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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form
 10-K

☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

2019
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to             

Commission file number
0-18277

VICOR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware
 
04-2742817

(State or other jurisdiction of

incorporation or organization)

 

(IRS employer

identification no.)

25 Frontage Road, Andover, Massachusetts
 
01810
(Address of principal executive offices)
 
(Zip code)

Registrant’s telephone number, including area code:

(978)
 470-2900

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.01 par value

Title of each class
 

Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value 
$0.01 per share
VICR
The NASDAQ Stock Market LLC

(Title of Class)(Name of Each Exchange on Which Registered)

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  
☐
    No  
☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  
☐
    No  
☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
☑
    No  
☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  
☑
    No  
☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K.  ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” inRule
 12b-2
of the Exchange Act. (Check one):

Large Accelerated Filer ☐

☑
 

Accelerated Filer ☑

☐
 
Non-accelerated
Filer 
☐
 
Smaller Reporting Company 
☐
Emerging growth company 
☐
 (Do not check if a smaller reporting company)                  

If an emerging growth company, 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 is a shell company (as defined inRule
 12b-2
of the Exchange Act).
Yes  ☐    No  
☑

The aggregate market value of the voting and
non-voting
common equity of the registrant held by
non-affiliates (for
(for this purpose, persons and entities other than executive officers and directors) of the registrant, as of the registrant’s most recently completed second fiscal quarter (June 30, 2016)2019) was approximately $163,529,000.

$549,713,000.

Title of Each Class

 

Number of Shares of Common Stock

Outstanding as of February 28, 2017

19
, 2020
Class A
Common Stock
 

27,321,277

28,844,478
Class B Common Stock
 
11,758,218

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive proxy statement (the “Definitive Proxy Statement”) to be filed with the Securities and Exchange Commission pursuant to Regulation 14A and relating to the Company’s 20172020 annual meeting of stockholders are incorporated by reference into Part III.

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PART I

In this Annual Report onForm
 10-K,
unless the context indicates otherwise, references to “Vicor
®
,” “the Company,” “our company,” “we,” “us,” “our,” and similar references, refer to Vicor Corporation and subsidiaries.

Thisits subsidiaries, unless otherwise specified.

The Company’s consolidated operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability, including the risk factors described in Item 1A of this Annual Report onForm 10-K contains
10-K.
As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, consolidated financial condition, operating results, and the share price of its listed common stock. This document and other documents filed by the Company with the Securities and Exchange Commission (“SEC”) include forward-looking statements withinregarding future events and the meaningCompany’s future results that are subject to the safe harbor afforded under the Private Securities Litigation Reform Act of Section 27A of1995 and other safe harbors afforded under the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934,1934. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Forward-looking statements are based on our current beliefs, expectations, estimates, forecasts, and projections for the future performance of the Company. Forward-looking statements are identified by the use of the words denoting uncertain, future events, such as amended (the “Exchange Act”). The words “believes,“anticipate,” “expects,“assume,” “anticipates,“believe,” “continue,” “could,” “estimate,” “expect,” “future,” “if,” “intend,” “estimate,“may,” “plans,“plan,” “assumes,“potential,” “may,“project,” “prospective,” “seek,” “should,” “target,” “will,” or “would,” “should,” “continue,” “prospective,” “project,”as well as similar words and phrases, including the negatives of these terms, or other similar expressions identify forward-looking statements.variations thereof. Forward-looking statements also include statements regarding: our ongoing development of power conversion architectures, switching topologies, materials, packaging, and products; the ongoing transition of our business strategically, organizationally, and organizationallyoperationally from serving a large number of relatively low volume customers across diversified markets and geographies to serving a small number of relatively large volume customers, typically concentrated in computing and communications;customers; our intent to enter new market segments; the levellevels of customer orders overall and, in particular, from large customers and the delivery lead times associated therewith; the financial and operational impact of customer changes to shipping schedules; the derivation of a portion of our sales in each quarter from orders booked in the same quarter; our ongoing developmentintent to expand the percentage of power conversion architectures, switching topologies, packaging technologies, and products;revenue associated with licensing our intellectual property to third parties; our plans to invest in expanded manufacturing capacity and the timing, location, and locationfunding thereof; our continued success depending in part on our ability to attract and retain qualified personnel; our belief cash generated from operations and the total of our cash and cash equivalents will be sufficient to fund operations and capital investments for the foreseeable future; our outlook regarding tariffs and the impact thereof on our business; our belief that we have limited exposure to currency risks; our intentions regarding the declaration and payment of cash dividends; our intentions regarding protecting our rights under our patents; and our expectation that no current litigation or claims will have a material adverse impact on our financial position or results of operations. These forward-looking statements are based upon our current expectations and estimates as to theassociated with prospective events and circumstances that may or may not be within our control and as to which there can be no assurance. Actual results could differ materially from those implied by forward-looking statements as a result of various factors, including our ability to: develop and market new products and technologies cost effectively and on a timely basis; leverage our new technologies in standard products to promote market acceptance of our approach to power system architecture; leverage design wins into increased product sales; continue to meet requirements of key customers and prospects; enter into licensing agreements increasing our market opportunity and accelerating market penetration; realize significant royalties under such licensing agreements; achieve sustainable bookings rates for our products across served markets and geographies; improve manufacturing and operating efficiencies; successfully enforce our intellectual property rights; successfully defend outstanding litigation; hire and retain key personnel; and maintain an effective system of internal controls over financial reporting. These and other factors that may influence actual results are described in this Annual Report onForm 10-K, including but not limited to those described under Part I, Item I1 — “Business,” under Part I, Item 1A — “Risk Factors,” under Part I, Item 3 — “Legal Proceedings,” and under Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.Operations.” The discussion of our business contained herein, including the identification and assessment of factors that may influence actual results, may not be exhaustive. Therefore, the information presented should be read together with other documents we file with the U.S. Securities and Exchange Commission (“SEC”)SEC from time to time, includingForms our Quarterly Reports on Form
 10-Q
and our Current Reports on Form
8-K,
which may supplement, modify, supersede, or update the factors discussed in this Annual Report on Form
10-K.
We do not undertake any obligation to update any forward-looking statements as a result of future events or developments, except as required by law.

ITEM 1.
BUSINESS

Overview

Vicor Corporation designs, develops, manufactures, and markets modular power components and power systems for converting regulating,electrical power (expressed as “watts,” and controlling electric current. We consider power components analogous to building blocks, and our strategy is based largely on products, performing distinct functions, that can be flexibly combined to enable a complete power system. We serve customers with applications for which the high

conversion efficiency (i.e., the ratio of output power in watts to the power consumedrepresented by the device)symbol “W”, with wattage being the product of voltage, expressed as “volts,” and high power density (i.e., the amount of power in watts dividedrepresented by the volumesymbol “V,” and current, expressed as

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“amperes,” and represented by the device) of our products are well suited. We also offer a range of higher value-added standard products (our “Configurable” product line) and custom system design and manufacturing capabilities. Both our Configurable products and custom systems leverage the superior performance of our modular power components.

In the market segments we serve, we position the Company as a vendor of power components that can be utilized individually, given their market-leading performance, or combined, given their level of integration, to create highly-differentiated power management solutions. We articulate this positioning through our “Power Component Design Methodology”, which is our approach to providing our customers the modular products, design tools, and support to enable the rapid design of comprehensive power conversion and management systems.

Our website, www.vicorpower.com, sets forth detailed information describing our Power Component Design Methodology, all of our products, the applications for which they may be used, and our suite of design tools. The information contained on our website is not a part of, nor incorporated by reference into, this Annual Report onForm 10-K and shall not be deemed “filed” under the Exchange Act.

We are headquartered in Andover, Massachusetts, where our manufacturing facility is located. We conduct business primarily through the activities of our Brick Business Unit (“BBU”), established in 2005, and our two operating subsidiaries, Picor Corporation, established in 2001, and VI Chip Corporation, established in 2007. Picor Corporation relocated its headquarters from North Smithfield, Rhode Island, to Lincoln, Rhode Island in January 2017. Picor Corporation also has personnel based in Andover, Massachusetts. VI Chip Corporation is headquartered in Andover, Massachusetts, where its manufacturing facilities areco-located with those of the BBU.

Our Vicor Custom PowerTMlocations are geographically distributed across the United States and all are incorporated in Delaware. In March 2016, we acquired 100% ownership of certain operating assets and cash of our consolidated subsidiary, Converpower Corporation, in which we held a 49% ownership interest. In December 2015, we completed the statutory merger of one Vicor Custom Power subsidiary, Mission Power Solutions, Inc., with and into another subsidiary, Northwest Power, Inc., after which we closed the Mission Power Solutions location. Also in December 2015, we sold our 49% ownership interest in Aegis Power Systems, Inc. to Aegis Power Systems, thereby ending our formal relationship with the subsidiary. The consolidated financial statements presented herein reflect these transactions.

Internationally, we conduct business through subsidiaries incorporated in or branch offices established in individual countries. Vicor Japan Company, Ltd. (“VJCL”), our majority-owned Japanese subsidiary, which is engaged in sales and customer support activities exclusively for the Japanese market, is headquartered in Tokyo, Japan. Vicor B.V., a wholly-owned subsidiary incorporated in the Netherlands, serves as our European distribution center. We have established individual subsidiaries or branch offices to conduct the activities of Technical Support Centers (“TSCs”) located outside of the United States.

VLT, Inc., incorporated in California, is our wholly-owned licensing subsidiary. VICR Securities Corporation, incorporated in Massachusetts, is a subsidiary established to hold certain investment securities.

Our subsidiaries and their legal domicile are set forth in Exhibit 21.1 to this Annual Report on Form10-K. The activities of all of the above named entities are consolidated in the financial statements presented herein.

We were incorporated in Delaware in 1981. Shares of our Common Stock were listed on the NASDAQ National Market System in April 1990 under the ticker symbol VICR, and we completed an initial public offering of our shares in May 1991.

Market Background and Our Strategy

“I”). In electrically-powered devices utilizing alternating current (“AC”) voltage from a primary AC source (for example, a wall outlet), a power system converts AC voltage into the stable direct current (“DC”) voltage necessary to power subsystems and/or individual applications and devices (known as “loads”). In many electronic devices, this DC voltage may be further converted to one or more higher or lower voltages and currents required by a range of loads. In equipment utilizing DC voltage from a primary DC source (for example, a battery) or a secondary source (such as an

AC-DC
converter), the initial DC voltage similarly may require further conversion. A power system most commonly incorporates four voltage conversion functions: transformation, isolation, rectification, and regulation. Transformation refers to onethe process of increasing or more voltages.decreasing an AC voltage; isolation refers to the electrical separation, for safety, of primary and secondary voltages in a transformer; rectification refers to the process of converting a voltage from AC to DC and/or from DC to AC; and regulation refers to the process of providing a near constant voltage under a range of line and load conditions. Because numerous applications requiring different DC voltages, currents, and varied power ratings may exist within an electronicelectronically-powered device, and system power architectures themselves vary, we offer an extensive range of products and accessories in numerous application-specific configurations. We believe our product offering is among the most comprehensive in the market segments we serve.

Our strategy, competitive positioning, and product offerings are all based on highly differentiated product performance, reflecting our anticipation of the evolution of system power architectures and customer performance requirements. Since the Company was founded, our product strategy has been driven bywe have pursued continuous innovations in product design and achievements in product performance, largely enabled by our focus on the research and development of differentiatedadvanced technologies and processes, often implemented in proprietary semiconductor circuitry.circuitry, materials, and packaging. Reflecting this strategy, we categorize our offerings as either “Advanced Products” or “Brick Products,” generally based on design, performance, and form factor considerations, as well as the range of evolving applications for which the products are appropriate.
Our competition varies, depending on the market segment and application. Generally, we compete with developers and manufacturers of integrated circuits and semiconductor-based modules when addressing the needs of customers in enterprise computing and other market segments with implementations of our proprietary Factorized Power Architecture
TM
(“FPA”) using Advanced Products. In contrast, we generally compete with manufacturers of integrated power supplies when addressing the needs of customers, across a wide range of market segments, implementing conventional power systems architectures (e.g., Centralized Power Architecture (“CPA”), Distributed Power Architecture (“DPA”), and Intermediate Bus Architecture (“IBA”)) using Brick Products.
Our website, www.vicorpower.com, sets forth detailed information describing our products, the applications for which they may be used, and our suite of design tools. The information contained on our website is not a part of, nor incorporated by reference into, this Annual Report on Form
 10-K
and shall not be deemed “filed” under the Exchange Act.
We are headquartered in Andover, Massachusetts, where our manufacturing facility is located. Our wholly-owned subsidiaries, VICR Securities Corporation and VLT, Inc., also are located in Andover, Massachusetts. Our domestic offices are located in Santa Clara, California, Lombard, Illinois, and Lincoln, Rhode Island. Our two Vicor Custom Power
TM
subsidiaries, Freedom Power Systems, Inc. and Northwest Power, Inc., are located in Cedar Park, Texas, and Milwaukie, Oregon, respectively.
We have established individual subsidiaries or branch offices outside of the United States, which we call Technical Support Centers (“TSCs”), to conduct preparatory and auxiliary services in support of the Company. Vicor Japan Company, Ltd. (“VJCL”), our 92.5%-owned Japanese subsidiary, which is engaged in sales and customer support activities exclusively for the sale of certain products customized by VJCL for the Japanese market, is headquartered in Tokyo, Japan.
On June 28, 2019, our subsidiary, VI Chip Corporation (“VI Chip”), was merged with and into the Company, and its operations and personnel were reassigned. On December 30, 2019, we closed Vicor B.V., a
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wholly-owned subsidiary incorporated in the Netherlands, which provided logistical and administrative support for certain sales in the European Union. In 2018, our subsidiary, Picor Corporation (“Picor”), was merged with and into the Company, and its operations and personnel were reassigned. We continue to occupy the former subsidiary’s Picor facility in Lincoln, Rhode Island. Also in 2018, we closed Granite Power Technologies, Inc., a Vicor Custom Power subsidiary located in Manchester, New Hampshire, transferring its operations and reassigning certain personnel.
Our subsidiaries and their legal domicile are set forth in Exhibit 21.1 to this Annual Report on Form
10-K.
The activities of all of the above named entities are consolidated in the financial statements presented herein.
Vicor was incorporated in Delaware in 1981, and we completed an initial public offering in May 1991. The Company has two classes of common stock outstanding: shares of our “Common Stock,” listed on The NASDAQ Stock Market under the ticker symbol VICR, and shares of our Class B common stock, which are not subject to registration pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are not listed on any exchange. (Please refer to Exhibit 4.2 to this Form
10-K
for a summary of our equity capitalization and the terms of our two classes of Common Stock.)
Our Strategy
Our strategy emphasizes demonstrable product differentiation and a value proposition based on competitively superior solution performance, advantageous design flexibility, and a compelling total cost of ownership (“TCO”). Since the Company was founded, our competitive position has been maintained by continuous innovations in product design and achievements in product performance, largely enabled by our focus on the research and development of advanced technologies and processes, often implemented in proprietary semiconductor circuitry, materials, and packaging. Many of our products incorporate patented or proprietary implementations of high-frequency switching topologies, which enable the design of converter modulespower system solutions more efficient and much smaller and more efficient than conventional alternatives. EmphasizingThis efficiency and small size is enabled by our proprietary switching circuitry and magnetic structures, as well as our use of highly differentiated packaging.
Power system performance is based primarily on conversion efficiency (i.e., the superiorratio of output power (i.e., watts) to input power) and power density and performance advantages(i.e., the amount of this technology, our primary product strategy since our founding has been to offer a comprehensive range of component-level building blocks to configure aoutput power system specific to a customer’s needs.

Our strategy, competitive positioning, and product offerings, all based on highly differentiated product performance, have anticipateddivided by the evolution of system power architectures. As system designs advanced along with the demandsvolume of the loads powered, the inherent limitations of historically accepted system power architectures have caused designerssystem). Higher efficiency and density contribute to seek out improved solutions.

In 1984, we introduced a significant enhancement of the standardizedDC-DC converter: the fully-encapsulated “brick” module. Our innovative, patented technology utilized our implementation of zero current soft switching topology to deliver unprecedentedly high switching frequencies and, in turn, unprecedented power density. Superior conversion efficiency, overall performance improvements, and full encapsulation (which provided shielding from environmental influences) contributed to significant enhancement ofsuperior thermal performance, characteristics, an important competitive advantage. Such thermal performance enhancement has been critical to the differentiation of our power converters, as the

by-product
of voltagepower conversion and distribution is heat, which must be dissipated in order to assure the performance of the converterpower system solution itself and the overall system to which it is delivering power.

Power system performance also is based on the electrical characteristics of the power system (and their effect on and compatibility with the customer’s application). Important electrical characteristics include transient responsiveness (i.e., the reaction of a power system to a sudden change in voltage or current levels) and noise profile (i.e., the level of electromagnetic interference created by power conversion). We believe the superior performance of our power systems is the most important element of our differentiation strategy.

Our strategy complements performance superiority with design flexibility (i.e., ease of use), as our products can be utilized individually or combined, given their level of integration, to create power system solutions specific to a customer’s precise needs. We articulate this positioning through our “Power Component Design Methodology,” an element of our differentiation strategy, which is our approach to providing our customers the modular products, design tools, and engineering support to enable the rapid design of advanced power system solutions by customers and, thereby, accelerate their own product development cycles. Our value proposition is supported by a compelling TCO, representing the cost of acquiring and operating a power system over its useful life, driven by competitive product pricing, high reliability, and demonstrably lower electricity costs.
Our earliest market focus was on telecommunications infrastructure, which uses a standard DC distribution voltage of 48V (nominally 48V to 54V), the highest distribution voltage that meets Safety
Extra-Low
Voltage (“SELV”) standard requirements, while leaving sufficient margin for over-voltage protection circuits. While we offer products addressing other DC voltage standards (e.g., 380V for power distribution in data centers, 110V for
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rail applications, 28V for military and avionics applications, and 24V for industrial automation) and a broad range of customer requirements, we consider our core competencies to be associated with 48V distribution, which offers numerous inherent cost and performance advantages over lower distribution voltages, while remaining within the 60V SELV safety limit.
Our product portfolio also includes families of
“front-end”
devices, which address applications requiring the transformation of AC voltages to regulated DC voltages. Examples of such applications include powering data center server racks, large-scale LED lighting, specialized laboratory, diagnostic, and test equipment, small-cell wireless base stations, and higher power equipment for defense and industrial use.
Our strategy, competitive positioning, and product offerings are all based on highly differentiated product performance, reflecting our anticipation of the evolution of system power architectures and customer performance requirements. Reflecting this, we categorize our offerings as either Advanced Products or Brick Products, generally based on design, performance, and form factor considerations, as well as the range of evolving applications for which the respective categories are appropriate. The brickAdvanced Products category consists of our most innovative products, which are used to implement our proprietary distribution architecture, FPA,, a highly differentiated approach to power distribution that enables flexible, rapid power system design using individual components optimized to perform a specific function. The Brick Products category largely consists of integrated power systems (i.e., “bricks”), incorporating multiple conversion stages, used in conventional power systems architectures including CPA, DPA, and IBA.
Given the growth profiles and performance requirements of the market segments served with Advanced Products and Brick Products, our strategy involves a transition in organizational focus, emphasizing investment in Advanced Products design and manufacturing, targeting high growth market segments with a
low-mix,
high-volume operational model, while maintaining a profitable business in mature market segments we serve with Brick Products with a
high-mix,
low-volume
operational model.
Our Products
Reflecting our Power Component Design Methodology, we offer a comprehensive range of modular building blocks enabling rapid design of a power system specific to a customer’s precise needs. Based on design, performance, and form factor considerations, as well as the range of evolving applications for which the products are appropriate, we categorize our product portfolios as either Advanced Products or Brick Products. We also sell a range of electrical and mechanical accessories for use with our products.
Advanced Products
We continue to invest in the research and development of power system technologies and product concepts addressing two accelerating trends, the first toward higher required conversion efficiencies, and the second toward more and diverse
on-board
voltages, higher performance demands of complex loads, and, in particular, higher current requirements of those loads. These trends are most visible in the microprocessor-based applications we target with Advanced Products, for which energy consumption, energy efficiency, processor performance, and computing density are critical priorities. Recognizing the performance and scale limitations of conventional power distribution architectures and products, we introduced FPA and a range of enabling products incorporating our latest advances in power distribution concepts, switching topologies, materials, and packaging.
FPA, which is focused on, but not limited to, 48V DC distribution solutions, increases power system conversion efficiency, density, and power delivery performance by “factorizing” (i.e., separating) the power conversion process into individual components, reducing the design limitations, thermal management challenges, and scaling trade-offs associated with conventional architectures for DC voltage distribution. All such architectures follow a sequence whereby a DC voltage is first transformed, or reduced, and that lower voltage subsequently conducted (i.e., “bussed”) across the circuit to the load (i.e., the point of use), where the voltage is
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regulated and lowered once more, to the required operating voltage of the load. In a FPA implementation, the sequence is reversed. Regulation occurs first, and the regulation module can be placed in the optimal position for space utilization and thermal management. A regulated voltage approaching 48V is bussed across the circuit to the transformation module, which performs what we refer to as current multiplication, adjacent to the load. Bussing high voltage minimizes the current levels across the circuit, thereby minimizing the potential for distribution losses and reducing the volume of the conduit (e.g., the copper wire). Placing the relatively low noise, low heat transformation module adjacent to the load further minimizes the potential for distribution losses associated with bussing a low operating voltage to the load and reduces the potential influence of the power system on the performance of the load.
A typical FPA implementation for delivering 48V DC from a server backplane to a 1.0V microprocessor would consist of three modules: a PRM
™
(Pre-Regulator
Module) regulator, a VTM
™
(Voltage Transformation Module) current multiplier, and a proprietary communications controller. In contrast, a commodity IBA design for delivering 48V DC from a server backplane to a 1.0V microprocessor requires an additional conversion stage, to reduce 48V to 12V, and a multiphase voltage regulation module (i.e., a “VRM” consisting of multiple switching regulators, each representing a phase and consisting of two switching transistors, a capacitor, and an inductor, with the transistors switched by separate pulse width modulation controller). For a 200W two stage, multiphase application, a 12V commodity IBA implementation would require an intermediate bus converter, to reduce 48V to 12V, and a VRM consisting of 10 phases and a controller to reduce and regulate the 12V current for use at 1V by the microprocessor. Such a commodity IBA design requires a significantly higher component count, consumes more motherboard area, requires more copper conduit, generates more heat due to switching and distribution losses, and can be meaningfully less efficient than a 48V FPA implementation. As microprocessor operating voltages have declined and operating currents increased, commodity IBA implementations, given the fundamental constraints of the architecture, have not met the power system conversion efficiency, density, and power delivery performance delivered by FPA.
The advantages of FPA over legacy power distribution architectures are most evident in high performance computing applications. Our
“Power-on-Package”
power system solution meets the computational performance requirements of artificial intelligence (“AI”). The microprocessors typically used in AI, particularly in more computationally demanding “machine learning” or “training” applications, are graphics processing units (“GPUs”) and custom application-specific integrated circuits (“ASICs”). Both GPUs and ASICs, in contrast to CPUs, are designed for parallel processing throughput, not serial execution of complex instruction sets. As such, higher levels of average and peak current are required to achieve this throughput. Our most popular
Power-on-Package
solution, a
re-integration
of the functions of our
PRM-VTM
configuration, consists of one MCD
©
(“Modular Current Driver”) unit, providing high-bandwidth,
low-noise
regulation, and two MCM
©
(“Modular Current Multiplier”) units, providing high performance current multiplication.
Power-on-Package
delivers unprecedented current levels to GPUs and ASICs, in part due to the placement of the MCMs directly on the substrate onto which the processor is mounted, thereby minimizing distribution losses associated with high current levels. Placement of MCM units on the substrate also reduces the number of GPU or ASIC processor substrate pins required for power, allowing for their use by other functions (e.g., memory I/O). A typical four-module laterally-mounted
Power-on-Package
configuration powering a GPU requiring 350W delivers 0.7V, 500A average current, and up to 1,000A peak current, with superior transient response and unmatched power density.
In 2019, we introduced vertically-mounted versions of our
Power-on-Package
solution, which, by being mounted directly to the underside of the GPU or ASIC, achieves a further 10 times reduction in distribution losses at the load over our laterally-mounted solution. Vertically-mounting the solution allows unrestricted access to microprocessor input/output (“I/O”) pins on the top side of the motherboard, thereby improving memory access, which is a priority for GPUs and ASICs in AI applications.
We are unaware of any competitive solution for AI acceleration offering the power system performance and density of
Power-on-Package,
as
IBA-based
solutions scale to reach high current levels by adding conversion
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phases, thereby increasing component count and motherboard area used, which contributes to higher switching and distribution losses and associated heat generation, resulting in lower efficiency.
Our proprietary technologies enable us to offer a range of Advanced Products, in various package formats across functional families, applicable to other market segments and power distribution architectures other than FPA. Within computing, these market segments include AC to DC voltage conversion and DC voltage distribution in server racks and high voltage conversion across datacenter infrastructure. We also offer Advanced Product power system solutions for aerospace and aviation (e.g., for use in satellites, unmanned aerial vehicles, and various airframes, for which small size, light weight, and design flexibility are advantageous); defense electronics (e.g., for use in airborne, seaborne, or field communications and radar, for which reliability in harsh environments is a priority); industrial automation, instrumentation, and test equipment (e.g., for use in robotics and semiconductor testing, for which high power levels and precision performance are required); solid state lighting (e.g., for use in large scale displays and signage, for which, again, small size, light weight, and design flexibility are advantageous ); telecommunications and networking infrastructure (e.g., for use in high throughput data distribution and pole-mounted small-cell base stations); and vehicles (e.g., in autonomous driving applications, electric vehicles, and hybrid electric vehicles).
Annual revenue associated with the sale of Advanced Products was approximately 28.6%, 35.9%, and 33.4% of the Company’s consolidated revenue for the years ended December 31, 2019, 2018, and 2017, respectively. Sales of Advanced Products declined sequentially from 2018 to 2019, falling as a percentage of our total revenue, due to an unexpected and sustained period of low demand across the computing market, notably in the data center and hyperscalers segments we target. This low demand was caused by the buildup of excess inventory levels at contract manufacturers during the second half of 2018 and planning uncertainty associated with the ongoing trade dispute between China and the U.S., the two largest geographic markets we serve. We anticipate the percentage of periodic revenue associated with the sale of Advanced Products will increase in the future, given our strategic and organizational focus and the relatively higher expected growth of the market segments we serve.
Brick Products
Brick-format converters provide the integrated transformation, rectification, isolation, regulation, isolation, filtering, and/or input protection necessary to power and protect loads, across a range of conventional power architectures. We offer a wide range of brick-format
DC-DC
converters, as well as complementary components providing AC line rectification, input filtering, power factor correction, and transient protection. Wide ranges of input voltages, output voltages, and output power are offered, allowing end users to select components appropriate to their individual applications. The products differ in dimensions, temperature grades, maximum power ratings, performance characteristics, pin configuration, and, in certain cases, characteristics specific to the targeted market.
We also integrate these converters and components into a single device, thereby driving the adoption of the Distributedcomplete power systems representing standard or custom
AC-DC
and
DC-DC
solutions for our customers’ power needs. We refer to such standard products as our “Configurable” product line, while our two Vicor Custom Power Architecture (“DPA”). The dominantsubsidiaries design, sell, and service custom power system power architecture up until that time, the Centralized Power Architecture (“CPA”), generates all system voltages centrally and distributes these voltages to loads using individual distribution buses (i.e., a conductive circuit, generally made of copper). CPA became expensive and impractical for electronic systems increasingly characterized by widely distributed loads requiring lower voltages, higher currents, and higher speeds. DPA, enabled by the brick concept, allows the distribution of one DC voltage system-wide and downstream conversion of that voltage, with a brick, at a specific load. This approach allows electricity to be distributed through a complex system in the most efficient manner, at a uniform higher voltage (typically 48 volts), thereby dramatically reducing distribution and conversion losses, lowering copper consumption, and significantly increasing design flexibility. With patented advances in switching topology and converter design, Vicor became a leading vendor of brickDC-DC converters in the 1980s and 1990s, particularly within the telecommunications infrastructure segment of the market.

With the advent of enterprise computing in the 1990s, the limitations of DPA became apparent, as the number of different loads on a system board increased beyond the level for which DPA and bricks were well-suited. The Intermediate Bus Architecture (“IBA”), a multi-stage extension of DPA, addressed the space

constraints, performance requirements, and cost challenges of highly complex system boards by further separating the functions of DC conversion carried out by the brick, which in IBA is replaced by an isolated bus converter delivering a stepped-down (i.e., reduced), unregulated voltage to anon-isolatedpoint-of-load regulator. For computing and, later, networking applications, IBA was more scalable and cost-efficient, as numerous brickDC-DC converters on a system board were replaced by one brickDC-DC converter, providing one system-wide distributed voltage, accompanied by numerous, lower-cost bus converters providing an intermediate bus voltage, typically from 5 to 14 volts, topoint-of-load regulators.

Two significant industry changes coincided with the broad adoption of IBA in the late 1990s and the early 2000s. The first change was the significant decline of the telecommunications infrastructure segment that representedsolutions.

We market our primary focus, while the second change was a pronounced shift toward product commoditization, primarily driven by globalization. These two changes had an interrelated impact on our strategy, as the primary driver of IBA adoption was initial cost reduction, not system conversion efficiency. As such, IBA was broadly implemented using 12 volt distribution, not the more efficient 48 volt distribution, our core competency.

Unwilling to pursue rapidly commoditized market opportunities, notably in IBA, and unwilling to relocate our manufacturing to lower-cost countries, we shifted our strategy and operations in the 2000s to emphasizestandard Brick Products emphasizing “mass customization”,customization,” using highly automated, efficient, domestic manufacturing to serve customers with product design and performance requirements, across a wide range of worldwide market segments, thatwhich could not be met by high-volume oriented competitors. We focusedfocus on applications, largelydistributed power implementations, of DPA, for which our brickDC-DC converters werebrick-format products are well-suited, in market segments such as aerospace and defense electronics, industrial automation, andindustrial equipment, instrumentation and test equipment, and transportation (e.g., rail). This strategy has been the basis upon which the BBU has competed since this strategic and operational shift. TheOur customers served range from independent manufacturers of highly specialized electronic devices to larger original equipment manufacturers (“OEMs”) and their contract manufacturers.

During the 2000s, we embarked on a long-term strategy based on our belief that our competitors’ products and existing system power architectures, notably IBA, would not meet evolving market requirements, notably system conversion efficiency. Over the last decade, we have invested significantly in the development

6
Table of new power component technologies and product concepts addressing two meaningful market trends, the first toward higher required conversion efficiencies, and the second toward higher currents, more and diverseon-board voltages, and the higher performance demands of numerous complex loads. Reflecting the versatile, building block approach of our Power Component Design Methodology, in 2003 we introduced our Factorized Power ArchitectureTM (“FPA”), an innovative, component-based approach to flexible, rapid system design, based on separate components optimized to perform a specific function. We continue to believe FPA represents a compelling architectural alternative to other architectural implementations, as it offers superior conversion efficiency, higher power density, improved system responsiveness, and an attractive total cost of ownership, while offering design flexibility. FPA increases total system conversion efficiency by separating power conversion stages, reducing the number of stages required (i.e., duplicated functions requiring separate components), reducing system distribution losses, and reducing power dissipation at thepoint-of-load.

To support implementation of FPA, we introduced our initial range of VI Chip modules exploiting our proprietary expertise in soft switching topologies and control, power semiconductors, materials, and packaging: the PRM®(Pre-Regulator Module), anon-isolated buck-boost regulator; the BCM® (Bus Converter Module), an isolated, fixed ratio intermediate bus voltage converter; and the VTM® (Voltage Transformation Module), an isolated current multiplier (i.e., voltage converter). The VTM and BCM utilize on our Sine Amplitude ConverterTMswitching topology, a patented fixed-frequency implementation of zero current / zero voltage soft switching, while the PRM is based on our proprietary implementation of zero voltage soft switching (“ZVS”), which is optimized for buck-boost voltage regulation. All three products incorporate technologies for which we have been issued patents or have patent applications pending.

Beginning in 2011, we began to shift our strategic focus toward higher-volume opportunities with global OEMs and their contract manufacturers, as FPA and VI Chip modules offered superior power density, conversion

efficiency, and thermal management characteristics for board-based, rack-mountedpoint-of-load applications, notably for microprocessors requiring tightly regulated high currents. FPA and our first-generation VI Chip modules were adopted by customers for use in demanding applications, most notably supercomputing, sophisticated test instrumentation, and defense electronics. However, broader adoption was inhibited by cost considerations and, to a lesser extent, a narrow product range.

In response, we undertook development of a substantially improved product platform, which we introduced in 2013. Our “ChiP” platform (ChiP is an acronym for “Converter housed in PackageTM”) specifically was designed to be a scalable, leveragable module format with lower manufacturing costs. ChiPs are offered in the same functional families as the earlier VI Chip modules, using the same advanced switching topologies, but, because of the format’s design flexibility and improved manufacturability, we are able to offer much broader ranges of performance specifications within existing and new functional families. Because ChiPs were designed to be manufactured with lower costs, we are able to profitably sell ChiPs and ChiP-based solutions at competitive prices, on acents-per-watt basis, comparable to prices of alternative commodity products. While our first-generation VI Chip modules were designed to facilitate FPA implementations, ChiP modules support all known power distribution architectures, including FPA, thereby expanding our addressable market opportunity (i.e., the range of customer applications across which our products can be used).

At the same time, our Picor subsidiary undertook development of a high-performance family ofpoint-of-load regulators, in “SiP” (System in Package LGA package) format, to be integrated into our expanded product portfolio, truly enabling comprehensive power management solutions topoint(s)-of-load. These Cool-Power®point-of-load regulators have been designed to meet the requirements of high-volume OEMs for cost-effectiveness, design flexibility, and high performance.

In 2014, we introduced the “VIA” packaging concept (VIA is an acronym for “Vicor Integrated AdaptorTM”), a rugged, double-sided package for ChiP modules integrating complementary components, circuitry, and superior thermal management. In 2016, we completed the installation of our first dedicated manufacturing line exclusively for the VIA packaging concept. The VIA package provides customers an advanced,turn-key solution for their demanding power needs, cost-effectively accelerating design cycles andtime-to-market, while providing superior power density. The VIA package is particularly differentiated by the flexibility it provides designers, as it offers substantial thermal advantages, and its form factor allows a broad range of installation options. We consider the VIA package to be strategically important, as it has been designed to be used in the widest range of power system architectures and applications, as well as serving as the packaging platform for our line of ChiP-basedAC-DC front end converters, a critical element of our comprehensive product portfolio enabling highly-differentiated power management solutions from the AC or DC source to thepoint(s)-of-load. The VIA package enables us to target applications ranging from those addressed by our legacy brick products to the most challenging emerging applications.

With the introduction of innovative new products, we began executing a transitionalgo-to-market strategy based on our Power Component Design Methodology, exploiting our historical strengths, while addressing both the realities of today’s power conversion marketplace and our vision of its long-term direction. This strategy involves maintaining a profitable legacy business in bricks and brick-based system solutions, while investing in and transitioning to a new, advanced product portfolio based largely on the ChiP platform, targeting high growth opportunities.

Today, we target well-defined applications for which the high conversion efficiency and high power density of our products are well suited within the following industrial and military market segments: aerospace and aviation; defense electronics; enterprise and high performance computing (including large scale datacenters and supercomputers); industrial automation, instrumentation, and test equipment; medical diagnostics; telecommunications and network equipment and infrastructure; and vehicles and transportation infrastructure. With our new, advanced products, we also are pursuing opportunities in emerging market segments, including: autonomous vehicles; hybrid and electric vehicles; commercial solid state lighting; and 380 voltDC-based facility infrastructure (also referred to as “HVDC” (for high voltage DC distribution) or “micro-grids”).

