of our ADSs has been and likely will continue to be highly volatile and could be subject to wide fluctuations in response to numerous factors, including but are not limited to the following:
 
   
actual or anticipated variations in our quarterly operating results or those of our competitors, customers, or NAND flash vendors;
 
   
actual or anticipated changes in NAND flash supply and demand dynamics;
 
   
actual or anticipated changes in our market share or the market share of our competitors;
 
   
the commencement or results of litigation;
 
   
short selling or other market manipulation activities;
 
   
announcements by us, our competitors, our customers, or their other suppliers of new products or technological innovations;
 
   
changes in financial estimates or recommendations by securities analysts;
 
   
economic and social effects of
the COVID-19 virus
or other pandemics;
 
   
the payment or
non-payment
of cash dividends at the discretion of our board of directors;
 
   
the announcement and implementation of share repurchase programs;
 
   
announcements by us or our competitors of significant acquisitions, divestitures or partnerships; and
 
   
actual or anticipated changes in the global economic or industry outlook.
Many of these factors are beyond our control and may negatively impact the market price of our ADSs, regardless of our performance. In addition, the stock market in general, and the market for technology and semiconductor companies in particular, have been highly volatile. Furthermore, the trading price of our ADSs may be adversely affected by third-parties trying to drive down the market price. Short sellers and others, some of whom post anonymously on social media, may be positioned to profit if our stock declines and their activities can negatively affect our stock price. These broad market and industry factors may seriously harm the market price of our ADSs, regardless of our operating performance. Our ADSs may not trade at the same price levels as that of other semiconductor and technology companies, and shares of semiconductor and technology companies, in general, may not sustain their current market prices. These fluctuations as well as general economic, political, and market conditions may have an adverse effect on the market price of our ADSs.
 
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There can be no assurance that we will continue to declare cash dividends, if at all, or in any particular amounts.
In January 2013, our Board of Directors declared our first quarterly cash dividend and has subsequently declared and paid dividends in each successive quarter. In November 2015, our Board changed the dividend declaration from quarterly to annually, with payments made in four quarterly installments. The decision to continue declaring dividends, if any, and their timing and amount, depends on, among other things, that the dividend payment is in the best interests of our shareholders, business visibility, our results of operations, capital availability and future capital requirements, financial condition, statutory requirements, and other factors that the Board may deem relevant and any dividend declaration is at the discretion of our Board. Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends, if at all or in any particular amounts. A reduction in or elimination of our dividend payments could have a negative effect on our share price.
If we are characterized as a passive foreign investment company, U.S. Holders may experience adverse tax consequences.
Based on the present and projected composition of our income and valuation of our assets, we believe we are not currently classified as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. We will generally be classified as a PFIC for any taxable year in which either (a) at least 75% of our gross income is passive income or (b) at least 50% of the value (determined on the basis of a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income. If we are characterized as a PFIC, U.S. Holders may experience adverse tax consequences. See “ITEM 10. ADDITIONAL INFORMATION — Taxation — United States Federal Income Taxation.”
Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.
A substantial portion of our business is conducted outside of the United States and, as a result, we are subject to foreign business, political and economic risks. Most of our integrated circuits are manufactured, assembled and tested by third-parties located in China and Taiwan. We generated 90%, 86% and 92% of our revenue in 2018, 2019 and 2020, respectively, from sales to customers outside the United States, and for the year ended December 31, 2020, 64% of our revenue was from sales in three jurisdictions, China, Singapore and Taiwan. Our controller research and development is conducted primarily in Taiwan and our SSD solutions research and development is conducted in both China and Taiwan. Most of our corporate functions are located in Taiwan. These operations are directly influenced by the political and economic conditions of the country in which they are located. We do not expect the portion of our business located outside of the United States to change in the future.
Accordingly, we are subject to risks associated with international operations, including but not limited to:
 
   
international economic and political conditions, such as political tensions between countries in which we do business (please also refer to Risk Factors relating to China and Taiwan);
 
   
unexpected changes in, or impositions of, legislative or regulatory requirements;
 
   
complying with a variety of foreign laws;
 
   
differing legal standards with respect to protection of intellectual property and employment practices;
 
   
cultural differences in the conduct of business;
 
   
inadequate local infrastructure that could result in business disruptions;
 
   
trade issues related to export or import restrictions, tariffs, quotas and other trade barriers and restrictions, including those related to the ongoing trade disputes between China and the U.S.;
 
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financial risks such as longer payment cycles and difficulty in collecting accounts receivable;
 
   
adverse taxes rules, regulations and penalties; and
 
   
other factors beyond our control such as nature disasters, terrorism, civil unrest, war and health emergencies, such as
COVID-19.
As a result of having global operations, the sudden disruption of our supply chain and/or disruption of the manufacture of our customer’s products caused by events outside of our control could impact our results of operations by impairing our ability to timely and efficiently deliver our products.
Although our reporting currency is the U.S. dollar, and the majority of our sales and cost of sales in the last three years are denominated in the U.S. dollar, the majority of our operating expenses are denominated in the NT dollar, and to a lesser extent, the Chinese yuan and U.S. dollar. Any unfavorable changes in foreign exchange rates could adversely affect, or cause fluctuations in, our results of operations. We do not currently engage in currency hedging activities.
We operate primarily in regions that are susceptible to natural disasters.
We operate primarily in regions of the world, including Taiwan, China and California, that are susceptible to earthquakes. In the past, these regions had experienced severe earthquakes that caused significant property damage and loss of life, although we did not suffer any material impact on our business. The occurrence of earthquakes is unpredictable, and a major earthquake and consequent disruptive events could severely disrupt the normal operations of our business and have a material and adverse effect on our financial condition and operating results.
We face substantial risks associated with doing business in Taiwan because of tense regional geopolitical risk.
Most of our business operations are in Taiwan, a self-governing democracy, with a unique international political status, that is claimed by China and receives security from the United States under the Taiwan Relations Act. China asserts that Taiwan is part of China, seeks the unification of Taiwan and has not ruled out the use of force to achieve this. China is also increasingly assertive in the region and claims sovereignty over much of the South China Sea south of Taiwan and has unilaterally established an Air Defense Identification Zone in the East China Sea north of Taiwan. The United States does not recognize China’s ADIZ and conducts regular freedom of navigation operations in the areas of the South China Sea claimed by China. In 2016, China dismissed the United Nation’s Permanent Court of Arbitration ruling against it in its claims to the South China Sea. Tensions between Taiwan and China and between the United States and China have increased in recent years.
A majority of our employees and a significant portion of our research and development and corporate functions are based in Taiwan. We also operate a research and development center in Shanghai, and China is one of the largest markets for our products. In addition, most of our foundries and assembly and testing subcontractors are located in either Taiwan or China. Accordingly, our business and results of operations and the market price of our ADSs may be affected by any deterioration in the relationship between Taiwan and China. Although there are significant economic ties between Taiwan and China, in recent years China has taken a more aggressive posture towards Taiwan, including the suspension of cross-straits communications channels in 1996, regular intrusion by Chinese military aircraft into Taiwan airspace, the sailing of naval ships around Taiwan waters, the conduct of military exercises close to Taiwan, and exclusion of Taiwan from international organizations such as the World Health Organization.
Furthermore, our principle executive offices are in Hong Kong. Recent
pro-democracy
protests and
COVID-19
containment activities have affected our Hong Kong operations and China’s new national security law for Hong Kong has reduced its autonomy and could lead to further repercussions from the United States, Taiwan and other countries that more adversely affect our operating arrangements, whether commercial or regulatory in nature.
 
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Past and recent developments in relations between Taiwan and China have on occasion depressed the market prices of the securities of Taiwanese companies or companies with significant business activities in Taiwan. We cannot assure you that any contentious situation between Taiwan and China will always resolve in maintaining the current status quo or remain peaceful. Relations between Taiwan and China, potential confrontations between the United States and China and other factors affecting military, political, social or economic conditions in Taiwan and Hong Kong could have a material adverse effect on our financial condition and results of operations, as well as the market price and the liquidity of our ADSs.
The enactment of legislation implementing changes in taxation of international business activities, the adoption of other tax reform policies or changes in tax legislation or policies could materially impact our financial position and results of operations.
Tax bills are introduced from time to time to reform taxation of international business activities. The Organisation for Economic
Co-operation
and Development, or OECD, has released guidance covering various topics, including
country-by-country
reporting, definitional changes to permanent establishment and guidelines in determining arm’s length transfer pricing. This guidance is collectively referred to as Base Erosion and Profit Shifting, or BEPS, an initiative that aims to standardize and modernize global tax policy. Depending on legislation ultimately enacted in connection with this guidance by jurisdictions in which we operate, there may be significant consequences for us due to our significant international business activities. For example, adoption of BEPS by foreign jurisdictions in which we operate could result in changes to tax policies, including transfer-pricing policies that could ultimately impact our tax liabilities to foreign jurisdictions. If any of these proposals are enacted into law, or if other international, consensus-based tax policies and principles are amended or implemented, they could have material adverse consequences on the amount of tax we pay and thereby on our financial position and results of operations. It is likely that new legislation enacted by several governments of countries in which we operate could lead to higher operating and tax expenses for our business in the near future.
In addition, policies regarding corporate income taxes in numerous jurisdictions in which we operate are under heightened scrutiny. As a result, decisions by tax authorities regarding treatments and positions of corporate income taxes could be subject to legislative investigation and inquiry, which could result in changes in tax policies or prior tax rulings. As such, the taxes we previously paid may be subject to change and our taxes may increase in the future, which could have an adverse effect on our results of operations, financial condition and our corporate reputation.
A substantial amount of our stock is held by a small number of large investors and significant sales of our ADSs in the public market by one or more of these holders could cause our stock price to fall.
As of December 31, 2020, we believe 10 of our largest holders of ADSs were active institutional investors who held approximately the equivalent of 37% of our outstanding ADSs in the aggregate, with Cardinal Capital Management LLC being our largest stockholder with approximately 7% of our ADSs. These investors may sell their ADSs at any time for a variety of reasons and such sales could depress the market price of our ADSs. In addition, any such sales of our ADSs by these entities could also impair our ability to raise capital through the sale of additional equity securities.
We are subject to risks associated with development and construction of our office buildings.
In September 2018, we purchased 65,700 square feet of land in Hsinchu, Taiwan for a total cost of US$58.9 million and expect to spend an estimated US$77 million for the development and construction of our future Hsinchu headquarters building, which is currently targeted for completion in 2024. On February 18, 2021, the Company won a bid with a third-party to build an office building in Taipei, Taiwan and is expected to execute a property development agreement in May 2021, with property development costs to be defined and agreed in a subsequent agreement. See “Financial Information — Recent Developments” in Item 8 below. We have no experience developing and constructing office buildings and managing real property of this scale. We
 