Our competitive positioning has been, and will continue to be, supported by our long-standing commitment to research and development of power conversion technologies, advanced packaging and manufacturing, and innovative approaches to solving customer problems. We incurred approximately $41,848,000, $41,472,000, and $41,479,000 in research and development expenses in 2016, 2015, and 2014, respectively, representing approximately 20.9%, 18.8%, and 18.4% of revenues in 2016, 2015, and 2014, respectively.

As stated, our strategy involves maintaining high levels of customer engagement and support, which has resulted in significant expansion of our sales and application engineering infrastructure over historical levels, notably in high growth regions of the world such as China, Korea, and India. We incurred approximately $37,967,000, $37,336,000, and $38,056,000 in marketing and sales expenses in 2016, 2015, and 2014, respectively, representing approximately 19.0%, 17.0%, and 16.9% of revenues in 2016, 2015, and 2014, respectively.

We intend to maintain spending in support of research and development and marketing and sales at levels, on an absolute basis, consistent with prior periods. If we successfully execute our strategy, we believe our revenue should increase and, if so, the percentages of revenue represented by spending on research and development and marketing and sales should decline.

Competition

Despite significant consolidation of our competitors, the growth of large-scale,low-cost competitors, and increased application overlap with vendors of solutions based on semiconductors and discrete components, the global merchant market forAC-DC andDC-DC power conversion solutions remains fragmented, with over 1,000 merchant vendors. The market is made up of many large, diversified manufacturers, as well as many smaller manufacturers focused on specialized products or narrowly defined market segments or geographies. The overall market, including those segments in which we compete, is characterized by rapid commoditization and intense price competition.

Although numerous third party industry studies estimate the total global merchant market forAC-DC andDC-DC switching power supplies to exceed $20 billion of annual revenue, representing approximatelytwo-thirds of the total annual consumption of switching power supplies (i.e., the sum of merchant and captive volumes consumed), the Company competes in smaller, well-defined industrial and military market segments. We believeAC-DC power supplies represent more than 85% of the total merchant market, reflecting a wide range of battery charging applications, primarily in the consumer, mobile device, and office computing segments (commodity segments in which we do not compete, together representing more than 50% of the total merchant market). Based on our own assessment of the segments in which we do compete, we estimate our aggregate addressable market opportunity within theAC-DC portion of the merchant market approaches $1 billion annually, while we estimate our aggregate addressable market opportunity within theDC-DC portion of the merchant market exceeds $3 billion annually.

Despite our relative position in the overall merchant market, our small historical presence in theAC-DC portion of the merchant market, and the competitive presence of numerous, far larger vendors in the market segments we serve, we believe we are consistently among the largest volume vendors of solutions for the conversion, regulation, and control ofDC-DC current, particularly in the market segments we serve. However, numerous competitors in these market segments have significantly greater financial and marketing resources and longer operating histories than we do.

The competitive characteristics of market segments we serve with our transitionalgo-to-market strategy may vary. Generally, competition is based on product price, product performance, design flexibility (i.e., ease of use), and product availability. We seek to position ourselves with customers across all market segments served in a manner that reduces our vulnerability to commoditization. As we shift our strategy to focus more on higher volume OEM opportunities, we are emphasizing what we believe are our sustainable competitive advantages: the differentiation of our products’ superior performance and power densities; a compelling value proposition based

on lower total cost of ownership enabled by superior power conversion efficiencies; and the advantageous design flexibility enabled by our products and tools. The BBU, given its history, continues to compete on the basis of differentiated responsiveness to individual customer requirements enabled by our mass customization capabilities, largely with brickDC-DC converters. However, the BBU is pursuing opportunities for which our new products are appropriate, particularly with VIA packaged ChiPs.

Our VI Chip and Picor subsidiaries, given our focus on higher-volume OEM opportunities with our new, innovative products, seek to build customer awareness and acceptance of our products and value propositions through the high levels of customer engagement and support described above. VI Chip and Picor are pursuing applications with these OEMs and their contract manufacturers in market segments for which the advantages of our new products are most compelling. In particular, we are marketing FPA, enabled by our new products, as an alternative to IBA and other distributed architectures, primarily in enterprise computing (notably for large-scale datacenter and supercomputing applications). A complement to this customer-specific effort is the ongoing development of collaborative relationships with influential suppliers to our OEM customers.

Our Products

Reflecting our Power Component Design Methodology, we offer a comprehensive range of individual, highly integrated building blocks enabling design of a power system specific to a customer’s needs. Since introducing and popularizing the encapsulated brick package format during the 1980s, our product focus has been on high performanceDC-DC switching converters providing the transformation, regulation, isolation, filtering, and/or input protection necessary to power and protect sophisticated electronic loads. With the development of FPA, VI Chip modules, Picorpoint-of-load regulators, and, most recently, ChiP modules and the VIA packaging platform, we believe we offer the most advanced range of high-performance power components in the industry. A secondary and highly complementary product strategy has been to vertically integrate our component-level building blocks into complete power systems representing turnkeyAC-DC andDC-DC solutions for our customers’ power needs.

Reflecting our history and direction, we broadly categorize our products as either “legacy” or “advanced”, generally based on design, performance, and form factor considerations, as well as the range of applications for which the products are appropriate.

Legacy Products

The following product groups include those that historically generated the majority of our revenue.Contents

manufacturers. Some of our brick productBrick Product lines have been in production for over a decade, reflecting the long-established relationships we have with many customers and the long-standing suitability of our products to their demanding applications. Their generally long lifecycles and well-established share of targeted market segments provide the competitive foundation and organizational resources for our transitionalgo-to-market strategy.

•Bricks (ModularDC-DC Converters and Complementary Components)

We offer brick modules asDC-DC converters, as well as complementary components providing AC line rectification, input filtering, power factor correction, and transient protection. All of our brick modules are encapsulated with a dielectric, thermally-conductive material, thereby providing electrical insulation, thermal conductivity, and environmental protection of the electronic circuitry. These products are well-established as important, reliable elements of conventional power systems architectures.

The BBU currently offers seven families of high power density,component-level DC-DC converters, representing what we believe to be the broadest selection ofDC-DC converter modules in the industry: theVI-200TM,VI-J00TM,MI-200TM,MI-J00TM, and the FasTrakTM module line, our highest volume products, made up of the Maxi, Mini, and Micro product families. All of ourDC-DC converters are based on our proprietary approach to resonant soft switching, enabling high efficiencies and power

densities. Wide ranges of input voltage (from nine to 425 volts), output voltages (from two to 54 volts), and output power (up to 600 watts) are offered, allowing end users to select components appropriate to their individual applications. The products differ in temperature grades, maximum power ratings, performance characteristics, pin configuration, and, in certain cases, characteristics specific to the targeted market. BrickDC-DC converters are offered in sizes, depending on family, ranging from 116.9 x 61.0 x 12.7 mm (full brick), to 57.9 x 61.0 x 12.7 mm (half brick), to 57.9 x 36.8 x 12.7 mm (quarter brick).

Products from our broad line of complementary components are used to condition and/or filter the input and output voltages of the brickDC-DC converter. Generally, these components address customer requirements at the AC current source, upstream from ourDC-DC converters, providing rectification of the AC current, input filtering, inrush limiting, and transient protection. An example of such a complementary product is our HAMTM (Harmonic Attenuator Module), a front end providing power factor correction. The HAM utilizes a proprietary zero current switching boost converter, allowing it to provide output power of up to 675 watts and DC output voltage of 365 volts.

We also offer numerous accessories (for example, base plates and heat sinks) to meet customer requirements.

These products are generally targeted at applications requiring high performance and reliability in the following market segments: aerospace and aviation; defense electronics; industrial automation, instrumentation, and test equipment; medical diagnostics; telecommunications infrastructure; and vehicles and transportation infrastructure.

•Open-Frame Intermediate Bus Converters

We offer an extensive line of open-frame (i.e., not encapsulated) intermediate bus converters (“IBCs”) for implementation of multi-stage power conversion. These devices utilize the same Sine Amplitude Converter switching topology utilized in our VTM and BCM modules in the VI Chip and ChiP formats. These low profile, isolated, fixed-ratio IBCs conform to industry standard quarter-brick and eighth-brick sizes, but offer increased capabilities and exceptional performance.

These devices typically are used in telecommunications and networking equipment applications. Because our IBCs represent pin compatible upgrades for existing designs, a customer, for example, can replace a competitor’s quarter-brick unit with our eighth-brick converter, using half the available space, while meaningfully improving system performance.

•Cool-Power High Density ZVSDC-DC Converters

We offer a family of isolatedDC-DC converters delivering up to 60 watts in a very small (22 x 16.5 x 6.7 mm) surface-mount package. Because these small devices are packaged in the VI Chip over-molded package, they are able to withstand harsh environments in applications for which space is limited and light weight is advantageous (e.g., aerospace, aviation, and defense electronics). These high density converter modules are offered in three input voltages: 48 volt nominal for communication applications; 28 volt nominal for rugged high temperature or military applications; and 24 volt nominal for industrial applications.

Cool-Power converters utilize our proprietary zero voltage soft switching topology (“ZVS”) to achieve high-switching frequencies enablingbest-in-class power density, while reducing input and output filtering requirements.

•Configurable Products

Utilizing our modular brick components to drive system function, we offer numerous higher valued-added standard products we configure to a customer’s specific needs, often with multiple voltage outputs. These near-custom products exploit the benefits and flexibility of our modular approach to offer higher performance, higher power densities, lower costs, and faster delivery than many competitive offerings. TheseAC-DC andDC-DC configurable products are designed, developed, and manufactured by the BBU.

Our highest volume configurable product, the FlatPACTM, is representative of our approach to integrating our power components to create high-performance solutions. FlatPACs, available in thousands of configurations in three package variants based on the number of DC output voltages, are complete, conductively-cooledAC-DC conversion solutions comprised of ourVI-200DC-DC converter modules and our complementary components, described above, providing rectification and filtering of the AC input voltage.

Our configurable products typically are used in a range of CPA and distributed power architecture implementations in defense electronics, industrial and transportation applications, as well as medical instrumentation.

•Custom Power Systems

Certain customers rely on us to design, develop, and manufacture custom power systems to meet performance and/or form factor requirements that cannot be met withoff-the-shelf system solutions. Theselow-volume, highvalue-add products frequently are designed to function reliably in the harsh environments

Annual revenue associated with aerospace, aviation, and defense applications, but also are used in applications ranging from industrial equipment to medical instrumentation. By utilizing our modular components to drive system function, we have been able to meet such customers’ needs with reliable, high power density, turnkey solutions.

Advancedthe sale of Brick Products,

The following product groups include those that reflect our vision representing the sum of the direction of the market segments we serve with our Power Component Design Methodology. Many of these products are targeted toward FPA implementations, but our more recently introduced products are suitable for other distributed architectures.

•ChiPs (Modular Power Components)

In 2013, our VI Chip Corporation subsidiary introduced the ChiP platform, designed to be a scalable, leveragable module format with lower manufacturing costs. We believe the ChiP platform establishesbest-in-class standards for a new generation of scalable power modules, while expanding our capability range and, in turn, our addressable market opportunity. Combining advanced proprietary magnetic structures, power semiconductors, and microcontrollers in a high density interconnect substrate, the ChiP delivers superior thermal management characteristics, allowing customers to achieve low cost power system solutions with previously unattainable system efficiency, size, and weight. ChiP modules also have lower manufacturing costs than our original VI Chips, thereby allowing us to offer highly differentiated products, not only with superior total cost of ownership over time, but at attractive initial price points. Our goal is to offer ChiP modules and solutions on a cents per watt basis near or equivalent to the prices of competitive product offerings, thereby presenting customers with a compelling value proposition.

ChiPs are produced in the same functional families as our earlier VI Chip FPA modules (i.e., PRM, BCM, and VTM), but today we offer five package sizes ranging from 6 by 23 mm to 61 by 23 mm. We currently offer over 100 specific ChiP module variants, reflecting the multiple configurations, based on dimensions, lead formats, and performance specifications, enabled by the flexible module format. During 2016, we continued to introduce ChiP modules, adding 32 new products and 128 additional variants within the product families. Based on our current design and development activities, we anticipate, in 2017, further expansion of the range of package sizes, board or chassis mounting alternatives, lead formats, and performance characteristics of our ChiP product offerings. We plan to target a number of these new product families and variants at segments and applications that, if successfully penetrated, should expand the size of our addressable markets.

ChiP modules are targeted at sophisticated applications, regardless of the power distribution architecture, for which their high level of performance and form factor differentiation is appropriate. Across distributed power system architectures, ChiPs are targeted at: aerospace and aviation (e.g., for

use in unmanned aerial vehicles, due to their conversion efficiency, reliability, small form factor, and light weight); computing (e.g., for source topoint-of-load solutions in servers deployed in datacenters, due to their conversion efficiency and flexibility of use, which contribute to lower total cost of ownership); defense electronics (e.g., for use in airborne, seaborne, or field radar, due to their high power capabilities, conversion efficiency, ruggedness, and reliability); industrial automation, instrumentation, and test equipment (e.g., for use in semiconductor testing, due to their power density and tight current regulation); telecommunications and networking infrastructure (e.g., for use in pole-mounted small-cell base stations in urban environments, due to their form factor, reliability, and cost/performance profile); and vehicles (e.g., in hybrid electric vehicles, due to their form factor, light weight, differentiated performance, and cost/performance profile). As stated, we also are pursuing applications with OEMs and their contract manufacturers in market segments for which the advantages of ChiPs are most compelling.

•VIAs (Vicor Integrated Adapter Package)

The VIA platform is a rugged, double-sided, copper-alloy package for ChiP modules, integrating complementary components, circuitry, and superior thermal management through conductive cooling. In 2016, we completed installation of our first dedicated manufacturing line exclusively for the VIA packaging concept.

We consider the VIA platform to be important to our transitionalgo-to-market strategy, as it has been designed to enable the use of ChiP modules across the widest range of power system architectures, power levels, and applications. It is aneasy-to-use power management solution, providing customers an advanced,turn-key solution for their demanding power needs, cost-effectively accelerating design cycles andtime-to-market, while providing superior power density. The VIA platform is particularly differentiated by the flexibility it provides designers, as it offers substantial thermal advantages and its form factor allows a broad range of installation options. In numerous applications, the package simplifies thermal design considerations and, in some instances, eliminates the need for a fan for convection cooling, improving overall system reliability and further minimizing the power system footprint. Offered in board and chassis mount configurations, all VIA packages have a vertical dimension of 9.3 mm and a width of 35.5 mm, and, depending on the packaged ChiP module and its functionality, range in length from 72.0 to 141.4 mm.

The VIA platform facilitates our latest ACfront-end solution, based on the ChiP PFM® (Power Factor Module). The VIA PFM represents a significant improvement over our legacyfront-end solutions, thereby enhancing our positioning as a supplier of highly-differentiated power management solutions from the AC source to the point(s) of load. The VIA PFM achieves a market-leading power density of 127 W/in³, supplying an isolated DC output of either 24 or 48 volts, at up to 400 watts, from a universal AC input. It operates with active power factor correction at 93% peak conversion efficiency, which is an unprecedented level for anAC-DC converter of this size and power density. Combining the VIA PFM with our small AIMTM (“AC Input Module”), which provides AC rectification, filtering, transient protection, and inrush limiting capabilities, creates a high-performanceAC-DCfront-end solution with an unmatched size profile. This solution is especially well-suited for emerging applications with size constraints, including small-cell base stations and commercial LED lighting.

The VIA platform also facilitates the VIA DCM, which is an important product for executing our strategic transition. We currently offer seven variants of the VIA DCM. The product family integrates filtering, output voltage regulation, circuitry protection, and a control interface, giving the VIA DCM the function of a conventional brickDC-DC converter, while offering higher conversion efficiency, superior power density, and the design flexibility described above. As such, we are positioning the VIA DCM as a successor to our legacy brickDC-DC converters, notably in advanced, challenging applications. However, the VIA DCM also is positioned as an innovative, high-performance element of our Power Component Design Methodology, as it has been designed to be integrated with our other products to facilitate design of comprehensive power system solutions.

•Cool-Power®ZVS Modules(System-in-PackagePoint-of-Load Regulators)

Our Cool-Power brand ofnon-isolated,point-of-load regulators currently consists of an expanding portfolio of buck (i.e., the device steps down voltage) and buck-boost (i.e., the device lowers or increases voltage) regulators.

We believe Cool-Power buck regulators provide best in class conversion efficiency (up to 98%), allowing customers to deploy more efficient designs, regardless of power system architecture, based on the compatibility of thesepoint-of-load regulators with higher, more efficient input voltages. Operating from nominal input voltages of 12, 24, or 48 volts, these regulators are optimized for applications requiring high conversion efficiency and power density, such as computer and graphic processors.

The high conversion efficiency of our Cool-Power regulators is enabled by our proprietary ZVS topology, which minimizes switching losses, while maximizing dynamic response to line and load transients. Along with ZVS control circuitry, the advanced design of Cool-Power regulators incorporates proprietary power semiconductors, all within a high-density, surface-mount package.

Cool-Power regulators are competitively well-positioned to address market trends toward higher required conversion efficiencies and higher currents at thepoint-of-load. The addition of buck-boost variants expands our capabilities to include loads powered by batteries, which are subject to varying voltage delivery over their discharge cycle. We believe these products will be an important contributor to our long-term success, as they represent a meaningful element of our Power Component Design Methodology, enabling comprehensive, highly integrated solutions for FPA and other distributed architectural implementations, fulfilling our strategic commitment to offering integrated solutions all the way from the source to thepoint-of-load. Our success to date with these products has frequently been when they have been part of an integrated FPA solution, delivering a tightly regulated voltage to a downstream VTM serving as a current multiplier, which in turn delivers low voltage, high amperage, regulated current to thepoint-of-load, typically a microprocessor. Our 48 volt topoint-of-load solutions for datacenter servers is representative of such an integrated FPA solution.

•Power Path Management Components

Our Picor subsidiary offers a limited range of specialized components for circuit protection, all of which are characterized by small size,ease-of-use, and differentiated performance. The highest volume products are QuietPower® filters for input filtering of electro-magnetic interference and output noise (i.e., ripple attenuation).

We consider these products to be a valuable complement to our Power Component Design Methodology, despite their relatively small sales volumes, as they enable customers, assisted by our application engineers, to source from Vicor their complete solution to power conversion and management.

•VI Chips (Modular Power Components)

We continue to offer the first generation of VI Chip PRM, BCM, and VTM modules, in full (32.5 by 22.0 by 6.73 mm) and half (22.0 by 16.5 by 6.73 mm) sizes, targeting FPA implementations. These products remain compelling solutions for certain applications, notably in defense electronics, medical instrumentation, and test and measurement applications.

With the expansion of ChiP product families, we anticipate ourthird-party sales of the first generationproducts sold under the Brick Products line, which were sold under the former the Brick Business Unit operating segment, inclusive of VI Chips will be limited to shipments to existing customers during the life cyclessuch sales of our Vicor Custom Power and VJCL subsidiaries, was approximately 71.4%, 64.1%, and 66.6% of the applications into which these products have been designed. We expectCompany’s consolidated revenue for the life cycles of many of these applications may continue for several years.

Patents and Intellectual Property

An important element of our strategy is to protect our competitive leadership with domestic and foreign patents and patent applications that cover our products and much of their enabling technologies. We believe our

competitive leadership is further protected by proprietary trade secrets associated with our use of certain components and materials of our own design, as well as our significant experience with manufacturing, packaging, and testing these complex devices.

We believe our patents afford advantages by building fundamental and multilayered barriers to competitive encroachment upon key features and performance benefits of our principal product families. Our patents cover the fundamental switching topologies used to achieve the performance attributes of our converter product lines; converter array architectures; product packaging design; product construction; high frequency magnetic structures; as well as automated equipment and methods for circuit and product assembly.

In the United States, as ofyears ended December 31, 2016, we have been issued 102 total patents, which expire between2019, 2018, and 2017, and 2035. We also have a number of patent applications pending in the United States and certain countries of Europe and Asia. We have vigorously protected our rights under these patents and will continue to do so. Although we believe patents are an effective way of protecting our technology, there can be no assurances our patents will prove to be enforceable in any given jurisdiction.

In addition to generating revenue from product sales, we seek to license our intellectual property. In granting licenses, we generally retain the right to use our patented technologies and manufacture and sell our products in all licensed geographic areas and fields of use. Licenses are granted and administered through our wholly-owned subsidiary, VLT, Inc., which is the assignee for our patents that may be subject to licensing. Revenues from licensing arrangements have not exceeded 10% of our consolidated revenues in any of the last three fiscal years.

respectively.

Customers and Backlog

The applications in which our productsAdvanced Products and Brick Products are used are typically in the higher-performance, higher-power segments of the market segments we serve. The BBU hasWith our Advanced Product lines, our customers concentrated in aerospace and aviation, defense electronics, industrial automation and equipment, medical diagnostics, rail transportation, and test and measurement instrumentation. VI Chip and Picor have customersare concentrated in the datacenterdata center and supercomputerhyperscaler segments of theenterprise computing, market,in which our products are used for voltage distribution on server motherboards, in server racks, and across datacenter infrastructure, although theywe also target applications in aerospace and aviation, defense electronics, networkingindustrial automation, instrumentation, test equipment, solid state lighting, testtelecommunications and measurementnetworking infrastructure, and vehicles (notably in the autonomous driving, electric vehicle, and hybrid vehicle niches of the vehicle segment). With our Brick Product lines, we serve customers concentrated in aerospace and defense electronics, industrial automation, industrial equipment, instrumentation and test equipment, and transportation (electric(notably in rail and hybrid vehicles and autonomous vehicles)heavy equipment applications). With our strategic emphasis on larger, high-volume customers, we expect to experience a greater concentration of sales among relatively fewer customers.

For the year ended December 31, 2016, one customer, NuPower Electronic, Ltd., accounted for approximately 16.4.% of net revenues, and our five largest customers represented approximately 26.5% of net revenues. For the year ended December 31, 2015, one customer, NuPower Electronic, Ltd., accounted for approximately 16.2% of net revenues, and our five largest customers represented approximately 33.4% of net revenues. For the year ended December 31, 2014, one customer (NuPower Electronic, Ltd.) accounted for approximately 14.7% of net revenues, and our five largest customers represented approximately 32.6% of net revenues.

International revenues, as a percentage of total revenues, were approximately 59.4%, 59.6%, and 60.5% in 2016, 2015, and 2014, respectively. Net revenues from customers in China, our largest international market, accounted for approximately 32.1% of total net revenues in 2016, approximately 34.2% in 2015, and approximately 32.3% in 2014, respectively. International sales have increased from historical levels primarily due to higher volumes of shipments to foreign contract manufacturers, many of which are located in China, utilized by domestic and international OEMs. As we have substantially expanded our sales and customer support activities and resources internationally, particularly in Asia, we expect international sales to continue to increase as a percentage of total revenue.

As of December 31, 2016, we had a2019, the Company’s order backlog ofwas approximately $48,371,000,$104,164,000, compared to $39,073,000$102,963,000 as of December 31, 2015.2018. Backlog, as presented here, consists of orders for products for which shipment is scheduled

within the following 12 months, subject to normal customerour scheduling and cancellation policies.

The lead times between receipt and acceptance of an order and our shipment of the product remained long through 2019, although overall conditions across the global electronics supply chain generally stabilized, allowing the Company to shorten production lead times for certain products. As of December 31, 2019, we were quoting average lead times of 16 weeks to customers, consistent with the lead times quoted as of December 31, 2018, although during 2019 we quoted lead times as high as 20 weeks for certain products. We expect supply availability for certain materials and components to remain uncertain for the foreseeable future, and we may further increase inventory levels for these components and raw materials, as necessary. Accordingly, we may not be able to reduce delivery lead times across all product lines for the foreseeable future.
A portion of our revenue in any quarter is, and will continue to be, derived from “turns” volume, representing either orders booked and shipped in the same quarter or orders for which customers have requested accelerated delivery from a later quarter to the current quarter. This volume generally has been associated with orders for Brick Products. Over the past twothree years, the portionvolume of salesorders booked and shipped within a quarter has declined steadily, reflecting lengthened delivery lead times across the electronics industry. However, over the same period, the volume of orders for which customers have requested accelerated delivery has increased, which we believe to be a reflection of improved conditions in many of the market segments we serve with Brick Products. An additional influence on turns volume has been our transition to larger OEM customers, which typically schedule large volumes for delivery over multiple quarters and frequently reschedule deliveries for either earlier or later shipment. Average quarterly turns volume averaged approximately 27% of 2019 revenue, approximately 20% of 2018 revenue, and approximately 36% of revenue for 2017.
Competition and Market Characteristics
The competitive characteristics of the markets we serve with Advanced Products and Brick Products can differ significantly. For example, in the same quarter has represented less thantwo-fifthshigher-performance segments of computing we serve, our quarterly revenue, as we typically only buildAdvanced
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Products most often compete with solutions offered by large integrated device manufacturers (“IDMs”), which offer integrated circuits and semiconductor-based modules. These IDMs generally offer far broader product portfolios, possess far greater global manufacturing and support resources, and have the ability to aggressively price their products to customer specifications upon receiptdefend market share. Accordingly, Advanced Products are positioned as highly differentiated alternatives to commodity solutions for customers seeking high levels of performance. The customers we serve with Advanced Products, typically on a purchase orderdirect basis, are in market segments generally characterized by an emphasis on product performance differentiation, a compelling TCO, relatively extended and highly competitive design cycles, and product life cycles of generally less than three years. In contrast, the Brick Products competitive landscape is relatively fragmented, with large-scale,
low-cost
global suppliers of commodity solutions and many smaller manufacturers focused on specialized products or narrowly defined market segments or geographies. The market segments we serve with Brick Products, typically through sales representatives and distribution partners, generally are characterized by relatively short design cycles, relatively long (i.e., greater than three years) product life cycles, and, given the maturity of many market segments and applications, degrees of commoditization and price competition. As such, Brick Products are positioned with an emphasis on mass customization, through which we offer products with specific features and performance profiles typically not available from catalog-oriented competitors.
The size and growth characteristics of the markets we serve with Advanced Products and Brick Products also can differ significantly, and the range and quality of market data is problematic, making summary statements about these markets challenging.
We believe our Advanced Products generally compete with power modules and power integrated circuits (“ICs”) developed and manufactured by IDMs and other fabless vendors of discrete power semiconductors. Based on available third-party industry assessments, we believe the global market for all categories of power semiconductor devices exceeds $40 billion annually and is expected to grow over the next five years at a compounded annual rate between 4% and 5%. We estimate the addressable market for power modules and power ICs in market segments we are targeting exceeded $7 billion in 2019 and, after recently slowed growth, is expected to resume annual growth rates well above those of the global market as a whole. We believe the market segments (and applications) we are targeting, primarily the data center segment of the enterprise computing market, driven by adoption of AI applications, and the electric and mild hybrid segments of the automotive market, driven by customer adoption of 48V distribution, should grow over the next five years at compounded annual rates exceeding 10%.
We believe our Brick Products generally compete with similarly integrated switching power supply products developed and manufactured by large global competitors and a fragmented group of small regional competitors. The switching power supply market can be segmented by product type (i.e.,
DC-DC
converters,
AC-DC
converters, and
DC-AC
inverters), by output power levels, and by numerous vertical markets (i.e., industry-specific applications). Available third party industry assessments estimate the total global merchant (i.e.,
non-captive)
market for
AC-DC
and
DC-DC
switching power supplies currently exceeds $25 billion of annual revenue, although as much as three-quarters of this total is associated by market analysts with
AC-DC
converters, primarily used in consumer applications. Accordingly, we estimate the addressable market for switching power supplies (and related products) in market segments we are targeting exceeded $4 billion in 2019. Estimates of total market compounded annual growth rates for the next five years are as high as 6%, but reflect relatively high growth in market segments in which we do not maintaincompete (e.g., solar inverters). We believe compounded annual growth rates in the smaller, well-defined market segments we serve are likely to approximate the annual growth of industrial output of the regions in which we operate. Across all geographies, Brick Products revenue has experienced low to middle single-digit growth over the three years prior to 2019. Given the maturity and fragmentation of the market segments in which we compete and our competitive positioning within these market segments, we anticipate revenue for Brick Products will continue to follow trends in industrial activity on a regional basis, with expectations of continued stability in U.S. segments and changes in export activity varying with economic conditions in Europe and Asia, with Chinese demand further influenced by the China — U.S. trade dispute. In 2019, the Chinese government increased its pressure on Chinese manufacturers to meet the
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“China 2025” mandate for targeted development of Chinese technology sectors, whereby their domestic technology vendors are explicitly favored over foreign vendors such as Vicor. We believe we have experienced reduced demand in certain segments (e.g., rail), reflecting the significant inventoriesrole of finished goodsstate-owned enterprises in those segments, and also believe such demand that may not recover for the BBUforeseeable future to historical levels, even if tariffs are reduced on Vicor products.
Despite our minor share in the overall merchant market and VI Chip).the competitive presence of numerous, far larger vendors in the market segments we serve with both Advanced Products sold byand Brick Products, we believe we maintain an advantageous competitive position in those market segments. Notably, we believe we have the BBU may have a lead time (i.e.,largest share of 48V distribution opportunities within the period between receipt of an order and shipmentsegments of the product) of up to six weeks, although the average lead time for 2016 was lesscomputing market we serve. However, numerous competitors across these market segments have significantly greater engineering, financial, manufacturing, and marketing and sales resources, as well as longer operating histories and longer customer relationships than four weeks. Products sold by VI Chip typically have a lead time in excess of eight weeks. Lead times for the BBUwe do.
Marketing and VI Chip may shorten (and have shortened) during periods of sustained volume. Picor, given its fabless model, builds inventories based on expected customer demand and orders from stocking distribution partners. As such, the portion of sales booked and shipped in the same quarter can vary considerably depending on the relative volumes of BBU, VI Chip, and Picor products booked within the quarter.

Sales and Marketing

We reach and serve customers through several channels: a direct sales force; a network of independent sales representative organizations in North America and South America; independent, authorized
non-stocking
distributors in Europe and Asia; and three authorized stocking distributors world-wide,
Digi-Key
Corporation, Future Electronics Incorporated, and Mouser Electronics, Inc. These channels are supported by regional TSCs, each offering application engineering and sales support for customers and our channel partners. Domestic TSCs are located in: Andover, Massachusetts; Lombard, Illinois; and Santa Clara, California. International TSCs are located in: Beijing, China; Hong Kong, China; Shanghai, China; Shenzhen, China; Munich, Germany; Bangalore, India; Milan, Italy; Tokyo, Japan; Seoul, South Korea; Taipei, Taiwan (Republic of China); Seoul, South Korea; and Camberley, United Kingdom. Customers do not place purchase orders with TSCs, but eitherdo so directly with the Company or with our distributors. In Japan, customers place purchase orders with VJCLauthorized distributors or, authorized distributors.

for certain custom products, VJCL.

We generally sell our products on the basis of our standard terms and conditions, and we most commonly warrant our products for a period of two years. Effective January 1, 2017, we extended the warranty period to three years for a range of H Grade, M Grade, and MI Family
DC-DC
products sold after that date. In a limited number of circumstances, we have entered into supply contracts with certain high-volume customers calling for extended warranty terms. With our distribution partners, we also enter into contracts providing for our product warranties to transfer to the end customer upon final sale of our product(s) by the distributor.
Because of the technically complex nature of our products and the applications they address, we maintain an extensive staff of Field Applications Engineers to support our own sales and customer support activities, as well as those of our channel partners. Field Application Engineers, based in our TSCs, provide direct technical support worldwide by reviewing new applications and technical matters with our channel partners in support of existing and potential customers, as well as our channel partners.customers. Product Line Engineers, located in our Andover headquarters, support Field Application Engineers assigned to all of our TSCs.

Vicor

Our direct sales force focuses on higher-volume opportunities involving Advanced Products with global OEMs (and the Original Design Manufacturers (“ODMs”) and contract manufacturers serving these OEMs). Because of the high level of product differentiation and the increasing complexity and challenges of customer requirements, we have experienced, and may continue to experience, extended design cycles before production orders are received.
We also reachesreach customers through the recently-expanded electronic commerce capabilities of our website, www.vicorpower.com. Registered, qualified customers in the United States, Canada, and certain European countries are able to purchase prototype quantities of selected products online. We intend to expand these capabilities to allow for higher-volume purchases.

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Our
web-based
resources are an important element of our efforts to interact with and support customers. Within our website,
PowerBench
TM
is a workspace of tools and references allowing engineers to select, architect, and implement power systems using Vicor’sour products. During 2016, we continued to enhance ourOur highly differentiated
Whiteboard
TM
tool which allows users to configure and analyze their own power system designs or those from an extensive library of designs addressing a wide range of applications. Users can modify the operating condition for each component of their design to match the intended application and perform efficiency and loss analysis of individual components and the full power system. We are aggressively expandingcontinue to enhance and expand the range and capabilities of engineering tools we make available online to customers and prospective customers.

In 2016, we reorganized

As stated, our approach to how we address new, low volume customers not already served by our regional distributorsstrategy involves maintaining high levels of customer engagement and support for design and engineering, which has resulted in European Union member countries. We discontinued our distributor support initiative, which had been an effort to address the needs of small-volume customers targeted for transition to distributors as their purchase volumes increased. Previously, such customers had placed orders via telephone or email, denominated in Euros or Pounds Sterling, with Vicor B.V., which served as importer of record for shipments by Vicor from Andover, Massachusetts. European TSCs participating in the initiative did not record

any revenue associated with shipments from Vicor to Vicor B.V. for subsequent delivery to customers. The early-stage, low volume customers previously served by this initiative now are referred by us to either our website or a distributor for order placement.

We generally sell our products on the basissignificant expansion of our standard termssales and conditions,application engineering infrastructure over historical levels, notably across Asia. We incurred approximately $43,387,000, $42,533,000, and we most commonly warrant our products for a period$40,438,000 in marketing and sales expenses in 2019, 2018, and 2017, respectively, representing approximately 16.5%, 14.6%, and 17.7% of two years. Effective January 1,revenues in 2019, 2018, and 2017, we extended the warranty period to three years for a range of H Grade, M Grade and MI FamilyDC-DC converters, input filters, output filters, and front ends sold after that date. In a limited number of circumstances, we have entered into supply contracts with certain high-volume customers calling for extended warranty terms. With our distribution partners, we also enter into contracts providing for our product warranties to transfer to the end customer upon final sale of our product(s) by the stocking distributor.

respectively.

Manufacturing, Quality Assurance, and Supply Chain Management

Our BBU and VI Chip230,000 sq. ft. manufacturing facilities areco-locatedfacility is located in Andover, Massachusetts, where we are headquartered. In this facility, we manufacture Brick Products, with the exception of custom products produced by our Vicor Custom Power and VJCL subsidiaries, and Advanced Products, with the exception of products designed and sourced by personnel from our former subsidiary, Picor, which, given its fabless model, outsources manufacturing,are manufactured, packaged, and tested by third party wafer foundries and packaging and testing of its products under contract to partnerscontractors in the United States and Asia.

Our primary manufacturing processes consist of assembly of electronic components onto printed circuit boards; automatic testing of components; wave, reflow and infrared soldering of assembled components; encapsulation or over-molding of converter subassemblies and assemblies; final environmental stress screening of certain products; and product inspection and testing using automated equipment. These processes are largely automated, but their labor components require relatively high levels of skill and training.

We pursuecontinue to make investments in automated manufacturing equipment, particularly for expansion of production capacity for Advanced Products. During 2019, through investment in additional capital equipment, we increased our total manufacturing capacity in our Andover facility by approximately 35%. We are scheduled to begin construction of an approximately 90,000 square feet addition to our existing plant in the spring of 2020 and take occupancy later in the year. The planned addition of multiple manufacturing lines in this additional space, across 2021, is expected to increase our Advanced Products capacity by an additional 100%.
As previously disclosed, in December 2017 we began collaborating with a manufacturing strategy based upon highly-specialized electroplating contractor capable of meeting our near-term volume expectations for our
SM-ChiP
©
line with acceptable quality and cost. In 2019, we entered into a service agreement with this contractor. While commodity electroplating services are available from numerous alternate providers, we entered into this service agreement due to the level of our collaboration to date with the contractor in the development of certain proprietary processes, the high quality of the contractor’s services, and its commitment to environmentally sound,
non-toxic
processes. As such, we have revised our schedule for taking such proprietary processes
in-house,
and expect to meet our forecast needs for
SM-ChiP
production flexibility and the continuous improvement of product quality, volume throughput, and reduced manufacturing costs. with this contractor through 2020.
Product quality and reliability are critical to our success and, as such, we emphasize quality and reliability in our design and manufacturing activities. We follow industry best practices in manufacturing and are compliant with ISO 9001 certification standards (as set forth by the International Organization for Standardization). Our quality assurance practices include rigorous testing and, as necessary,
burn-in
and temperature cycling (i.e., extended operation of a product to confirm performance) of our products using automated equipment.

We continue to make investments in automated manufacturing equipment, particularly for our ChiP modules and VIA packaging platforms. Based on current estimates of ChiP and VIA manufacturing volumes and our capacity requirements, we do not expect to incur capital expenditures during 2017 significantly higher than we incurred during recent years.

Components and materials used in our products are purchased from a variety of domestic and international vendors. Most of the components are available from multiple sources, whether directly from suppliers or indirectly through distributors. In instances of single source items, we maintain levels of inventories we consider to be appropriate to enable meeting the delivery requirements of customers. Incoming components, assemblies, and other parts are subjected to several levels of inspection procedures, and we maintain robust data on our raw material inventories in order to support our quality assurance procedures.

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Components and materials used in our products are purchased from a variety of domestic and international vendors. Generally, the global electronics supply chain has stabilized, but lead times for delivery of certain raw materials required for the manufacturing of our products remain extended. Most of these raw materials are available from multiple sources, whether directly from suppliers or indirectly through distributors, and, during 2019 we continued to opportunistically expand certain raw material inventories to offset the uncertainties associated with availability and lead times.
Advanced Products developed by personnel from Picor, given its fabless model, relies onour former subsidiary, are manufactured by a limited number of wafer foundries, and providers ofwith packaging and test services.services provided by a limited number of providers. Our proprietary switching controllers were designed by Picor and are sourced through Picor, which reliesinternally, and we rely on these wafer foundries and service providers for supply continuity and sufficiency of these critical semiconductor devices.

See Note 17 —Segment Information to Similarly, many of the Consolidated Financial Statementsproprietary semiconductors we use, for which we have either a manufacturing license or ownership of the designs, are sourced from third party foundries.

To date, we have not experienced delays or reduced raw material availability as a result of trade disputes between the United States and China, including the imposition in 2018 of import tariffs under the provisions of Section 301 of the Trade Act of 1974 (19 U.S.C. § 2411) (“Section 301 Tariffs”) on certain financial informationChinese goods imported into the United States. For the year ended December 31, 2019, costs associated with tariffs totaled approximately $5,280,000. We continue to assess the operationsimpact of these costs and are actively evaluating alternative sources of raw materials. We also have engaged a consultant to assist us with implementing a “duty drawback” process, by which we may file with U.S. Customs and Border Protection for the recovery of tariffs paid on raw materials used to produce products we subsequently exported. At this time, we are not able to estimate the amount of such recovery or the timing thereof.
Intellectual Property
Our competitive positioning has been, and will continue to be, supported by our long-standing commitment to research and development of power distribution architectures, power conversion technologies, advanced packaging and manufacturing, and innovative approaches to solving customer problems. Our research and development activities have resulted in important domestic and foreign patents protecting our products and enabling technologies, as well as proprietary trade secrets associated with our use of certain components and materials of our business segments.

Employees

own design and proprietary manufacturing, packaging, and testing processes. We incurred approximately $46,588,000, $44,286,000, and $44,924,000 in research and development expenses in 2019, 2018, and 2017, respectively, representing approximately 17.7%, 15.2%, and 19.7% of revenues in 2019, 2018, and 2017, respectively.

We believe our intellectual property affords advantages by building fundamental and multilayered barriers to competitive encroachment upon key features and performance benefits of our principal product families. Our patents cover the fundamental switching topologies used to achieve the performance attributes of our converter product lines; converter array architectures; product packaging design; product construction; high frequency magnetic structures; and automated equipment and methods for circuit and product assembly.
As of December 31, 2016,2019, in the United States, we have been issued 114 total patents. These patents have expirations scheduled between 2020 and 2038. We also have a number of patent applications pending in the United States and certain countries of Europe and Asia, including applications that would extend the life of current patents. We have vigorously protected our rights under these patents and will continue to do so. Although we believe patents are an effective way of protecting our technology, there can be no assurances our patents will prove to be enforceable in any given jurisdiction.
In addition to generating revenue from product sales, we seek to license our intellectual property. In granting licenses, we generally retain the right to use our patented technologies and manufacture and sell our products in all licensed geographic areas and fields of use. Licenses are granted and administered through our
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wholly-owned subsidiary, VLT, Inc., which is the assignee for our patents that may be subject to licensing. Revenues from licensing arrangements have not exceeded 10% of our consolidated revenues in any of the last three fiscal years.
Employees
As of December 31, 2019, we had 959993 full time employees and 1221 part time employees. The number of part time employees varies throughout any year, largely based on the number of production shifts we may require at a particular time, as well as the number of college and graduate students participating in short term
co-op
programs. None of our employees are subject to a collective bargaining agreement. We believe our continued success depends, in part,

on our ability to attract and retain qualified personnel. Although there is strong demand for qualified personnel, we have not to date experienced meaningful difficulty in attracting and retaining sufficient engineering and technical personnel to meet our needs (see Part I, Item 1A — “Risk Factors”).

Available Information

We maintain a website with the address www.vicorpower.com and make available free of charge through this website our Annual Reports onForm
 10-K,
Quarterly Reports onForm
 10-Q,
Current Reports onForm
 8-K,
and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 (“the Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. We also make available on our website our Code of Business Conduct, as well as the charters for the Audit and Compensation Committees of our Board of Directors.

While our website sets forth extensive information, including information regarding our products and the applications in which they may be used, such information is not a part of, nor incorporated by reference into, this Annual Report onForm
 10-K
and shall not be deemed “filed” under the Exchange Act.

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ITEM 1A.
RISK FACTORS

This Annual Report onForm
 10-K
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Actual results could differ materially from those projected in the forward-looking statements as a result of, among other factors, the risk factors set forth below.

Our future operating results are difficult to predict and are subject to fluctuations.

Our operating results, including revenues, gross margins, operating expenses, and net income (loss), have fluctuated on a quarterly and annual basis. Our focus on higher volume opportunities with OEMs, ODMs, and their contract manufacturers has caused the impactactions of a relative few such customers to disproportionately influence our operating results. Unanticipated delays in purchase orders from, and shipments to, thesecertain large customers have resulted in lower revenue, contributing tothan expected revenue. Despite our recent operating losses. Weprofitability during 2019, we cannot predict when, or if we will return tomaintain sustained profitability. Our future operating results may be materially affectedinfluenced by a number of factors, many of which are beyond our control, including:

changes in demand for our products and for our customers’
end-products
incorporating our products, as well as our ability to respond efficiently to such changes in demand, including changes in orderdelivery lead times and the volume of product for which orders are receivedaccepted and the product shipped within an individual quarter;

our ability to manage our supply chain, inventory levels, and our own manufacturing capacity or that of third-party partners, particularly in the event of delays or cancellation of significant customer orders;

our ability to effectively coordinate changes in the mix of products we manufacture and sell, while managing our ongoing transition in organizational focus to Advanced Products from traditional brick power components to our new products;Brick Products;

our ability to provide and maintain a high level of sales and engineering support to an increasing number of demanding, high volume customers;

the ability of our third party suppliers, service subcontractors, and manufacturers to supply us with sufficient quantities of high quality products, components, and/or services on a timely basis;

the effectiveness of our ongoing efforts to continuously reduce product costs and manage operating expenses;

our ability to utilize our manufacturing facilities and personnel at efficient levels, maintaining sufficient production capacity and necessary manufacturing yields;

our ability to plan, schedule, execute, and fund capacity expansion, including the anticipated addition in 2020 of approximately 90,000 square feet to our Andover manufacturing facility;
the timing of our new product introductions and our ability to meet customer expectations for timely delivery of fully qualified products;

the timing of new product introductions or other competitive actions (e.g., product price reductions) by our competitors;

the ability to hire, retain, and motivate qualified employees to meet the demands of our customers;

intellectual property disputes;

potential significant litigation-related costs;

adverse economic conditions in the United States and those international markets in which we operate;operate, as well as our ability to respond to rapid developments, such as the imposition of tariffs or trade restrictions;

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adverse budgetary conditions within the U.S. government, particularly the Department of Defense, which continue to influence spending on current and anticipated programs into which we sell or anticipate to sell our products;

costs related to compliance with increasing worldwide governance, quality, environmental, and other regulations; and

•the effects of events outside of our control, including natural disasters, public health emergencies, terrorist activities, political risks, international conflicts, information security breaches, communication interruptions, and otherforce majeure.

the effects of events outside of our control, including natural disasters, public health emergencies, terrorist activities, political risks, international conflicts, information security breaches, communication interruptions, and other
force majeure
.
As a result of these and other factors, we cannot assure you we will not experience significant fluctuations in future operating results on a quarterly or annual basis. In addition, if our operating results do not meet the expectations of investors, the market price of our Common Stock may decline.

Our stock price has been volatile and may fluctuate in the future.

Because of the factors set forth above and below, among others, the trading price of our Common Stock has fluctuated and may continue to fluctuate significantly:

volatility of the financial markets;markets, notably the equity markets in the United States;

uncertainty regarding the prospects of domestic and foreign economies, including the impact of tariffs, trade restrictions, and volatile currency exchange rates;

uncertainty regarding domestic and international political conditions, including tax and tariff policies;

actual or anticipated fluctuations in our operating performance or that of our competitors;

the performance and prospects of our major customers;

announcements by us or our competitors of significant new products, technical innovations, or litigation;

investor perception of our companythe Company and the industry in which we operate;

the absence of earnings estimates and supporting research by investment analysts;

the liquidity of the market for our Common Stock;Stock, reflecting a relatively low trading float and relatively low average trading volumes;

the uncertainty of the declaration and payment of future cash dividends on our Common Stock; and

the concentration of ownership of our Common Stock by Dr. Vinciarelli, our Chairman of the Board, Chief Executive Officer, and President.

We do not actively communicate with investment analysts and, as a consequence, we are not aware of earnings estimates or supporting investment research coverage of Vicor and our Common Stock. While we seek to be transparent in our financial reporting, public statements, and related disclosures, the absence of research coverage may limit investor interest in our Common Stock. Because our operating results have fluctuated on a quarterly and annual basis, investors may have difficulty in assessing our current and future performance.

In the past, we have declared and paid cash dividends on our Common Stock. The payment of dividends is based on the periodic determination by our Board of Directors that we have adequate capital to fund anticipated operating requirements and that excess cash is available for distribution to stockholders via a dividend. We have no formal policy regarding dividends and, as such, investors cannot make assumptions regarding the possibility of future dividend payments nor the amounts and timing thereof.

As of December 31, 2019, we have no plans to declare or pay a cash dividend.

The ownership of our Common Stock is concentrated between Dr. Vinciarelli and a limited number of institutional investors. As of December 31, 2016,2019, Dr. Vinciarelli owned 9,828,272was the beneficial owner of 9,861,605 shares of our Common Stock, as well asplus 311,954 shares which Dr. Vinciarelli has the right to acquire upon exercise of options to purchase Common Stock within 60 days of December 31, 2019. He also holds 11,023,648 shares of our unregistered Class B Common Stock (convertible(which may only be sold or transferred after required conversion, on a
one-for-one
basis, into registered shares of Common Stock), together representing 54.5%with his ownership of Common Stock, represents 52.9% of our total issued and outstanding shares.shares of capital stock. Accordingly, the market float for our
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Common Stock and average daily trading volumes are relatively small, which canmay negatively impact investors’ ability to buy or sell shares of our Common Stock in a timely manner.

Dr. Vinciarelli owns 93.8% of ourthe issued and outstanding shares of our Class B shares,Common Stock, which possess 10 votes per share. Dr. Estia J. Eichten, a member of our Board of Directors, owns the majority of the balance of the Class B shares

Common Stock issued and outstanding. As such, Dr. Vinciarelli, controlling in aggregate 82.7%81.6% of our outstanding voting securities, has effective control of our governance.

Global economic uncertainty could materially and adversely affect our business and consolidated operating results.

During 2019, global economic conditions varied by region. Domestic industrial and defense electronics market segments were steady for the year. However, conditions in China, our largest international market, continued to deteriorate through the year, contributing to the cyclical decline of certain markets and geographies around the world. Conditions in the enterprise computing supply chain, notably those associated with the data center and hyperscaler categories, caused customer uncertainty across Asia and reduced demand for our products. Our exports to China declined through the year, in part, due to the imposition by China of tariffs on certain U.S. goods imported into China in response to the imposition of Section 301 Tariffs on certain imported Chinese goods by the United States. In addition, our near-term forecasts of Chinese demand for our products may be revised if the negative impact of the coronavirus on the Chinese economy is sustained.
Disruption and further deterioration of global economic conditions, including extended trade disputes, the relative strength of the U.S. Dollar, and rising interest rates, may reduce customer
end-demand
for our customers’ products and, in turn, their purchases of our products, thereby reducing our revenues and earnings. In addition, such adverse conditions may, among other things, result in increased price competition for our products, notably in Brick Product categories, increased risk of excess and obsolete inventories, increased risk in the collectability of our accounts receivable from our customers, increased risk in potential reserves for doubtful accounts and write-offs of accounts receivable, and higher operating costs as a percentage of revenues.

We compete with many companies possessing far greater resources.

Some of our competitors have far greater financial, manufacturing, technical, and sales and marketing resources than we have. Wepossess or have access to. Our Brick Products compete with those products offered by domestic and foreign manufacturers of integrated power supplies and related power conversion components. With the growth of our VI Chip and Picor productAdvanced Product lines, we increasingly are competingcompete with global manufacturersIDMs and fabless developers of semiconductor-based power management products withmodules and power management ICs. These competitors have far larger organizations and broader semiconductor-based product lines. Competition is generally based on design and quality of products, product performance, features and functionality,design flexibility (i.e., ease of use), product price, and product pricing, availability, and capacity,but with the relative importance of these factors varying among products, markets, and customers.
Existing or new competitors may develop products or technologies that more effectively address the demands of our customers and markets with enhanced performance, features and functionality, or lower cost. Larger competitors frequently seek to maintain market share and protect customer relationships through heavily-discounted pricing, which we may not be able to match. If we fail to develop and commercialize leading-edge technologies and products that are cost effective and maintain high standards of quality, and introduce them to the market on a timely basis, our competitive position and results of operations could be materially adversely affected.

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Our future success depends upon our ability to develop and market differentiated, leading-edge power conversion products for larger customers, potentially contributing to lengthy product development and sales cycles that may result in significant expenditures before revenues are generated. Our future operating results are dependent on the growth in such customers’ businesses and on our ability to profitably develop and deliver products meeting customer requirements.

The power system industry and the industries in which many of our customers operate are characterized by intense competition, rapid technological change, quickened product obsolescence, and price erosion for mature products, each of which could have an adverse effect on our results of operations. We are following a strategy based on the development of differentiated productsAdvanced Products addressing what we believe to be the long-term limitations of traditional power architectures, while at the same time sustaining the performancesales and profitability of the BBU, which manufactures and markets our lines of legacy brick products.well-established Brick Products. The development of new, innovative products is often a complex, time-consuming, and costly process involving significant investment in research and development, with no assurance of return on investment. Although we have introduced many productsAdvanced Products over the past threerecent years, there can be no assurance we will be able to continue to develop and introduce new and improved products and power system concepts in a timely or efficient manner. Similarly, there can be no assurance recently introduced or to be developed products will achieve customer acceptance.

Our future success depends substantially upon customer acceptance of our innovative products.Advanced Products, notably our
Power-on-Package
concept in AI and other high-performance applications. As we have been in the early stages of market penetration for these products,and other Advanced Products, we have experienced lengthy periods during which we have focused our product development efforts on the specific requirements of a limited number of large customers, followed by further periods of delay before meaningful purchase orders are received. These lengthy development and sales cycle times increase the possibility a customer may decide to cancel or change product plans, which could reduce or eliminate our sales to that customer. As a result, we may incur significant

product development expenses, as well as significant sales and marketing expenses, before we generate the related revenues for these products. Furthermore, we may never generate the anticipated revenues from a product after incurring such expenses if our customer cancels or changes its product plans.

We are shiftingcontinue to shift our
go-to-market
strategy to focus on larger opportunities with global OEMs, ODMs, and their contract manufacturers. Our growth is therefore dependent on: the pace at which these OEMs and ODMs develop their own new products,products; the acceptance of our productsAdvanced Products by these OEMs and ODMs; and the success of the OEMcustomers’ products incorporating our new products.Advanced Products. If we fail to anticipate changes in our customers’ businesses and their changing product needs or do not successfully identify and enter new markets, our results of operations and financial position could be negatively impacted.
In 2019, we expanded our dedicated sales effort to penetrate the automotive market with our Advanced Products, notably in the rapidly expanding 48V opportunity within the electric vehicle and mild hybrid vehicle market segments. The automotive market is dominated by relatively few global OEMs and “tiers” of well-established suppliers. Penetrating this market will be challenging and we may not be successful in doing so. Additionally, our early success with vendors of AI computing solutions may not translate into long-term success with customers participating in the long-term development of autonomous driving solutions.
We cannot assure youoffer any assurance the markets we currently serve will grow in the future, our existing and new productsAdvanced Products or Brick Products will meet therespective market requirements, of these markets, or we can maintain adequate gross margins or operating profits in these markets.

Our operating results recently have been influenced by a limited number of customers, and our future results may be similarly influenced.

Since it was established in 2007,the introduction of our VI Chip subsidiaryAdvanced Products, the Company has derived a substantial portion of its revenue from Advanced Products in any given year from either one customer or a limited number of customers,
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whether through sales directly to the customercustomer(s) or indirectly to the customer’scustomers’ contract manufacturers. Similarly, our Picor subsidiary has derived a substantial portion of its third-party revenue from a limited number of customers, including those customers served by VI Chip. This concentration of revenue is a reflection of the relatively early stage of adoption of the Advanced Products and the associated technologies and power system architectures, and products offered by these subsidiaries, and theirour targeting of market leading innovators as initial customers. A consequence of customer concentration was the significant decline in bookings and shipments from an important hyperscaler customer during the first two quarters of 2019, while that customer transferred production capacity from China to Taiwan in response to the tariffs charged on imported materials, including our products. Once this transfer of production was completed, booking and shipment activity resumed during the third quarter of 2019.
Our current sales and marketing efforts in part, are focused primarily on accelerating the adoption of VI Chip and Picor productsAdvanced Products by a diversified customer base, across a number of identified market segments. However, we cannot assure you our new strategy will be successful and such diversification of customers will be achieved.

Further stagnation of spending by the U.S. Department of Defense or a pronounced shift in the nature of such spending may negatively influence our operating results.

Customers in the defense electronics segment historically have contributed a meaningful portion of our revenue, primarily in the BBU, which sells military-grade brick modules and, through our Vicor Custom Power businesses, customer-specific systems incorporating our brick modules, primarily for C4I (Command,Control,Communications,Computing, and Intelligence) applications. However, shifts in Department of Defense spending priorities and ongoing budget constraints have contributed to a decline in such revenue as a percentage of our consolidated revenue. Additional risks to our defense electronics volume has been associated with the organizational structure, capacity, and ownership of our Vicor Custom Power businesses. In March 2016, we acquired 100% ownership of certain operating assets and cash of our consolidated subsidiary, Converpower Corporation, in which we held a 49% ownership interest, transferring operations to Granite Power Technologies, Inc., a wholly-owned subsidiary we established to assume the operations of a previously unincorporated Vicor Custom Power location (i.e., a division). Converpower ceased operations in December 2015. In December 2015, we completed the statutory merger of one Vicor Custom Power subsidiary, Mission Power Solutions, Inc. with and into another subsidiary, Northwest Power, Inc., after which we closed the Mission Power Solutions location. Also in December 2015, we sold our 49% ownership interest in Aegis Power Systems, Inc. to Aegis Power Systems, thereby ending our formal relationship with the subsidiary. We undertook these transactions in order to consolidate our custom organization, reduce manufacturing capacity, and reduce our cost structure. If the performance of the remaining three Vicor Custom Power subsidiaries does not improve as expected, we may choose to further consolidate our locations or otherwise rationalize our associated cost structure, which may impact our ability to compete cost effectively in this market segment.

We may not be able to procure necessary key components for our products,or raw materials, or we may purchase excess raw material inventory or unusable inventory, possibly impactingwhich increases the risk of reserve charges to reduce the value of any inventory deemed excess or obsolete, thereby reducing our operating results.

profitability.

The power systems industry, and the electronics industry as a whole, can be subject to pronounced, lengthy business cycles and otherwise subject to sudden and sharp changes in demand. Our success, in part, is dependent on our

ability to forecast and procure inventories of rawcomponents and materials and components to match production schedules and customer delivery requirements. Many of our products require raw materials supplied by a limited number of vendors and, in some instances, a single vendor. During certain periods, key components or materials required to build our products may become unavailable in the timeframe required for us to meet our customers’ needs. Our inability to secure sufficient raw materials and components to buildmanufacture products for our customers has reduced, in the past, negatively impacted our salesrevenue and operating resultsprofitability and could do so again.

We may choose, and have chosen, to mitigate this riskour inventory risks by increasing the levels of inventory for certain materialscomponents and components.materials. Such increased inventory levels may increase the potential risk for excess or obsolete inventories, should our forecasts fail to materialize or if there are negative factors impacting our customers’ end markets, leading to order cancellation. If we identify excess inventory or determine certain inventory is obsolete (i.e., unusable), we maylikely will record additional inventory reserves (i.e., expenses representing the
write-off
of the excess or obsolete inventory), which could have an adverse effect on our gross margins and on our operating results.

We rely on third-party vendors and subcontractors for supply of components, assemblies, and services and, therefore, cannot control the availability or quality of such components, assemblies, and services.

We depend on third-party vendors and subcontractors to supply components, assemblies, and services used in our products, some of which are supplied by a single vendor, and have experienced shortages of certain semiconductor components, incurred additional and unexpected costs to address the shortages, and experienced delays in production and shipping. In 2019, we increased our dependence on a highly-specialized electroplating contractor for meeting our near-term volume expectations for our
SM-ChiP
line. While commodity electroplating services are available from numerous alternate providers, we have developed certain proprietary processes with this contractor. As such, any interruption or delay of production by the contractor could have an adverse effect on our delivery of
SM-ChiP
modules to our customers.
If suppliers or subcontractors cannot provide their products or services on time or to our specifications, we may not be able to meet the demand for our products and our delivery times may be negatively affected. In addition, we cannot directly control the quality of the products and services provided by third parties. In order to growexpand revenue, we likely will need to identify and qualify new suppliers and subcontractors to supplant or replace existing suppliers and subcontractors, which ismay be a time-consuming and expensive process. In addition, any qualification of new suppliers may require customers of our products utilizing products and
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services from new suppliers and service providers to undergo a
re-qualification
process. Such circumstances likely would lead to disruptions in our production, increased productionmanufacturing costs, delays in shipping to our customers, and/or increases in prices paid to third parties for products and services.

In addition, visibility into our Chinese supply chain has been recently clouded by the uncertain impact of the coronavirus on the personnel and operations of our Chinese vendors. We are in frequent contact with our critical vendors in China, and are monitoring the situation closely.

We are exposed to foreign economic, political, and other external risks.

For the years ended December 31, 2016, 2015,2019, 2018, and 2014, our2017, revenues from sales outside the United States were 59.4%53.7%, 59.6%62.0%, and 60.5%63.2%, respectively, of the Company’sour total revenues. Net revenues from customers in China, our largest international market, accounted for approximately 32.1%22.1% of total net revenues in 2016,2019, approximately 34.2%37.4% in 2015,2018, and approximately 32.3%35.8% in 2014,2017, respectively. We expect international sales will continue to be a significant component of total sales, since many of the global manufacturersOEMs and ODMs we target as customers are domiciled offshore, and such customers increasingly utilize offshore contract manufacturers, and rely upon those contract manufacturers to place orders directly with us. We also expect international revenue from our distributors to increase.

While our currency risks are limited, as our sales are denominated in U.S. Dollars worldwide, with the exception of
Yen-based
sales by VJCL and Vicor B.V.,in Japan, our international activities expose us to special risks including, but not limited to, regulatory requirements, economic and political instability, transportation delays, foreign currency controls, and market fluctuations, trade barriersrestrictions and tariffs, and unfavorable shifts in foreign exchange rates. In addition, ourOur international customers’ business may be negatively affected by the imposition of tariffs, as was the case in 2018 and 2019 with the imposition of Section 301 Tariffs on certain Chinese goods imported into the United States and the corresponding imposition of import tariffs by China on certain U.S. goods imported into China, and by economic sanctions, as were imposed in 2014 by the U.S. DepartmentUnited States on certain Chinese enterprises and individuals in 2019 and on certain Russian enterprises and individuals in 2014.
In addition, as noted elsewhere in this Annual Report on Form 10-K, recent uncertainty associated with the extent of the Treasury against certain Russian entitiesnegative impact of the coronavirus outbreak in China may cause us to which we had sold products inrevise our near-term forecast of Chinese demand and to closely assess the past. ability of our Chinese vendors to meet our near-term supply requirements.
Sudden or unexpected changes in the foregoing could have a material adverse effect on our operating results.

We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively.

We operate in an industry in which the ability to compete depends on the development or acquisition of proprietary technologies that must be protected to preserve the exclusive use of such technologies. We devote

substantial resources to establish and protect our patents and proprietary rights, and we rely on patent and intellectual property law to protect such rights. This protection, however, may not prevent competitors from independently developing products similar or superior to our products. We may be unable to protect or enforce current patents, may rely on unpatented technology that competitors could restrict or replicate, or may be unable to acquire patents in the future, all of which may have a material adverse effect on our competitive position. In addition, the intellectual property laws of foreign countries may not protect our rights to the same extent as those of the United States. We have been and may need to continue to defend or challenge patents. We have incurred and expect to incur significant financial costs in the defense of our patented technologies and have devoted and expect to devote significant resources to these efforts which, if unsuccessful, may have a material adverse effect on our operating results and financial position.

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We face intellectual property infringement claims that could be disruptive to operations and costly to resolve and may encounter similar infringement claims in the future.

The power supply industry is characterized by vigorous protection and pursuit of intellectual property rights. We have in the past and may in the future receive communications from third parties asserting that our products or manufacturing processes infringe on a third party’s patent or other intellectual property rights. Such assertions, if publicly disclosed, have in the past and may in the future inhibit the willingness of potential customers to purchase certain of our products. In the event a third party makes a valid intellectual property claim against us and a license is not available to us on commercially reasonable terms, or at all, we could be forced to either redesign or stop production of products incorporating that technology, and our operating results could be materially and adversely affected. In addition, litigation may be necessary to defend us against claims of infringement, and this litigation could be costly, extend over a lengthy period of time, and divert the attention of key personnel. An adverse outcome in these types of matters could have a material adverse impact on our operating results and financial condition.

Please see Part I, Item 3 — “Legal Proceedings” for information regarding current litigation related to our intellectual property.

Any expenses or liability resulting from the outcome of litigation could adversely affectinfluence our operating results and financial condition.

From time to time, we may be subject to claims or litigation, including intellectual property litigation as described elsewhere in this Annual Report on Form
10-K.
Any such claims or litigation may be time-consuming and costly, divert management resources, require us to change our products, or have other adverse effects on our business. Any of the foregoing could have a material adverse effect on our operating results and could require us to pay significant monetary damages.

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is considered probable an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial statements. As of December 31, 2016,2019, our evaluation led us to conclude no accrual of a loss contingency was warranted.

We may face legal claims and litigation from product warranty or other claims that could be costly to resolve.

We have in the past and may in the future encounter legal action from customers, vendors, or others concerning product warranty or other claims. We generally offer a
two-year
warranty from the date title passes

from us for all of our standard products. Effective January 1, 2017, we extended the warranty period to three years for a range of H Grade, M Grade and MI Family

DC-DC converters, input filters, output filters, and front ends
legacy products sold after that date. In a limited number of circumstances, we have entered into supply contracts with certain high-volume customers calling for extended warranty terms. With our distribution partners, we also enter into contracts providing for our product warranties to transfer to the end customer upon final sale of our product(s) by the stocking distributor.

We invest significant resources in the testing of our products; however, if any of our products contain defects, we may be required to incur additional development and remediation costs, pursuant to our warranty policies. These issues may divert our technical and other resources from other product development efforts and could result in claims against us by our customers or others, including liability for costs associated with product returns, which may adversely impactinfluence our operating results. If any of our products contain defects, or have
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reliability, quality, or compatibility problems, ourthe Company’s reputation may be damaged, which could make it more difficult for us to sell our products to existing and prospective customers and could adversely affect our operating results. We are currently party to a limited number of supply agreements with certain customers contractually committing us to warranty and indemnification requirements exceeding those to which we have been exposed in the past. While we maintain insurance coverage for such exposure, we could incur significant financial cost beyond the limits of such coverage, as well as operational disruption and damage to our competitive position and image if faced with a significant product warranty or other claim.

Our ability to successfully implement our business strategy may be limited if we do not retain our key personnel and attract and retain skilled and experienced personnel.

Our success depends on our ability to retain the services of our executive officers. The loss of one or more members of senior management could materially adversely affect our business and financial results. In particular, we are dependent on the services of Dr. Vinciarelli, our founder, Chairman of the Board, Chief Executive Officer, and President. The loss of the services of Dr. Vinciarelli could have a material adverse effect on our development of new products and on our results of operations. In addition, we depend on highly skilled engineers and other personnel with technical skills that are in high demand and are difficult to replace. Our continued operations and growth depend on our ability to attract and retain skilled and experienced personnel in a very competitive employment market. If we are unable to attract and retain these employees, our ability to successfully implement our business strategy may be harmed.

Extended interruption of production at our manufacturing facility in Andover, Massachusetts, could materially reduce our revenue and increase costs.

All modular

The majority of our power components and power systems, whether for direct sale to customers or for sale to our subsidiaries for incorporation into their respective products, as well as all configurable products, are manufactured at our Andover Massachusetts, production facility. Substantial damage to this facility due to fire, natural disaster, power loss, or other events, including events associated with our planned expansion of the facility in 2020, could interrupt manufacturing. While we have never experienced any meaningful interruption of manufacturing in our history, any prolonged inability to utilize all or a significant portion of our Andover facility could have a material adverse effect on our results of operations.

Given our intent to begin construction during the first half of 2020 of an approximately 90,000 square foot addition to our Andover facility, we have phased the construction schedule and otherwise developed procedures intended to minimize the disruption of our operations over the period of construction, which likely will extend into early 2021. Any prolonged disruption or delay in current production caused by construction could have a material adverse effect on our results of operations.
Disruption of our information technology infrastructure could adversely affect our business.

We depend heavily on our computing and communications infrastructure to achieve our business objectives, particularly for email communications,our financial and operational record keeping, and our computer-integrated manufacturing processes that controlcontrolling all aspects of our operations in our manufacturing facility in Andover, Massachusetts.Massachusetts, our public website, and our email communications. We also rely on trusted third parties to provide certain infrastructure support services to us. If we or a third party service provider encounter a problem occurs impairingthat impairs this infrastructure, the resulting disruption could impede the accuracy and timeliness of our financial reporting processes, and our ability to record or process customer orders, manufacture, and ship in a timely manner, or otherwise carry on business in the normal course. Since 2012,Our image and reputation also could be negatively affected by such circumstances. Additionally, we have experienced no interruptioncould incur material liabilities associated with the harm such impairment and disruption of our computinginfrastructure may have on third parties including those associated with the unintentional release of confidential information and communications capabilities.or sensitive data. While we carry business interruption insurance that would mitigateto offset financial losses from such an

interruption, and cyber-risk insurance to an extent,address potential liabilities from such circumstances, such insurance may be insufficient to compensate us for the potentially significant amountscosts or liabilities incurred. Any such events, if prolonged, could have a material and adverse effect on our operating results and financial condition.

Our systems are designed to protect us from network security breachesincidents and associated disruptions. However, as evidenced by the ransomware incident described below, we remain vulnerable to computer viruses and related software-based challenges to the integrity of our systems, unauthorized or illegalbreak-ins, or malicious network hacking, equipment or software sabotage, acts of vandalism to our systems by third parties, and, in the extreme, forms of cyber-terrorism. Our security measures or those of our third-partythird party service providersprovider detected, but did not prevent, the network security incident and the associated disruptions described below and may not detect or prevent such incidents and disruptions in the future. 
On December 24, 2019, elements of our network were compromised by a form of malware referred to as “ransomware.” The malware was introduced unintentionally into our network by a trusted service provider that

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had access to our network for remote management of application patching and related system updates. The infection was spread in an automated manner through the download and distribution of malicious executables to systems in our network via an application used by the service provider. Only systems under the service provider’s support were affected. The malware encrypted Windows-based files stored on PCs and on Windows-based servers across our global network. The malware did not encrypt Windows operating systems or Unix or Linux based files. On that same date, our network monitoring processes detected unusual network traffic volumes and patterns and automatically alerted management of the circumstances. Following established business continuity and disaster recovery policies and procedures, a cross-functional team of senior managers immediately began diagnosis of the circumstances and quickly determined the nature of the ransomware and the extent of the incident. In close collaboration with the service provider, a containment and recovery plan was developed and executed. Law enforcement authorities and our insurance providers were notified of the incident, and we immediately engaged outside counsel and forensic specialists with security breachesexpertise. The forensic specialists provided information to us to support our conclusion there was no evidence to indicate sensitive data was accessed, viewed, or associated disruptions. Also,exfiltrated from our environment as a result of this incident. Based on the forensic findings, we determined, in consultation with counsel the Company was not required to provide notification of this incident under applicable data breach notification laws. On December 25, 2019, the service provider obtained and distributed the necessary decryption key, and we began the process of recovering encrypted files and restoring system and operational functionality. Business functions were prioritized for restoration and, by the evening of December 26, 2019, we believe over 90% of encrypted resources had been recovered. We also believe we had restored all operations by the afternoon of December 27, 2019.
Subsequent analysis by management and the forensic specialists we retained allowed us to conclude the incident had no material impact on our operations, financial condition and performance, or the integrity of our financial reporting systems. Management is developing a plan to enhance network and file security, reflecting the lessons learned from the incident and the restoration process. Our expectation is these enhancements to system monitoring, network and file access, and emergency procedures will be deployed during the first half of 2020, however there can be no assurance that these enhancements will be successful in detecting or preventing such an incident in the future.
As of December 31, 2019, we were compliant with the comprehensive requirements for the protection of controlled unclassified information (“CUI”) as set forth in Special Publication 800-171 of the National Institute of Standards and Technology (“NIST”). The Company provides confidential information to third-partythird party business partners and/or receives confidential information from third party business partners in certain circumstances, when doing so is necessary to conduct business.business, particularly with departments of agencies of the U.S. Government. While we employ confidentiality agreements to protect suchother sensitive information (i.e., information not considered CUI), our own security measures or those of our third-partythird party service providers may not be sufficient to protect such information in the event the computing infrastructure of these third-partythird party business partners is compromised. Security breaches ofincidents involving our computing and communications infrastructure or that of a third-partythird party business partner or service provider could result in the misappropriation or unauthorized release of confidential information belonging to us or to our employees, partners, customers or suppliers, which could result in an interruption to our operations, result in a violation of privacy or other laws, expose us to a risk of litigation, or damage our reputation, any of which could have a material and adverse effect on our operating results and financial condition.