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may encounter unanticipated occurrences or conditions during construction that may increase the expense of these projects. We may also encounter unanticipated delays in the construction of the new buildings and local government approvals for the projects may be delayed. We are financing these construction projects from our cash balance, which could limit alternative deployments of capital. The purchase of the land and construction of the buildings will increase our fixed assets significantly and could reduce our return on invested capital. After the office buildings have been constructed, we may consider sale and leaseback arrangements if favorable terms can be obtained.
 
ITEM 4.
INFORMATION ON THE COMPANY
Introduction
Silicon Motion Technology Corporation (“Silicon Motion”) is a corporation which was incorporated in the Cayman Islands in January 2005 and acquired Silicon Motion, Inc., a Taiwan corporation (“SMI Taiwan”), in April 2005. Originally SMI Taiwan was known as Feiya Technology Corporation (“Feiya”), a Taiwan corporation which was incorporated in April 1997 but had changed its name to SMI Taiwan after acquiring in August 2002 Silicon Motion, Inc., a California corporation (“SMI USA”), which was incorporated in November 1995. Feiya was originally a flash memory products company and SMI USA a graphics processor company.
We are a global leader in developing NAND flash controllers for SSDs and other solid state storage devices. We have over 20 years of experience developing specialized processor ICs that manage NAND components and deliver market leading, high- performance storage solutions widely used in data centers, PCs, smartphones and commercial and industrial applications. We have one of the broadest portfolios of controller intellectual properties developed from our deep understanding of NAND characteristics, which enables us to design both unique, highly optimized configurable IC plus related firmware controller platforms and complete turnkey controller solutions. In the last ten years, we have shipped over six billion controllers, more than any other company in the world. More NAND flash components, including current and
up-coming
generations of 3D flash produced by Intel, Kioxia, Micron, Samsung, SK Hynix, Western Digital and YMTC, are supported by Silicon Motion controllers than any other company. Our customers include NAND flash makers, module makers, hyperscalers and OEMs.
We are the world’s leading supplier of SSD controllers used in PCs and other client devices and leading merchant supplier of eMMC/UFS controllers used in smartphones and IoT devices. We also leverage our controller expertise to supply customized high-performance data center SSDs to China’s leading hyperscalers and specialized small single-chip form factor SSDs for industrial, commercial and automotive applications. We market our controllers under the “SMI” brand, enterprise-grade SSDs under the “Shannon Systems” brand and single-chip industrial-grade SSDs under the “Ferri SSD” and “Ferri-eMMC” brands.
Our principal executive offices are located at Unit B, 16/F, Centre 600, 82 King Lam St, Cheung Sha Wan, Kowloon, Hong Kong. The address of our United States operating subsidiary, Silicon Motion, Inc., is 690 N. McCarthy Blvd. Suite 200, Milpitas, CA 95035. The address of our Taiwan operating subsidiary, Silicon Motion, Inc., is 8/F, #36 Taiyuan St., Jhubei, Hsinchu 30265, Taiwan. Our ADSs, each representing four of our ordinary shares, have been listed and traded on Nasdaq since June 2005.
Significant Subsidiaries of the Company
Below is a list of significant subsidiaries of the Company. All subsidiaries are wholly owned.
 
Name of Entity
 
Jurisdiction of Incorporation
Silicon Motion, Inc.   Taiwan
Silicon Motion (MCO) Ltd*.   Macau
Silicon Motion Technology (HK) Ltd.   Hong Kong
 
*
Liquidated in December 2020.
 
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Our Market and Products
We focus primarily on designing, developing and marketing: (i) NAND flash controllers for solid state storage devices, primarily SSDs used in PCs and other client devices and eMMC and UFS mobile embedded storage used in smartphones and IOT devices and (ii) SSD solutions, primarily enterprise-grade SSDs used in data centers and small form-factor specialized SSDs used in industrial, commercial and automotive applications. In 2020, 50% to 60% of our net sales were of SSD controllers, 25% to 30% were eMMC and UFS controllers and 10% to 15% were SSD solutions.
NAND Flash Controllers
We offer a broad range of controllers from which customers may choose in developing different categories of solid state storage devices that are used in a wide variety of applications. We provide controllers for computing-grade SSDs used in PCs and other client devices, enterprise-grade SSDs used in data centers, eMMC and UFS mobile embedded storage used in smartphones and IoT devices and flash memory cards and flash drives used as expandable storage, and specialized SSDs used in industrial, commercial and automotive applications. For most of these applications we offer customers controllers which are designed for a range of different price-performance trade-offs that enable the targeting of different market segments, such as value-line, mainstream and premium. Our controllers are a combination of integrated circuits and firmware and are offered as configurable platforms or turnkey solutions, which provides customers with options to customize products to achieve desired differentiation or focus on fast
time-to-market. Since
SSDs and mobile embedded storage products are defined by continuously evolving industry standards such those relating to, but are not limited to, the PCIe host interface, NVMe data transfer protocol and UFS storage specification, we provide controllers for the latest versions of these industry standards and design our solutions for customers to build storage devices with competitive product performance and compatibility with host devices. Our controllers are also designed to support the majority of the latest next generations of NAND flash components manufactured by vendors such as Intel, Kioxia, Micron, Samsung, SK Hynix, Western Digital and YMTC, which enables customers to have wide choices of components for developing and building storage devices. Controllers integrate technologies that are critical to their functionality and these include advanced error correction codecs (ECC) and digital signal processing (DSP) engines for ensuring data reliability and sophisticated wear-leveling algorithms for maximizing the usable life of NAND flash components. We may also incorporate other technologies in our controllers such as encryption, power-loss protection, multimedia digital rights management and active temperature monitoring.
SSD Solutions
We use our unique controller technology to develop Ferri and Shannon SSD solutions. Our FerriSSDs and Ferri-eMMCs products are highly reliable industrial-, commercial- and automotive-grade single-chip SSDs, which are developed for a wide-range of embedded applications that require high data rate, small form factor and compliance with industry standards. We offer customers firmware customization for performance tuning as a value-added service. Our Shannon SSDs include both standard enterprise-grade PCIe NVMe SSDs used in data centers and proprietary enterprise-grade Open-Channel SSDs developed for China’s leading hyperscale data center operators. Our Bigtera software-defined storage solutions are enterprise-grade software defined storage and storage appliances targeted at China and Taiwan markets.
Our Customers
We sell our products to NAND flash makers, module makers, hyperscalers and OEMs worldwide. Most of our high performance flash memory storage controllers are supplied to NAND flash manufacturers. We are a leading supplier of SSD controllers used in data centers, PCs and other client devices and leading merchant supplier of eMMC and UFS used in smartphones and IOT devices. Sales to our five largest customers represented approximately 54%, 54% and 56% of our net revenue in 2018, 2019 and 2020, respectively. Sales to our significant customers representing 34%, 31% and 24% of our net revenue in 2018, 2019 and 2020,
 