Our network segmented NIST 800-171 environment was not impacted by the December 2019 ransomware incident, but there can be no assurance that it will not be impacted by similar incidents in the future, which could have a material and adverse effect on our operating results and financial condition for the reasons described above.

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If we fail to maintain an effective system of internal controls over financial reporting or discover material weaknesses in our internal controls over financial reporting, we may not be able to report our financial results accurately or timely or detect fraud, which could have a material adverse effect on our business.

An effective internal control environment is necessary for us to produce reliable financial reports and is an important part of our effort to prevent financial fraud. Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”) requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting.

We have an ongoing program to perform the system and process evaluation and testing necessary to comply with the requirements of the Sarbanes-Oxley ActSOX and to continuously improve and, when necessary, remediate internal controls over financial reporting.

While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure in human judgment. In addition, control procedures are designed to reduce rather than eliminate business risks. In the event our Chief Executive Officer or Chief Financial Officer, our certifying officers under SOX, or our independent registered public accounting firm determines our internal controls over financial reporting are not effective as defined under Section 404, we may be unable to produce reliable financial reports or prevent fraud, which could materially adversely affectharm our business. In addition, we may be subject to sanctions or investigation by government authorities or self-regulatory organizations, such as the SEC, the Financial Industry Regulatory Authority, or The NASDAQ Stock Market LLC. Any such actions could affect investor perceptions of the Company and result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our Common Stock to decline or limit our access to capital.

New regulations

Regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals (including gold, tantalum, tin, and tungsten, and their related ores), originating from the Democratic Republic of Congo (“DRC”) and adjoining countries. As a result, in August 2012 the SEC released final rules for annual disclosure and reporting for those companies who use conflict minerals mined from the DRC and adjoining countries in

their products. We began to implement processes within our supply chain to comply with these rules beginning in 2012 and filed our initial Form SD in May 2014. There have been and will continue to be costs associated with complying with these disclosure requirements, including due diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes, or sources of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply, and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict free” conflict minerals, we cannot be sure thatcertain we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.

Our ability to successfully implement our business strategy may be limited if we do not retain our key personnel and attract and retain skilled and experienced personnel.
Our success depends on our ability to retain the services of our executive officers. The loss of one or more members of senior management could materially adversely influence our business and financial results. In particular, we are dependent on the services of Dr. Vinciarelli, our founder, Chairman of the Board, Chief Executive Officer, and President. The loss of the services of Dr. Vinciarelli could have a material adverse effect on our development of new products and on our results of operations. In addition, our research and development
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and marketing and sales activities depend on highly skilled engineers and other personnel with technical skills, who are in high demand and are difficult to replace. Our continued operations and growth depend on our ability to attract and retain skilled and experienced personnel in a very competitive employment market. If we are unable to attract and retain such employees, our ability to successfully implement our business strategy may be harmed.
ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

ITEM 2.
PROPERTIES

Our corporate headquarters building in Andover, Massachusetts, which we own, provides approximately 90,000 square feet of office space for our sales, marketing, engineering, and administrative personnel and is used by and supports all business segments.personnel. We also own a building of approximately 230,000 square feet in Andover, Massachusetts, which houses all Massachusetts manufacturing activities.

In December 2014,

Current capital investments are focused on the expansion of manufacturing capacity for the production of Advanced Products at our Andover facility. Based on our long-term forecast of production levels, we anticipate substantial additional capacity will be required to meet expected requirements. We believe the most appropriate manner of meeting our long-term capacity requirements will be to initially expand the production area of our Andover facility by approximately 90,000 square feet, through the addition of a two story wing. We have completed the consolidationdesign and permitting phase for this project, have entered into an agreement to acquire approximately three acres adjacent to our facility, and expect to begin construction of this new addition to our existing plant in the spring of 2020 and take occupancy later in the year. We also are proceeding with the evaluation of alternative projects for the addition of another, larger manufacturing Westcor’s products, fromfacility, should we anticipate the need based on our forecasts for capacity beyond 2021.
We own and lease a single-story industrial building of approximately 31,000 square feet in Sunnyvale, California, to our manufacturing facility in Andover, Massachusetts. The Sunnyvale building was purchased in 1994 and is carried on our consolidated balance sheet at a net book value, as of December 31, 2016, of approximately $631,000. In February 2016, we executed a long-term lease with a corporate tenant, who occupied the building beginning in June 2016.

All other domestic and foreign facilities are leased from third-party lessors on arms’ length terms. We believe our owned and leased facilities are adequate for our present needs and expect them to remain adequate for the foreseeable future.

ITEM 3.
LEGAL PROCEEDINGS

On

We are the defendant in a patent infringement lawsuit originally filed on January 28, 2011 by SynQor, Inc. (“SynQor”) filed a complaint for patent infringement against Ericsson, Inc. (“Ericsson”), Cisco Systems, Inc. (“Cisco”) and Vicor in the U.S. District Court for the Eastern District of Texas (the “Texas Action”). Ericsson and Cisco subsequently settled with SynQor and are no longer parties to the Texas Action. With respect to Vicor, SynQor’sThe complaint, in the Texas Action allegedas amended, alleges that our products, including but not limited to, unregulated bus converters used in intermediate bus architecture power supply systems, infringe SynQor’s U.S. patent numbers 7,072,190, 7,272,021, 7,564,702, and 7,564,7028,023,290 (“the ‘190 patent”, “the ‘021 patent” and, “the ‘702 patent”, and “the ‘290 patent”, respectively). SynQor’s complaintcompliant sought an injunction against further infringement and an award of unspecified compensatory and enhanced damages, interest, costs and attorney fees. On September 20, 2011, SynQor filed an amended complaint in the Texas ActionWe denied that further alleged that our products, including, but not limited to, unregulated bus converters used in intermediate bus architecture power supply systems, infringe SynQor’s U.S. patent number 8,023,290 (“the ‘290 patent”). We responded to SynQor’s amended complaint in the Texas Action by denying our products infringe any of the SynQor patents, and assertinghave asserted that the SynQor patents are invalid. We further alleged that the SynQor ‘290 patent is unenforceable due to inequitable conduct by SynQor invalid and/or its agents during the examination of the ‘290 patent at the United States Patent and Trademark Office (“USPTO”).unenforceable. We have also asserted counterclaims seeking damages againstfrom SynQor for deceptive trade practices and tortious interference with prospective economic advantage arising from SynQor’s attempted enforcement of its patents against us.

We have initiated administrative review On May 23, 2016, after extensive discovery, the Texas Action was stayed by the court pending completion of certain inter partes reexamination (“IPRx”) proceedings at the United States Patent and Trademark Office (“USPTO”) (including any appeals from such proceedings to the Federal Circuit (as defined below)) concerning the SynQor patents, which are described below. That stay remains in force.

In 2011, in response to the filing of the Texas Action, our IPRx proceedings at the USPTO challengingchallenged the validity of certain claims of the SynQor patents asserted in the Texas Action, including all claims that were asserted against us by SynQor. The current status of these proceedings is as
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follows. Regarding the ‘190 patent the Patent Trial and Appeal Board (“PTAB”) of the USPTO issued a decision upholding the validity of the ‘190 patent claims. That decision was appealed by us toIPRx, the United States Court of Appeals for the Federal Circuit (“the Federal(the “Federal Circuit”), which issued a decision on March 13, 2015, reversing the PTAB, determining that certain claims were invalid and remanding the matter to the PTABPatent Trial and Appeal Board (“PTAB”) of the USPTO for further proceedings. On May 2, 2016,February 20, 2019, the PTAB issued a decision determiningfinding that all but one of the remaining claims of the ‘190 patent were invalid and remanding the remaining claim to a patent examiner for further examination, where it remains under review. In addition, on that date, the PTAB issued decisions finding all challenged claims of SynQor’s ‘021 patent invalidwere unpatentable. SynQor has appealed that decision to the Federal Circuit, and upholding the validity of all challenged claims of SynQor’sappeal remains pending. On August 30, 2017, the Federal Circuit issued rulings with regard to the IPRx proceedings for the ’021, ‘702 and ‘290 patents. We haveWith respect to the ‘021 patent, the Federal Circuit affirmed the PTAB’s determination that all of the challenged claims of the ‘021 patent were invalid. The Federal Circuit remanded the case to the PTAB for further consideration of the patentability of certain claims that had been added by amendment during the reexamination. On February 20, 2019, the PTAB issued a decision affirming the examiner’s rejections of all challenged claims. SynQor has filed an appeal withof that decision in the Federal Circuit, fromand that appeal remains pending. With respect to the ‘702 patent, the Federal Circuit affirmed the PTAB’s decision upholding the validitydetermination that all of the challenged claims of the ‘702 andpatent were patentable. With respect to the ‘290 patents. SynQor has filed an appeal withpatent, the Federal Circuit fromvacated the PTAB’s decision thatupholding the challenged claimspatentability of the ‘021‘290 patent are invalid. Decisions in these appeals are expected later in 2017.claims, and remanded the case to the PTAB for further consideration. On May 23, 2016,February 20, 2019, the Texas CourtPTAB issued an order stayinga decision reversing its prior affirmance of the Texas Action untilexaminer’s
non-adoption
of rejections with respect to the completion‘290 patent, and entering rejections of all of the administrative review proceedings concerningclaims of the ‘290 patent. On May 20, 2019, as permitted by USPTO rules, SynQor requested the USPTO to reopen prosecution of this proceeding to address the new rejections made by the PTAB. While prosecution was reopened, the examiner has yet to issue a further substantive ruling.
On October 31, 2017, we filed a request with the USPTO for ex parte reexamination (“EPRx”) of the asserted claims of the ‘702 patent, based on different prior art references than had been at issue in the previous IPRx of the ‘702 patent. On September 12, 2018, a patent examiner found that all of the asserted claims were invalid. SynQor has appealed that ruling to the PTAB, where the appeal remains pending. On August 6, 2018, we filed a request with the USPTO for EPRx of the asserted claims of the ‘190 patent, based on different prior art references than had been at issue in the previous IPRx of the ‘190 patent. On August 9, 2019, the USPTO issued a final rejection of all of the asserted claims of the ‘190 patent. SynQor has appealed that ruling to the PTAB, where the appeal remains pending.
On January 23, 2018, the
20-year
terms of the ‘190 patent, the ‘021 patent, the ‘702 patent and the ‘290 patent expired. As a consequence of these expirations, we cannot be liable under any of the SynQor patents includingfor allegedly infringing activities occurring after the patents’ respective expiration dates. In addition, any appeals from suchamended claims that may issue as a result of any of the still-pending reexamination proceedings towill have no effective term and cannot be the Federal Circuit.

basis for any liability by us.

We continue to believe none of our products, including our unregulated bus converters, infringe any valid claim of the asserted SynQor patents, either alone or when used in an intermediate bus architecture implementation, including such use by Cisco.implementation. We believe SynQor’s claims lack merit and, therefore, we continue to vigorously defend ourselvesourself against SynQor’s patent infringement allegations. We do not believe a loss is probable for this matter. If a loss were to be incurred, however, we cannot estimate the amount of possible loss or range of possible loss at this time.

In addition to the SynQor matter, we are involved in certain other litigation and claims incidental to the conduct of our business. While the outcome of lawsuits and claims against us cannot be predicted with certainty, we domanagement does not expect any current litigation or claims will have a material adverse impact on our financial position or results of operations.

ITEM 4.
MINE SAFETY DISCLOSURES

Not Applicable.

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PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is listed on The NASDAQ Stock Market LLC, under the trading symbol “VICR.” Shares of our Class B Common Stock are not registered with the Securities and Exchange Commission, are not listed on any exchange nor traded on any market, and are subject to transfer restrictions under our Restated Certificate of Incorporation, as amended.

The following table sets forth the quarterly high and low sales prices for the Common Stock as reported by The NASDAQ Stock Market for the periods indicated:

2016

  High   Low 

First Quarter

  $10.60   $7.19 

Second Quarter

   11.06    8.94 

Third Quarter

   12.16    9.74 

Fourth Quarter

   16.05    11.50 

2015

  High   Low 

First Quarter

  $15.79   $10.77 

Second Quarter

   17.21    11.73 

Third Quarter

   11.89    8.93 

Fourth Quarter

   10.66    8.96 

As of February 28, 2017,19, 2020, there were 153146 holders of record of our Common Stock and 13 holders of record of our Class B Common Stock. These numbers do not reflect persons or entities that hold their shares in nominee or “street name” through various brokerage firms.

Dividend Policy

We do not have a policy mandating the declaration of cash dividends at any particular time or on a regular basis. We did not pay cash dividends on our Common Stock for the years ended December 31, 2016 or 2015.

Dividends are declared periodically, only at the discretion of our Board of Directors, and any such declaration depends on actual cash from operations, our financial condition and capital requirements, the recommendation of our management, and any other factors the Board of Directors may consider relevant at the time.

From time to time, excess cash held at the subsidiary level is transferred to the Company via cash dividends declared by the subsidiary. Because we have owned less than 100% of the common stock of certain subsidiaries, such subsidiary dividends can result in payments to outside shareholders of those subsidiaries. During the years ended December 31, 2016 and 2015, one of our subsidiaries paid a total of $750,000 and $250,000 in cash dividends, respectively, all of which was paid to us. Dividends paid to outside shareholders of our subsidiaries are accounted for as a reduction in noncontrolling interest.

Issuer Purchases of Equity Securities

Period

Total
Number of
Shares
Purchased		Average Price Paid
per Share		Total Number of
Shares
Purchased as Part
of Publicly
Announced Plans
or Programs		Maximum
Number (of
Approximate
Dollar Value) of
Shares
that May Yet Be
Purchased Under
the Plans or
Programs

October 1 — 31, 2016

   
Period
Total
Number
of Shares
Purchased
Average Price Paid
per Share
Total Number of
Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
Maximum
Number (or
Approximate
Dollar Value) of
Shares
that May Yet Be
Purchased Under
the Plans or
Programs
October 1 — 31, 2019
        —        
          $
—
        —        
  $
8,541,000
November 1 — 30, 2019
        —        
        $
—        
        —        
  $
8,541,000
December 1 — 31, 2019
        —        
        $
—        
        —        
  $
8,541,000
     
Total
—        
          $8,541,000

November 1

—        30, 2016

   
—        
    $—
8,541,000
     —          $8,541,000

December 1 — 31, 2016

        —                $—            —          $8,541,000

Total

        —                $—            —           $8,541,000

 

In November 2000, our Board of Directors authorized the repurchase of up to $30,000,000 of our Common Stock (the “November 2000 Plan”). The November 2000 Plan authorizes us to make such repurchases from time to time in the open market or through privately negotiated transactions. The timing and amounts of Common Stock repurchases are at the discretion of management based on its view of economic and financial market conditions.

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Stockholder Return Performance Graph

The graph set forth below presents the cumulative, five-year stockholder return for each of the Company’s Common Stock, the Standard & Poor’s 500 Index (“S&P 500 Index”), a value-weighted index made up of 500 of the largest, by market capitalization, listed companies, and the Standard & Poor’s SmallCap 600 Index (“S&P SmallCap 600 Index”), a value-weighted index of 600 listed companies with market capitalizations between $200,000,000 and $1,000,000,000.

The graph assumes an investment of $100 on December 31, 2011,2014, in each of our Common Stock, the S&P 500 Index, and the S&P SmallCap 600 Index, and assumes reinvestment of all dividends. The historical information set forth below is not necessarily indicative of future performance.

Comparison of Five Year Cumulative Return

Among Vicor Corporation, S&P 500 Index

and S&P SmallCap 600 Index

   2011 2012  2013  2014  2015  2016 

Vicor Corporation

 $100.00 $68.09  $168.59  $152.01  $114.57  $189.70 

S&P 500 Index

 $100.00 $116.00  $153.57  $174.60  $177.01  $198.18 

S&P SmallCap 600 Index

 $100.00 $116.33  $164.38  $173.84  $170.41  $215.67 

                         
 
2014
  
2015
  
2016
  
2017
  
2018
  
2019
 
Vicor Corporation
  
$100.00
  $
75.37
  $
124.79
  $
172.73
  $
312.31
  $
386.12
 
S&P 500 Index
  
$100.00
  $
101.38
  $
113.51
  $
138.29
  $
132.23
  $
173.86
 
S&P SmallCap 600 Index
  
$100.00
  $
98.03
  $
124.06
  $
140.48
  $
128.56
  $
157.85
 
Our equity plan information required by this item is incorporated by reference to the information in Part III, Item 12 of this Annual Report on Form
10-K.

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ITEM 6.
SELECTED FINANCIAL DATA

The following selected consolidated financial data with respect to our statements of operations for the years ended December 31, 2019, 2018, and 2017, and with respect to our balance sheet as of December 31, 2019 and 2018, are derived from our audited Consolidated Financial Statements, which appear elsewhere in this Annual Report on Form
10-K.
The following selected consolidated financial data with respect to our statements of operations for the years ended December 31, 2016 2015, and 2014, and with respect to our balance sheet as of December 31, 2016 and 2015, are derived from our audited Consolidated Financial Statements, which appear elsewhere in this Annual Report on Form10-K. The following selected consolidated financial data with respect to our statements of operations for the years ended December 31, 2013 and 2012, and with respect to our balance sheets as of December 31, 2014, 2013,2017, 2016, and 2012,2015, are derived from our Consolidated Financial Statements, which are not included herein. The data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.

   Year Ended December 31, 

Statement of Operations Data

  2016  2015  2014  2013  2012 
   (In thousands, except per share data) 

Net revenues

  $200,280  $220,194  $225,731  $199,160  $218,507 

Loss from operations

   (6,314)   (267)   (14,763)   (20,467)   (2,785) 

Consolidated net income (loss)

   (6,261)   5,159   (14,070)   (23,504)   (3,798) 

Net income (loss) attributable to noncontrolling interest

   (14)   232   (183)   136   279 

Net income (loss) attributable to Vicor Corporation

   (6,247)   4,927   (13,887)   (23,640)   (4,077) 

Net income (loss) per share — basic and diluted attributable to Vicor Corporation

   (0.16)   0.13   (0.36)   (0.60)   (0.10) 

Weighted average shares — basic

   38,842   38,754   38,569   39,195   41,811 

Weighted average shares — diluted

   38,842   39,146   38,569   39,195   41,811 
   As of December 31, 

Balance Sheet Data

  2016  2015  2014  2013  2012 
   (In thousands) 

Working capital

  $89,545  $94,905  $90,321  $97,869  $128,498 

Total assets

   154,067   157,545   155,542   165,640   202,581 

Total liabilities

   23,050   21,460   24,990   23,303   20,608 

Total equity

   131,017   136,085   130,552   142,337   181,973 

                     
 
Year Ended December 31,
 
Statement of Operations Data
 
2019
  
2018
  
2017
  
2016
  
2015
 
 
(In thousands, except per share data)
 
Net revenues
 $
262,977
  $
291,220
  $
227,830
  $
200,280
  $
220,194
 
Net income (loss) from operations
  
13,821
   
32,059
   
(1,360
)  
(6,314
)  
(267
)
Consolidated net income (loss)
  
14,109
   
31,846
   
258
   
(6,261
)  
5,159
 
Net income (loss) attributable to noncontrolling interest
  
11
   
121
   
91
   
(14
)  
232
 
Net income (loss) attributable to Vicor Corporation
  
14,098
   
31,725
   
167
   
(6,247
)  
4,927
 
Net income (loss) per share — basic attributable to Vicor Corporation
  
0.35
   
0.80
   
0.00
   
(0.16
)  
0.13
 
Net income (loss) per share — diluted attributable to Vicor Corporation
  
0.34
   
0.78
   
0.00
   
(0.16
)  
0.13
 
Weighted average shares — basic
  
40,330
   
39,872
   
39,228
   
38,842
   
38,754
 
Weighted average shares — diluted
  
41,677
   
40,729
   
39,933
   
38,842
   
39,146
 
                     
 
As of December 31,
 
Balance Sheet Data
 
2019
  
2018
  
2017
  
2016
  
2015
 
 
(In thousands)
 
Working capital
 $
149,136
  $
129,062
  $
90,796
  $
89,545
  $
94,905
 
Total assets
  
240,727
   
221,068
   
165,724
   
154,067
   
157,545
 
Total liabilities
  
34,857
   
36,978
   
29,305
   
23,050
   
21,460
 
Total equity
  
205,870
   
184,090
   
136,419
   
131,017
   
136,085
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

A discussion regarding our results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2017 was included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2018 on pages
32-35
under Part II, Item 7, “Management’s Discussion and Analysis of Financial Position and Results of Operations”, which was filed with the SEC on February 28, 2019.
We design, develop, manufacture, and market modular power components and power systems for converting regulating,electrical power for use in electrically-powered devices. Our competitive position is supported by innovations in product design and controlling electric current. We also license certain rights toachievements in product performance, largely enabled by our technologyfocus on the research and development of advanced technologies and processes, often implemented in return for recurring royalties. The principal customers forproprietary semiconductor circuitry, materials, and packaging. Many of our products incorporate patented or proprietary implementations of high-frequency switching topologies enabling power converterssystem solutions that are more efficient and systems are large original equipment manufacturers (“OEMs”)much smaller than conventional alternatives. Our strategy emphasizes demonstrable product differentiation and their contract manufacturers, a value proposition based on competitively superior solution performance, advantageous design flexibility,
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and smaller, lower volume users. We serve a broadcompelling total cost of ownership. While we offer a wide range of market segmentsAC and geographies worldwide.

We have organizedDC power conversion products, we consider our business segments accordingcore competencies to our key product lines. Reflecting our historybe associated with 48V DC distribution, which offers numerous inherent cost and direction,performance advantages over lower distribution voltages, although we broadly categorize ouroffer products as either “legacy” or “advanced”addressing other DC voltage standards (e.g., generally based380V for power distribution in data centers, 110V for rail applications, 28V for military and avionics applications, and 24V for industrial automation).

Based on design, performance, and form factor considerations, as well as the range of evolving applications for which our products are appropriate, we categorize our product portfolios as either “Advanced Products” or “Brick Products.” The Advanced Products category consists of our more recently introduced products, which are largely used to implement our proprietary Factorized Power Architecture
™
(“FPA”), an innovative power distribution architecture enabling flexible, rapid power system design using individual components optimized to perform a specific conversion function. The Brick Products category largely consists of our broad and well-established families of integrated power converters, incorporating multiple conversion stages, used in conventional power systems architectures.
Given the growth profiles of the markets we serve with our Advanced Products line and our Brick Products line, our strategy involves a transition in organizational focus, emphasizing investment in our Advanced Products line and targeting high growth market segments with a
low-mix,
high-volume operational model, while maintaining a profitable business in the mature market segments we serve with our Brick Products line with a
high-mix,
low-volume
operational model.
On June 28, 2019, VI Chip Corporation (“VI Chip”), a subsidiary of Vicor, fully consolidated for financial reporting purposes, was merged with and into the Company (the “Merger”), and the corporate existence of VI Chip ceased. (See Note 18 to the Consolidated Financial Statements,
VI Chip and Picor Mergers
, for further detail). In connection with the Merger, the VI Chip Corporation Amended and Restated 2007 Stock Option and Incentive Plan (the “VI Chip Plan”), under which options for the purchase of shares of the common stock of VI Chip were awarded, was amended and restated, and Vicor assumed the VI Chip Plan and each outstanding option to acquire the common stock of VI Chip (each “VI Chip Option”), whether vested or unvested, awarded under the VI Chip Plan. Each VI Chip Option was, immediately following the Merger, deemed to constitute an option (a “Company Option”) to purchase, on the same terms and conditions as were applicable to the VI Chip Option prior to the Merger, a number of shares of our Common Stock, $0.01 par value, equal to the product of (i) the number of shares of the common stock of VI Chip subject to the VI Chip Option multiplied by (ii) 0.1418, which was the exchange ratio used in the Merger (the “Exchange Ratio”). The exercise price per share of each Company Option immediately following the Merger was determined by dividing (x) the exercise price per share of the VI Chip Option by (y) the Exchange Ratio.
The VI Chip Plan, which was previously approved by our stockholders at the 2017 Annual Meeting of Stockholders, was amended and restated in connection with the Merger to (i) provide that VI Chip Options granted under the VI Chip Plan, upon exercise, will be settled in shares of our Common Stock, (ii) adjust the number of shares that are issuable under the assumed VI Chip Plan to reflect the Exchange Ratio, (iii) provide that no new awards may be granted under the VI Chip Plan after the completion of the Merger, (iv) permit cashless broker-assisted net exercises of assumed VI Chip Options pursuant to the terms of the assumed VI Chip Plan, and (v) make other conforming and administrative changes to reflect the VI Chip Plan’s assumption by the Company and the effects of the Merger.
On May 25, 2018, the Company’s Board of Directors unanimously approved the merger of Picor Corporation (“Picor”), a subsidiary of Vicor, fully consolidated for financial reporting purposes, with and into the Company. The merger was completed as of May 30, 2018, at which time the separate corporate existence of Picor ceased. To effect the merger, holders of Picor Common Stock and Picor stock options received an equivalent value of Vicor Common Stock and Vicor stock options, respectively, pursuant to the assumption of the Picor Corporation Amended and Restated 2001 Stock Option and Incentive Plan, and options outstanding thereunder, by the Company.
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In the second quarter of 2019, management determined, with the approval of our Board of Directors and our Chief Operating Decision Maker (“CODM”), Dr. Vinciarelli, we would report as one segment, rather than under the three segment approach employed since 2007. Our strategy has evolved with a transition in organizational focus, emphasizing investment in Advanced Products, targeting high growth market segments with a
low-mix,
high-volume operational model, while maintaining a profitable business in mature market segments we serve with Brick Products with a
high-mix,
low-volume
operational model. Dr. Vinciarelli and management began to make incremental changes in management practices and organizational structure based on a management plan established in 2018 for the definitive reconfiguration of the three business units into one business focused on the Advanced Products and Brick Products product line categorizations, including three significant changes: the merger of Picor with and into Vicor, which was completed on May 30, 2018; the reconfiguration of our internal reporting systems, which was completed on December 31, 2018; and the merger of VI Chip with and into Vicor, which was completed on June 28, 2019. Our CODM now determines the allocation of our resources based upon the two product line groupings, which constitute one segment. Both product lines are built in our manufacturing facility in Andover, Massachusetts, employing similar processing and production techniques, are supported by the same sales and marketing organization, and address a continuum of customer applications. As such, we have conformed our segment reporting to the new reporting structure utilized by the CODM.
Revenue from the sale of Advanced Products represents the sum of third-party sales of the products are appropriate.

The BBU segment designs, develops, manufacturessold under the Advanced Products line, which were sold under the former Picor and markets our legacy linesVI Chip operating segments during periods prior to the second quarter ofDC-DC converters and configurable products, as well as complementary components providing AC line rectification, input filtering, power factor correction, and transient protection. The BBU segment also includes 2019. Revenue from the BBU business conducted through VJCL and our Vicor Custom Power subsidiaries. The BBU has customers concentrated in aerospace and aviation, defense electronics, industrial automation and equipment, medical diagnostics, rail transportation, and test and measurement instrumentation.

As previously disclosed, on March 30, 2016, we acquired 100% ownershipsale of certain operating assets and cashBrick Products represents the sum of Converpower Corporation (“Converpower”). We also entered into a license with Converpower allowing us to continue manufacturing certain products and supporting existing customers. With the closingthird-party sales of the Converpower transaction, we completedproducts sold under the consolidationBrick Products line, which were sold under the former Brick Business Unit operating segment, inclusive of such sales of our Vicor Custom Power operations into three wholly-ownedand Vicor Japan Company, Ltd. (“VJCL”) subsidiaries.

When reporting such revenue on a consolidated basis, intra-segment revenues are eliminated.

The VI Chip segment consistsapplications in which our Advanced Products and Brick Products are used are typically in the higher-performance, higher-power segments of the market segments we serve. With our subsidiary, VI Chip Corporation, which designs, develops, manufactures,Advanced Products, we generally serve large Original Equipment Manufacturers (“OEMs”), Original Design Manufacturers (“ODMs”), and markets many of our advanced power component products. The VI Chip segment also includes VI Chip business conducted in Japan through VJCL. VI Chip generally targets large, high-volume customerstheir contract manufacturers, with sales currently are concentrated in the datacenterdata center and supercomputerhyperscaler segments of theenterprise computing, market,in which our products are used for voltage distribution on server motherboards, in server racks, and across datacenter infrastructure, although we also target applications in aerospace and aviation, defense electronics, industrial automation, instrumentation, test equipment, solid state lighting, telecommunications and networking infrastructure, and vehicles (notably in the autonomous driving, electric vehicle, and hybrid vehicles,vehicle niches of the vehicle segment). With our Brick Products, we generally serve a fragmented base of large and small customers, concentrated in aerospace and defense electronics, industrial automation, industrial equipment, instrumentation and test equipment, and networking equipment.

The Picor segment consiststransportation (notably in rail and heavy equipment applications). With our strategic emphasis on larger, high-volume customers, we expect to experience over time a greater concentration of our subsidiary, Picor Corporation, which designs, develops,sales among relatively fewer customers.

2019 Results
Our overall operating results declined for 2019, compared to 2018, due to an overall 17.7 % year over year decrease in bookings, with 31.2% and markets integrated circuits10.1% decreases in Advanced Products and related solid-state productsBrick Products bookings, respectively. Consolidated revenue for 2019 declined 9.7%. Factors contributing to the decline in bookings and revenue were customer delays in the launch of new Advanced Products programs for use in a varietyArtificial Intelligence (“AI”) and supercomputing, for which we had achieved design wins, reduced shipments of power management and power system applications. Picor is a “fabless manufacturer,” as its products are manufactured, assembled, packaged, and tested by third parties. Picor develops productsAdvanced Products for use in our BBU and VI Chip modules,existing data center applications due to be sold as complements to our BBU and VI Chip products, or for sale to third parties for separate (i.e., stand-alone) applications, often integrated with VI Chip products to represent a customer solution, particularlyexcess inventory in the datacenterserver supply chain, reduced bookings and supercomputer segmentsshipments of the computing market.

Our consolidated results for 2016, particularly our decreased revenue and profitability, continueBrick Products to be impacted by the general weakness of demand for our legacy productsChinese customers due to global macroeconomic uncertainty. Customer interest in our expanding portfoliothe costs of advanced products continues to increase, but we are encountering longer sales cycles than originally anticipated, attributable, in part, to the same macroeconomic trendsimport tariffs and industry-specific conditions influencing bookings and sales of our legacy product lines. In addition, for the latter half of 2015 and throughout 2016, demand for our 48 volt topoint-of-load solutions for datacenter servers was influenced by customer supply chain matters, notably scheduling delaysuncertainties associated with the releaseChina — U.S. trade dispute, and continued weakness in industrial market segments served with Brick Products in Japan and certain European countries. We experienced increased bookings and revenue for 2019 in recently targeted market segments (e.g., Advanced Products applications in automotive and commercial lighting applications), but such increases were not of next generation computer processors. However, sincesufficient volume to meaningfully offset declines in larger, established market segments and geographies.

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Gross margins, both in absolute dollars and as a percentage of revenue, decreased year over year, reflecting the first quarterdecrease in revenue and higher tariff charges paid on raw materials imported from China, although an improved mix of 2016, these solutions received significant, high profile recognitionhigher-margin products shipped partially offset the effect lower production volume on absorption of manufacturing overhead costs and tariffs. Consolidated gross margin as a percentage of revenue decreased to 46.8% for 2019, from customers, user groups,47.7% for 2018.
Total operating expenses, largely associated with compensation and trade publications, leadingrelated personnel costs, grew 2.1% from 2018 to 2019. The number of full-time employees totaled 993 at December 31, 2019, an increase of 17 employees, or 1.7% year over year. In aggregate, Marketing and Sales expenses and Administrative expenses were essentially unchanged, while Research and Development expenses increased design activitiesyear over year, due to higher compensation costs and design wins with an expanded range of customers. We believe this heightened visibility, along with the implied endorsements of our solutions, has contributed to shortened sales cycles for our advanced products.

higher prototyping and related engineering material costs.

We believe the following factors influenced our results forconsiderations have the year ended December 31, 2016, and may continuepotential to influence our results for the foreseeable future:

financial performance in 2020:
Global demand for our legacy brick converters, configurable products,
Operational Considerations
We operate a highly automated electronics manufacturing facility in Andover, Massachusetts, and associated components remains unpredictable and at volumes lower than historical trend, given the macroeconomic variables underlying customer confidence across the industries and geographies we serve. Our legacy products are commonly used in high-value capital goods and sizeable infrastructure projects, the end demand for which has lagged, reflectinglow-growth economies and budgetary uncertainty. Although we have completed initiatives to reduce our exposure to certain problematic market segments, notably the custom portion of defense electronics, we expect to experience relatively flat aggregate demand for the BBU until customer outlooks improve.

Our profitability is closely aligned with production unit volumes. We manufacture ourhave invested significantly in

state-of-the-art
systems, equipment, and robotics, which allow us to generate relatively higher profitability when operating at or near factory capacity, even with a high mix of products in Andover, Massachusetts, in astate-of-the-art, highly automated factory. While direct labor and associated costs are scaled with volume, extendedproduced. However, periods of low activityvolume production and/or smallbrief, low volume production runs contribute to lower profitability, largely due to lower absorption of relatively high manufacturing overhead expenses, whichcosts associated with our manufacturing model. While direct labor and associated variable costs generally correlate with volume, manufacturing overhead costs are less flexibleinflexible and, less scalable, giventherefore, problematic during periods of low volume or brief production runs.
We continue to invest in the sophisticationproduction machinery and complexityspecialized equipment necessary to enhance the efficiency of our current manufacturing processes. An additional influence oncapacity. However, if sustained, uniform, high-volume production levels are not achieved, notably in Advanced Products, our product-level profitability likely will not reach the levels necessary to adequately cover our fixed spending, consisting of manufacturing overhead costs and operating costs.
Our ability to achieve sustained, high volume production levels is tied to our ability to forecast manufacturing requirements for, and the availability of, a range of inputs, notably raw material inventories. Because we utilize a number of components and other materials of proprietary design, our ability to sustain targeted production schedules and meet customer delivery requirements has been vulnerable to delays or shortages of such inventories, which often cause prices of these components and materials to rise. With the availabilityimplementation in 2018 of Section 301 Tariffs on certain Chinese goods imported into the United States, we are now exposed to higher costs on certain electronic components and deliverydevices we import from China for use in the manufacture of our products. For the year ended December 31, 2019, costs associated with duties and tariffs totaled approximately $5,280,000. We continue to assess the impact of these costs and are actively evaluating alternative sources of raw materials. We also have engaged a consultant to assist us with implementing a “duty drawback” process, by which we may file with U.S. Customs and Border Protection for the recovery of tariffs paid on raw materials used to produce products we subsequently exported. At this time, we are not able to estimate the amount of such recovery or the timing ofthereof.
To mitigate supply chain risks, we focus on identifying and reducing potential vulnerabilities to stock-outs, vendor shortages, and similar disruptions. We maintain safety-stock programs for certain critical components and materials, and componentsthese programs recently have contributed to increased levels of raw material inventory, primarily for Advanced Products. We also have established second-source supply relationships, in order to reduce exposure to material shortages. Although the global electronics supply chain generally stabilized in 2019, we use in our products. Duecontinue to the same economic uncertainty we and our customers are experiencing, our suppliers are facing production and scheduling challenges. While we

experience lengthened lead times for certain product

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closely monitor our supply chaincategories, and our raw materials requirements, we are susceptible to production delaysproduct-level profitability and added costs associated with unforeseen supply chain disruption.

overall performance could be negatively influenced by an unplanned shortage of a particular component or material. We anticipate availability of certain commodity components may remain uncertain through 2020.