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respectively. In 2020, the significant customer was Micron. In 2019, the significant customers were Intel and Micron and in 2018, were SK Hynix and Intel. The identities of our largest customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period.
The majority of our customers purchase our products through purchase orders, as opposed to entering into long-term contracts with us. The price for our products is typically agreed upon at the time a purchase order is placed.
Sales and Marketing
We market and sell our products worldwide through a combination of direct sales personnel and independent electronics distributors. Our direct sales personnel are strategically located near our NAND flash manufacturer, leading technology OEM and modular maker customers in Taiwan, Korea, China, the United States, and Japan. Approximately 68% of our sales in 2018, 69% of our sales in 2019, and 70% of our sales in 2020 were attributable to our direct sales force while the remainder was attributable to distributors.
To supplement our direct sales, we have independent electronics distributors and sales reps located throughout the world. We selected these distributors and reps based on their ability to provide effective field sales, marketing communications and technical support for our products to our customers.
Our marketing group focuses on our product strategy, product development road maps, new product introduction process, demand assessment, competitive analysis and product marketing. We seek to work with potential and existing customers early in their design process to best match our products to their needs, and more broadly, to ensure that product development activities, product launches, and
on-going
demand and supply planning occur in a well-managed, timely basis in coordination with our research and development, operations, and sales groups, as well as our customers and distributors. We also attend industry tradeshows and technical conferences to promote our products and solutions, maintain close contact with our existing customers to assess demand, and keep current with industry trends. Our participation in industry standards associations, such as IEEE, JEDEC and NVM Express, helps us monitor the latest industry developments and promote our corporate profile. Our marketing group also works with our sales teams to identify new business opportunities.
We also have field application engineers (FAEs), who provide technical support and assistance to existing and potential customers in designing, testing and qualifying systems that incorporate our products. Our FAE organization is segmented by product and market to support our customers.
Research and Development
Our future success depends on our ability to introduce improvements to our existing products and to develop new products that deliver cost-effective solutions for both existing and new markets. Our research and development efforts are directed largely to both the development of algorithms and other technological building blocks necessary for managing NAND flash and the use of these technological building blocks to develop a wide variety of NAND flash controller solutions, which are integrate circuits and firmware, that can manage most available NAND flash components and are used to create different classes of solid state storage devices, such as SSDs used in enterprise applications and data centers, SSDs used in PCs and other client devices, eMMC and UFS embedded storage for smartphones and IOT devices and their market
sub-segments.
We have assembled a core team of engineers who have experience in the areas of firmware, digital and mixed-signal circuit design and system-level architecture. Our research and development expenses consist primarily of employee salaries and related benefits including stock-based compensation,
tape-out
and related project expenses and intellectual property and software licensing costs. We expense research and development expenditures as they are incurred.
Our primary research and development centers are located in Hsinchu and Taipei, Taiwan, and Shanghai, China. Our facilities in Hsinchu and Taipei focus primarily on our NAND flash controller products, and our
 
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facilities in Shanghai focus primarily on SSD solutions and specific product requirements of our customers in China.
Our research and development activities broaden and strengthen our portfolio of intellectual properties, including patents and trade secrets. As of March 31, 2021, we have 1,829 patents and 1,323 pending applications worldwide, and we will continue to actively pursue the filing of additional patent applications in important jurisdictions.
Our research and development expenses were approximately US$102.0 million, US$110.3 million, and US$121.8 million for the years ended December 31, 2018, 2019 and 2020, respectively.
Manufacturing
We design and develop our products and electronically transfer our proprietary designs to independent foundries for the manufacturing and processing of silicon wafers. Once the wafers are manufactured, they are then shipped to third-party assembly and testing subcontractors. Individual dies on each wafer are assembled into finished chips and undergo several stages of testing before delivery to our customers. We also ship bare dies to our customers. We believe that our strategy of outsourcing wafer fabrication, packaging and testing enables us to benefit from the research and development efforts of leading manufacturers without having to commit our own substantial capital investments. Our fabless business model also provides us with the flexibility to engage vendors who offer services that best complement our products and technologies.
Wafer fabrication
. TSMC and SMIC are currently our primary foundries that manufacture most of our semiconductors. We use their fabs in Taiwan, Singapore, and China to fabricate our devices using CMOS process technology, primarily with process nodes from 16/12 to 55 nanometers. We regularly evaluate the benefits and feasibility, on a
product-by-product
basis, of migrating to more cost-efficient manufacturing process technologies.
Assembly and testing
. Following wafer fabrication, our wafers are shipped to our assembly and test subcontractors where they are probed, singulated into individual dies, assembled into packaged chips, and undergo the process of electronic final testing. In order to minimize cost and reduce turn-around time, our products are designed to use low cost, industry standard packages and can be tested with widely available automatic testing equipment. We currently engage companies such as ASE, SPIL, and KYEC as our primary subcontractors for the assembly and testing of our products. We have dedicated teams of manufacturing engineers who maintain control over this process from the early stages of manufacturing. Our engineers work closely with our subcontractors to develop product testing and packaging programs to ensure these programs meet our product specifications, thereby maintaining our ownership of the functional and parametric performance of our semiconductors.
Quality and reliability assurance
. We have designed and implemented a quality assurance system that provides the framework for continual improvement of products, processes and customer service. To ensure consistent product quality, reliability and yield, our quality assurance teams perform reliability engineering, quality control, international organization for standardization (ISO) system development, document control, subcontractor quality management and customer engineering services to closely monitor the overall process from IC design to after-sale customer support. In particular, we rely on
in-depth
simulation studies, testing and practical application testing to validate and verify our products. We emphasize a strong supplier quality management practice in which our manufacturing suppliers and subcontractors are
pre-qualified
by our quality assurance teams. Our suppliers are required to have a quality management system, certified to ISO 9000 standard as a minimum requirement. Our operations have been ISO 9001 certified since 1999.
Competition
We face competition from a number of competitors, including Marvell, our flash memory customers and small Taiwanese merchant controller suppliers.
 
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The markets for our products are intensely competitive, and are characterized by rapid technological change, evolving industry standards, frequent new product introductions and pricing pressures. Competition has intensified as a result of the increasing demand for higher levels of performance at competitive prices. We expect competition to intensify as current competitors continue to strengthen the depth and breadth of their product offerings. We believe that our ability to compete successfully in the rapidly evolving markets for our products depends on a number of factors, including, but not limited to:
 
   
the performance, features, quality and price of our products;
 
   
the timing and success of new product introductions by us, our customers and our competitors;
 
   
emergence, rate of adoption and acceptance of new industry standards;
 
   
our ability to obtain adequate foundry capacity at competitive prices; and
 
   
the number and nature of our competitors in a given market
sub-segment.
We expect increased competition in the future from emerging or established companies, customers or other third parties, any of which could acquire significant market share. See “Risk Factors — Because the markets in which we compete are highly competitive and many of our competitors have greater resources than we have, we cannot be certain that our products will compete favorably in the marketplace,” in Item 3 above.
Seasonality
See “Risk Factors — Our financial conditions and results of operations may vary from quarter to quarter, which may cause the price of our ADSs to decline.” in Item 3 above and “Operating and Financial Review and Prospects — Principal Factors Affecting Our Results of Operations” in Item 5 below.
Intellectual Property
Our success and future revenue growth depend, in part, on our ability to protect our intellectual property. We rely on a portfolio of intellectual property rights, registered in the United States, Taiwan, and other countries, including patents, copyrights and trademark registrations, trade secret laws, contractual provisions, licenses, and other methods to protect our intellectual property.
As of March 31, 2021, we have 1,829 patents and 1,323 pending applications worldwide. There can be no assurance that patents will ever be issued with respect to these pending applications. Furthermore, it is possible that any patents held by us may be invalidated, circumvented, challenged or licensed to others. In addition, there can be no assurance that such patents will provide us with competitive advantages or adequately safeguard our proprietary rights. While we continue to file new patent applications with respect to our recent developments, existing patents are granted for prescribed time periods and will expire at various times in the future. We expect to continue to file patent applications where appropriate to protect our proprietary technologies.
Companies in the semiconductor industry have frequently demonstrated a readiness to commence litigation based on allegations of patent and other intellectual property infringement. From time to time, third parties may assert infringement claims against us. We may not prevail in any such litigation or may not be able to license patents from third parties on commercially reasonable terms, if at all. Litigation, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time. Any such litigation could materially adversely affect us. In addition, in the contracts under which we sell semiconductor products, we may have agreed to indemnify our customers against losses arising out of claims of unauthorized use of intellectual property.
We intend to protect our intellectual property rights vigorously, but there can be no assurance that our efforts will be successful. In addition, the laws of other countries in which our products are sold may not protect our products and intellectual property rights to the same extent as the laws of the United States.
 
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While our ability to effectively compete depends in large part on our ability to protect our intellectual property, we believe that our technical expertise, customer support capabilities, and ability to introduce new products in a timely and cost-effective manner will be important factors in maintaining our competitive position.
We claim copyright and trademark protection for proprietary documentation for our products and a variety of branding marks. We have registered “Silicon Motion” and its logo (a three-dimensional cube depiction of the letters “SM”), “NANDSustain,” “NANDXtend,” “SSDLifeGuard,” “SSDLifeSaver,” “TurboMLC,” “FerriSSD,” “Ferri-eMMC,” the powered by SiliconMotion logo, “InstantView,” the Shannon Systems logo, “PCIe-RAID,”
“DIRECT-IO,”
“Hyper-IO,”
“Bigtera,” the Bigtera logo, “VirtualStor,” “CloudStor,” and “StorVisor” as trademarks in the United States, Taiwan and other countries.
We also attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees and consultants, and through other customary security measures.
We have entered into license agreements with third party intellectual property vendors for wafer fabrication tool libraries, semiconductor IP core, computer aided design tools and software.
Facilities
As of the date of this annual report, we occupy facilities totaling approximately 383,200 square feet, which house our management and administration, operations, research and development and sales and marketing departments. Of our facilities, approximately 182,400 square feet are owned and approximately 200,800 square feet are occupied under leases. We consider our facilities insufficient to meet our future operational requirements and in 2018, purchased 65,700 square feet of land in Hsinchu, Taiwan for the construction of a future office building. See “Risk Factor — We are subject to risks associated with development and construction of our office buildings.” The table below lists the location of our operating facilities.
 