Capacity and Capital Investment Considerations
We have focusedbeen making and will continue to make capital investments for the expansion of manufacturing capacity for the production of Advanced Products at our organizationAndover facility. Based on our extended long-term volume forecast, we anticipate additional capacity will be required to meet expected requirements. We believe the promising opportunitiesmost appropriate manner of meeting our long-term capacity requirements will be to initially expand the production area of our Andover facility by approximately 90,000 square feet, through the addition of a two story wing. In December 2019, we acquired, for approximately $1.5 million, approximately three acres adjacent to our advanced products, in which wefacility to accommodate our Andover facility expansion. We have invested a substantial amount of researchcompleted the design and development effort and dollars. Many of these opportunities are in the early phases of market exposure,permitting phase for this project and we are committedscheduled to expandingbegin construction of an approximately 90,000 square feet addition to our product linesexisting plant in the spring of 2020 and our abilitytake occupancy later in the year. Full operational capacity may not be achieved until early 2021. Construction activity can be difficult to serveschedule, and support customers in pursuit of these opportunities.construction sites can present management and operational challenges. As such, given the proximity of the addition to our operatingexisting operations, this construction activity has the potential to disrupt our current operations, which could cause production to be delayed and costs to increase.
We believe we have adequate manufacturing capacity to meet our requirements through approximately 2021. However, we are proceeding with the evaluation of alternatives for the addition of a second manufacturing facility, should we determine the need for (and timing of) such additional capacity based on forecasts. We have not reached a point in our evaluation at which we could estimate the size, location, capabilities, costs, or timing of construction of such a second facility. The alternatives under consideration include joint ventures and similar collaborative arrangements with third-parties, which increases the complexities and uncertainties of our evaluation and may contribute to additional delays and higher costs.
In 2019, we entered into a supply agreement with a highly-specialized contractor for meeting our near-term volume expectations for our
SM-ChiP
line. While commodity electroplating and related surface preparation and finishing services are available from numerous alternate providers, we have developed certain proprietary processes with this contractor. The terms of the supply agreement call for Vicor to acquire and install certain capital equipment at the contractor’s premises during 2020. Such equipment will be operated by Vicor employees.
Because of the challenges associated with the proprietary processes required for
SM-ChiP
production, Vicor and the contractor encountered delays in meeting certain volume and scheduling milestones during 2019 and, as a result, incurred higher costs than anticipated. We believe we have remedied the causes of the delays and are scheduling sufficient production volumes to meet our 2020 forecast for shipments of
SM-ChiPs.
However, the Company and the contractor expect to be installing and qualifying additional capital equipment through the year, which may cause delays similar to those experienced in 2019.
The terms of the supply agreement also call for the Company and the contractor to collaborate on the design and implementation of a separate facility, to be funded, owned, and operated by Vicor, utilizing the proprietary processes developed for
SM-ChiP
production. We currently are scheduling this separate facility to be functional during the first half of 2021, but have yet to identify a location for new construction or an existing building for acquisition. As stated above, construction activity can be difficult to schedule, and construction sites can present management and operational challenges. Given our collaboration with the contractor on the design and development of the proposed facility, we believe our design, process installation, and process qualification risks have been identified and minimized. However, given the uncertainties associated with construction and the complex nature of

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the proprietary processes to be implemented, we may incur unanticipated delays and costs during 2020 associated with the construction of the proposed facility and the implementation of the proprietary processes, which we anticipate will not be completed until 2021. 
Market and Macroeconomic Considerations
We continue to believe the transition from 12V to 48V distribution in data centers is expanding and will be sustained, as an increasing number of hyperscaler and high relativeperformance computing customers are evaluating our FPA components and placing orders for Advanced Products solutions. Our
Power-on-Package
solution powering graphics processing units (“GPUs”) and application-specific integrated circuits (“ASICs”) used in Artificial Intelligence applications continued to revenue levels,receive strong customer interest in 2019, and likelywe secured additional design wins. In April 2019, we entered into a design collaboration with a significant Asia-based vendor of advanced processor packaging solutions.
However, despite greater customer interest and additional design wins, conditions in the data center market segment through 2019 caused customers and potential customers to delay shipments and/or bookings. We believe the excess inventories that existed across the server supply chain from late 2018 through 2019 have been reduced, and that existing customer programs are resuming and new orders will remain relatively high until revenue from our legacy products recovers and revenue from our newer advanced products increases on a sustained basis.

Customer adoptionaccelerate through 2020. Similarly, we believe the launch of certain new products hasinto which Advanced Products have been designed will no longer be delayed, by unanticipated market influences beyond our control. For example, our leadership positiongiven improved demand visibility of the customers associated with these new products. Although we believe the inventory excesses in the server supply chain have been remedied, leading to improved customer visibility for hyperscaler and data center customers, recurring uncertainties, such as those associated with the coronavirus outbreak in China, may cause orders from new and existing customers to be delayed, potentially influencing our financial results and capacity expansion plans.
We also are confident the transition from 12V to 48V distribution in automotive applications is expanding, as automobile manufacturers broaden their offerings of datacenter computingelectric vehicles and hybrid-electric vehicles, the performance of which is significantly enhanced through the use of 48V distribution. During 2019, we expanded our dedicated automotive effort to 48 volt topoint-of-load solutions usingaddress the increasing interest in our Factorized Power Architecture wassmall, light-weight, and efficient Advanced Products. The number of domestic, European, and Japanese OEMs and Tier One suppliers with which we are engaged approximately doubled in 2019, with substantive design wins for certain
all-electric
and mild-hybrid vehicles models. However, because the basis for our expectation of an earlier, higher-volume uptake of such solutions and our decisions to focus our resources on such opportunities. However, delays
design-to-production
cycle in the transitionautomotive industry exceeds three years, we do not anticipate significant revenue from these engagements or our design wins until 2023. Currently, recognized revenue is limited primarily to development fees and low volume shipments of processor generationsprototype products. As such, there is a possibility our profitability may be negatively affected by the costs of our expanded automotive effort incurred prior to the volume shipments we expect to begin in 2023.
With the expanding adoption of 48V distribution in our targeted market segments, we are facing a more complex competitive landscape, with additional challenges and associated supply chain disruption caused repeated delays in customer purchase orders.competitors. We continue to believe our new products notably our 48 volt topoint-of-load solutions for datacenters, will be adopted in volume by multiple leading customers, particularly in lightas the level of various announcements during the first and second quarters of 2016 from two industry trade organizations regarding adoption and support of 48 Volt bus architectures.engagement with high profile, global customers remains high. However, we cannot control the actions by, noror the timing of, our customers, their contract manufacturers, or the significant vendorscompetitors also participating in the market.

Recent consolidated Many of these competitors possess resources far greater than our resources and have operational and financial resultsflexibility we do not. Many of these vendors also have been influenced by operational changesthe ability to aggressively price their products to defend market share. Such aggressive pricing may influence our own pricing and, restructuring initiatives. Duringin turn, our profitability.
We anticipate aggregate demand for the first quartermature markets we serve with our Brick Products will grow over the long-term at the rate of 2016, we completed the consolidationoverall industrial economy (i.e., in the United States, for example, at the rate of growth approximating that of the industrial segments of gross domestic product). Given our long-term customer relationships and the status of our Brick Products in long-standing customer applications, we anticipate maintaining our share in many of these mature markets. While we are
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pursuing opportunities to replace certain Brick Products used in existing customers’ applications with Advanced Products, when appropriate, and, similarly, to replace competitors’ products in existing applications, we believe such opportunities may not cumulatively contribute to a substantial expansion of our share of the mature markets we serve.
We have experienced reduced demand for Brick Products in China, due to the imposition of import tariffs of 20% on our products. We believe much of the demand for our Brick Products will recover if the tariffs are substantially reduced or eliminated, as our products benefit from price inelasticity in certain Chinese market segments, due to their differentiated performance and reliability. However, we cannot estimate the timing of such a recovery or if the tariffs will be reduced or eliminated and economic conditions improve, in the foreseeable future. We also believe demand for certain products may not fully recover if tariffs are reduced or eliminated, as the Chinese government increased its pressure on Chinese manufacturers during 2019 to meet the “China 2025” mandate for targeted development of Chinese technology sectors, whereby domestic technology vendors are explicitly favored over foreign vendors such as Vicor. We believe we have experienced reduced demand in certain market segments (e.g., rail), reflecting the significant role of state-owned enterprises in those market segments, and also believe such demand that may not recover for the foreseeable future to historical levels, even if tariffs on Vicor Custom Power operations, reducing our six domestic locations to three. While this consolidation disruptedproducts are reduced or eliminated.
In February 2020, the sales, bookings,global electronics industry became aware of the potentially significant influence of the coronavirus on the industry’s supply chain, notably on the future availability of materials and manufacturing patterns of the custom operations for the fourth quarter of 2015capacity in China. We are in frequent contact with both customers and the first quarter of 2016, we believe we currentlysuppliers with meaningful exposure to China and are achieving our competitivemonitoring conditions there and performance goals.across Asia.

During the third quarter of 2016, we reversed approximately $768,000 of stock-based compensation expense related to certain VI Chip performance-based stock options. This resulted in decreases to cost of revenues of $86,000, selling, general, and administrative expense of $516,000, and research and development expense of $166,000 in the third quarter of 2016. (See Note 3 to the Consolidated
2019 Financial Statements).Highlights

Financial Highlights:

Net revenues decreased 9.0%9.7% to $200,280,000$262,977,000 for 2016,2019, from $220,194,000$291,220,000 for 2015,2018, primarily due to an 8.7% decreaseoverall decline in overall BBU2019 bookings for 2016 compared to 2015. While VI Chip and Picor bookings increased year over year, a large portion of their respective bookings2018. Bookings decreased 17.7% in the third and fourth quarter of 2016 was scheduled for shipment in 2017, mitigating the impact of the increased bookings on 2016 revenue.2019 compared to 2018.

Export sales, as a percentage of total revenues, represented approximately 59.4%53.7% in 20162019 and 59.6%62.0% in 2015.2018.

Gross margin decreased to $91,209,000$122,966,000 for 2016,2019, from $99,518,000$138,971,000 for 2015, due primarily to lower production volumes associated with the decrease in net revenues.

2018. Gross margin, as a percentage of net revenues increaseddecreased to 45.5%46.8% for 20162019 from 45.2%47.7% for 2015.2018. The gross margin percentage improved, despite lower net revenues,decreases were primarily due to a more favorable product mix and lower charges for warranty reserves.the decrease in net revenues.

Backlog, representing the total of orders for products received for which shipment is scheduled within the next 12 months, was approximately $48,371,000$104,164,000 at the end of 2016,2019, as compared to $39,073,000$102,963,000 at the end of 2015. The increase in backlog was due to increased VI Chip and Picor bookings in the second half of 2016, compared to the second half of 2015, partially offset by lower BBU bookings.2018.

Operating expenses for 2016 decreased $2,262,000,2019 increased $2,233,000, or 2.3%2.1%, to $97,523,000$109,145,000 from $99,785,000$106,912,000 for 2015,2018, due to a decreaseincreases in research and development expenses of $2,302,000 and selling, general, and administrative expenses of $2,638,000, partially offset by an increase$333,000. In addition, we recorded severance and other charges of $402,000 in research and development expense2018 in connection with the closure of $376,000.

The primary components of the decrease in selling, general and administrative expenses were declines in compensation expenses of $1,077,000, commission expenses of $748,000, and legal fees of $734,000.

Lower compensation expenses were due to a reversal of stock-based compensation expense related to certain VI Chip performance-based stock options in the third quarter of 2016, as noted above, the impact of the consolidationone of our Vicor Custom Power subsidiaries, Granite Power Technologies, Inc. (“GPT”), as part of our ongoing initiative to streamline operations and the final shutdown of Westcor operations.improve our cost structure.

The primary elements of the increase in research and development expenses were project andpre-production materials of $1,214,000, and compensation expenses of $502,000, partially offset by decreases in deferred costs of $774,000, depreciation and amortization of $357,000, and facilities expenses of $221,000.

We recorded a gain from equity method investment of $4,999,719 in the third quarter of 2015 when Intersil Corporation (“Intersil”) acquired Great Wall Semiconductor Corporation (“GWS”). See Note 8 to the Consolidated Financial Statements for additional details.

We reported a net lossincome for 20162019 of $(6,247,000), as$14,098,000, or $0.34 per diluted share, compared to net income of $4,927,000 for 2015, and a net loss per share of $(0.16) for 2016, as compared to net income$31,725,000, or $0.78 per diluted share, of $0.13 for 2015.2018.

In 2016,2019, depreciation and amortization totaled $8,438,000,$10,334,000, and capital additionsexpenditures were $8,428,000,$12,485,000, compared to $9,142,000$9,254,000 and $9,090,000,$18,211,000, respectively, for 2015.2018.

Inventories increased by approximately $3,694,000,$1,817,000, or 15.8%3.8%, to $27,136,000$49,187,000 at the end of 2016,2019, as compared to $23,442,000$47,370,000 at the end of 2015. This increase was primarily associated with increases in VI Chip and Picor inventories2018.
33
Table of $2,959,000 and $1,799,000, respectively, to meet increased bookings for the two segments, partially offset by a decrease in BBU inventories of $1,064,000.Contents

The following table sets forth certain items of selected consolidated financial information as a percentage of net revenues for the years shown, ended December 31. This table and the subsequent discussion should be read in conjunction with the selected financial data and the Consolidated Financial Statements and related footnotes contained elsewhere in this report.

   Year Ended December 31, 
   2016  2015  2014 

Net revenues

   100.0%   100.0%   100.0% 

Gross margin

   45.5%   45.2%   43.0% 

Selling, general and administrative expenses

   27.8%   26.5%   30.2% 

Research and development expenses

   20.9%   18.8%   18.4% 

Loss before income taxes

   (3.0)%   (0.1)%   (6.4)% 

             
 
Year Ended December 31,
 
 
2019
  
2018
  
2017
 
Net revenues
  
100.0
%  
100.0
%  
100.0
%
Gross margin
  
46.8
%  
47.7
%  
44.6
%
Selling, general and administrative expenses
  
23.8
%  
21.4
%  
25.5
%
Research and development expenses
  
17.7
%  
15.2
%  
19.7
%
Income (loss) before income taxes
  
5.7
%  
11.3
%  
(0.0
)%
Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States.States (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, and our associated judgments, including those related to inventories, income taxes, contingencies, and litigation.

We base our estimates, assumptions, and judgments on historical experience, knowledge of current conditions, and on various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We also have other policies we consider key accounting policies, such as our policy for revenue recognition, including the deferral of revenue on sales to distributors until the products are sold(See Note 2 to the end user.Consolidated Financial Statements —

Significant Accounting Policies — Recently Adopted Accounting Standards
). However, the application of these other policies does not require us to make significant estimates and assumptions difficult to support quantitatively.

Inventories

We employ a variety of methodologies to estimate allowances for ourevaluate inventory forthat is estimated obsolescenceto be excess, obsolete or unmarketable, in order to write down that inventory to net realizable value. Our estimation process for assessing net realizable value is based upon our existingforecasted future usage which we derive based on backlog, historical consumption, and assumptions about future demand andexpected market conditions. For BBU products produced at our Andover facility, our principal manufacturing location,both Brick and Advanced product lines, the methodology used compares
on-hand
quantities to projected demandforecasted usage and historical consumption, such that amounts of inventory on hand in excess of a three-year projected consumptionusage or three-year historical consumption, whichever is higher, are fully reserved. VI Chip and Picor usetwo-year projected and historical consumption assumptions. While we have used our best efforts and believe we have used the best available information to estimate future demand, due to uncertainty in the economy and our business and the inherent difficulty in predictingforecasting future demand,usage, it is possible actual demand for our products will differ from our estimates. If actual future demand or market conditions are less favorable than those projected by management, additional inventory reserves for existing inventories may need to be recorded in future periods.

Income Taxes

We make certain estimates, assumptions, and judgments in determining income tax expense for financial statement reporting purposes. These estimates, assumptions, and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain assets and liabilities that arise from differences in the timing and

Evaluation of the recognitionRealizability of revenue and expense for tax and financial statement purposes, as well as the interest and penalties relating to uncertain tax positions. Significant changes to these estimates, assumptions, and judgments may result in an increase or decrease to our tax provision in a subsequent period.

Deferred Tax Assets

Significant management judgment also is required in determining whether deferred tax assets will be realized in full or in part. We assess the need for a valuation allowance on a quarterly basis. We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance. Currently, we maintainWhile recent positive operating results caused the Company to be in a cumulative income position
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as of December 31, 2019, its overall profitability has been declining since the third quarter of 2018, primarily due to overall reduced bookings for both Advanced and Brick products, reflecting U.S.-China trade/tariff dynamics and elements of macro uncertainty. The uncertain impact of the coronavirus on the supply chain and certain process issues with the production of Advanced Products is contributing to near-term uncertainty. As a result, management has concluded a full valuation allowance against all net domestic net deferred tax assets and the majorityis still warranted as of foreign net deferred tax assets.December 31, 2019. The valuation allowances against these deferred tax assets may require adjustment in the future based on changes in the mix of temporary differences, changes in tax laws, and operating performance. If the positive quarterly earnings continue and our concerns about industry uncertainty, process issues with the production of Advanced Products are resolved, and order volumes are alleviated to the point we believe future profits can be more reliably forecasted, we may release all or a portion of the valuation in the near-term. Certain state tax credits, though, will likely never be uncovered by the valuation allowance. If and when we determine the valuation allowance should be released (i.e., reduced), the adjustment would result in a tax benefit reported in that period’s Consolidated Statements of Operations, the effect of which would be an increase in reported net income. A portion of such an adjustment may be accounted for through an increase to “Additionalpaid-in capital”, a component of Stockholders’ Equity. The amount of any such tax benefit associated with release of our valuation allowance in a particular quarter may be material.

We follow atwo-step process to determine the amount of tax benefit to recognize in our financial statements for tax positions taken on tax returns. The first step is to evaluate the tax position to determine the likelihood it would be sustained upon examination by a tax authority. If the tax position is deemed“more-likely-than-not” to be sustained, the second step is to assess the tax position to determine the amount of tax benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater

than 50 percent likelihood of being realized upon ultimate settlement. If the tax position does not meet the“more-likely-than-not” threshold then it is not recognized in the financial statements. We accrue interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. If the estimates, assumptions, and judgments made by us change, the unrecognized tax benefits may have to be adjusted, and such adjustments may be material.

Contingencies

From time to time, we receive notices of product failure claims, notices of infringement of patent or other intellectual property rights of others, or notices associated with other claims. In January 2011, we were named in a lawsuit for patent infringement (See Part I, Item 3 — “Legal Proceedings”) that is ongoing. We assess each notice and associated matter to determine if a contingent liability should be recorded. In making this assessment, we may consult, depending on the nature of the matter, with external legal counsel and technical experts. Based on the information we obtain, combined with our judgment regarding all the facts and circumstances of each matter, we determine whether it is probable a contingent loss may be incurred and whether the amount of such loss can be reasonably estimated. Should a loss be probable and reasonably estimable, we record such a loss (i.e., we establish a loss contingency). In determining the amount of the loss to be recorded, we consider advice received from experts in the specific matter, current status of legal proceedings (if any), prior case history, comparable precedent litigation, and other factors. Should the estimates, assumptions, and judgments made by us change, we may need to record additional losses (i.e., add to our loss contingency) that may be material.

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of recently issued accounting standards will not have a material impact on our future financial condition and results of operations. See Note 2 —
Significant Accounting Policies
—
Impact of recently issued accounting standards
, to the Consolidated Financial Statements for a description of recently issued and adopted accounting pronouncements, including the dates of adoption and expected impact on our financial position and results of operations.

Revenue Recognition

Lease Accounting
In May 2014,February 2016, the FASB issued new guidance for revenue recognition,lease accounting, which will require an entityrequires lessees to recognize leases on the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.balance sheet and disclose key information about leasing arrangements. The new guidance which includes several amendments, will replace most existing revenueestablishes a
right-of-use
model (“ROU”) that requires a lessee to recognize a ROU asset and a lease liability on the balance sheet for all leases with a term longer than twelve months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. For lessors, the guidance in U.S. Generally Accepted Accounting Principles when it becomes effective which will be,modifies the classification criteria and accounting for us, onsales-type and direct financing leases.
We adopted the new standard as of January 1, 2018. The2019, using the effective date as the date of initial application. As a result, financial information has not been updated and the disclosures required under the new standard have not been provided for dates and periods before January 1, 2019. We elected the “package of practical expedients”, which permits companies to not reassess under the use of eithernew standard lease identification, lease classification and initial direct costs. We did not elect the retrospective
use-of-hindsight
or cumulative effect transition method. As described in Note 2 — Significant Accounting Policies,Revenue Recognition, of the Notespractical expedient pertaining to land easements, as the Consolidated Financial Statements, we defer revenue and the related cost of sales on shipments to stocking distributors until the distributors resell the products to their customers. Uponlatter is not applicable.
The adoption of the new guidance, we willstandard resulted in the recognition of ROU assets and lease liabilities of approximately $4,329,000 and $4,455,000, respectively, as of January 1, 2019. There was no longer be permitted to defer revenue until sale by the stocking distributor to the end customer, but rather, will be required to estimate the effects of returns and allowances provided to stocking distributors and record revenue at the time of sale to the stocking distributor. We currently plan to utilize the cumulative effect transition method for adoption of the standard. Upon adoption, we will recognize the cumulative effect of adopting this guidance as an adjustment to the balance of retained earnings as of January 1, 2018. We are continuing to evaluate the future impact and method of adoption the new guidance, willand the standard did not have a material impact on our consolidated statements of operations or cash flows for the year ended December 31, 2019.
Other new pronouncements issued but not effective until after December 31, 2019 are not expected to have a material impact on our consolidated financial statements and related disclosures.

statements.

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Year ended December 31, 20162019 compared to Year ended December 31, 2015

Net2018

See Note 19,
Segment Information
, to the Consolidated Financial Statements for a discussion of our change to segment reporting in the second quarter of 2019.
Consolidated net revenues for 20162019 were $200,280,000,$262,977,000, a decrease of $19,914,000$28,243,000, or 9.0%9.7%, as compared to $220,194,000$291,220,000 for 2015.

The components of revenue2018.

Net revenues, by product line, for the years ended December 31 were as follows (dollars in thousands):

           Increase (decrease) 
   2016   2015   $   % 

BBU

  $151,429   $173,108   $(21,679)    (12.5)% 

VI Chip

   38,369    35,198    3,171    9.0% 

Picor

   10,482    11,888    (1,406)    (11.8)% 
  

 

 

   

 

 

   

 

 

   

Total

  $200,280   $220,194   $(19,914)    (9.0)% 
  

 

 

   

 

 

   

 

 

   

                 
     
Increase (decrease)
 
 
2019
  
2018
  
      $      
  
      %      
 
Brick Products
 $
187,896
  $
186,704
  $
1,192
   
0.6
%
Advanced Products
  
75,081
   
104,516
   
(29,435
)  
(28.2
)%
                 
Total
 $
262,977
  $
291,220
  $
(28,243
)  
(9.7
)%
                 
The overall year to year decrease in consolidated net revenues was primarily due to an 8.7%overall 17.7% decrease in overall BBU bookings for 2016the year ended December 31, 2019, compared to 2015. While VI Chipthe year ended December 31, 2018, as bookings declined by 31.2% and Picor bookings increased year over year, a large portion of their respective bookings10.1% for Advanced Products and Brick Products, respectively, for reasons described in the third and fourth quarter of 2016 was scheduled for shipment in 2017, mitigating the impact of the increased bookings on 2016 revenue. Customer bookings patterns continue to be unpredictable, particularly with the VI Chip and Picor segments. The decrease in BBU revenues was primarily attributable to a decrease in BBU module and configurable product revenues of approximately $18,225,000 and a decrease in Vicor Custom Power revenues of $5,440,000, due to the consolidation of operations noted
2019 Results
section, above.

Gross margin for 20162019 decreased $8,309,000,$16,005,000, or 8.3%11.5%, to $91,209,000$122,966,000 from $99,518,000$138,971,000 in 2015.2018. Gross margin as a percentage of net revenues increaseddecreased to 45.5%46.8% in 20162019 from 45.2%47.7% in 2015. The lower gross margin dollars is2018. Both decreases were primarily due to the lower net revenues, while the higher gross margin percentage was primarily due to a more favorable product mix and lower charges for warranty reserves in 2016 compared to 2015.

Income (loss) from operations by segment for the years ended December 31 were as follows (dollars in thousands):

           Increase (decrease) 
   2016   2015         $               %       

BBU

  $11,750   $21,743   $(9,993)    (46.0)% 

VI Chip

   (16,494)    (21,040)    4,546    21.6% 

Picor

   (637)    (290)    (347)    (119.7)% 

Corporate

   (933)    (680)    (253)    (37.2)% 
  

 

 

   

 

 

   

 

 

   

Total

  $(6,314)   $(267)   $(6,047)    (2,264.8)% 
  

 

 

   

 

 

   

 

 

   

The decrease in BBU operating profit in 2016 compared to 2015 was primarily due to a decrease in revenues and related decrease in gross margin, partially offset by decreases in operating expenses. The primary decreases in operating expenses were compensation expenses, commissions expense, and legal fees. Compensation and other operating expenses have decreased in part due to the Westcor consolidation and the consolidation of our Vicor Custom Power operations discussed above. The decrease in commissions expense is primarily attributable to the decrease in net revenues, subject to commissions. Legal fees, which are charged to the BBU segment, are associated with the ongoing patent infringement litigation. The decrease in VI Chip operating loss in 2016 compared to 2015 was due to the increase in revenues and the related increase in gross margin, along with the reversalhigher tariff charges of approximately $768,000$5,089,000 and lower production volume on absorption of stock-based compensation expense related to certain VI Chip performance-based stock options in the third quartermanufacturing overhead costs, partially offset by an improved mix of 2016. The VI Chip segment continues to incur significant operating losses as revenue volume and related gross margins are not sufficient to cover fixed manufacturing costs and operating expenses, particularly research and development expenses. The cash needs for each segment are primarily for working capital and capital expenditures. Positive cash flow from BBU historically has funded, and is expected to continue to fund, VI Chip and Picor operations, as well as the capital expenditures for all segments for the foreseeable future.

higher-margin products shipped.

Selling, general, and administrative expenses were $55,675,000$62,557,000 for 2016, a decrease2019, an increase of $2,638,000,$333,000, or 4.5%0.5%, as compared to $58,313,000$62,224,000 for 2015.2018. As a percentage of net revenues, selling, general, and administrative expenses increased to 27.8%23.8% in 20162019 from 26.5%21.4% in 2015,2018, primarily due to the decrease in net revenues.

The components of the $2,638,000 decrease$333,000 increase in selling, general, and administrative expenses were as follows (dollars in thousands):

   Increase (decrease) 

Compensation

  $(1,077)    (3.1)%(1) 

Commissions expense

   (748)    (17.4)%(2) 

Legal fees

   (734)    (31.9)%(3) 

Depreciation and amortization

   (148)    (5.2)%(4) 

Supplies expense

   (138)    (25.3)%(5) 

Project expenses

   (132)    (73.5)%(6) 

Computer expenses

   (52)    (5.2)% 

Employment recruiting

   (40)    (15.3)% 

Travel expenses

   300    11.3%(7) 

Outside services

   362    22.1%(8) 

Other, net

   (231)    (3.0)% 
  

 

 

   
  $(2,638)    (4.5)% 
  

 

 

   

         
 
Increase (decrease)
 
Depreciation and amortization
 $
384
   
15.8
%(1)
Outside services
  
285
   
15.0
%(2)
Advertising expenses
  
217
   
7.1
%(3)
Facilities allocations
  
156
   
10.4
%(4)
Commissions
  
104
   
3.0
%
Bad debt expense
  
(209
)  
(321.7
)%(5)
Legal fees
  
(223
)  
(12.2
)%(6)
Compensation
  
(362
)  
(0.9
)%(7)
Other, net
  
(19
)  
(0.2
)%
         
 $
333
   
0.5
%
         
(1)Increase attributable to an increase in additions of furniture and fixtures and building improvements.
(2)Increase in use of outside service providers in Andover.
(3)Increase primarily attributed to increases in sales support expenses, direct mailings, and advertising in trade publications.
36
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(4)Increase primarily attributable to an increase in utilities and building maintenance expenses.
(5)Decrease attributable to favorable historical collections experience over the period analyzed.
(6)Decrease attributable to a decrease in corporate legal matters.
(7)Decrease primarily attributable to the reversal of VI Chip performance-based stockdecreased stock-based compensation expense, (see Note 3 to the Consolidated Financial Statements), the consolidation of Westcor operations, and the consolidation of our Vicor Custom Power operations, partially offset by annual compensation adjustments in May 2016.

(2)Decrease primarily attributable to the2019. The decrease in net revenues subjectstock-based compensation expense was due to commissions.decreased expense in 2019 for certain Vicor stock options held by a
non-employee.

(3)Decrease attributable to reduced activity associated with the patent infringement claims filed against us during the first quarter of 2011 by SynQor. See Note 16 to the Consolidated Financial Statements.

(4)Decrease attributable to certain Corporate segment fixed assets becoming fully depreciated during 2016.

(5)Decrease primarily attributable to a decrease in spending by the VI Chip segment.

(6)Decrease primarily attributable to a decrease in spending by the BBU segment.

(7)Increase primarily attributable to increased travel by our sales and marketing personnel.

(8)Increase primarily attributable to an increase in the use of outside consultants at certain international locations.

Research and development expenses increased $376,000,$2,302,000, or 0.9%5.2%, to $41,848,000$46,588,000 in 20162019 from $41,472,000$44,286,000 in 2015.2018. As a percentage of net revenues, research and development expenses increased to 20.9%17.7% in 20162019 from 18.8%15.2% in 2015,2018, primarily due to the decrease in net revenues.

revenues, an increase in prototype development costs, and a net increase in headcount.

The components of the $376,000$2,302,000 increase in research and development expenses were as follows (in(dollars in thousands):

   Increase (decrease) 

Project andpre-production materials

  $1,214    26.5%(1) 

Compensation

   502    1.8%(2) 

Computer expenses

   91    22.7% 

Outside services

   (86)    (9.7)% 

Facilities expenses

   (221)    (10.2)%(3) 

Depreciation and amortization

   (357)    (14.8)%(4) 

Deferred costs

   (774)    (474.7)%(5) 

Other, net

   7    0.3% 
  

 

 

   
  $376    0.9% 
  

 

 

   

         
 
Increase (decrease)
 
Compensation
 $
1,580
   
5.0
%(1)
Project and
pre-production
materials
  
1,548
   
28.4
%(2)
Depreciation and amortization
  
(141
)  
(7.3
)%
Deferred costs
  
(761
)  
(77.5
)%(3)
Other, net
  
76
   
1.2
%
         
 $
2,302
   
5.2
%
         
(1)Increase primarily attributable to increases in spending by the BBU and VI Chip segments.

(2)Increase primarily attributable to annual compensation adjustments in May 2016.2019 and increased stock-based compensation expense.

(3)(2)DecreaseIncrease primarily attributable to a decrease in utilities and building maintenance expenses.increased spending for new product development of Advanced Products.

(4)Decrease attributable to certain BBU segment fixed assets becoming fully depreciated during 2016.

(5)(3)Decrease primarily attributable to an increase in deferred costs capitalized for certain
non-recurring
engineering projects for which the related revenues have been deferred.

The significant changes in the components of “Other income (expense), net” for the years ended December 31 were as follows (in thousands):

   2016   2015   Increase
(decrease)		 

Rental income

  $462   $—   $462 

Foreign currency losses, net

   (268)    (161)    (107) 

Interest income

   68    47    21 

Credit gains on available for sale securities

   13    12    1 

(Loss) gain on disposal of equipment

   (4)    60    (64) 

Other

   13    67    (54) 
  

 

 

   

 

 

   

 

 

 
  $284   $25   $259 
  

 

 

   

 

 

   

 

 

 

During the second quarter of 2016, we began recognizing rental income under a new leasing agreement with a third party for the former Westcor facility.

             
 
2019
  
2018
  
Increase
(decrease)
 
Rental income
 $
792
  $
792
  $
—
 
Interest income
  
300
   
257
   
43
 
Foreign currency losses, net
  
(108
)  
(260
)  
152
 
Gain on disposal of equipment
  
38
   
57
   
(19
)
Credit gains on
available-for-sale
securities
  
4
   
7
   
(3
)
Other
  
40
   
21
   
19
 
             
 $
1,066
  $
874
  $
192
 
         ��   
Our exposure to market risk for fluctuations in foreign currency exchange rates relates primarily to the operations of VJCL, for which the functional currency is the Japanese Yen. The functional currency of theYen, and all other subsidiaries in Europe and other subsidiaries in Asia, for which the functional currency is the U.S. Dollar. While our Vicor B.V. operation also potentially exposes us to exchange rate risk, as that subsidiary’s sales are denominatedThese other subsidiaries in EurosEurope and Pounds Sterling, any periodic gains or losses associated withAsia experienced favorable foreign currency exchange rate fluctuations are small, given the small U.S. Dollar valuein 2019 compared to 2018. Interest income increased due to an increase in interest rates.
37
Table of shipments we make to Vicor B.V.

LossContents

Income before income taxes was $(6,030,000)$14,887,000 in 2016,2019, as compared to $(242,000)$32,933,000 in 2015.

2018.

The provision (benefit) for income taxes and the effective income tax rate for the years ended December 31 were as follows (dollars in thousands):

   2016  2015 

Provision (benefit) for income taxes

  $231  $(401) 

Effective income tax rate

   3.8%   (165.7)% 

For the years ended December 31, 2016

         
 
2019
  
2018
 
Provision for income taxes
 $
778
  $
1,087
 
Effective income tax rate
  
5.2
%  
3.3
%
The 2019 and 2015, no2018 income tax benefit could be recognized for the majority of our losses due to a full valuation allowance against all domestic deferred tax assets. The tax provision for both years includesprovisions include estimated federal, state and foreign income taxes on the Company’s
pre-tax
income. Federal tax expense was offset in both years by net operating loss carryforwards and also by tax credits in 2015, estimated federal and state income taxes for one noncontrolling interest subsidiary. In 2016, in connection with the acquisition of 100% ownership of certain operating assets and cash of Converpower Corporation, the related deferred tax liability for unremitted earnings of $55,000 was reversed and recorded as a discrete benefit in the first quarter of 2016 (see2019.
See Note 9 to the Consolidated Financial Statements). In 2015, we recognized a tax benefit of approximately $555,000 as a discrete item in the fourth quarter of 2015 for the release of certain tax reserves, due to entering into voluntary disclosure agreements with several states. In addition, in connection with the sale of our 49% interest in a noncontrolling interest subsidiary, Aegis Power Systems, Inc., the related deferred tax liability for unremitted earnings of $274,000 was reversed and recorded as a deferred tax benefit in the fourth quarter of 2015 (see Note 9 to the Consolidated Financial Statements). We continue to maintain a full valuation allowance against all

domestic net deferred tax assets and the majority of foreign net deferred tax assets. The effective tax rate was lower in 2016 than 2015 as the loss before income taxes and before the gain from sale of equity method investments was significantly higher in 2016 than in 2015.

In September 2015, Intersil acquired GWS. At that time, our gross investment innon-voting convertible preferred stock of GWS totaled $4,999,719, giving us an approximately 27% ownership interest in GWS. We received cash consideration of $4,999,719 for our investment from Intersil, representing full preference value of our shares ofnon-voting convertible preferred stock of GWS. Since the investment in GWS had previously been written down to zero, the full amount of the consideration was recorded as a gain from sale of equity method investment in the third quarter of 2015. (See Note 816 to the Consolidated Financial Statements for additional information.)

Net loss per share attributable to Vicor Corporation was $(0.16) for the year ended December 31, 2016, compared to net income per diluted share of $0.13 for the year ended December 31, 2015.