Location
  
Primary Use
  
Approximate Square Footage
Hsinchu, Taiwan
   Research & development, management & administration    205,200
Taipei, Taiwan
   Research & development, sales & marketing    82,200
Shanghai, China
   Research & development, sales & marketing    43,400
Shenzhen, China
   Sales & marketing    20,200
Milpitas, California
   Sales & marketing, management    13,300
Others 
(1)
   Sales & marketing, management    18,900
 
(1)
Korea, Macau, Hong Kong, Yokohama, Japan, Beijing, Nanjing, Hangzhou and Suzhou, China
Leases covering our current facilities expire at varying dates, generally within the next five years. We anticipate no difficulty in retaining occupancy through lease renewals,
month-to-month
occupancy or replacing the leased facilities with equivalent facilities.
We currently own commercial property in Taipei of approximately 6,200 square feet and commercial property in Shanghai of approximately 20,000 square feet, which we have no plans to use for our operations. We are in the process of selling the Shanghai property. The Taipei property is leased to a third-party.
Government Regulation
See Risk Factors — “Our business is subject to various governmental regulations, and compliance with these regulations may cause us to incur significant expense.” in Item 3 above.
 
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ITEM 4A.
UNRESOLVED STAFF COMMENTS
None.
 
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. We caution you that our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. See “Special Note Regarding Forward-Looking Statements.” In evaluating our business, you should also carefully consider the information provided under the caption “Risk Factors” included in Item 3 of this annual report.
Overview
We are a global leader in developing NAND flash controllers for SSDs and other solid state storage devices. We have over 20 years of experience developing specialized processor ICs that manage NAND components and deliver market leading, high- performance storage solutions widely used in data centers, PCs, smartphones and commercial and industrial applications. We have one of the broadest portfolios of controller intellectual properties developed from our deep understanding of NAND characteristics, which enables us to design both unique, highly optimized configurable IC plus related firmware controller platforms and complete turnkey controller solutions. In the last ten years, we have shipped over six billion controllers, more than any other company in the world. More NAND flash components, including current and
up-coming
generations of 3D flash produced by Intel, Kioxia, Micron, Samsung, SK Hynix, Western Digital and YMTC, are supported by Silicon Motion controllers than any other company. Our customers include NAND flash makers, module makers, hyperscalers and OEMs.
We are the world’s leading supplier of SSD controllers used in PCs and other client devices and leading merchant supplier of eMMC/UFS controllers used in smartphones and IoT devices. We also leverage our controller expertise to supply customized high-performance data center SSDs to China’s leading hyperscalers and specialized small single-chip form factor SSDs for industrial, commercial and automotive applications. We market our controllers under the “SMI” brand, enterprise-grade SSDs under the “Shannon Systems” brand and single-chip industrial-grade SSDs under the “Ferri SSD” and “Ferri-eMMC” brands.
Summary of Consolidated Financial Results
Summary of the year ended December 31, 2020 include the following:
 
   
Total revenue increased by 18% to US$539.5 million.
 
   
Gross profit as a percentage of revenue decreased by 0.4% points to 48.2%.
 
   
Total operating expenses increased by 6% to US$179.7 million.
 
   
Operating profit increased by 54% to US$80.5 million.
 
   
Income tax expense as a percentage of income before income tax decreased to 6.8%.
 
   
Diluted earnings per ADS increased by 25% to US$2.28.
Principal Factors Affecting Our Results of Operations
Net sales.
Our net sales consist primarily of sales of our products, after deducting sales discounts and allowances for returns.
 
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Our net sales are denominated primarily in U.S. dollars. The percentages of our net sales by currency for the periods indicated are set forth in the following table:
 
    
Year Ended December 31,
 
    
2018
   
2019
   
2020
 
Currency
                        
U.S. dollars
     88     95     98
Korean won
     3     1     —    
Chinese yuan
     9     4     2
The length of our sales cycle, from the day purchase orders are received until products are shipped to customers, is dependent on the availability of our product inventories. If we do not have sufficient inventories on hand to meet customer demands, approximately three months are generally required from the day purchase orders are received until finished goods are manufactured and shipped to customers. This cycle can take up to six months during times when capacity at independent foundries is being fully utilized. The potential delays inherent in the manufacturing process increase the risk that we may not be able to fulfill a customer’s order on time. All of our sales are made by purchase orders. Because our practice, which is consistent with industry practice, allows customers to reschedule orders on relatively short notice, order backlog may not be a good indicator of our future sales.
Because most of our semiconductor solutions are designed for the mobile and computing devices markets, we expect our business to be subject to seasonality, with higher net sales generally in the second half of each year, when customers place orders to meet increased demand during
year-end
holiday seasons. However, changing market and business conditions, as well as changing product mix in recent years could make assessment of the impact of seasonal factors on our business difficult.
Cost of sales.
Our cost of sales consists primarily of the following costs:
 
   
cost of wafer fabrication;
 
   
assembly, testing and shipping costs of our semiconductors;
 
   
personnel and equipment costs associated with manufacturing support;
 
   
quality assurance;
 
   
cost of raw materials; and
 
   
write-down of inventory.
We engage independent foundries for the manufacturing and subcontractors for the assembly and testing of our semiconductors. Our manufacturing cost is subject to the cyclical supply and demand conditions typical of the semiconductor industry. Our cost per wafer generally fluctuates with the availability of capacity at independent foundries. We believe that our cost of sales is substantially variable in nature.
Research and development expenses.
Our research and development expenses consist primarily of employee salaries and related costs, stock-based compensation,
tape-out
and related project expenses and intellectual property and software licensing costs. We expense research and development expenditures as they are incurred.
Sales and marketing expenses.
Our sales and marketing expenses consist primarily of employee salaries and related costs, stock-based compensation expense, commissions paid to independent distributors and costs for our advertising and promotional activities.
General and administrative expenses.
Our general and administrative expenses consist primarily of employee salaries and related costs, stock-based compensation expense, insurance premiums, professional fees and allowance for doubtful accounts.
 
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Impairment of goodwill and intangible assets.
We evaluate the recoverability of goodwill and intangible assets annually, or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable.
Amortization of acquired intangible assets.
Amortization of acquired intangible assets relates to intangible assets, such as development technology, but excluding goodwill.
Accounting for stock-based compensation.
We grant restricted stock units to our employees and members of the Board of Directors. The value of our restricted stock units is expensed over the vesting period and based on the grant date share price, less the present value of expected dividends during the vesting period, discounted at a risk-free interest rate.
Non-operating
income and expenses.
Our
non-operating
income and expenses include gains from disposal of subsidiary, gains or losses on the sales of investments, interest from deposited cash or short-term investments, gains or losses on foreign exchange rates, interest paid on loans, gain or loss on equity-method investment and other
non-operating
income and expenses not categorized above. We conduct an assessment on the value of our long-term investments quarterly and make corresponding write-downs as required to the value of the long-term investments.
Provision for income taxes.
We must make certain estimates and judgments in determining income tax expenses for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, deductions and allowance, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax positions.
We have operations in several countries, which include Taiwan, China, Hong Kong, Macau and the US and determine income taxes for each of the jurisdictions where we operate. In May 2019, we divested our specialty RF ICs product line with operations in South Korea.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an
on-going
basis, including those related to product returns and pricing allowances, allowances for doubtful accounts, inventories, business combinations, goodwill, long-lived assets, income taxes, litigation and contingencies. We base our estimates and judgments on our historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. Because our estimates may vary in each situation, our actual results may differ from our estimates under different assumptions and conditions.
Our management considers the following factors in reviewing our financial statements:
 
   
the selection of critical accounting policies; and
 
   
the judgments and other uncertainties affecting the application of those critical accounting policies.
The selection of critical accounting policies, the judgments and other uncertainties affecting the application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in detail in Note 2 to our consolidated financial statements included elsewhere in this annual report.
 
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We believe the following critical accounting policies affect our more significant judgments used in the preparation of our financial consolidated statements.
Revenue recognition
. As a result of the adoption of the new revenue standard (ASC 606) on January 1, 2018, The Company enters into contracts that may include products that are capable of being distinct and accounted for as separate performance obligations. To date, the majority of the revenue has been generated by sales associated with products for the storage and mobile communication markets, where a single performance obligation is identified in general. Revenue from services has been insignificant. Performance obligations associated with product sales transactions are generally satisfied when control passes to customers upon shipment or the written acceptance by the customers. Accordingly, product revenue is recognized at a point in time when control of the asset is transferred to the customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control of a product to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods. Some of the Company’s sales are made to distributors and revenue is recognized when control of a product passes to the distributor upon shipment and terms and payment by the distributor are not contingent on resale of the product.
The Company grants certain distributors limited rights of return and price protection rights on unsold products. The return rights are generally limited to five percent of the monetary value of products purchased within the preceding six months, provided that the distributor places a corresponding restocking order of equal or greater value. An allowance for sales returns for distributors and all customers is recorded at the time of sale based on historical returns information available, management’s judgment and any known factors at the time the financial statements are prepared that would significantly affect the allowance. Price protection rights are based on the inventory of products the distributors have on hand at the date the price protection is offered. Actual price adjustments to distributors incurred by the Company have been minimal.
Allowance for doubtful accounts.
We record an allowance for doubtful accounts based on our evaluation of the collectability of our accounts receivable. Normal payment terms are provided to customers and applied upon transfer of title. On an ongoing basis, we analyze the payment history of customer accounts, including recent customer purchases. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we record a specific allowance against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other accounts receivable due from customers, we categorize accounts receivable and make provisions based on a percentage of each category. We determine these percentages by examining the historical collection experience, current trends in the credit quality of the customers and internal credit policies as well as current economic conditions that may affect a customer’s ability to pay. If the financial condition of our customers or economic conditions in general were to deteriorate, additional allowances may be required in the future and such additional allowances would increase our operating expenses and therefore reduce our operating income and net income.
Our allowance for trade-related doubtful accounts were approximately US$0.6 million, US$1.6 million and US$1.6 million as of December 31, 2018, 2019 and 2020, respectively, representing approximately 0.7%, 1.5% and 1.3% of our gross accounts receivables at the end of each respective periods.
Inventory valuation.
We value inventories at the lower of cost or net realizable value for raw materials, work-in-process and finished goods. Inventories are recorded at standard cost and adjusted to the approximate weighted-average cost at the balance sheet date. We assess net realizable value of the inventory for estimated obsolescence or unmarketable inventory based upon management’s assumptions about future demand and market conditions. In estimating reserves for obsolescence, we primarily evaluate estimates based on the timing of the introduction of new products and the quantities remaining of old products and provides reserves for inventory on hand in excess of the estimated demand. Estimated losses on slow-moving items are recognized and included in the allowance for losses. We wrote down US$2.1 million, US$9.1 million and US$6.9 million in 2018, 2019 and 2020, respectively, for estimated obsolete or unmarketable inventory, with write-downs in 2019 and 2020 primarily related to the value of NAND components and SSDs in inventory affected by rapidly falling NAND prices.
 
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Valuation of long-lived assets and intangible assets with finite useful life.
We evaluate the recoverability of long-lived assets and intangible assets whenever events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of a long-lived asset is considered impaired when the sum of the anticipated undiscounted cash flows from such asset is separately identifiable and is less than the carrying value. If impairment occurs, a loss based on the excess of carrying value over the fair market value of the long-lived asset is recognized. Fair market value is determined by reference to quoted market prices, if available, or discounted cash flows, as appropriate. The impairment evaluations and the estimate of fair market value involve management estimates of assets’ useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management. This could have a material effect on our operating results and financial condition. As of December 31, 2019, we wrote down the value of intangible assets by US$3.7 million, See Note 10 Goodwill and Acquired Intangible Assets in our financial statements.
Impairment of long-term investments.
We evaluate the recoverability of long-term investments whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment charges are determined based on the difference between our carrying value and our proportionate ownership of the investee company’s fair value at year end. No impairment losses were recognized in 2018, 2019 and 2020.
Business combinations.
When we acquire businesses, we allocate the purchase price to tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on historical experience and information obtained from the management of the acquired companies. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the synergistic benefits expected to be derived from the acquired business. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates.
Goodwill.
We record goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired. We measure and test goodwill on an annual basis or more frequently if we believe indicators of impairment exist. Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. We determined that our reporting units are equivalent to our operating segments or components of an operating segment for the purposes of completing our impairment test. In the fourth quarter of 2017, we elected to early adopt FASB Accounting Standard Update
2017-04,
which removed step two from the goodwill impairment test, in conjunction with our annual review for impairment. Estimating fair value is performed by utilizing various valuation approaches, such as income approach or market approach. The total of all reporting unit fair values was also compared to our market capitalization plus control premium for reasonableness.
In 2018, we record an impairment charge of US$0.6 million related to our Bigtera acquisition. In 2019 and 2020, we recorded an impairment charge of US$15.7 million and US$17.5 million related to our Shannon acquisition. The worse than expected business outlook and lower cash flow projections of these reporting units led to reductions in their fair market value and the assessment of impairment charges for the difference of carrying value in excess of fair market value. The estimate of cash flow was based upon, among other things, certain assumptions about expected future operating performance such as revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparable. We based our fair value estimates on assumptions we believed to be reasonable but that are unpredictable and inherently uncertain. The long-term financial forecast represented the best estimate that we had at that time and we believed that its underlying assumptions were reasonable.
Noncurrent assets held for sale.
Noncurrent assets are presented separately as held for sale when we are committed to selling the asset, an active plan of sale has commenced, and the sale is expected to be completed
 
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within 12 months or under a specified market condition that meets an exception to
one-year
requirement. Assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell. Assets held for sale are no longer amortized or depreciated.
Accounting for income taxes.
In preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We are tax resident in numerous taxing jurisdictions around the world and have identified our major tax jurisdictions as Taiwan, Hong Kong, Korea prior to our 2019 divestiture of FCI, Macau and China with statutory tax rate of 20%, 16.5%, 11%, 12% and 25%, respectively and estimate our actual current tax exposure together with assessed temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income within the relevant jurisdiction and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. The total amount of valuation allowance as of December 31, 2018, 2019 and 2020 was US$20.0 million, US$18.1 million and US$20.8 million, respectively. We provide for a valuation allowance to the extent we believe that it is more likely than not that the deferred tax assets will not be recovered from future taxable income. Realization of future tax benefits related to the deferred tax assets is dependent on many factors, including our ability to generate taxable income within the period during which the temporary differences reverse, the outlook for the economic environment in which we operate, and the overall future industry outlook. Should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an additional allowance for the deferred tax asset would be charged to income in the period the determination was made.
We utilize a
two-step
approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The total amount of unrecognized tax benefits as of December 31, 2018, 2019 and 2020 was US$18.7 million, US$20.7 million and US$19.0 million, respectively. As of December 31, 2019 and 2020, US$4.5 million and US$5.2 million, respectively, of interest and penalties were accrued. Fiscal years 2015 through 2020 remain subject to examination by the US Internal Revenue Service and other foreign tax jurisdictions. The ultimate outcome of tax matters may differ from our estimates and assumptions. Unfavorable settlement of any particular issue would require the use of cash and could result in increased income tax expense. Favorable resolution could result in reduced income tax expense. Within the next 12 months, we do not expect that our unrecognized tax benefits would change significantly. See Note 15 to the Consolidated Financial Statements for further information regarding changes in unrecognized tax benefits during 2020.
Legal Contingencies.
From time to time, we are involved in legal actions or other third-party assertions arising in the ordinary course of business. There can be no assurance these actions or other third-party assertions will be resolved without costly litigation, in a manner that does not adversely impact our financial position, results of operations or cash flows or without requiring royalty payments in the future, which may adversely impact gross margins. We record a liability when it is probable that a loss has been incurred and the amount can be reasonably estimated. In determining the probability of a loss and consequently, determining a reasonable estimate, management is required to use significant judgment. Given the uncertainties associated with any litigation, the actual outcome can be different than our estimates and could adversely affect our results of operations, financial position and cash flows. See Item 8: “Legal Proceedings”.
Segment Information.
 The Company has one operating segment, NAND flash controllers and SSD solutions, consisting of numerous product areas. The Company’s chief operating decision maker (CODM) is considered to be its Chief Executive Officer. The CODM allocates resources and assesses performance of the business and other activities at the operating segment level. Our numerous product areas include SSD controllers, eMMC and UFS controllers, memory card and flash drive controllers, Ferri industrial SSDs, Shannon data center SSDs, Bigtera software defined storage appliances, and prior to our divestiture of FCI in May 2019, specialty RF ICs.
 
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Results of Operations
The following table sets forth our statements of operations as a percentage of net sales for the periods indicated:
 
    
Year Ended December 31,
 
    
2018
   
2019
   
2020
 
Net sales
     100.0     100.0     100.0
Cost of sales
     50.8       51.4       51.8  
  
 
 
   
 
 
   
 
 
 
Gross profit
     49.2       48.6       48.2  
  
 
 
   
 
 
   
 
 
 
Operating expenses:
      
Research and development
     19.2       24.1       22.6  
Sales and marketing
     5.5       5.5       4.6  
General and administrative
     3.3       3.9       2.9  
Impairment of goodwill and intangible assets
     0.8       3.5       3.2  
Amortization of intangible assets
     0.6       0.2       —    
  
 
 
   
 
 
   
 
 
 
Total operating expenses
     29.4       37.2       33.3  
  
 
 
   
 
 
   
 
 
 
Operating income
     19.8       11.4       14.9  
  
 
 
   
 
 
   
 
 
 
Non-operating
income (expenses):
      
Gain from disposal of subsidiary
     0.0       2.7       —    
Gain from disposal of long-term investments
     0.0       0.1       —    
Gain from disposal of short-term investments
     0.0       0.0       0.0  
Interest income
     1.2       1.5       0.9  
Foreign exchange gain (loss), net
     (0.1     0.0       0.1  
Interest expense
     (0.1     0.0       0.0  
Loss on equity-method investment
     (0.1     —         —    
Other income (loss), net
     0.0       0.0       0.0  
  
 
 
   
 
 
   
 
 
 
Total
non-operating
income
     0.9       4.3       1.0  
  
 
 
   
 
 
   
 
 
 
Income before income taxes
     20.7       15.7       15.9  
Income tax expense
     2.2       1.7       1.1  
  
 
 
   
 
 
   
 
 
 
Net income
     18.5     14.0     14.8
  
 
 
   
 
 
   
 
 
 
Comparison of Year Ended December 31, 2020 to Year Ended December 31, 2019
Net sales.
 