Year ended December 31, 2015 compared to Year ended December 31, 2014

Net revenues for 2015 were $220,194,000, a decrease of $5,537,000 or 2.5%, as compared to $225,731,000 for 2014.

The components of revenue for the years ended December 31 were as follows (dollars in thousands):

           Increase (decrease) 
   2015   2014         $               %       

BBU

  $173,108   $184,224   $(11,116)    (6.0)% 

VI Chip

   35,198    32,929    2,269    6.9% 

Picor

   11,888    8,578    3,310    38.6% 
  

 

 

   

 

 

   

 

 

   

Total

  $220,194   $225,731   $(5,537)    (2.5)% 
  

 

 

   

 

 

   

 

 

   

The overall year to year decrease in BBU net revenues was primarily due to a 8.2% decrease in bookings in 2015 compared to 2014. The decrease in BBU revenues was primarily attributable to decreases in BBU revenues of approximately $4,481,000, Vicor Custom Power revenues of approximately $3,507,000, and VJCL revenues of approximately $3,100,000. While bookings declined across all three segments on a year over year basis, VI Chip and Picor revenues increased due to strong bookings in the latter half of 2014, particularly from the two segments’ major datacenter customer.

Gross margin for 2015 increased $2,398,000, or 2.5%, to $99,518,000 from $97,120,000 in 2014. Gross margin as a percentage of net revenues increased to 45.2% in 2015 from 43.0% in 2014. The increases in gross margin and gross margin percentage were primarily due to the increase in VI Chip and Picor net revenues, particularly due to a larger proportion of higher margin Picor products. In addition, the gross margin for BBU products remained relatively flat, despite their decrease in net revenues, due to average selling price improvements across several BBU programs, along with realizing the full benefitdisclosure regarding our current assessment of the Westcor consolidation into Andover manufacturing.

Income (loss) from operations by segment for the years ended December 31 were as follows (dollars in thousands):

           Increase 
   2015   2014   $   % 

BBU

  $21,743   $15,499   $6,244    40.3% 

VI Chip

   (21,040)    (29,015)    7,975    27.5% 

Picor

   (290)    (407)    117    28.7% 

Corporate

   (680)    (840)    160    19.0% 
  

 

 

   

 

 

   

 

 

   

Total

  $(267)   $(14,763)   $14,496    98.2% 
  

 

 

   

 

 

   

 

 

   

The increase in BBU operating profit in 2015 compared to 2014 was due to decreases in operating expenses, partially offset by decreases in revenues and the related gross margin. The primary decreases in operating expenses were legal fees and compensation expenses. Legal fees, which are charged to the BBU segment, are associated with the ongoing patent infringement litigation. The decrease in legal fees continued the trend begun in the fourth quarter of 2014 associated with continued delays in the expected trial date related to the SynQor litigation. Compensation and other operating expenses have decreased in part due to the Westcor consolidation discussed above.

Selling, general, and administrative expenses were $58,313,000 for 2015, a decrease of $9,884,000, or (14.5)%, as compared to $68,197,000 for 2014. As a percentage of net revenues, selling, general, and administrative expenses decreased to 26.5% in 2015 from 30.2% in 2014.

The components of the $9,884,000 decrease in selling, general, and administrative expenses were as follows (dollars in thousands):

   Increase (decrease) 

Legal fees

  $(8,621)    (78.9)%(1) 

Compensation

   (1,064)    (3.0)%(2) 

Commissions expense

   (310)    (6.7)%(3) 

Travel expenses

   (280)    (9.5)%(4) 

Advertising expenses

   (234)    (9.6)%(5) 

Business taxes and fees

   83    16.0% 

Outside services

   130    8.1% 

Audit, tax, and accounting fees

   145    8.1% 

Facilities expenses

   145    10.0% 

Other, net

   122    2.0% 
  

 

 

   
  $(9,884)    (14.5)% 
  

 

 

   

(1)Decrease attributable to reduced activity associated with the patent infringement claims filed against us during the first quarter of 2011 by SynQor. See Note 16 to the Consolidated Financial Statements.

(2)Decrease primarily attributable to the decrease in bonuses and the consolidation of Westcor operations.

(3)Decrease primarily attributable to the decrease in net revenues subject to commissions.

(4)Decrease primarily attributable to decreased travel by our sales and marketing personnel.

(5)Decrease primarily attributed to decreases in sales support expenses, direct mailings, and advertising in trade publications.

Research and development expenses decreased $7,000, or 0.0%, to $41,472,000 in 2015 from $41,479,000 in 2014. As a percentage of net revenues, research and development increased to 18.8% in 2015 from 18.4% in 2014, primarily due to the decrease in net revenues.

The significant changes in the components of “Other income, net” for the years ended December 31 were as follows (in thousands):

   2015   2014   Increase (decrease) 

Foreign currency losses, net

  $(161)   $(196)   $35 

Gain on disposal of equipment

   60    22    38 

Interest income

   47    80    (33) 

Credit gains on available for sale securities

   12    311    (299) 

Other

   67    51    16 
  

 

 

   

 

 

   

 

 

 
  $25   $268   $(243) 
  

 

 

   

 

 

   

 

 

 

We assess the value of our investment portfolio of auction rate securities each quarter, and record any credit gains or losses calculated as a component of “Other income (expense), net”. Our exposure to market risk fluctuations in foreign currency exchange rates relate primarily to the operations of VJCL, for which the functional currency is the Japanese Yen. The functional currency of all other subsidiaries in Europe and Asia is the U.S. Dollar. While our Vicor B.V. operation also potentially exposes us to exchange rate risk, as that subsidiary’s sales are denominated in Euros and Pounds Sterling, any periodic gains or losses associated with exchange rate fluctuations are small, given the small U.S. Dollar value of shipments we make to Vicor B.V. The decrease in interest income for the period was due to lower average balances on our long-term investments, as well as a general decrease in interest rates earned on these investments.

Loss before income taxes was $(242,000) in 2015, as compared to $(14,495,000) in 2014.

The benefit for income taxes and the effective income tax rate for the years ended December 31 were as follows (dollars in thousands):

   2015  2014 

Benefit for income taxes

  $(401)  $(425) 

Effective income tax rate

   (165.7)%   (2.9)% 

For the years ended December 31, 2015 and 2014, no tax benefit could be recognized for the majority of our losses due to a full valuation allowance against all domestic deferred tax assets. In 2015, we recognized a tax benefit of approximately $555,000 as a discrete item in the fourth quarter of 2015 for the release of certain tax reserves, due to entering into voluntary disclosure agreements with several states. In addition, in connection with the sale of our 49% interest in a noncontrolling interest subsidiary, Aegis Power Systems, Inc., the related deferred tax liability for unremitted earnings of $274,000 was reversed and recorded as a deferred tax benefit in the fourth quarter of 2015 (see Note 9 to the Consolidated Financial Statements). In 2014, we recognized a tax benefit of approximately $552,000 as a discrete item in the third quarter of 2014 for the release of certain income tax reserves, due to the completion of an Internal Revenue Service examination of its 2010 and 2011 federal corporate income tax returns during the quarter. The tax benefits in both years were partially offset by estimated federal and state taxes for one noncontrolling interest subsidiary as well as estimated state and foreign taxes in jurisdictions in which we do not have net operating loss carryforwards. We continue to maintain a full valuation allowance against all domestic net deferred tax assets, and in 2015, established a valuation allowance against the majority of foreign net deferred tax assets. The effective tax rate was higher in 2015 than 2014 as the loss before income taxes and before the gain from sale of equity method investments was significantly lower in 2015 than in 2014.

In September 2015, Intersil acquired GWS. At that time, our gross investment innon-voting convertible preferred stock of GWS totaled $4,999,719, representing an approximately 27% ownership preference in GWS. We received cash consideration from Intersil of $4,999,719, representing full preference valuepossible release (i.e., reduction) of the shares of

non-voting convertible preferred stock of GWS we owned. Since the investment in GWS had previously been reduced to zero, the full amount of the consideration was recorded as a gain from sale of equity method investmentallowance in the third quarter of 2015. See Note 8 to the Consolidated Financial Statements for additional information.

Net income (loss) of noncontrolling interest increased by $415,000 for 2015 to $232,000, as compared to $(183,000) for 2014. This increase was due to the increase in net income during 2015 recorded by entities in which others held an equity interest (i.e., three Vicor Custom Power subsidiaries and VJCL).

future.

Net income per diluted share attributable to Vicor Corporation was $0.13$0.34 for the year ended December 31, 2015,2019, compared to net lossincome per diluted share of $(0.36)$0.78 for the year ended December 31, 2014. The increase in net income per diluted share was due in part to the acquisition of GWS by Intersil2018.
Liquidity and the resulting gain from sale of equity method investment recorded by us, as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Capital Resources

At December 31, 2016,2019, we had $56,170,000$84,668,000 in cash and cash equivalents. The ratio of current assets to current liabilities was 5.0:6.0:1 at December 31, 2016,2019, as compared to 5.6:4.6:1 at December 31, 2015. Working2018. Net working capital decreased $5,360,000increased $20,074,000 to $89,545,000$149,136,000 at December 31, 20162019 from $94,905,000$129,062,000 at December 31, 2015.

2018.

The primary working capital changes were due to the following (in thousands):

   Increase (decrease) 

Cash and cash equivalents

  $(6,810) 

Accounts receivable

   (766) 

Inventories

   3,694 

Other current assets

   148 

Accounts payable

   (118) 

Accrued compensation and benefits

   (616) 

Accrued expenses

   389 

Accrued severance charges

   195 

Income taxes payable

   (61) 

Deferred revenue

   (1,415) 
  

 

 

 
  $(5,360) 
  

 

 

 

     
 
Increase (decrease)
 
Cash and cash equivalents
 $
14,111
 
Accounts receivable
  
(5,558
)
Inventories
  
1,817
 
Other current assets
  
3,636
 
Accounts payable
  
7,144
 
Accrued compensation and benefits
  
247
 
Accrued expenses
  
(59
)
Sales allowances
  
(193
)
Accrued severance and other charges
  
234
 
Short-term lease liabilities
  
(1,520
)
Income taxes payable
  
653
 
Short-term deferred revenue and customer prepayments
  
(438
)
     
 $
20,074
 
     
The primary sources of cash for the year ended December 31, 2016,2019 were $544,000 from operating activities of $22,208,000, and $1,584,000 of proceeds from the issuance of Common Stock associated withupon the exercise of options for the purchaseunder our stock option plans and our 2017 Employee Stock Purchase Plan of shares of our Common Stock.$4,742,000. The primary useuses of cash for the year ended December 31, 2016,2019 was the purchase of equipment of $8,428,000.

$12,485,000.

In November 2000, our Board of Directors authorized the repurchase of up to $30,000,000 of Common Stock (the “November 2000 Plan”). The November 2000 Plan authorizes us to make such repurchases from time to time in the open market or through privately negotiated transactions. The timing of such repurchases and the
38
Table of Contents
number of shares purchased in each transaction are at the discretion of management based on its view of economic and financial market conditions. We did not repurchase shares of Common Stock under the November 2000 Plan during the year ended December 31, 2016.2019. As of December 31, 2016,2019, we had approximately $8,541,000 remaining for share purchases under the November 2000 Plan.

During the yearsyear ended December 31, 2016 and 2015, one of our2019, three subsidiaries paid a total of $750,000 and $250,000$3,602,000 in cash dividends, respectively,of which $3,463,000 was paid to us and $139,000 was paid to outside shareholders. Dividends paid to outside shareholders are accounted for as a reduction in noncontrolling interest. During the year ended December 31, 2018, one subsidiary paid a total of $632,000 in cash dividends, all of which werewas paid to us.

As of December 31, 2016,2019, we had no
off-balance
sheet arrangements.

The table below summarizes our contractual obligations for operating leases as of December 31, 20162019 (in thousands):

   Payments Due by Period 

Contractual Obligations

  Total   Less than
1 Year		   Years 2 & 3   Years 4 & 5   More Than
5 Years		 

Operating lease obligations

  $4,771   $1,572   $1,569   $699   $931 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

                     
 
Payments Due by Period
 
Contractual Obligations
 
Total
  
Less than
1 Year
  
Years 2 & 3
  
Years 4 & 5
  
More Than
5 Years
 
Operating lease obligations (1)
 $
4,711
  $
1,657
  $
1,690
  $
1,193
  $
171
 
                     
(1)For further information, refer to Note 13 of the notes to Consolidated Financial Statements,
Leases
, included in Part II, Item 8 of this Annual Report on Form
10-K.
We had approximately $3,222,000 of capital expenditure commitments, principally for manufacturing equipment, as of December 31, 2019, which we intend to fund with existing cash. Our primary liquidity needs are for making continuing investments in manufacturing equipment.equipment and, if we proceed with the planned construction of 90,000 square feet of additional manufacturing space adjoining our existing Andover manufacturing facility, for funding architectural and construction costs. We believe cash generated from operations and the total of our cash and cash equivalents will be sufficient to fund planned operations andoperational needs, capital equipment purchases, and the planned construction, for the foreseeable future. We have approximately $2,393,000 of capital expenditure commitments, principally for manufacturing equipment, as of December 31, 2016.

We do not consider the impact of inflation and changing prices on our business activities or fluctuations in the exchange rates for foreign currency transactions to have been significant during the last three fiscal years.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 7A.
We are exposed to a variety of market risks, including changes in interest rates affecting the return on our cash and cash equivalents and fluctuations in foreign currency exchange rates. As our cash and cash equivalents consist principally of cash accounts and money market securities, which are short-term in nature, we believe our exposure to market risk on interest rate fluctuations for these investments is not significant. As of December 31, 2016,2019, our long-term investment portfolio, recorded on our Consolidated Balance Sheet as “Long-term investments,investment, net”, consisted of a single auction rate security with a par value of $3,000,000, purchased through and held in custody by a broker-dealer affiliate of Bank of America, N.A., that has experienced failed auctions (the “Failed Auction Security”) since February 2008. While the Failed Auction Security is Aaa/AA+ rated by major credit rating agencies, collateralized by student loans and guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program, continued failure to sell at its periodic auction dates (i.e., reset dates) could negatively impact the carrying value of the investment, in turn leading to impairment charges in future periods. Periodic changes in the fair value of the Failed Auction Security attributable to credit loss (i.e., risk of the issuer’s default) are recorded through earnings as a component of “Other income (expense), net”, with the remainder of any periodic change in fair value not related to credit loss (i.e., temporary
“mark-to-market”
carrying value adjustments) recorded in “Accumulated other comprehensive income (loss) income””, a component of Vicor Corporation Stockholders’ Equity. Should we conclude a decline in the fair value of the Failed Auction
39
Table of Contents
Security is other than temporary, such losses would be recorded through earnings as a component of “Other income (expense), net”. We do not believe there was an “other-than-temporary” decline in value in this security as of December 31, 2016.

2019.

We estimate our annual interest income would change by approximately $30,000 in 20162019 for each 100 basis point increase or decrease in interest rates.

Our exposure to market risk for fluctuations in foreign currency exchange rates relates primarily to the operations of VJCL, for which the functional currency is the Japanese Yen, and changes in the relative value of the Yen to the U.S. Dollar. Relative to our Yen exposure as of December 31, 2016,2019, we estimate a 10% unfavorable movement in the value of the Yen relative to the U.S. Dollar would increase our foreign currency loss by approximately $188,000. As the$54,000. The functional currency of all other subsidiaries in Europe and other subsidiaries in Asia is the U.S. Dollar,Dollar. While we believe risk to fluctuations in foreign currency exchange rates for these subsidiaries is generally not significant, as these operations do not incur materialthey can be subject to substantial currency changes, and therefore foreign exchange exposures.

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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX

  Page 

Page
FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

  44
42
 

Consolidated Balance Sheets as of December 31, 20162019 and December 31, 20152018

  
45
 

Consolidated Statements of Operations For The Years Ended December 31, 2016, 2015,2019, 2018, and 20142017

  
46
 

Consolidated Statements of Comprehensive Income (Loss) For The Years Ended December 31, 2016, 2015,2019, 2018, and 20142017

  
47
 

Consolidated Statements of Cash Flows For The Years Ended December 31, 2016, 2015,2019, 2018, and 20142017

  
48
 

Consolidated Statements of Equity For The Years Ended December 31, 2016, 2015,2019, 2018, and 20142017

  
49
 

Notes to the Consolidated Financial Statements

  
50
 

Schedule (Refer to Item 15)

  
89
 

41
Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The

Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors and Stockholders

Vicor Corporation:

Opinion on the
Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Vicor Corporation and subsidiaries (the Company) as of December 31, 20162019 and 2015, and2018, the related consolidated statements of operations, comprehensive income, (loss), cash flows, and equity for each of the years in the
three-year
period ended December 31, 2016. In connection with our audits of2019, and the consolidated financial statements, we also have audited therelated notes and financial statement schedule listed in Item 15(a)(2).
,
collectively, the consolidated financial statements. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the
three-year
period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control – Integrated Framework (2013)
 issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion,

Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements referredthat were communicated or required to above present fairly,be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in all material respects, the financial position of Vicor Corporation and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also inany way our opinion on the related financial statement schedule, when considered in relation to the basic consolidated financial statements, taken as a whole, presents fairly, in all material respects,and we are not, by communicating the information set forth therein.

We also have audited, in accordance withcritical audit matters below, providing separate opinions on the standardscritical audit matters or on the accounts or disclosures to which they relate.

42
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Evaluation of the Publicrealizability of raw materials inventory
As discussed in Note 3 to the consolidated financial statements, approximately 73%, or $35.9 million, of the Company’s total inventory balance is comprised of raw materials. The Company Accounting Oversight Board (United States), Vicor Corporation’speriodically analyzes its raw materials inventory and writes down any amounts that have a cost basis in excess of estimated net realizable value. Inventory write downs generally relate to excess quantities, obsolescence, or products that are unmarketable.
We identified evaluation of the realizability of raw materials inventory to be a critical audit matter. Overall, raw materials have a higher risk of a significant write down as the Company generally maintains higher levels of raw materials inventory to manage prolonged lead times for delivery of purchased raw materials within the global electronics supply chain. Specifically, the Company must exercise judgment to estimate excess, obsolete, or unmarketable inventory based on their forecast of future usage. Forecasted future usage considers historical consumption, existing backlog and expected market conditions and requires judgement to predict as changes in customer demand and delivery lead times can fluctuate and are outside the Company’s control. Evaluation of the realizability of raw materials inventory required auditor judgment because the Company’s estimate is judgmental and is based on a number of quantitative and qualitative assumptions. Changes in forecasted future usage could have a significant impact on the timing and amount of write downs of raw materials inventory.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controlcontrols over the Company’s process to develop its forecast of usage, including estimating the projected demand based on historical usage and the potential impact of market conditions. We evaluated the Company’s estimate of the realizability of raw materials by:
Assessing historical consumption as a predictor of future product demand by comparing it to trends in industry publications;
Examining the historical accuracy of the Company’s prior estimates by considering subsequent sales and write off activity;
Evaluating the manual adjustments made to forecast future demand based on historical usage data
Interviewing operational personnel of the Company involved in purchasing and manufacturing to evaluate product innovations, changes in customer mix, and other factors that may impact expected future sales and usage of raw material inventory.
Evaluation of the realizability of U.S. deferred tax assets
As discussed in Note 16 to the consolidated financial reportingstatements, the Company had $30.4 million of U.S. net deferred tax assets as of December 31, 2016, based on criteria established inInternal Control — Integrated Framework (2013) issued by2019 with an offsetting valuation allowance of $30.4 million. The deferred tax assets consist primarily of U.S. research and development tax credits that can be carried forward to reduce future U.S. income taxes. In evaluating the Committeecontinued need for a valuation allowance, the Company considers the nature and trend of Sponsoring Organizationscurrent and cumulative taxable income or losses, estimates of future taxable income, industry and global economic conditions and the duration of statutory carryforward periods.
We identified the evaluation of the Treadway Commission (COSO), and our report dated March 7, 2017expressed an unqualified opinion on the effectivenessrealizability of the U.S. deferred tax assets as a critical audit matter due to the magnitude of the deferred tax assets and the subjectivity involved in evaluating the recoverability of those deferred tax assets. This subjectivity is driven by uncertainty inherent in estimating the Company’s ability to generate sufficient taxable income of the appropriate character in the future.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controlcontrols over financial reporting.

the Company’s income tax process, including controls over the assessment of the realizability of deferred tax assets and the application of relevant tax regulations. To assess the Company’s ability to forecast, we compared the Company’s previous forecasts to actual results. We also

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assessed and evaluated the Company’s consideration of the impact of industry and global economic conditions. We also involved federal and state income tax professionals with specialized skills and knowledge, who assisted in assessing the Company’s application of the relevant tax regulations and evaluating the realizability of deferred tax assets.
/s/ KPMG LLP

We have served as the Company’s auditor since 2013.
Boston, Massachusetts

March 7, 2017

February 28, 2020
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VICOR CORPORATION

CONSOLIDATED BALANCE SHEETS

Consolidated Balance Sheets
December 31, 20162019 and 2015

2018

(In thousands, except per share data)

   2016  2015 
ASSETS 

Current assets:

   

Cash and cash equivalents

  $56,170  $62,980 

Accounts receivable, less allowance of $153 in 2016 and $171 in 2015

   25,216   25,982 

Inventories, net

   27,136   23,442 

Other current assets

   3,250   3,102 
  

 

 

  

 

 

 

Total current assets

   111,772   115,506 

Long-term deferred tax assets

   38   15 

Long-term investments, net

   2,508   2,866 

Property, plant and equipment, net

   37,574   37,450 

Other assets

   2,175   1,708 
  

 

 

  

 

 

 

Total assets

  $154,067  $157,545 
  

 

 

  

 

 

 
LIABILITIES AND EQUITY 

Current liabilities:

   

Accounts payable

  $7,588  $7,470 

Accrued compensation and benefits

   8,965   8,349 

Accrued expenses

   2,179   2,568 

Accrued severance charges

   —   195 

Income taxes payable

   92   31 

Deferred revenue

   3,403   1,988 
  

 

 

  

 

 

 

Total current liabilities

   22,227   20,601 

Long-term deferred revenue

   374   468 

Contingent consideration obligations

   253   144 

Long-term income taxes payable

   196   192 

Deferred income taxes

   —   55 
  

 

 

  

 

 

 

Total liabilities

   23,050   21,460 

Commitments and contingencies (Note 16)

   

Equity:

   

Vicor Corporation stockholders’ equity:

   

Preferred Stock, $.01 par value, 1,000,000 shares authorized; no shares issued

   

Class B Common Stock: 10 votes per share, $.01 par value, 14,000,000 shares authorized, 11,758,218 shares issued and outstanding in 2016 and 2015

   118   118 

Common Stock: 1 vote per share, $.01 par value, 62,000,000 shares authorized 38,922,489 shares issued and 27,251,003 shares outstanding (38,705,564 shares issued and 27,034,078 shares outstanding in 2015)

   397   395 

Additionalpaid-in capital

   176,344   174,337 

Retained earnings

   93,438   99,685 

Accumulated other comprehensive loss

   (561)   (577) 

Treasury stock at cost: 11,671,486 shares in 2016 and 2015

   (138,927)   (138,927) 
  

 

 

  

 

 

 

Total Vicor Corporation stockholders’ equity

   130,809   135,031 

Noncontrolling interest

   208   1,054 
  

 

 

  

 

 

 

Total equity

   131,017   136,085 
  

 

 

  

 

 

 

Total liabilities and equity

  $154,067  $157,545 
  

 

 

  

 

 

 

 
2019
  
2018
 
ASSETS
 
Current assets:
      
Cash and cash equivalents
 $
84,668
  $
70,557
 
Accounts receivable, less allowance of $59 in 2019 and $224 in 2018
  
38,115
   
43,673
 
Inventories, net
  
49,187
   
47,370
 
Other current assets
  
7,096
   
3,460
 
         
Total current assets
  
179,066
   
165,060
 
Long-term deferred tax assets
  
205
   
265
 
Long-term investment, net
  
2,510
   
2,526
 
Property, plant and equipment, net
  
56,952
   
50,432
 
Other assets
  
1,994
   
2,785
 
         
Total assets
 $
240,727
  $
221,068
 
         
LIABILITIES AND EQUITY
 
Current liabilities:
      
Accounts payable
 $
9,005
  $
16,149
 
Accrued compensation and benefits
  
10,410
   
10,657
 
Accrued expenses
  
2,690
   
2,631
 
Sales allowances
  
741
   
548
 
Short-term lease liabilities
  
1,520
   
—
 
Accrued severance and other charges
  
—
   
234
 
Income taxes payable
  
57
   
710
 
Short-term deferred revenue and customer prepayments
  
5,507
   
5,069
 
         
Total current liabilities
  
29,930
   
35,998
 
Long-term deferred revenue
  
1,054
   
232
 
Contingent consideration obligations
  
451
   
408
 
Long-term income taxes payable
  
567
   
238
 
Long-term lease liabilities
  
2,855
   
102
 
         
Total liabilities
  
34,857
   
36,978
 
Commitments and contingencies (Note 17)
      
Equity:
      
Vicor Corporation stockholders’ equity:
      
Class B Common Stock: 10 votes per share, $.01 par value, 14,000,000 shares authorized, 11,758,218 shares issued and outstanding in 2019 and 2018
  
118
   
118
 
Common Stock: 1 vote per share, $.01 par value, 62,000,000 shares authorized 40,403,058 shares issued and 28,768,252 shares outstanding in 2019; 40,066,710 shares issued and 28,430,971 shares outstanding in 2018
  
405
   
402
 
Additional
paid-in
capital
  
201,251
   
193,457
 
Retained earnings
  
143,098
   
129,000
 
Accumulated other comprehensive loss
  
(383
)  
(394
)
Treasury stock at cost: 11,634,806 shares in 2019 and 11,635,739 shares in 2018
  
(138,927
)  
(138,927
)
         
Total Vicor Corporation stockholders’ equity
  
205,562
   
183,656
 
Noncontrolling interest
  
308
   
434
 
         
Total equity
  
205,870
   
184,090
 
         
Total liabilities and equity
 $
240,727
  $
221,068
 
         
See accompanying notes.

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VICOR CORPORATION

CONSOLIDATED STATEMENTS OF

Consolidated Statements of OPERATIONS

Years Ended December 31, 2016, 20152019, 2018 and 2014

2017

(In thousands, except per share amounts)

   2016  2015  2014 

Net revenues

  $200,280  $220,194  $225,731 

Cost of revenues

   109,071   120,676   128,611 
  

 

 

  

 

 

  

 

 

 

Gross margin

   91,209   99,518   97,120 

Operating expenses:

    

Selling, general and administrative

   55,675   58,313   68,197 

Research and development

   41,848   41,472   41,479 

Severance and other charges

   —   —   2,207 
  

 

 

  

 

 

  

 

 

 

Total operating expenses

   97,523   99,785   111,883 
  

 

 

  

 

 

  

 

 

 

Loss from operations

   (6,314)   (267)   (14,763) 

Other income (expense), net:

    

Total unrealized (losses) gains onavailable-for-sale securities, net

   (18)   (49)   750 

Portion of gains (losses) recognized in other comprehensive income (loss)

   31   61   (439) 
  

 

 

  

 

 

  

 

 

 

Net credit gains recognized in earnings

   13   12   311 

Other income (expense), net

   271   13   (43) 
  

 

 

  

 

 

  

 

 

 

Total other income (expense), net

   284   25   268 
  

 

 

  

 

 

  

 

 

 

Loss before income taxes

   (6,030)   (242)   (14,495) 

Less: Provision (benefit) for income taxes

   231   (401)   (425) 

Gain from sale of equity method investment, net of tax

   —   5,000   — 
  

 

 

  

 

 

  

 

 

 

Consolidated net income (loss)

   (6,261)   5,159   (14,070) 

Less: Net income (loss) attributable to noncontrolling interest

   (14)   232   (183) 
  

 

 

  

 

 

  

 

 

 

Net income (loss) attributable to Vicor Corporation

  $(6,247)  $4,927  $(13,887) 
  

 

 

  

 

 

  

 

 

 

Net income (loss) per common share attributable to Vicor Corporation:

    

Basic

  $(0.16)  $0.13  $(0.36) 

Diluted

  $(0.16)  $0.13  $(0.36) 

Shares used to compute net income (loss) per common share attributable to Vicor Corporation:

    

Basic

   38,842   38,754   38,569 

Diluted

   38,842   39,146   38,569 

 
2019
  
2018
  
2017
 
Net revenues
 $
262,977
  $
291,220
  $
227,830
 
Cost of revenues
  
140,011
   
152,249
   
126,174
 
             
Gross margin
  
122,966
   
138,971
   
101,656
 
Operating expenses:
         
Selling, general and administrative
  
62,557
   
62,224
   
58,092
 
Research and development
  
46,588
   
44,286
   
44,924
 
Severance and other charges
  
—
   
402
   
—
 
             
Total operating expenses
  
109,145
   
106,912
   
103,016
 
             
Income (loss) from operations
  
13,821
   
32,059
   
(1,360
)
Other income (expense), net:
         
Total unrealized (losses) gains on
available-for-sale
securities, net
  
(16
)  
1
   
17
 
Portion of losses (gains) recognized in other comprehensive income (loss)
  
20
   
6
   
(6
)
             
Net credit gains recognized in earnings
  
4
   
7
   
11
 
Other income (expense), net
  
1,062
   
867
   
1,251
 
             
Total other income (expense), net
  
1,066
   
874
   
1,262
 
             
Income (loss) before income taxes
  
14,887
   
32,933
   
(98
)
Less: Provision (benefit) for income taxes
  
778
   
1,087
   
(356
)
             
Consolidated net income
  
14,109
   
31,846
   
258
 
Less: Net income attributable to noncontrolling interest
  
11
   
121
   
91
 
             
Net income attributable to Vicor Corporation
 $
14,098
  $
31,725
  $
167
 
             
Net income per common share attributable to Vicor Corporation:
         
Basic
 $
0.35
  $
0.80
  $
0.00
 
Diluted
 $
0.34
  $
0.78
  $
0.00
 
Shares used to compute net income per common share attributable to Vicor Corporation:
         
Basic
  
40,330
   
39,872
   
39,228
 
Diluted
  
41,677
   
40,729
   
39,933
 
See accompanying notes.

4
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VICOR CORPORATION

CONSOLIDATED STATEMENTS OF

Consolidated Statements of COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2016, 20152019, 2018 and 2014

2017

(In thousands)

   2016  2015  2014 

Consolidated net income (loss)

  $(6,261)  $5,159  $(14,070) 

Foreign currency translation gains (losses), net of tax benefit (1)

   52   (52)   (410) 

Unrealized (losses) gains onavailable-for-sale securities, net of tax (1)

   (31)   (59)   429 
  

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss)

   21   (111)   19 
  

 

 

  

 

 

  

 

 

 

Consolidated comprehensive income (loss)

   (6,240)   5,048   (14,051) 

Less: Comprehensive income (loss) attributable to noncontrolling interest

   (9)   227   (219) 
  

 

 

  

 

 

  

 

 

 

Comprehensive income (loss) attributable to Vicor Corporation

  $(6,231)  $4,821  $(13,832) 
  

 

 

  

 

 

  

 

 

 

             
 
2019
  
2018
  
2017
 
Consolidated net income
 $
14,109
  $
31,846
  $
258
 
Foreign currency translation gains, net of tax benefit (1)
  
33
   
98
   
83
 
Unrealized (losses) gains on
available-for-sale
securities, net of tax (1)
  
(20
)  
(6
)  
6
 
             
Other comprehensive income
  
13
   
92
   
89
 
             
Consolidated comprehensive income
  
14,122
   
31,938
   
347
 
Less: Comprehensive income attributable to noncontrolling interest
  
13
   
129
   
97
 
             
Comprehensive income attributable to Vicor Corporation
 $
14,109
  $
31,809
  $
250
 
             
(1)The deferred tax assets associated with cumulative foreign currency translation gains (losses) and cumulative unrealized losses(losses) gains on available for sale securities are completely offset by a tax valuation allowance as of December 31, 2016, 2015,2019, 2018, and 2014.2017. Therefore, there is no0 income tax benefit (provision) recognized forin any of the three years ended December 31, 2016.2019.

See accompanying notes.

4
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VICOR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Consolidated Statements of Cash Flows
Years Ended December 31, 2016, 20152019, 2018 and 2014

2017

(In thousands)

   2016  2015  2014 

Operating activities:

    

Consolidated net income (loss)

  $(6,261)  $5,159  $(14,070) 

Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

   8,438   9,142   9,805 

Gain from sale of equity method investment

   —   (5,000)   — 

Increase in other assets

   (505)   —   — 

Gain from disposition of consolidated subsidiary

   —   (28)   — 

Stock-based compensation expense

   506   1,782   1,634 

Increase (decrease) in long-term income taxes payable

   4   (675)   (472) 

Deferred income taxes

   (78)   (183)   18 

Decrease in long-term deferred revenue

   (94)   (139)   (139) 

Loss (gain) on disposal of equipment

   4   (60)   (22) 

(Benefit) provision for doubtful accounts

   (22)   (18)   66 

Credit gain on available for sale securities

   (13)   (12)   (311) 

Change in current assets and liabilities, net

   (1,435)   1,499   5,682 
  

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

   544   11,467   2,191 

Investing activities:

    

Additions to property, plant and equipment

   (8,428)   (9,090)   (7,128) 

Sales and maturities of investments

   —   360   3,460 

Purchases of investments

   —   —   (340) 

Proceeds from sale of equity method investment

   —   5,000   — 

Deconsolidation of subsidiary

   —   (392)   — 

Proceeds from sale of equipment

   2   60   22 

Increase in other assets

   (93)   (204)   (43) 
  

 

 

  

 

 

  

 

 

 

Net cash used for investing activities

   (8,519)   (4,266)   (4,029) 

Financing activities:

    

Proceeds from issuance of Common Stock

   1,584   820   788 

Acquisition of noncontrolling interest

   (372)   (216)   — 

Payment of contingent consideration obligations

   (99)   —   — 

Noncontrolling interest dividends paid

   —   —   (162) 
  

 

 

  

 

 

  

 

 

 

Net cash provided by financing activities

   1,113   604   626 

Effect of foreign exchange rates on cash

   52   (12)   60 
  

 

 

  

 

 

  

 

 

 

Net (decrease) increase in cash and cash equivalents

   (6,810)   7,793   (1,152) 

Cash and cash equivalents at beginning of period

   62,980   55,187   56,339 
  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of period

  $56,170  $62,980  $55,187 
  

 

 

  

 

 

  

 

 

 

Change in assets and liabilities, excluding effects of disposition of consolidated subsidiary:

    

Accounts receivable

  $780  $2,201  $(1,151) 

Inventories, net

   (3,677)   1,880   3,202 

Other current assets

   (158)   (111)   1,029 

Accounts payable and accrued liabilities

   339   (1,301)   300 

Accrued severance charges

   (195)   (1,709)   1,855 

Income taxes payable

   61   (10)   26 

Deferred revenue

   1,415   549   421 
  

 

 

  

 

 

  

 

 

 
  $(1,435)  $1,499  $5,682 
  

 

 

  

 

 

  

 

 

 

Supplemental disclosures:

    

Cash paid during the year for income taxes, net of refunds

  $230  $675  $(1,529) 

             
 
2019
  
2018
  
2017
 
Operating activities:
         
Consolidated net income
 $
14,109
  $
31,846
  $
258
 
Adjustments to reconcile consolidated net income to net cash provided by (used for) operating activities:
         
Depreciation and amortization
  
10,334
   
9,254
   
8,893
 
Stock-based compensation expense
  
3,036
   
3,396
   
1,735
 
Increase (decrease) in long-term income taxes payable
  
329
   
43
   
(1
)
Deferred income taxes
  
60
   
(55
)  
(172
)
Increase (decrease) in long-term deferred revenue
  
822
   
(71
)  
(71
)
Increase in other long-term liabilities
  
—
   
9
   
93
 
Gain on disposal of equipment
  
(38
)  
(57
)  
(14
)
(Benefit) provision for doubtful accounts
  
(144
)  
65
   
6
 
Credit gain on
available-for-sale
securities
  
(4
)  
(7
)  
(11
)
Increase in refundable income taxes
  
—
   
—
   
(736
)
Increase in contingent consideration obligations
  
280
   
—
   
650
 
Change in current assets and liabilities, net
  
(6,576
)  
(8,252
)  
(13,094
)
             
Net cash provided by (used for) operating activities
  
22,208
   
36,171
   
(2,464
)
Investing activities:
         
Additions to property, plant and equipment
  
(12,485
)  
(18,211
)  
(12,545
)
Proceeds from sale of equipment
  
38
   
57
   
14
 
(Decrease) increase in other assets
  
(35
)  
(85
)  
5
 
             
Net cash used for investing activities
  
(12,482
)  
(18,239
)  
(12,526
)
Financing activities:
         
Proceeds from issuance of Common Stock
  
4,742
   
8,656
   
3,300
 
Payment of contingent consideration obligations
  
(237
)  
(270
)  
(225
)
Noncontrolling interest dividend paid
  
(139
)  
—
   
—
 
             
Net cash provided by financing activities
  
4,366
   
8,386
   
3,075
 
Effect of foreign exchange rates on cash
  
19
   
9
   
(25
)
             
Net increase (decrease) in cash and cash equivalents
  
14,111
   
26,327
   
(11,940
)
Cash and cash equivalents at beginning of year
  
70,557
   
44,230
   
56,170
 
             
Cash and cash equivalents at end of year
 $
84,668
  $
70,557
  $
44,230
 
             
Change in current assets and liabilities, excluding effects of deconsolidation of subsidiary:
         
Accounts receivable
 $
5,714
  $
(8,834
) $
(9,210
)
Inventories, net
  
(1,812
)  
(10,827
)  
(9,309
)
Other current assets
  
(2,895
)  
176
   
(357
)
Accounts payable and accrued liabilities
  
(7,339
)  
7,450
   
3,186
 
Accrued severance and other charges
  
(234
)  
234
   
—
 
Short-term lease payable
  
12
   
—
   
—
 
Income taxes payable
  
(653
)  
410
   
208
 
Deferred revenue
  
631
   
3,139
   
2,388
 
             
Change in current assets and liabilities, net
 $
(6,576
) $
(8,252
) $
(13,094
)
             
Supplemental disclosures:
         
Cash paid during the year for income taxes, net of refunds
 $
2,194
  $
743
  $
373
 
See accompanying notes.