    
Years Ended December 31
              
    
2019
    
2020
              
    
US$
    
% of net sales
    
US$
    
% of net sales
    
$ change
   
% change
 
    
(in thousands, except percentage data)
 
Net sales
                
Mobile Storage
     441,700        97        532,682        99        90,982       21  
Mobile Communications
     10,356        2        —          —          (10,356     (100
Others
     5,197        1        6,839        1        1,642       32  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Net sales
     457,253        100        539,521        100        82,268       18  
In 2020, our net sales increased by 18% year-over-year to approximately US$539.5 million. Our Mobile Storage revenue increased by 21% year-over-year primarily because of increasing sales of SSD controllers, eMMC and UFS controllers and SSD solutions, partially offset by declining expandable storage controller sales.
 
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Our SSD controller sales increased in the range of 15% to 20% year-over-year to account for approximately 50% to 60% of revenue, eMMC plus UFS controller sales increased in the range of 35% to 40% year-over-year to account for approximately 25% to 30% of revenue and SSD solutions sales increased in the range of 35% to 40% year-over-year to account for approximately 10% to 15% of revenue. We divested our Mobile Communications product line in May 2019.
Gross profit.
 
    
Years Ended December 31
               
    
2019
    
2020
               
    
US$
    
% of net sales
    
US$
    
% of net sales
    
$ change
    
% change
 
    
(in thousands, except percentage data)
 
Gross profit
     222,172        49        260,156        48        37,984        17  
Gross profit as a percentage of net sales decreased to 48% in 2020 as compared to 49% in 2019 primarily because of a higher mix of lower gross margin SSD solutions sales as well as a slight decrease in controller gross margin. Our gross profit excluding obsolete and unmarketable inventory write-downs as a percentage of revenue decreased from 51% in 2019 to 50% in 2020.
Research and development expenses.
 
    
Years Ended December 31
               
    
2019
    
2020
               
    
US$
    
% of net sales
    
US$
    
% of net sales
    
$ change
    
% change
 
    
(in thousands, except percentage data)
 
Salary and benefits
     57,165        13        66,674        12        9,509        17  
Stock-based compensation
     9,927        2        10,132        2        205        2  
Other research and development
     43,213        9        44,978        9        1,765        4  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Research and development
     110,305        24        121,784        23        11,479        10  
Our research and development expenses increased by 10% year-over-year to approximately US$121.8 million in 2020. Salary and benefits increased by 17% year-over-year to approximately US$66.7 million in 2020. Stock-based compensation increased by 2% year-over-year to approximately US$10.1 million. Other research and development expenses increased by 4% year-over-year to approximately US$45.0 million, primarily because of higher IC tape-outs and other project expenses in 2020.
Sales and marketing expenses.
 
    
Years Ended December 31
              
    
2019
    
2020
              
    
US$
    
% of net sales
    
US$
    
% of net sales
    
$ change
   
% change
 
    
(in thousands, except percentage data)
 
Salary and benefits
     14,586        3        15,599        3        1,013       7  
Stock-based compensation
     1,789        1        1,759        —          (30     (2
Other sales and marketing
     8,733        2        7,447        2        (1,286     (15
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Sales and marketing
     25,108        6        24,805        5        (303     (1
Our sales and marketing expenses decreased by 1% year-over-year to approximately US$24.8 million in 2020. Salary and benefits increased by 7% year-over-year to approximately US$15.6 million. Stock-based compensation decreased by 2% year-over-year to approximately US$1.8 million in 2020. Other sales and marketing expenses decreased by 15% year-over-year to approximately US$7.4 million.
 
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General and administrative expenses.
 
    
Years Ended December 31
              
    
2019
    
2020
              
    
US$
    
% of net sales
    
US$
    
% of net sales
    
$ change
   
% change
 
    
(in thousands, except percentage data)
 
Salary and benefits
     9,202        2        9,445        2        243       3  
Stock-based compensation
     2,570        1        2,445        —          (125     (5
Other general and administrative
     6,106        1        3,714        1        (2,392     (39
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
General and administrative
     17,878        4        15,604        3        (2,274     (13
Our general and administrative expenses decreased by 13% year-over-year to approximately US$15.6 million in 2020. Salary and benefits increased by 3% year-over-year to approximately US$9.4 million. Stock-based compensation decreased by 5% year-over-year to approximately US$2.4 million in 2020. Other general and administrative expenses decreased by 39% year-over-year to approximately US$3.7 million.
Stock-based compensation.
The following table presents details of total stock-based compensation that is included in each functional line item in our consolidated statements of income:
 
    
Years Ended December 31
              
    
2019
    
2020
              
    
US$
    
% of net sales
    
US$
    
% of net sales
    
$ change
   
% change
 
    
(in thousands, except percentage data)
 
Cost of sales
     305        —          253        —          (52     (17
Research and development
     9,927        2        10,132        2        205       2  
Sales and marketing
     1,789        —          1,759        —          (30     (2
General and administrative
     2,570        1        2,445        —          (125     (5
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Total stock-based compensation
     14,591        3        14,589        2        (2     (0
See Note 17 to Consolidated Financial Statements for a discussion of activity related to share-based awards.
Impairment of goodwill and intangible assets.
We performed impairment assessments of the carrying value of goodwill and intangible assets on an annual basis or more frequently, if we believe indicators of impairment exist. In 2019, we determined that the goodwill and intangible assets of our Shannon acquisition were impaired and recognized approximately US$16.0 million of impairment expenses. During our 2020 assessment, we determined that the goodwill of our Shannon acquisition remained impaired and recognized approximately $17.5 million of impairment expenses.
Amortization of intangible assets.
Our amortization of intangible asset was approximately US$0.8 million in the year ended December 31, 2019.
Gain (loss) from disposal of subsidiary
. We realized disposal of FCI gain of US$12,409 thousand and loss of US$293 thousand for the year ended December 31, 2019 and 2020, respectively.
Gain from disposal of long-term investments
. We recognized a gain from disposal of ProGrade of US$473 thousand for the year ended December 31, 2019.
Gain from disposal of short-term investments
. We realized gains on sales of trading securities of US$48 thousand and US$169 thousand for the year ended December 31, 2019 and 2020, respectively.
 
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Interest income.
Our interest income decreased to approximately US$4.6 million for the year ended December 31, 2020 from approximately US$6.8 million for the year ended December 31, 2019.
Interest expense.
Interest expense increased to approximately US$11 thousand for the year ended December 31, 2020 from approximately US$3 thousand for the year ended December 31, 2019.
Foreign exchange gain (loss), net.
For the year ended December 31, 2020, we incurred foreign exchange gain of US$619 thousand, compared with gain of US$148 thousand for the year ended December 31, 2019. We do not engage in any hedging activities.
Income tax expense (benefit).
Income tax expense was approximately US$5.8 million for the year ended December 31, 2020 compared to an income tax expense of approximately US$7.7 million for the year ended December 31, 2019.
Net income (loss).
Net income was approximately US$79.7 million for the year ended December 31, 2020 compared to a net income of approximately US$64.4 million for the year ended December 31, 2019.
Comparison of Year Ended December 31, 2019 to Year Ended December 31, 2018
Net sales.
 
    
Years Ended December 31
              
    
2018
    
2019
              
    
US$
    
% of net sales
    
US$
    
% of net sales
    
$ change
   
% change
 
    
(in thousands, except percentage data)
 
Net sales
                                                    
Mobile Storage
     494,012        93        441,700        97        (52,312     (11
Mobile Communications
     30,163        6        10,356        2        (19,807     (66
Others
     6,173        1        5,197        1        (976     (16
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Net sales
     530,348        100        457,253        100        (73,095     (14
In 2019, our net sales decreased by 14% year-over-year to approximately US$457.3 million. Our Mobile Storage revenue decreased by 11% year-over-year as declining eMMC plus UFS controller sales and SSD solutions sales more than offset growth of SSD controller sales. Our SSD controller sales increased by about 20% year-over-year to approximately 50% to 60% of revenue, eMMC plus UFS controller sales decreased by about 30% year-over-year to approximately 20% to 25% of revenue and SSD solutions sales decreased by 50% year-over-year to approximately 10% of revenue. Mobile Communications revenue decreased by 66% as this product line was divested in May 2019.
Gross profit.
 
    
Years Ended December 31
              
    
2018
    
2019
              
    
US$
    
% of net sales
    
US$
    
% of net sales
    
$ change
   
% change
 
    
(in thousands, except percentage data)
 
Gross profit
     260,807        49        222,172        49        (38,635     (15
Gross profit was stable year-over-year at approximately 49% of net sales in 2019. Our gross profit excluding obsolete and unmarketable inventory write-downs as a percentage of revenue increased from 50% in 2018 to 51% in 2019.
 