4
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Table of Contents
VICOR CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

Years Ended December 31, 2016, 20152019 , 2018 and 2014

2017

(In thousands)

  Class B
Common
Stock		  Common
Stock		  Additional
Paid-In
Capital		  Retained
Earnings		  Accumulated
Other
Comprehensive
Income (Loss)		  Treasury
Stock		  Total Vicor
Corporation
Stockholders’
Equity		  Noncontrolling
Interest		  Total
Equity		 

Balance on December 31, 2013

 $118  $392  $169,474  $108,645  $(526)  $(138,927)  $139,176  $3,161  $142,337 

Sales of Common Stock

   1   787      788    788 

Noncontrolling interest dividends paid

         (162)   (162) 

Stock-based compensation expense

    1,634      1,634    1,634 

Other

    6      6    6 

Components of comprehensive income, net of tax

         

Net loss

     (13,887)     (13,887)   (183)   (14,070) 

Other comprehensive income (loss)

      55    55   (36)   19 
       

 

 

  

 

 

  

 

 

 

Total comprehensive loss

        (13,832)   (219)   (14,051) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2014

  118   393   171,901   94,758   (471)   (138,927)   127,772   2,780   130,552 

Sales of Common Stock

   2   818      820    820 

Acquisition of noncontrolling interest

    (144)      (144)   (216)   (360) 

Disposition of consolidated subsidiary

    (5)      (5)   (1,737)   (1,742) 

Stock-based compensation expense

    1,782      1,782    1,782 

Net settlement stock option exercises

    (22)      (22)    (22) 

Other

    7      7    7 

Components of comprehensive income, net of tax

         

Net income

     4,927     4,927   232   5,159 

Other comprehensive loss

      (106)    (106)   (5)   (111) 
       

 

 

  

 

 

  

 

 

 

Total comprehensive income

        4,821   227   5,048 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2015

  118   395   174,337   99,685   (577)   (138,927)   135,031   1,054   136,085 

Sales of Common Stock

   2   1,587      1,589    1,589 

Acquisition of noncontrolling interest

    (81)      (81)   (837)   (918) 

Stock-based compensation expense

    506      506    506 

Net settlement stock option exercises

    (5)      (5)    (5) 

Components of comprehensive income, net of tax

         

Net income

     (6,247)     (6,247)   (14)   (6,261) 

Other comprehensive income

      16    16   5   21 
       

 

 

  

 

 

  

 

 

 

Total comprehensive income

        (6,231)   (9)   (6,240) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2016

 $118  $397  $176,344  $93,438  $(561)  $(138,927)  $130,809  $208  $131,017 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                                     
 
Class B
Common
Stock
  
Common
Stock
  
Additional
Paid-In

Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Treasury
Stock
  
Total Vicor
Corporation
Stockholders’
Equity
  
Noncontrolling
Interest
  
Total
Equity
 
Balance on December 31, 2016
 $
118
  $
397
  $
176,344
  $
93,438
  $
(561
) $
(138,927
) $
130,809
  $
208
  $
131,017
 
Sales of Common Stock
     
4
   
3,296
            
3,300
      
3,300
 
Stock-based compensation expense
        
1,735
            
1,735
      
1,735
 
Other
        
20
            
20
      
20
 
Components of comprehensive income, net of tax
                           
Net income
           
167
         
167
   
91
   
258
 
Other comprehensive income
              
83
      
83
   
6
   
89
 
                                     
Total comprehensive income
                    
250
 
 
 
97
 
 
 
347
 
                                     
Balance on December 31, 2017
  
118
   
401
   
181,395
   
93,605
   
(478
)  
(138,927
)  
136,114
   
305
   
136,419
 
Sales of Common Stock
     
6
   
6,776
            
6,782
      
6,782
 
Stock-based compensation expense
        
3,396
            
3,396
      
3,396
 
Issuances of stock through employee stock purchase plan
     
1
   
1,873
            
1,874
      
1,874
 
Cumulative effect of adoption of new accounting principle (Topic 606)
           
3,670
         
3,670
      
3,670
 
Other
     
(6
)  
17
            
11
      
11
 
Components of comprehensive income, net of tax
                           
Net income
           
31,725
         
31,725
   
121
   
31,846
 
Other comprehensive income
              
84
      
84
   
8
   
92
 
                                     
Total comprehensive income
                    
31,809
 
 
 
129
 
 
 
31,938
 
                                     
Balance on December 31, 2018
  
118
   
402
   
193,457
   
129,000
   
(394
)  
(138,927
)  
183,656
   
434
   
184,090
 
Sales of Common Stock
      
2
   
2,435
               
2,437
       
2,437
 
Stock-based compensation expense
          
3,036
               
3,036
       
3,036
 
Issuances of stock through employee stock purchase plan
      
1
   
2,304
               
2,305
       
2,305
 
Noncontrolling interest dividend paid
                          —   
(139
)  
(139
)
Other
          
19
               
19
       
19
 
Components of comprehensive income, net of tax
                           
Net income
              
14,098
           
14,098
   
11
   
14,109
 
Other comprehensive income
                  
11
       
11
   
2
   
13
 
                                     
Total comprehensive income
  
 
   
 
   
 
   
 
   
 
   
 
   
14,109
 
 
 
13
 
 
 
14,122
 
                                     
Balance on December 31, 2019
 $
118
  $
405
  $
201,251
  $
143,098
  $
(383
) $
(138,927
) $
205,562
  $
308
  $
205,870
 
                                     
See accompanying notes.

4
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Table of Contents
VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  DESCRIPTION OF BUSINESS

Vicor Corporation (the “Company” or “Vicor”) designs, develops, manufactures, and markets modular power components and power systems for converting regulating and controlling electric current.electrical power. The Company also licenses certain rights to its technology in return for recurring royalties. The principal markets for the Company’s power converters and systems are large original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”) and their contract manufacturers, and smaller, lower volume users, which are broadly distributed across several major market areas.

2.  SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation. Two of the Company’s subsidiaries were not majority owned by the Company prior to 2016, and a third was not majority owned prior to March 31, 2016. Prior to the transactions described in Note 9, these entities were consolidated by the Company as management believed that the Company had the ability to exercise control over their activities and operations.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates and assumptions relate to the useful lives of fixed assets and identified intangible assets, recoverability of long-lived assets, fair value of long-term investments, allowances for doubtful accounts, the net realizable value ofpotential excess, obsolete or unmarketable inventory, potential reserves relating to litigation matters, accrued liabilities, accrued taxes, deferred tax valuation allowances, assumptions pertaining to share-based payments, and other reserves. Actual results could differ from those based on these estimates and assumptions, and such differences may be material to the financial statements.

Revenue

Recently Adopted Accounting Standard
s
Lease Accounting
In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance for lease accounting, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new guidance establishes a
right-of-use
model (“ROU”) that requires a lessee to recognize a ROU asset and a lease liability on the balance sheet for all leases with a term longer than twelve months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition

Product revenue is recognized in the period when persuasive evidenceincome statement. For lessors, the guidance modifies the classification criteria and accounting for sales-type and direct financing leases.

The Company adopted the new standard as of January 1, 2019, using the effective date as the date of initial application. As a result, financial information has not been updated and the disclosures required under the new standard have not been provided for dates and periods before January 1, 2019. The Company elected the “package of practical expedients”, which permits companies to not reassess under the new standard lease identification, lease classification and initial direct costs. The Company did not elect the
use-of-hindsight
or the practical expedient pertaining to land easements, as the latter is not applicable.
The adoption of the standard resulted in the recognition of ROU assets and lease liabilities of approximately $4,329,000 and $4,455,000, respectively, as of January 1, 2019. There was no cumulative effect of adopting this new guidance, and the standard did not have a material impact on the Company’s consolidated statements of operations or cash flows for the year ended December 31, 2019.
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance for revenue recognition (“Topic 606”), which requires an arrangement withentity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance, which includes several amendments, replaces most of the prior revenue recognition guidance under U.S. GAAP. The Company adopted the new guidance as of January 1, 2018 using the modified retrospective method, as applied to all contracts. As a customer exists,result, the products are shipped and titleCompany has transferredchanged its accounting policy for revenue recognition, as detailed below. The most significant impact of the adoption was on the timing of recognition of sales to the customer,Company’s stocking distributors and including the price is fixed or determinable, and collection is considered probable.

Theadditional required disclosures under the new standard. Through December 31, 2017, the Company defersdeferred revenue and the related cost of sales on shipments to stocking distributors until the distributors resellresold the products to their customers. Upon adoption, the Company is no longer permitted to defer revenue until sale by the stocking distributor to the end customer, but rather, is required to estimate the effects of returns and allowances provided to stocking distributors and record revenue at the time of sale to the stocking distributor. In addition, the Company modified the accounting for a contractual arrangement due to a reassessment of the number of performance obligations in the arrangement, and adjusted for the timing of certain royalty revenue. The cumulative effect of adopting this guidance, recorded as an increase to the balance of retained earnings as of January 1, 2018, was approximately $3,670,000. The comparative information for the year ended December 31, 2017, including disclosures, has not been restated and continues to be reported under the accounting standards in effect for that period.

The following tables summarize the impacts of adopting the new revenue recognition guidance on certain components of the Company’s consolidated financial statements (in thousands):
a)Consolidated Balance Sheet Items
 
As of December 31, 2018
 
 
As reported
 
 
Adjustments
 
 
Balances without
adoption of
Topic 606
 
Accounts receivable, net
 $
43,673
  $
(72
) $
43,601
 
Inventories, net
  
47,370
   
(110
)  
47,260
 
Total assets
  
221,068
   
(182
)  
220,886
 
Income taxes payable
  
710
   
(59
)  
651
 
Deferred revenue
  
5,069
   
5,768
   
10,837
 
Sales allowances
  
548
   
(483
)  
65
 
Total liabilities
  
36,978
   
5,226
   
42,204
 
Retained earnings
  
129,000
   
(5,408
)  
123,592
 
Total equity
  
184,090
   
(5,408
)  
178,682
 
Total liabilities and equity
  
221,068
   
(182
)  
220,886
 
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
b)Consolidated Statement of Operations Items
 
Year Ended December 31, 2018
 
 
As reported
 
 
Adjustments
 
 
Balances without
adoption of
Topic 606
 
Net revenues
 $
291,220
   
$(3,946)
  $
287,274
 
Cost of revenues
  
152,249
   
(2,149
)  
150,100
 
             
Gross margin
  
138,971
   
(1,797
)  
137,174
 
Income before income taxes
  
32,933
   
(1,797
)  
31,136
 
Provision for income taxes
  
1,087
   
(59
)  
1,028
 
Consolidated net income
  
31,846
   
(1,738
)  
30,108
 
Net income attributable to Vicor Corporation
  
31,725
   
(1,738
)  
29,987
 
The impact of the adoption of the new revenue recognition standard on the consolidated statements of comprehensive income (loss) and cash flows for the year ended December 31, 2018 was not material.
Prior to January 1, 2018
Product revenue was recognized in the period when persuasive evidence of an arrangement with a customer existed, the products were shipped and title was transferred to the customer, the price was fixed or determinable, and collection was considered probable.
The Company deferred revenue and the related cost of sales on shipments to stocking distributors until the distributors resold the products to their customers. The agreements with these stocking distributors allowallowed them to receive price adjustment credits or to return qualifying products for credit, as determined by the Company, in order to reduce the amounts of slow-moving,slow moving, discontinued, or obsolete product from their inventory. These stocking distributors arewere also granted price adjustment credits in the event of a price decrease subsequent to the date the product was shipped and invoiced to the stocking distributor. Given the uncertainties associated with the levels of price adjustment credits to be granted to stocking distributors, the sales price to the stocking distributor iswas not fixed or determinable until the stocking distributor resellsresold the products to its customers. Therefore, the Company defersdeferred revenue and the related cost of sales on shipments to stocking distributors until the stocking distributors resellresold the products to their customers. Accordingly, the Company’s revenue fully reflectsreflected
end-customer
purchases and iswas not impacted by stocking distributor inventory levels. Agreements with stocking distributors limitlimited returns of qualifying product to the Company to a certain percentage of the value of the

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Company’s shipments to that stocking distributor during the prior quarter. In addition, stocking distributors arewere allowed to return unsold products if the Company terminatesterminated the relationship with the stocking distributor. Title to the inventory transferred to the stocking distributor at the time of shipment or delivery to the stocking distributor, as well as paymentdistributor. Payments from the stocking distributor, aredistributors were due in accordance with the Company’s standard payment terms. These payment terms arewere not contingent upon the stocking distributors’ sale of the products to their

end-customers.
Upon title transfer to stocking distributors, the Company reducesreduced inventory for the cost of goods shipped, the margin (i.e., revenues less cost of revenues) iswas recorded as deferred revenue, and an account receivable iswas recorded. As of December 31, 2016, the Company had gross deferred revenue of approximately $3,337,000 and gross deferred cost of revenues of approximately $1,445,000 under agreements with stocking distributors ($2,042,000 and $882,000, respectively, as of December 31, 2015).

The Company evaluatesevaluated revenue arrangements with potential multi-element deliverables to determine if there iswere more than one unit of accounting. A deliverable constitutesconstituted a separate unit of accounting when it hashad standalone value and there arewere no customer-negotiated refund or return rights for the undelivered elements. The Company entersentered into arrangements containing multiple elements that maycould include a combination of
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Table of Contents
VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
non-recurring
engineering services (“NRE”), prototype units, and production units. The Company has determined NRE and prototype units representrepresented one unit of accounting and production units representrepresented a separate unit of accounting, based on an assessment of the respective standalone value. The Company defersdeferred revenue recognition for NRE and prototype units until completion of the final milestone under the NRE arrangement, which iswas generally the delivery of the prototype. Recognition generally takestook place within six to twelve months of the initiation of the arrangement. Revenue for the production units iswas recognized upon shipment, consistent with other product revenue summarized above. During 2016, 2015, and 2014, revenue recognized under multi-element arrangements accounted for less than 3% of net revenues.

License fees arewere recognized as earned. The Company recognizesrecognized revenue on such arrangements only when the contract iswas signed, the license term hashad begun, all obligations havehad been delivered to the customer, and collection iswas probable.

Foreign currency translation

The financial statements of Vicor Japan Company, Ltd. (“VJCL”), a majority-owned subsidiary, for which the functional currency is the Japanese Yen, have been translated into U.S. Dollars using the exchange rate in effect at the balance sheet date for balance sheet amounts and the average exchange rates in effect during the year for income statement amounts. The gains and losses resulting from the changes in exchange rates from year to year have been reported in other comprehensive income.

Transaction gains and losses resulting from the remeasurement of foreign currency denominated assets and liabilities of the Company’s foreign subsidiaries where the functional currency is the U.S. Dollar are included in other income (expense), net. Foreign currency lossesgains (losses) included in other income (expense), net, were approximately $(268,000)$(108,000), $(161,000)$(260,000), and $(196,000)$323,000 in 2016, 2015,2019, 2018, and 2014,2017, respectively.

Cash and cash equivalents

Cash and cash equivalents include funds held in disbursement (i.e., checking) and money market accounts, certificates of deposit, and debt securities with maturities of less than three months at the time of purchase. Cash and cash equivalents are valued at cost, approximating market value. The Company’s money market securities, which are classified as cash equivalents on the balance sheet, are purchased and redeemed at par value. Their estimated fair value is equal to their cost, and, due to the nature of the securities and their classification as cash equivalents, there are no unrealized gains or losses recorded at the balance sheet dates.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Long-term investments

investment

The Company’s principal sources of liquidity are its existing balances of cash and cash equivalents, as well as cash generated from operations. Consistent with the guidelines of the Company’s investment policy, the Company can invest, and has historically invested, its cash balances in demand deposit accounts, money market funds, brokered certificates of deposit and auction rate securities meeting certain quality criteria. All of theThe Company’s investments arelong-term investment is subject to credit, liquidity, market, and interest rate risk.

The Company’s long-term investments areinvestment, which is a debt security, is classified as an
available-for-sale securities.Available-for-sale securities are
security. The
available-for-sale
security is recorded at fair value, with unrealized gains and losses, net of tax, attributable to credit loss recorded through the statementConsolidated Statement of operationsOperations and unrealized gains and losses, net of tax, attributable to other
non-credit
factors recorded in “Accumulated other comprehensive loss,income (loss),” a component of Total Equity. In determining the amount of credit loss, the Company compares the present value of cash flows expected to be collected to the amortized cost basis of the securities,security, considering credit default risk probabilities and changes in credit ratings, among other factors.

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VICOR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost of the debt securitiessecurity is adjusted for amortization of premiums and accretion of discounts to maturity, the net amount of which, along with interest and realized gains and losses, is included in “Other income (expense), net” in the Consolidated Statements of Operations. The Company periodically evaluates investmentsthe investment to determine if impairment is required, whether an impairment is other than temporary, and the measurement of an impairment loss. The Company considers a variety of impairment indicators such as, but not limited to, a significant deterioration in the earnings performance, credit rating, or asset quality of the investment.

Fair value measurements

The Company accounts for certain financial assets at fair value, defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. A three-level hierarchy is used to show the extent and level of judgment used to estimate fair value measurements:

Level 1

 
Inputs used to measure fair value are unadjusted quoted prices available in active markets for the identical assets or liabilities as of the reporting date.

Level 2

 
Level 2
Inputs used to measure fair value, other than quoted prices included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in inactive markets. Level 2 also includes assets and liabilities valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

Level 3

 
Level 3
Inputs used to measure fair value are unobservable inputs supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these financial instruments.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Allowance for doubtful accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, based on assessments of customers’ credit-risk profiles and payment histories. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company does not require collateral from its customers, although there have been circumstances when the Company has required cash in advance (i.e., a partial down-payment) to facilitate orders in excess of a customer’s established credit limit. To date, such amounts have not been material.

Inventories

Inventories are valued at the lower of cost (determined using the
first-in,
first-out
method) or net realizable value. Fixed production overhead is allocated to the inventory cost per unit based on the normal capacity of the production facilities. Abnormal production costs, including fixed cost variances from normal production capacity, if any, are charged to cost of revenues in the period incurred. All shipping and handling costs incurred in connection with the sale of products are included in cost of revenues.

The Company provides reserves for inventories

Inventory estimated to be excess, obsolete, or unmarketable.unmarketable is written down to net realizable value. The Company’s estimation process for assessing net realizable value is based upon its knownforecasted future usage which is derived based on backlog, projected future demand, historical consumption and expected market conditions. If the Company’s estimated demand and/or market expectations were to change or if product sales were to decline, the Company’s estimation process may cause larger inventory reserves to be recorded, resulting in larger charges to cost of revenues.

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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Concentrations of risk

Financial instruments potentially subjecting the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, of which a significant portion is held by one financial institution, its long-term investments,investment, and trade accounts receivable. The Company maintains cash and cash equivalents and certain other financial instruments with various large financial institutions. Generally, amounts invested with these financial institutions are in excess of federal deposit insurance limits. The Company has not experienced any losses in such accounts, and management believes the Company is not exposed to significant credit risk. The Company’s long-term investments consistinvestment as of December 31, 2019 consists of a single auction rate security with a par
value of $
3,000,000
, which is
collateralized
by student loans. It is a highly rated (Aaa/AA+) municipal and corporate debt securities which, as of December 31, 2016, consist of a single auction rate security with a par value of $3,000,000, which is collateralized by student loans.security. Through December 
31 2016,
,
2019
, auctions held for the Company’s auction rate security have failed. The funds associated with an auction rate security that has failed auction may not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the security is called, or the underlying securities have matured. If the credit rating of the issuer of the auction rate security held deteriorates, the Company may be required to adjust the carrying value of the investment for an other-than-temporary decline in value through an impairment charge.
The Company’s investment policy, approved by the Board of Directors, limits the amount the Company may invest in any issuer, thereby reducing credit risk concentrations.

The Company’s products are sold worldwide to customers ranging from smaller, independent manufacturers of highly specialized electronic devices, to larger OEMs, ODMs and their contract manufacturers. See Note 19,
Segment Information
, for a discussion of a change to segment reporting in the second quarter of 2019. The Company’s Brick Business Unit (“BBU”) hasProducts’ customers are primarily concentrated in the following industries: aerospace and defense electronics, industrial automation, industrial equipment, instrumentation and test equipment, and transportation
(
notably in rail and heavy equipment applications
)
. The Company’s Advanced Products’ customers are concentrated in the data center and hyperscaler segments of enterprise computing, in which
the Company’s
products are used for voltage distribution on server motherboards, in server racks, and across datacenter infrastructure, although we also target applications in aerospace and aviation, defense electronics, industrial automation, and equipment, medical diagnostics, rail transportation, andinstrumentation, test and measurement instrumentation. The Company’s VI Chip and Picor subsidiaries have customers concentrated in the datacenter and supercomputer segments of the computing market, although they also target applications in aerospace and aviation, defense

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

electronics, networking equipment, solid state lighting, testtelecommunications and measurement instrumentation,networking infrastructure, and transportation (electricvehicles (notably in the autonomous driving, electric vehicle, and hybrid vehicles and autonomous vehicles)vehicle niches of the vehicle segment). While, overall, the Company has a broad customer base and sells into a variety of industries, VI Chip and Picor have derived a substantial portion of theirthe Company’s revenue from its Advanced Products line has been derived from a limited number of customers. This concentration of revenue is a reflection of the relatively early stage of adoption of the technologies, architectures and products offered by these subsidiaries,in the Advanced Products line, and theirthe Company’s strategy of targeting of market leading innovators as initial customers.customers for its Advanced Products. Concentrations of credit risk with respect to trade accounts receivable are limited due to the number of entities comprising the Company’s customer base. base

.
As of December 
31 2016
,
2019
and 2015, one
2018
,
1
customer accounted for approximately 14.2% and 21.9%, respectively,
14.3
% of trade account receivables.

During 2016, 2015, and 2014, one customer accounted for approximately 16.4%, 16.2%, and 14.7% of net revenues, respectively. International sales, based on customer location, as a percentage of total net revenues, were approximately 59.4% in 2016, 59.6% in 2015, and 60.5% in 2014. Net revenues from customers in China, our largest international market, accounted for approximately 32.1% of total net revenues in 2016, approximately 34.2% in 2015, and approximately 32.3% in 2014, respectively.

Components and materials used in the Company’s products are purchased from a variety of vendors. While most of the components are available from multiple sources, some key components for certain VI Chip and Picor products,Advanced Products, in particular, are supplied by single vendors. In instances of single source items, the Company maintains levels of inventories management considers appropriate to enable meeting the delivery requirements of customers. If suppliers or subcontractors cannot provide their products or services on time or to the required specifications, the Company may not be able to meet the demand for its products and its delivery times may be negatively affected.

Long-lived assets

The Company reviews property, plant and equipment and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of such assets may not be recoverable.
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management determines whether the carrying value of an asset or asset group is recoverable based on comparison to the undiscounted expected future cash flows the assets are expected to generate over their remaining economic lives. If an asset value is not recoverable, the impairment loss is equal to the amount by which the carrying value of the asset exceeds its fair value, which is determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. Evaluation of impairment of long-lived assets requires estimates of future operating results that are used in the preparation of the expected future undiscounted cash flows. Actual future operating results and the remaining economic lives of our long-lived assets could differ from the estimates used in assessing the recoverability of these assets.
These differences could result in impairment charges, which could be material.

Intangible assets

Values assigned to patents are amortized using the straight-line method over periods ranging from three to 20 years. Patents and other intangible assets are included in “Other assets” in the accompanying Consolidated Balance Sheets.

Advertising expense

The cost of advertising is expensed as incurred. The Company incurred $1,818,000, $1,762,000,approximately $2,749,000, $2,610,000, and $1,832,000$2,150,000 in advertising costs during 2016, 20152019, 2018, and 2014,2017, respectively.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Product warranties

The Company generally offers a
two-year
warranty for all of its products, though it has extended the warranty period to three years for certain military grade products sold after January 1, 2017. The Company is party to a limited number of supply agreements with certain customers contractually committing the Company to warranty and indemnification requirements exceeding those to which the Company has been exposed in the past. Effective January 1, 2017, the Company extended the warranty period to three years for certain military grade products sold after that date. The Company provides for the estimated cost of product warranties at the time product revenue is recognized. Factors influencing the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty returns, and the cost per return. The Company periodically assesses the adequacy of warranty reserves and adjusts the amounts as necessary. Warranty obligations are included in “Accrued expenses” in the accompanying Consolidated Balance Sheets.

Revenue recognition
Subsequent to January 1, 2018, revenue is recognized when control of the promised goods or services is transferred to a customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Sales, value add, and other taxes collected concurrent with revenue producing activities are excluded from revenue. The expected costs associated with product warranties continue to be recognized at the time product revenue is recognized. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues.
The Company’s primary source of net revenue comes from the sale of products, which are modular power components and power systems for converting, regulating and controlling electric current. The principal customers for the Company’s power converters and systems are large OEMs, ODMs and the original design manufacturers and contract manufacturers serving them, and smaller, lower volume users, which are broadly distributed across several major market areas. The Company recognizes revenue for product sales at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
delivery, depending on the terms of the underlying contract. The Company previously deferred revenue and the related cost of revenues on shipments to stocking distributors until the distributors resold the products to their customers. The Company now records revenue for such transactions at the time of sale to the stocking distributor. The Company establishes sales allowances for estimated future product returns including distributor returns and price adjustment credits, primarily based upon historical and anticipated rates of product returns and allowances.
Certain contracts with customers contain multiple performance obligations, which typically may include a combination of NRE, prototype units, and production units. For these contracts, the individual performance obligations are accounted for separately if they are distinct. Generally, the Company has determined the NRE and prototype units represent one distinct performance obligation and the production units represent a separate distinct performance obligation. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price, based on prices charged to customers or using the expected cost plus a margin approach. The Company defers revenue recognition for NRE and prototype units until the point in time at which the final milestone under the NRE arrangement is completed and control is transferred to the customer, which is generally the shipment or delivery of the prototype. Revenue for production units is recognized upon shipment or delivery, consistent with product revenue summarized above.
The Company licenses its intellectual property under right to use licenses, in which royalties due to the Company are based upon a percentage of the licensee’s sales. The Company utilizes the exception under the revenue recognition guidance for the recognition of sales- or usage-based royalties, in which the royalties are not recognized until the later of when 1) the customer’s subsequent sales or usages occur, or 2) the performance obligation to which some or all of the sales- or usage-based royalty has been allocated is satisfied or partially satisfied.
Accounts receivable includes amounts billed and currently due from customers. The amounts due are stated at their estimated realizable value. The Company’s payment terms vary by the type and location of its customers and the products or services offered, although terms generally include a requirement of payment within 30 to 60 days. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, based on assessments of customers’ credit-risk profiles and payment histories. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company does not require collateral from its customers, although there have been circumstances when the Company has required cash in advance (i.e., a partial down-payment) to facilitate orders in excess of a customer’s established credit limit. To date, such amounts have not been material.
The Company records deferred revenue, which represents a contract liability, when cash payments are received or due in advance of performance under a contract with a customer. During the years ended December 31, 2019 and 2018, the Company recognized revenue of approximately $76,000 and $991,000, respectively, that was included in deferred revenue at the beginning of the respective period.
The Company applies the practical expedient for the incremental costs of obtaining a contract for sales commissions, which are expensed when incurred because the amortization period is generally less than one year. These costs are included in selling, general and administrative expenses.
The Company also applies another practical expedient and does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Legal Costs

Legal costs in connection with litigation are expensed as incurred.

Net income (loss) per common share

The Company computes basic net income (loss) per share using the weighted average number of common shares outstanding and diluted net income (loss) per share using the weighted average number of common shares outstanding plus the effect of outstanding dilutive stock options, if any. The following table sets forth the computation of basic and diluted net income (loss) per share for the years ended December 31 (in thousands, except per share amounts):

   2016   2015   2014 

Numerator:

      

Net income (loss) attributable to Vicor Corporation

  $(6,247)   $4,927   $(13,887) 
  

 

 

   

 

 

   

 

 

 

Denominator:

      

Denominator for basic net income (loss) per share-weighted average shares (1)

   38,842    38,754    38,569 

Effect of dilutive securities:

      

Employee stock options (2)

   —    392    — 
  

 

 

   

 

 

   

 

 

 

Denominator for diluted net income (loss) per share-adjusted weighted-average shares and assumed conversions (3)

   38,842    39,146    38,569 
  

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

  $(0.16)   $0.13   $(0.36) 
  

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share

  $(0.16)   $0.13   $(0.36) 
  

 

 

   

 

 

   

 

 

 

 
2019
  
2018
  
2017
 
Numerator:
         
Net income attributable to Vicor Corporation
 $
14,098
  $
31,725
  $
167
 
             
Denominator:
         
Denominator for basic net income per share-weighted average shares (1)
  
40,330
   
39,872
   
39,228
 
Effect of dilutive securities:
         
Employee stock options (2)
  
1,347
   
857
   
705
 
             
Denominator for diluted net income per share-adjusted weighted-average shares and assumed conversions (3)
  
41,677
   
40,729
   
39,933
 
             
Basic net income per share
 $
0.35
  $
0.80
  $
0.00
 
             
Diluted net income per share
 $
0.34
  $
0.78
  $
0.00
 
             
(1)Denominator represents weighted average number of Common Shares and Class B Common Shares outstanding.

(2)Options to purchase 1,696,222, 238,792,164,367, 67,247 and 1,895,67553,913 shares of Common Stock in 2016, 2015,2019, 2018, and 2014,2017, respectively, were not included in the calculation of net income (loss) per share as the effect would have been antidilutive.

(3)Denominator represents weighted average number of Common Shares and Class B Common Shares outstanding for the year, adjusted to include the dilutive effect, if any, of outstanding options.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Income taxes

Deferred tax assets and liabilities are determined based on the differences between
the
financial reporting and tax bases of assets and liabilities and are measured using the enacted income tax rates and laws expected to be in effect when the temporary differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if management determines it is more likely than not that some portion or all of the deferred tax assets will not be realized. All deferred tax assets and liabilities are classified as noncurrent.

The Company follows a
two-step
process to determine the amount of tax benefit to recognize. The first step is to evaluate the tax position to determine the likelihood it would be sustained upon examination by a tax authority. If the tax position is deemed
“more-likely-than-not”
to be sustained, the second step is to assess the tax position to determine the amount of tax benefit to be recognized in the financial statements. The amount of the benefit that may be recognized is the largest amount that possesses greater than 50 percent likelihood of being
5
8
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
realized upon ultimate settlement. If the tax position does not meet the
“more-likely-than-not”
threshold, then it is not recognized in the financial statements. Additionally, the Company accrues interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. The unrecognized tax benefits, including accrued interest and penalties, if any, are included in “Long-term income taxes payable” in the accompanying Consolidated Balance Sheets.

Stock-based compensation

The Company uses the Black-Scholes option-pricing model to calculate the grant-date fair value of stock option awards, whether they possess time-based vesting provisions or performance-based vesting provisions.provisions, and awards granted under the Vicor Corporation 2017 Employee Stock Purchase Plan (“ESPP”), as of their grant date. For stock options with time-based vesting provisions, the calculated compensation expense, net of expected forfeitures, is recognized on a straight-line basis over the service period of the award, which is generally five years for stock options. For stock options with performance-based vesting provisions, recognition of compensation expense, net of expected forfeitures, commences if and when the achievement of the performance criteria is deemed probable. For stock options with performance-based vesting provisions, compensation expense, net of expected forfeitures, when recognized, is recognized over the relevant performance period.

Comprehensive income (loss)

The components of comprehensive income (loss) include, in addition to net income (loss), unrealized gains and losses on investments, net of tax and foreign currency translation adjustments related to VJCL, net of tax.

Impact of recently issued accounting
standards

In August 2016,December 2019, the Financial Accounting Standards Board (“FASB”)FASB issued
guidance
designed to clarify howsimplify the accounting for income taxes by eliminating certain cash receiptsexceptions to the general principles in Topic 740,
Income Taxes
, and cash payments should be presented in the statementalso improve consistent application of cash flows. These include debt prepayment, settlementand simplify U.S. GAAP for other areas ofzero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees Topic 740 by clarifying and beneficial interests in securitization transactions. Theamending existing guidance. This new guidance iswill be effective for interim and annual reporting periodsthe Company for its fiscal year beginning after December 15, 2017,2020, with early adoption permitted. The Company has not yet determined the impact this new guidance will have on its consolidated financial statements and disclosures
In August 2018, the FASB issued guidance which modifies the disclosure requirements on fair value measurements under Topic 820, Fair Value Measurements, including the consideration of costs and benefits. The new guidance is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted. It is required to be applied on a retrospective approach with certain elements being adopted prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The Company does not expect the adoption of the new guidance will have a material impact on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued new guidance which will require measurement and recognition of expected credit losses on certain types of financial instruments. It also modifies the impairment model for
available-for-sale
debt securities and provides for a simplified accounting model for purchased financial assets

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

with credit deterioration since their origination. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. It is required to be applied on a modified-retrospective approach with certain elements being adopted prospectively. The Company has not yet determined the impact this new guidance will have on its consolidated financial statements

In March 2016, the FASB issued new guidance for employee share-based payment accounting, which makes several modifications to existing guidance related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. This new guidance also clarifies the statement of cash flows presentation for certain components of share-based awards. In terms of the accounting for forfeitures, the new guidance allows an option for them to either be estimated, as currently required, or recognized when they occur. The Company will continue to estimate forfeitures. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company does not anticipateexpect the adoption of the new guidance will have a material impact on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued new guidance for lease accounting, which will require lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new guidance establishes aright-of-use model (“ROU”) that will require a lessee to recognize a ROU asset and a lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification

5
9
Table of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and accounting for sales-type and direct financing leases. The new standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt the new guidance effective January 1, 2019. The new standard must be adopted using a modified retrospective transition which includes certain practical expedients. The Company has not yet determined the impact this new guidance will have on its consolidated financial statements and related disclosures.