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Research and development expenses.
 
    
Years Ended December 31
              
    
2018
    
2019
              
    
US$
    
% of net sales
    
US$
    
% of net sales
    
$ change
   
% change
 
    
(in thousands, except percentage data)
 
Salary and benefits
     53,922        10        57,165        13        3,243       6  
Stock-based compensation
     13,278        2        9,927        2        (3,351     (25
Other research and development
     34,828        7        43,213        9        8,385       24  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Research and development
     102,028        19        110,305        24        8,277       8  
Our research and development expenses increased by 8% year-over-year to approximately US$110.3 million in 2019. Salary and benefits increased by 6% year-over-year to approximately US$57.2 million in 2019. Stock-based compensation decreased by 25% year-over-year to approximately US$9.9 million. Other research and development expenses increased by 24% year-over-year to approximately US$43.2 million, primarily because of higher IC tape-outs and other project expenses in 2019.
Sales and marketing expenses.
 
    
Years Ended December 31
              
    
2018
    
2019
              
    
US$
    
% of net sales
    
US$
    
% of net sales
    
$ change
   
% change
 
    
(in thousands, except percentage data)
 
Salary and benefits
     15,546        3        14,586        3        (960     (6
Stock-based compensation
     3,407        1        1,789        1        (1,618     (47
Other sales and marketing
     10,326        2        8,733        2        (1,593     (15
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Sales and marketing
     29,279        6        25,108        6        (4,171     (14
Our sales and marketing expenses decreased by 14% year-over-year to approximately US$25.1 million in 2019. Salary and benefits decreased by 6% year-over-year to approximately US$14.6 million. Stock-based compensation decreased by 47% year-over-year to approximately US$1.8 million in 2019. Other sales and marketing expenses decreased by 15% year-over-year to approximately US$8.7 million.
General and administrative expenses.
 
    
Years Ended December 31
              
    
2018
    
2019
              
    
US$
    
% of net sales
    
US$
    
% of net sales
    
$ change
   
% change
 
    
(in thousands, except percentage data)
 
Salary and benefits
     8,073        1        9,202        2        1,129       14  
Stock-based compensation
     3,704        1        2,570        1        (1,134     (31
Other general and administrative
     5,856        1        6,106        1        250       4  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
General and administrative
     17,633        3        17,878        4        245       1  
Our general and administrative expenses increased by 1% year-over-year to approximately US$17.9 million in 2019. Salary and benefits increased by 14% year-over-year to approximately US$9.2 million. Stock-based compensation decreased by 31% year-over-year to approximately US$2.6 million in 2019. Other general and administrative expenses increased by 4% year-over-year to approximately US$6.1 million.
 
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Stock-based compensation.
The following table presents details of total stock-based compensation that is included in each functional line item in our consolidated statements of income:
 
    
Years Ended December 31
              
    
2018
    
2019
              
    
US$
    
% of net sales
    
US$
    
% of net sales
    
$ change
   
% change
 
    
(in thousands, except percentage data)
 
Cost of sales
     390        —          305        —          (85     (22
Research and development
     13,278        2        9,927        2        (3,351     (25
Sales and marketing
     3,407        1        1,789        —          (1,618     (47
General and administrative
     3,704        1        2,570        1        (1,134     (31
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Total stock-based compensation
     20,779        4        14,591        3        (6,188     (30
Total stock-based compensation, all of which are RSU expenses, decreased by 30% in 2019.
See Note 17 to Consolidated Financial Statements for a discussion of activity related to share-based awards.
Impairment of goodwill and intangible assets.
We performed impairment assessments of the carrying value of goodwill and intangible assets in November 2018, June 2019 and November 2019. During our 2018 assessment, we compared the carrying value of Bigtera to its estimate fair value and determined that goodwill was impaired and recognized approximately $4.1 million for impairment of goodwill and intangible assets. In the June 2019 assessment, we compared the carrying value of Shannon to its estimated fair value and determined that goodwill and intangible assets were impaired and recognized approximately US$16.0 million for impairment of goodwill and intangible assets.
Amortization of intangible assets.
Our amortization of intangible asset decreased to approximately US$0.8 million in the year ended December 31, 2019 from US$3.0 million in the year ended December 31, 2018.
Gain from disposal of subsidiary
. We realized a gain from disposal of FCI of US$12,409 thousand for the year ended December 31, 2019.
Gain from disposal of long-term investments
. We recognized a gain from disposal of ProGrade of US$473 thousand for the year ended December 31, 2019.
Gain from disposal of short-term investments
. We realized gains on sales of trading securities of US$134 thousand and US$48 thousand for the year ended December 31, 2018 and 2019, respectively.
Interest income.
Our interest income increased to approximately US$6.8 million for the year ended December 31, 2019 from approximately US$6.3 million for the year ended December 31, 2018.
Interest expense.
Interest expense decreased to approximately US$3 thousand for the year ended December 31, 2019 from approximately US$378 thousand for the year ended December 31, 2018.
Foreign exchange gain (loss), net.
For the year ended December 31, 2019, we incurred foreign exchange gain of US$148 thousand, compared with losses of US$615 thousand for the year ended December 31, 2018. We do not engage in any hedging activities.
Income tax expense (benefit).
Income tax expense was approximately US$7.7 million for the year ended December 31, 2019 compared to an income tax expense of approximately US$11.8 million for the year ended December 31, 2018.
 
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Net income (loss).
Net income was approximately US$64.4 million for the year ended December 31, 2019 compared to a net income of approximately US$98.1 million for the year ended December 31, 2018.
Liquidity and Capital Resources
 
    
Year Ended December 31
 
    
2019
    
2020
 
    
US$
    
US$
 
    
(in thousands)
 
Cash and cash equivalents
     323,166        342,961  
Short-term investments
     2,010        —    
    
 
 
    
 
 
 
Cash, cash equivalents and short-term investments
     325,176        342,961  
As of December 31, 2020, we had approximately US$343.0 million in cash, cash equivalents and short-term investments, an increase of US$17.8 million from December 31, 2019. We maintain our cash balances in bank deposits and in money market instruments. We do not engage in any currency hedging activities. Our short-term investments consist primarily of principal protected notes that we trade.
We believe our existing cash balances and short-term investments, together with cash we expect to generate from operating activities, will be sufficient to meet our anticipated working capital needs, capital expenditures, investment requirements and any declared dividends, repurchase of our ADSs and other commitments for at least the next 12 months. Our future capital requirements will depend on many factors, including the level of our net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products, the costs to ensure access to adequate manufacturing capacity, the continuing market acceptance of our products, availability of attractive acquisition and investment opportunities and construction of our Hsinchu and Taipei office buildings. We could be required, or could elect, to seek additional funding through public or private equity or debt financing, and additional funds may not be available on terms acceptable to us or at all.
The following table sets forth a summary of our cash flows for the periods indicated:
 
    
Year Ended December 31,
 
    
2018
    
2019
    
2020
 
    
US$
    
US$
    
US$
 
    
(in thousands)
 
Consolidated Cash Flow Data:
                          
Net cash provided by operating activities
     108,242        77,695        117,229  
Net cash provided by (used in) investing activities
     (79,568      34,668        (21,545
Net cash used in financing activities
     (101,820      (70,260      (73,914
Depreciation and amortization
     14,796        13,213        13,562  
Capital expenditures
     (74,853      (11,015      (19,545
Operating activities
Our net cash provided by operating activities was approximately US$117.2 million for the year ended December 31, 2020, compared to net cash provided by operating activities of approximately US$77.7 million and US$108.2 million during 2019 and 2018, respectively.
For the year ended December 31, 2020, cash flow provided by operations of US$117.2 million resulted primarily from our net income of US$79.7 million and the following reasons:
 
   
Our net income includes substantial
non-cash
charges, namely US$13.6 million of depreciation and amortization, US$14.6 million of stock-based compensation and US$17.5 million of impairment of goodwill.
 
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Net working capital increased by US$10.2 million. Inventory increased by US$21.7 million, notes and accounts receivable increased by US$7.1 million, notes and accounts payable increased by US$13.8 million, income tax payable increased by US$4.4 million, and other assets net of other liabilities provided US$0.4 million of cash.
For the year ended December 31, 2019, cash flow provided by operations of US$77.7 million resulted primarily from our net income of US$64.4 million and the following reasons:
 
   
Our net income includes substantial
non-cash
charges, namely US$13.2 million of depreciation and amortization, US$14.6 million of stock-based compensation and US$16.0 million of impairment of goodwill and intangible assets.
 
   
Net working capital increased by US$20.3 million. Inventory increased by US$10.2 million, notes and accounts receivable increased by US$18.8 million, notes and accounts payable increased by US$4.4 million, income tax payable decreased by US$1.7 million, and other assets net of other liabilities provided US$5.9 million of cash.
Investing activities
Our net cash used in investing activities was approximately US$21.5 million for the year ended December 31, 2020, compared to net cash provided by investing activities of approximately US$34.7 million for the year ended December 31, 2019. In 2020, we paid US$19.5 million for the routine purchase of software, design tools and other items and invested US$2.0 million in Deep Vision.
Our net cash provided by investing activities was approximately US$34.7 million for the year ended December 31, 2019, compared to net cash used in investing activities of approximately US$79.6 million for the year ended December 31, 2018. In 2019, we paid US$11.0 million for the routine purchase of software, design tools and other items, and received US$44.0 million and US$1.7 million for the disposal of FCI and ProGrade, respectively.
Financing activities
Our net cash used in financing activities was approximately US$73.9 million for the year ended December 31, 2020, compared to net cash used in financing activities of approximately US$70.3 million for the year ended December 31, 2019. Our cash used in financing activities in 2020 consists primarily of US$48.9 million of dividend payments and US$25.0 million for share repurchases.
Our net cash used in financing activities was approximately US$70.3 million for the year ended December 31, 2019, compared to net cash used in financing activities of approximately US$101.8 million for the year ended December 31, 2018. Our cash used in financing activities in 2019 consists primarily of US$44.0 million of dividend payments and US$26.2 million for share repurchases.
Capital Return to Shareholders
Dividend.
On October 26, 2020, we announced an annual cash dividend of $1.40 per ADS to be paid in four quarterly installments of $0.35 per ADS, which followed our previous $1.40 per ADS annual cash dividend. In accordance with our dividend declarations, we paid $44.0 million and $48.9 million to shareholders in 2019 and 2020, respectively.
The declaration and payment of future cash dividends is subject to our Board’s continuing determination that the payment of dividends is in the best interests of our shareholders and is in compliance with all laws and agreements applicable to the declaration and payment of cash dividends.
 
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Share Repurchase.
On November 21, 2018, we announced a new share repurchase program to repurchase up to US$200 million of our ADSs over a 24 month period. On October 26, 2020, the Board of Directors of the Company authorized the extension of the expiration of this program to November 21, 2021. In the year ended December 31, 2020, we repurchased 0.6 million ADSs for US$25.0 million at an average price of US$39.93 per ADS. In the year ended December 31, 2019, we repurchased 0.8 million ADSs for US$25.0 million at an average price of US$32.82 per ADS. In the year ended December 31, 2018, we repurchased 1.0 million ADSs for US$34.8 million at an average price of US$34.54 per ADS.
Repurchases are made in the open market or according to other methods in compliance with Securities and Exchange Commission Rule
10b-18,
subject to market conditions, applicable legal requirements and other factors. Share repurchase plans announced does not obligate us to acquire any particular amount of ADSs and may be suspended at any time at our discretion.
Contractual Obligations
The following table sets forth our commitments to settle contractual obligations in cash as of December 31, 2020:
 
    
Amount of Commitment Maturing by Year
 
    
Total
    
Less Than
1 Year
    
1-3 Years
   
3-5 Years
   
More Than
5 Years
 
    
US$
    
US$
    
US$
   
US$
   
US$
 
    
(in thousands)
 
Operating leases
     7,339        3,253        3,247       807       32  
Pension
     2,603        2,603       
(a
 
)
 
   
(a
 
)
 
   
(a
 
)
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Contractual cash obligations
     9,942        5,856        3,247       807       32  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
 
(a)
Our pension obligation after one year has not been estimated.
We decreased long-term taxes payable of US$1,654 thousand related to uncertain tax positions as of December 31, 2020. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing and outcome of a potential tax audit.
Off-balance
Sheet Arrangements
We currently do not have any outstanding derivative financial instruments,
off-balance
sheet guarantees or arrangements, interest rate swap transactions, or foreign currency forward contracts. We do not engage in any trading activities involving
non-exchange
traded contracts.
Recent Accounting Pronouncements
Please refer to Note 2 to the consolidated financial statements
 
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ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Executive Officers and Directors
Members of our board of directors are elected by our shareholders. Our board of directors consists of nine directors. Our executive officers are appointed by, and serve at the discretion of, our board of directors. The following table sets forth information regarding our directors and executive officers as of the date of this annual report.
 
Name
  
Age
    
Position
James Chow
     70      Chairman of the Board
Wallace C. Kou
     62      President, Chief Executive Officer and Managing Director
Steve Chen
     49      Director
Tsung-Ming Chung
     71      Director
Lien-Chun Liu
     63      Director
Yung-Chien Wang
     58      Director
Han-Ping
D. Shieh
     67      Director
Kenneth Kuan-Ming Lin
     68      Director
Riyadh Lai
     52      Chief Financial Officer
Nelson Duann
     52      Senior VP of Marketing & R&D and Director
Arthur Yeh
     60      VP of Sales, Asia and Greater China
Robert Fan
     57      President of SMI USA
Ken Chen
     59      VP of Operations
Kevin Yeh
     57      VP of R&D, Algorithm & Technology
Kevin Tsai
     55      Senior Director of R&D, System Validation
Executive Officers and Directors
James Chow, Chairman of the Board of Directors
Mr. Chow has served as the Chairman of our board of directors since April 2005. Mr. Chow has been the Chairman of Concord Financial Co., Ltd. since 1993. Concord Financial Co., Ltd. is an investment holding company and was one of our significant shareholders. Mr. Chow has an MBA from Columbia University.
Wallace C. Kou, President, Chief Executive Officer, Managing Director
Mr. Kou founded Silicon Motion in 1995 and has been our President and Chief Executive Officer since our founding. Prior to founding Silicon Motion, Mr. Kou was the Vice President and Chief Architect at the Multimedia Products Division of Western Digital Corporation, which developed graphics processors for notebook PCs and was sold to Philips Semiconductor in 1995. Before Western Digital, Mr. Kou worked for Wyse Technology. Mr. Kou has a BS in Electrical & Control Engineering from the National Chiao Tung University in Taiwan and an MS in Electrical & Computer Engineering from the University of California at Santa Barbara.
Steve Chen, Director
Mr. Chen joined our board of directors in 2012. Mr. Chen is the chairman of Mercuries Co., Ltd. Mr. Chen has dual M. Eng. from Cornell University.
Tsung-Ming Chung, Director
Mr. Chung joined our board of directors in June 2005. Mr. Chung is the Chairman of Dynapack International Technology Corp, a leading provider of battery packs for notebook PCs and tablets. From 1985 to
 
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2000, Mr. Chung was an audit partner at Arthur Andersen. He is also a director at Far East International Bank and Fubon Hyundai Life Insurance Corporation. Mr. Chung has a BA in Business Administration from the National Taiwan University and an MBA from the National
Cheng-chi
University in Taiwan.
Lien-Chun Liu, Director
Ms. Liu joined our board of directors in June 2005. She is Vice President of the International Council of Women and currently also serves on the board of supervisors of Concord VIII Venture Capital Co., Ltd. and the board of directors of New Tamsui Golf Course. She was formerly a research fellow at the Taiwan Research Institute and served on the board of supervisors of China Television Corp. from 2000 to 2004. Ms. Liu has a BA from Wellesley College and a JD from Boston College Law School.
Yung-Chien Wang, Director
Mr. Wang joined our board of directors in June 2005. Mr. Wang has over 20 years of working experience in the human resource and legal services industries. Mr. Wang has been a consultant of Professional Trust Co., Ltd., a human resource consulting firm in Taiwan since August 1998 and is currently its Vice President. Mr. Wang has a law degree from Fu Jen Catholic University in Taiwan.
Han-Ping
D. Shieh, Director
Mr. Shieh joined our board of directors in 2014. He is an Life Chair Professor, National Chiao Tung University (NCTU) in Taiwan, a fellow of the Institute of Electrical and Electronics Engineers (IEEE), the Optical Society of American (OSA) and the Society for Information Display (SID) and a board member of Young Optics Inc., Dynapack International Tech. Corp., and Focal Tech. Inc. Mr. Shieh received his PhD in Electrical and Computer Engineering from Carnegie Mellon University in 1987. He joined NCTU as a professor in 1992 and was previously a Research Staff Member at the IBM Thomas J. Watson Research Center. He was previously the Dean of the College of Electrical and Computer Engineering and a Senior Vice President of NCTU and a Vice Chancellor of the University System of Taiwan.
Kenneth Kuan-Ming Lin, Director
Mr. Lin joined our board of directors in September 2018. Mr. Lin was previously a director on our board from 2009 to 2014. Mr. Lin is the Chairman of Premier Capital Management Corp., Ruby Tech Corp. and Taiwan Health Care Association, Chief Executive Officer of SINOCON Industrial Standards Foundation and Deputy Secretary-General of Cross-Strait CEO Summit. He was previously the Chairman of the Taiwan Venture Capital Association and the Taiwan Private Equity Association and a Board Director of the Straits Economic & Cultural Interchange Association. Mr. Lin has a BS in Electrical Engineering from the National Taiwan University.
Riyadh Lai, Chief Financial Officer
Mr. Lai joined us in April 2007 from ING Corporate Finance, Asia, where he was the Head of the Technology Group. Previously, he was also an investment banker at Morgan Stanley and ABN AMRO and finance manager at PepsiCo in Hong Kong and New York. Mr. Lai has over two decades of finance and financial management experience. He has a BA in Economics from Georgetown University and an MBA from New York University.
Nelson Duann, Senior VP of Marketing and R&D and Director
Mr. Duann became our Senior Vice President of marketing and R&D for mobile storage in November 2018. He joined Silicon Motion in August 2007 as a product marketing director and R&D team leader. Mr. Duann has