In July 2015, the FASB issued new guidance for inventory accounting, which will require companies to measure in scope inventory at the lower of cost or net realizable value. Current guidance requires an entity to measure inventory at the lower of cost or market. The new guidance does not apply to inventory that is measured usinglast-in,first-out (“LIFO”) or retail inventory methods. The guidance applies to all other inventory, which includes inventory that is measured usingfirst-in,first-out (“FIFO”), which the Company employs, or average cost methods. The new guidance will be effective for the Company on January 1, 2017, and is to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not anticipate the new guidance will have a material impact on its consolidated financial statements and related disclosures.

In May 2014, the FASB issued new guidance for revenue recognition, which will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance, which includes several amendments, will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective which will be, for the Company, on January 1, 2018. The new standard permits the use of either the retrospective or cumulative effect transition method. As described in Note 2 — Significant Accounting Policies,Revenue Recognition, of these Notes to the Consolidated Financial Statements, the Company defers revenue and the related cost of sales on shipments to stocking distributors until the distributors resell the products to their customers. Upon adoption of the new guidance, the Company will no longer be permitted to defer revenue until sale by the stocking distributor to the end customer, but rather, will be required to estimate the effects of returns and allowances provided to stocking distributors and record revenue at the time of sale to the stocking distributor. The Company currently plans to utilize the cumulative effect transition method for adoption of the standard. Upon adoption, the Company will recognize the cumulative effect of adopting this guidance as an adjustment to the balance of

Contents

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

retained earnings as of January 1, 2018. The Company is continuing to evaluate the future impact and method of adoption the new guidance will have on its consolidated financial statements and related disclosures.

Other
new pronouncements issued but not effective until after December 31, 20162019 are not expected to have a material impact on the Company’s consolidated financial statements.

3.  STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

Vicor currently grants options for the purchase of common stock (i.e., “stock options”) under the following equity compensation plans that are stockholder-approved:

Amended and Restated 2000 Stock Option and Incentive Plan (the “2000 Plan”) — Under the 2000 Plan, the Board of Directors or the Compensation Committee of the Board of Directors may grant stock incentive awards based on the Company’s Common Stock, including stock options, stock appreciation rights, restricted stock, performance shares, unrestricted stock, deferred stock, and dividend equivalent rights. Awards may be granted to employees and other key persons, includingnon-employee directors. Incentive stock options may be granted to employees at a price at least equal to the fair market value per share of the Common Stock on the date of grant, andnon-qualified options may be granted tonon-employee directors at a price at least equal to 85% of the fair market value of the Common Stock on the date of grant. A total of 4,000,000 shares of Common Stock have been reserved for issuance under the 2000 Plan. The period of time during which an option may be exercised and the vesting periods are determined by the Compensation Committee. The term of each option may not exceed 10 years from the date of grant.

Picor Corporation (“Picor”), a privately held, majority-owned subsidiary of Vicor, currently grants stock options under the following equity compensation plan that has been approved by its Board of Directors:

2001 Stock Option and Incentive Plan, as amended (the “2001 Picor Plan”) — Under the 2001 Picor Plan, the Board of Directors of Picor may grant equity-based awards associated with Picor Common Stock, including stock options, restricted stock, or unrestricted stock. Awards may be granted to employees and other key persons, includingnon-employee directors and full or part-time officers. No incentive stock options have been granted since November 11, 2011, and no such options were outstanding

  Inventories
Inventories as of December 31 2015.Non-qualifying stock options may be granted to employees at a price at least equal to the fair market value per share of Picor Common Stock, based on judgments made by Picor’s Board of Directors on the date of grant. All stock option awards must be approved by both the Picor Board of Directors and the Compensation Committee of the Company’s Board of Directors. A total of 20,000,000 shares of Picor Common Stock have been reserved for issuance under the 2001 Picor Plan. The period of time during which an option may be exercised and the vesting periods are determined by the Picor Board of Directors. The term of each option may not exceed 10 years from the date of grant.

VI Chip Corporation (“VI Chip”), a privately held, majority-owned subsidiary of Vicor, currently grants stock options under the following equity compensation plan that has been approved by its Board of Directors:

2007 Stock Option and Incentive Plan,were as amended (the “2007 VI Chip Plan”) — Under the 2007 VI Chip Plan, the Board of Directors of VI Chip may grant equity-based awards associated with VI Chip Common Stock, including stock options, restricted stock, or unrestricted stock. Awards may be granted to employees and other key persons, includingnon-employee directors and full or part-time officers. No incentive stock options have been granted since November 11, 2011, and no such options were outstanding as of December 31, 2016.Non-qualifying stock options may be granted to employees at a price at least equal to the fair market value per share of the VI Chip Common Stock, based on judgments made by VI Chip’s Board of Directors on the date of grant. A total of 12,000,000 shares of VI Chip Common Stock have

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

been reserved for issuance under the 2007 VI Chip Plan. The period of time during which an option may be exercised and the vesting periods are determined by the VI Chip Board of Directors. The term of each option may not exceed 10 years from the date of grant.

All time-based (i.e.,non-performance-based) options for the purchase of Vicor common stock are granted at an exercise price equal to or greater than the market price for Vicor common stock at the date of the grant. All time-based (i.e.,non-performance-based) options for the purchase of VI Chip or Picor common stock are granted at an exercise price equal to or greater than the estimated fair market value of the respective share price, based on a value calculated using a discounted cash flow model at the date of grant consistent with the requirements of Section 409A of the Internal Revenue Code.

On December 31, 2010, the Company granted 2,984,250non-qualified stock options under the 2007 VI Chip Plan with performance-based vesting provisions tied to achievement of certain margin targets by VI Chip Corporation. follows (in thousands):

 
2019
  
2018
 
Raw materials
 $
35,901
  $
37,696
 
Work-in-process
  
5,184
   
4,740
 
Finished goods
  
8,102
   
4,934
 
         
  $
49,187
  $
47,370
 
         
4.  LONG-TERM INVESTMENT
As of December 31, 2010, the Company determined it was probable the margin targets would be achieved2019 and accordingly, began recording stock-based compensation expense relating to these options beginning January 1, 2011. During the third quarter of 2016, the Company determined the margin targets would not be met prior to the expiration date of the corresponding options, as VI Chip’s revenue growth has been below levels necessary to achieve the targets. As a result, the Company reversed approximately $768,000 of previously recorded stock-based compensation expense in the third quarter of 2016, representing all expense taken for these performance-based options through June 30, 2016. This resulted in decreases in cost of revenues of $86,000, selling, general and administrative expense of $516,000, and research and development expense of $166,000 in the third quarter of 2016.

During the fourth quarter of 2014, the Company, in effect, cancelled certain stock options previously awarded to three corporate officers in 2013 and awarded to those officers new stock options representing an equivalent value, as calculated using the Black-Scholes option-pricing model. Subsequent to the 2013 awards, the Company determined those grants exceeded the limit on the number of stock options that may be granted to an individual in a year, according to the terms of the 2000 Plan. In connection with this action, recorded for financial reporting purposes as a modification of existing options, a total of 129,028 stock options awarded in 2013 were cancelled and a total of 150,355 new stock options were awarded. The cancellation of the 2013 stock options and the award of new stock options did not have a material impact on the Company’s results of operations.

Stock-based compensation expense for the years ended December 31 was as follows (in thousands):

   2016   2015   2014 

Cost of revenues

  $95   $230   $183 

Selling, general and administrative

   412    1,246    1,176 

Research and development

   (1)    306    275 
  

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $506   $1,782   $1,634 
  

 

 

   

 

 

   

 

 

 

The decrease in stock-based compensation expense in 2016 compared to 2015 was primarily due to the reversal of previously recorded stock-based compensation for VI Chip performance-based options, described above.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair value for options awarded for the years shown below was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

   Non Performance-
based Stock
Options		 

Vicor:

  2016  2015  2014 

Risk-free interest rate

   1.5%   2.0%   2.2% 

Expected dividend yield

   —   —   — 

Expected volatility

   45%   51%   52% 

Expected lives (years)

   7.2   7.2   6.6 

VI Chip:

  2016  2015  2014 

Risk-free interest rate

   1.7%   2.1%   2.3% 

Expected dividend yield

   —   —   — 

Expected volatility

   34%   37%   41% 

Expected lives (years)

   6.5   6.5   6.5 

Picor:

  2016  2015  2014 

Risk-free interest rate

   1.5%   1.9%   2.2% 

Expected dividend yield

   —   —   — 

Expected volatility

   42%   41%   42% 

Expected lives (years)

   6.5   6.5   6.5 

Risk-free interest rate:

Vicor — The Company uses the yield onzero-coupon U.S. Treasury “Strip” securities for a period that is commensurate with the expected term assumption for each vesting period.

Picor and VI Chip — Picor and VI Chip use the yield to maturity of a seven-year U.S. Treasury bond, as it most closely aligns to the expected exercise period.

Expected dividend yield:

Vicor — The Company determines the expected dividend yield by annualizing the most recent prior cash dividends declared by the Company’s Board of Directors, if any, and dividing that result by the closing stock price on the date of that dividend declaration. Dividends are not paid on options.

Picor and VI Chip — Picor and VI Chip have not and do not expect to declare and pay dividends in the foreseeable future. Therefore, the expected dividend yield is not applicable.

Expected volatility:

Vicor — Vicor uses historical volatility to estimate the grant-date fair value of the options, using the expected term for the period over which to calculate the volatility (see below). The Company does not expect its future volatility to differ from its historical volatility. The computation of the Company’s volatility is based on a simple average calculation of monthly volatilities over the expected term.

Picor — As Picor is a nonpublic entity, historical volatility information is not available. An industry sector index of six publicly traded fabless semiconductor firms was developed for calculating historical volatility for Picor. Historical prices for each of the companies in the index based on the market price of the shares on each day of trading over the expected term were used to determine the historical volatility.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

VI Chip — As VI Chip is a nonpublic entity, historical volatility information is not available. An industry sector index of 11 publicly traded fabless semiconductor firms was developed for calculating historical volatility for VI Chip. Historical prices for each of the companies in the index based on the market price of the shares on each day of trading over the expected term were used to determine the historical volatility.

Expected term:

Vicor — The Company uses historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. The Company believes this historical data is currently the best estimate of the expected term of options, and all groups of the Company’s employees exhibit similar exercise behavior.

Picor and VI Chip — Due to the lack of historical information, the “simplified” method as prescribed by the Securities and Exchange Commission is used to determine the expected term.

Forfeiture rate:

The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. The forfeiture analysis isre-evaluated annually and the forfeiture rate is adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

Vicor — The Company currently expects, for Vicor options, based on an analysis of historical forfeitures, approximately 86% of its options will actually vest. An annual forfeiture rate of 5.00% has been applied to all unvested options as of December 31, 2016. For 2015 and 2014, the Company expected 88% and 78%, respectively, of its options would actually vest and applied an annual forfeiture rate of 4.25% and 8.00%, respectively.

Picor — The Company currently expects, for Picor options, based on an analysis of historical forfeitures, approximately 92% of its options will actually vest. An annual forfeiture rate of 2.50% has been applied to all unvested options as of December 31, 2016. For 2015 and 2014, the Company expected 93% and 92%, respectively, of its options would actually vest and applied an annual forfeiture rate of 2.50% and 2.75%, respectively.

VI Chip — The Company currently expects, for VI Chip options, based on an analysis of historical forfeitures, approximately 76% of its options will actually vest. An annual forfeiture rate of 9.00% has been applied to all unvested options as of December 31, 2016. For 2015 and 2014, the Company expected 78% and 77%, respectively, of its options would actually vest and applied an annual forfeiture rate of 8.50% and 7.75%, respectively.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Vicor Stock Options

A summary of the activity under Vicor’s stock option plans as of December 31, 2016 and changes during the year then ended, is presented below (in thousands except for share and weighted-average data):

   Options
Outstanding		  Weighted-
Average
Exercise
Price		   Weighted-
Average
Remaining
Contractual
Life in
Years		   Aggregate
Intrinsic
Value		 

Outstanding on December 31, 2015

   1,848,067  $8.57     

Granted

   83,817  $10.32     

Forfeited and expired

   (18,737)  $9.21     

Exercised

   (216,925)  $7.25     
  

 

 

      

Outstanding on December 31, 2016

   1,696,222  $8.82    6.83   $10,661 
  

 

 

      

Exercisable on December 31, 2016

   730,388  $7.74    6.51   $5,375 
  

 

 

      

Vested or expected to vest as of December 31, 2016 (1)

   1,646,808  $8.76    6.82   $10,437 
  

 

 

      

(1)In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. The number of options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.

As of December 31, 2015 and 2014 the Company had options exercisable for 565,861 and 306,173 shares respectively, for which the weighted average exercise prices were $7.24 and $6.90, respectively.

During the years ended December 31, 2016, 2015, and 2014 under all plans, the total intrinsic value of Vicor options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $1,392,000, $928,000, and $751,000, respectively. The total amount of cash received by the Company from options exercised in 2016, 2015, and 2014, was $1,572,000, $805,000, and $788,000, respectively. The total grant-date fair value of stock options that vested during the years ended December 31, 2016, 2015, and 2014 was approximately $365,000, $1,194,000, and $1,096,000, respectively.

As of December 31, 2016, there was $870,000 of total unrecognized compensation cost related to unvestednon-performance based awards for Vicor. That cost is expected to be recognized over a weighted-average period of 1.5 years for those awards. The expense will be recognized as follows: $490,000 in 2017, $245,000 in 2018, $103,000 in 2019, $28,000 in 2020, and $4,000 in 2021.

The weighted-average fair value of Vicor options granted was $4.94, $6.76, and $5.50, in 2016, 2015, and 2014, respectively.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Picor Stock Options

A summary of the activity under the 2001 Picor Plan as of December 31, 2016 and changes during the year then ended, is presented below (in thousands except for share and weighted-average data):

   Options
Outstanding		  Weighted-
Average
Exercise
Price		   Weighted-
Average
Remaining
Contractual
Life in
Years		   Aggregate
Intrinsic
Value		 

Outstanding on December 31, 2015

   9,725,067  $0.62     

Granted

   603,000  $0.88     

Forfeited and expired

   (113,560)  $0.65     

Exercised

   (683,520)  $0.88     
  

 

 

      

Outstanding on December 31, 2016

   9,530,987  $0.62    4.56   $1,262 
  

 

 

      

Exercisable on December 31, 2016

   7,915,219  $0.62    4.09   $1,030 
  

 

 

      

Vested or expected to vest as of December 31, 2016 (1)

   9,470,822  $0.62    4.54   $1,256 
  

 

 

      

(1)In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.

As of December 31, 2015 and 2014, Picor had options exercisable for 8,053,490 and 6,643,377 shares, respectively, for which the weighted average exercise prices were $0.64 and $0.67, respectively.

During the years ended December 31, 2016 and 2015, the total intrinsic value of Picor options exercised was $24,000 and $72,000, respectively. The total amount of cash received by Picor from options exercised in 2016 and 2015 was $17,000 and $14,000, respectively. There were no Picor options exercised in 2014. The total grant-date fair value of stock options that vested during the years ended December 31, 2016, 2015, and 2014 was approximately $155,000, $39,000, and $0, respectively.

As of December 31, 2016, there was $285,000 of total unrecognized compensation cost related to unvested share-based awards for Picor. That cost is expected to be recognized over a weighted-average period of 2.8 years for all Picor awards. The expense will be recognized as follows: $116,000 in 2017, $78,000 in 2018, $45,000 in 2019, $29,000 in 2020, and $17,000 in 2021.

The weighted-average fair value of Picor options granted was $0.26 in 2016, $0.48 in 2015, and $0.19 in 2014.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

VI Chip Stock Options

A summary of the activity under the 2007 VI Chip Plan as of December 31, 2016 and changes during the year then ended, is presented below (in thousands except for share and weighted-average data):

   Options
Outstanding		  Weighted-
Average
Exercise
Price		   Weighted-
Average
Remaining
Contractual
Life in
Years		   Aggregate
Intrinsic
Value		 

Outstanding on December 31, 2015

   10,097,500  $1.00     

Granted

   5,000  $1.00     

Forfeited and expired

   (168,750)  $1.00     

Exercised

   —  $—     
  

 

 

      

Outstanding on December 31, 2016 (1)

   9,933,750  $1.00    1.88   $— 
  

 

 

      

Exercisable on December 31, 2016

   7,074,650  $1.00    0.88   $— 
  

 

 

      

Vested or expected to vest as of December 31, 2016 (2)

   9,747,034  $1.00    1.83   $— 
  

 

 

      

(1)Of the total VI Chip options outstanding on December 31, 2016, 5,500,000 options had been granted to Dr. Vinciarelli, the Company’s Chief Executive Officer.

(2)In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.

As of December 31, 2015 and 2014, VI Chip had options exercisable for 7,042,600 and 7,377,950 shares, respectively, for which the weighted average exercise price was $1.00.

There were no VI Chip options exercised in 2016 and 2014. The total intrinsic value of VI Chip options exercised in 2015 was zero. The total amount of cash received by VI Chip from options exercised in 2015 was $1,000.

As of December 31, 2016, there was $51,000 of total unrecognized compensation cost related to unvested share-based awards for VI Chip. That cost is expected to be recognized over a weighted-average period of 2.1 years for all VI Chip awards. The expense will be recognized as follows: $39,000 in 2017, and $12,000 in 2018.

The weighted-average fair value of VI Chip options granted was $0.01, $0.01, and $0.02 in 2016, 2015, and 2014, respectively.

401(k) Plan

The Company sponsors a savings plan available to all domestic employees, which qualifies under Section 401(k) of the Internal Revenue Code. Employees may contribute to the plan in amounts representing from 1% to 80% of theirpre-tax salary, subject to statutory limitations. The Company matches employee contributions to the plan at a rate of 50%, up to the first 3% of an employee’s compensation. The Company’s matching contributions currently vest at a rate of 20% per year, based upon years of service. The Company’s contributions to the plan were approximately $882,000, $854,000, and $877,000 in 2016, 2015, and 2014, respectively.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Bonus Plan

Under the Company’s 1985 Stock Bonus Plan, as amended, shares of Common Stock may be awarded to employees from time to time as determined by the Board of Directors. On December 31, 2016, 109,964 shares were available for further award. All shares awarded to employees under this plan have vested. No further awards are contemplated under this plan at the present time.

4.  LONG-TERM INVESTMENTS

As of December 31, 2016 and 2015, the Company held one auction rate security that had experienced failed auctionswith a par value of $3,000,000, at par value, which was purchased through and is held in custody by a broker-dealer affiliate of Bank of America, N.A., that has experienced failed auctions (the “Failed Auction Security”). since February 2008. The Failed Auction Security held by the Company is Aaa/AA+ rated by the major credit rating agencies, is collateralized by student loans, and is guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program. Management is not aware of any reason to believe the issuer of the Failed Auction Security is presently at risk of default. The interest rate for the security is reset at regular intervals ranging from seven to 28 days. The auction rate security held by the Company traded at par prior to February 2008 and is callable at par at the option of the issuer. Through December 31, 2016,2019, the Company has continued to receive interest payments on the Failed Auction Security in accordance with the terms of its indenture. Management believes the Company ultimately should be able to liquidate the Failed Auction Security without significant loss primarily due to the overall quality of the issue held and the collateral securing the substantial majority of the underlying obligation. However, current conditions in the auction rate securities market have led management to conclude the recovery period for the Failed Auction Security exceeds 12 months. As a result, the Company continued to classify the Failed Auction Security as long-term as of December 31, 2016.

2019.

The following is a summary of the
available-for-sale securities
security (in thousands):

December 31, 2016

  Cost   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Estimated Fair
Value		 

Failed Auction Security

  $3,000   $—   $492   $2,508 
  

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2015

  Cost   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Estimated Fair
Value		 

Failed Auction Security

  $3,000   $—   $474   $2,526 

Brokered certificates of deposit

   340    —    —    340 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $3,340   $—   $474   $2,866 
  

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2019
 
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated Fair
Value
 
Failed Auction Security
 $
3,000
  $
—
  $
490
  $
2,510
 
                 
             
December 31, 2018
        
Failed Auction Security
 $
3,000
  $
—
  $
474
  $
2,526
 
                 
As of December 31, 20162019 and 2015,2018, the Failed Auction Security had been in an unrealized loss position for greater than 12 months.

The amortized cost and estimated fair value of the
available-for-sale securities
security on December 31, 2016,2019, by contractual maturities, are shown below (in thousands):

   Cost   Estimated Fair
Value		 

Due in twenty to forty years

  $3,000   $2,508 
  

 

 

   

 

 

 

 
Cost
  
Estimated Fair
Value
 
Due in twenty to forty years
 $
3,000
  $
2,510
 
         
60
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VICOR
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Based on the fair value measurements described in Note 5, the fair value of the Failed Auction Security on December 31, 2016,2019, with a par value of $3,000,000, was estimated by the Company to be approximately $2,508,000.$2,510,000. The gross unrealized loss of $492,000$490,000 on the Failed Auction Security consists of two types of

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

estimated loss: an aggregate credit loss of $59,000$37,000 and an aggregate temporary impairment of $433,000.$453,000. In determining the amount of credit loss, the Company compared the present value of cash flows expected to be collected to the amortized cost basis of the security, considering credit default risk probabilities and changes in credit ratings as significant inputs, among other factors (see Note 5).

The following table represents a rollforward of the activity related to the credit loss recognized in earnings on the
available-for-sale
auction rate securitiessecurity held by the Company for the years ended December 31 (in thousands):

   2016   2015   2014 

Balance at the beginning of the period

  $72   $84   $395 

Reductions in the amount related to credit gain for which other-than-temporary impairment was not previously recognized

   (13)    (12)    (39) 

Reductions for securities sold during the period

   —    —    (272) 
  

 

 

   

 

 

   

 

 

 

Balance at the end of the period

  $59   $72   $84 
  

 

 

   

 

 

   

 

 

 

 
2019
  
2018
  
2017
 
Balance at the beginning of the period
 $
41
  $
48
  $
59
 
Reductions in the amount related to credit gain for which other-than-temporary impairment was not previously recognized
  
(4
)  
(7
)  
(11
)
             
Balance at the end of the period
 $
37
  $
41
  $
48
 
             
At this time, the Company has no intent to sell the Failed Auction Security and does not believe it is more likely than not the Company will be required to sell the security. If current market conditions deteriorate further, the Company may be required to record additional unrealized losses. If the credit rating of the security deteriorates, the Company may be required to adjust the carrying value of the investment through impairment charges recorded in the Consolidated Statement of Operations, and any such impairment adjustments may be material.

Based on the Company’s ability to access cash and cash equivalents and its expected operating cash flows, management does not anticipate the current lack of liquidity associated with the Failed Auction Security held will affect the Company’s ability to execute its current operating plan.

5.  FAIR VALUE MEASUREMENTS

  Fair Value Measurements
The Company accounts for certain financial assets at fair value, defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions market participants would use in pricing an asset or liability. A three-level hierarchy is used to show the extent and level of judgment used to estimate fair value measurements.

Assets and liabilities measured at fair value on a recurring basis included the following as of December 31, 20162019 (in thousands):

   Using    
   Quoted Prices
in Active
Markets
(Level 1)		   Significant
Other
Observable
Inputs
(Level 2)		   Significant
Unobservable
Inputs
(Level 3)		  Total Fair
Value as of
December 31,
2016		 

Cash equivalents:

       

Money market funds

  $10,114   $—   $—  $10,114 

Long-term investments:

       

Failed Auction Security

   —    —    2,508   2,508 

Liabilities:

       

Contingent consideration obligations

   —    —    (253)   (253) 

 
Using
   
 
Quoted Prices
in Active
Markets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total Fair
Value as of
December 31,
2019
 
Cash equivalents:
            
Money market funds
 $
9,630
  $
—
  $
—
  $
9,630
 
Long-term investments:
            
Failed Auction Security
  
—
   
—
   
2,510
   
2,510
 
Liabilities:
            
Contingent consideration obligations
  
—
   
—
   
(451
)  
(451
)
61
Table of Contents
VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Assets measured at fair value on a recurring basis included the following as of December 31, 20152018 (in thousands):

   Using    
   Quoted Prices
in Active
Markets
(Level 1)		   Significant
Other
Observable
Inputs
(Level 2)		   Significant
Unobservable
Inputs
(Level 3)		  Total Fair
Value as of
December 31,
2015		 

Cash equivalents:

       

Money market funds

  $10,412   $—   $—  $10,412 

Long-term investments:

       

Failed Auction Security

   —    —    2,526   2,526 

Brokered certificates of deposit

   —    340    —   340 

Liabilities:

       

Contingent consideration obligation

   —    —    (144)   (144) 

The Company has classified its contingent consideration obligations as Level 3 because the fair value for this liability was determined using unobservable inputs. The liability was based on estimated sales of legacy products over the period of royalty payments at the royalty rate (see Note 9), discounted using the Company’s estimated cost of capital.

The Company has classified its brokered certificates of deposit as Level 2 because the fair value for these investments was determined utilizing observable inputs fromnon-active markets. The fair values fluctuate with changes in market interest rates obtained from information available in publicly quoted markets. Management tested the reported fair values by comparing them to net present value calculations utilizing a discount rate based on U.S. Treasury bill and bond yields for similar maturities.

 
Using
   
 
Quoted Prices
in Active
Markets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total Fair
Value as of
December 31,
2018
 
Cash equivalents:
            
Money market funds
 $
9,433
  $
—
  $
—
  $
9,433
 
Long-term investments:
            
Failed Auction Security
  
—
   
—
   
2,526
   
2,526
 
Liabilities:
            
Contingent consideration obligations
  
—
   
—
   
(408
)  
(408
)
As
of December 31, 2016,2019, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Security using Level 1 or Level 2 inputs. As such, the Company’s investment in the Failed Auction Security was deemed to require valuation using Level 3 inputs. Management, after consulting with advisors, valued the Failed Auction Security using analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issue’s interest rate was set). Management utilized a probability weighted discounted cash flow (“DCF”) model to determine the estimated fair value of this security as of December 31, 2016.2019. The major assumptions used in preparing the DCF model included: estimates for the amount and timing of future interest and principal payments based on default probability assumptions used to measure the credit loss of 2.0%1.0%; the rate of return required by investors to own this type of security in the current environment, which we estimate to be 5.0% above the risk free rate of return; and an estimated timeframetime frame of three to five years for successful auctions for this type of security to occur. In making these assumptions, management considered relevant factors including: the formula applicable to each security defining the interest rate paid to investors in the event of a failed auction (the “Penalty Rate”); forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering the guarantees by the U.S. Department of Education of the underlying student loans, guarantees by other third parties, and additional credit enhancements provided through other means; and publicly available pricing data for recently issued student loan asset-backed securities not subject to auctions. In developing its estimate of the rate of return required by investors to own these securities, management compared the Penalty Rate of the Failed Auction Security with yields of actively traded long-term bonds with similar characteristics and, reflecting the limited liquidity for auction rate securities and the discounts to par value seen in recent tender offers by issuers and arm’s length market transactions between informed buyers and sellers,

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

estimated the implied yield (i.e., the discount to par value) necessary to complete a sale of the Failed Auction Security. Management has calculated an increase or decrease in the liquidity risk premium of 5.0% referenced above of 1.0% (i.e., 100 basis points) as used in the model, would decrease or increase, respectively, the fair value of the Failed Auction Security by approximately $100,000.

For purposes of the valuation process for the Failed Auction Security, “management” consists of senior members of the Company’s finance department.

The fair value measurements for the Failed Auction Security are reviewed and updated on a quarterly basis. The calculations are prepared by the Company’s Corporate Controller, in conjunction with information provided by its valuation advisors, and include the development and substantiation of the unobservable inputs. The methodology, assumptions, and calculations are reviewed and approved by the Company’s Chief Financial Officer and Chief Accounting Officer.

The

significant unobservable inputs used in the fair value measurement of the Company’s Failed Auction Security are the cumulative probability of earning the maximum rate until maturity, the cumulative probability of principal return prior to maturity, the cumulative probability of default, the liquidity risk premium, and the recovery rate in default. Significant increases (decreases) in any of those inputs in isolation would result in changes in fair value measurement. Significant increases (decreases) in the cumulative probability of earning the maximum rate until maturity, the cumulative probability of principal return prior to maturity, and the recovery
62
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
rate in default would result in a higher (lower) fair value measurement, while increases (decreases) in the cumulative probability of default and the liquidity risk premium would result in a (lower) higher fair value measurement.

Generally, the interrelationships are such that a change in the assumption used for the cumulative probability of principal return prior to maturity is accompanied by a directionally similar change in the assumption used for the cumulative probability of earning the maximum rate until maturity and a directionally opposite change in the assumptions used for the cumulative probability of default and the liquidity risk premium. The recovery rate in default is somewhat independent and based upon the securities’ specific underlying assets and published recovery rate indices.

Quantitative information about Level 3 fair value measurements as of December 31, 20162019 are as follows (dollars in thousands):

   Fair
Value		   Valuation
Technique		   

Unobservable Input

  Weighted
Average		 

Failed Auction Security

  $2,508    
Discounted
cash flow		 
 		  Cumulative probability of earning the maximum rate until maturity   0.04% 
      Cumulative probability of principal return prior to maturity   93.72% 
      Cumulative probability of default   6.24% 
      Liquidity risk premium   5.00% 
      Recovery rate in default   40.00% 

 
Fair
Value
  
Valuation
   
 
Technique
 
     
  
Unobservable Input
 
Weighted
Average
 
Failed Auction Security
 $
2,510
   
Discounted cash flow
  
Cumulative probability of earning the maximum rate until maturity
  0.11%
       
Cumulative probability of principal return prior to maturity
  93.66%
       
Cumulative probability of default
  6.24%
       
Liquidity risk premium
  5.00%
       
Recovery rate in default
  40.00%
The change in the estimated fair value calculated for the investment valued on a recurring basis utilizing Level 3 inputs (i.e., the Failed Auction Security) for the year ended December 31, 20162019 was as follows (in thousands):

Balance at the beginning of the period

  $2,526 

Credit gain on available-for- sale security included in Other income (expense), net

   13 

Loss included in Other comprehensive income (loss)

   (31) 
  

 

 

 

Balance at the end of the period

  $2,508 
  

 

 

 

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Balance at the beginning of the period
 $
2,526
 
Credit gain on
available-for-sale
security included in Other income (expense), net
  
4
 
Gain included in Other comprehensive income (loss)
  
(20
)
     
Balance at the end of the period
 $
2,510
 
     
The Company has classified its contingent consideration obligations as Level 3 because the fair value for this liability was determined using unobservable inputs. The liability is based on estimated sales of legacy products over the period of royalty payments at the royalty rate (see Note 9), discounted using the Company’s estimated cost of capital.
The change in the estimated fair value calculated for the liabilities valued on a recurring basis utilizing Level 3 inputs (i.e., the Contingent consideration obligations) for the year ended December 31, 20162019 was as follows (in thousands):

Balance at the beginning of the period

  $144 

Obligation incurred upon acquisition of noncontrolling interest (see Note 9)

   208 

Payments

   (99) 
  

 

 

 

Balance at the end of the period

  $253 
  

 

 

 

Balance at the beginning of the period
 $
408
 
Increase in estimated contingent consideration obligations (see Note 9)
  
280
 
Payments
  
(237
)
     
Balance at the end of the period
 $
451
 
     
There were no0 transfers between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2016.

6.  INVENTORIES

Inventories as2019.

63
Table of December 31 were as follows (in thousands):

   2016   2015 

Raw materials

  $18,648   $16,257 

Work-in-process

   3,361    2,879 

Finished goods

   5,127    4,306 
  

 

 

   

 

 

 

Net balance

  $27,136   $23,442 
  

 

 

   

 

 

 

7.  Contents

VICOR
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.
PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost and are depreciated and amortized over a period of three to 39 years generally under the straight-line method for financial reporting purposes and accelerated methods for income tax purposes.

Property, plant and equipment as of December 31 were as follows (in thousands):

   2016   2015 

Land

  $2,089   $2,089 

Buildings and improvements

   43,950    44,647 

Machinery and equipment

   237,434    231,305 

Furniture and fixtures

   5,656    5,652 

Constructionin-progress and deposits

   2,471    3,839 
  

 

 

   

 

 

 
   291,600    287,532 

Accumulated depreciation and amortization

   (254,026)    (250,082) 
  

 

 

   

 

 

 

Net balance

  $37,574   $37,450 
  

 

 

   

 

 

 

 
2019
  
2018
 
Land
 $
3,600
  $
2,089
 
Buildings and improvements
  
45,791
   
45,170
 
Machinery and equipment
  
220,405
   
208,135
 
Furniture and fixtures
  
8,231
   
7,239
 
Construction
in-progress
and deposits
  
4,362
   
9,251
 
         
  
282,389
   
271,884
 
Accumulated depreciation and amortization
  
(229,698
)  
(221,452
)
Right of use asset — net
  
4,261
   
—
 
         
Net balance
 $
56,952
  $
50,432
 
         
Depreciation expense for the years ended December 31, 2016, 20152019, 2018 and 20142017 was approximately $8,304,000, $9,028,000,$10,226,000, $9,135,000, and $9,833,000$8,763,000 respectively. As of December 31, 2016,2019, the Company had approximately $2,393,000$3,222,000 of capital expenditure commitments.

8.  OTHER INVESTMENTS

In September 2015, Intersil Corporation (“Intersil”) acquired, through a statutory merger, Great Wall Semiconductor Corporation (“GWS”), in which the Company heldnon-voting convertible preferred stock. GWS

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and its subsidiary designed and sold semiconductors, conducted research and development activities, and developed and licensed patents. A director of the Company was the founder, Chairman of the Board, President and Chief Executive Officer (“CEO”), as well as the majority voting shareholder, of GWS. The Company accounted for its investment in GWS under the equity method. The Company determined, while GWS was a variable interest entity, the Company was not the primary beneficiary. The key factors in the Company’s assessment were that the CEO of GWS had: (i) the power to direct the activities of GWS that most significantly impact its economic performance, and (ii) an obligation to absorb losses or the right to receive benefits from GWS, respectively, that could potentially be significant to GWS.

At the time of the merger transaction, the Company’s gross investment totaled $4,999,719. However, during the fourth quarter of 2008, the Company determined a decline in value judged to be other-than-temporary had occurred and, as such, the investment’s recorded value on the Consolidated Balance Sheet, as of December 31, 2008, was reduced to zero. Management’s decision to reduce the remaining investment balance to zero at that time was based on GWS’ continued operating losses, the impact of the global economic crisis on the current and short-term outlook for its operations, a negative working capital position as of December 31, 2008, and a valuation based on discounted cash flows.

Under the terms of the merger agreement between GWS and Intersil, and in accordance with the terms of the shareholder agreement under which the Company made its investments, all preferred stock was redeemed at full preference value (i.e., purchased for cash equal to the original investment amount). This redemption was effected through the exchange of a share of preferred stock for (a) the right to receive the preference value in cash upon surrender of the preferred shares and (b) thenon-transferable right to receive certain cash payments as additional consideration, after a period of 16 months, associated with (i) the release by Intersil of some or all of the $2,625,000 portion of total consideration held in escrow by Intersil for potential funding of indemnification and related obligations made by GWS and its selling shareholders and (ii) additional consideration of up to $4,000,000, payable in the event Intersil achieved certain revenue goals related to GWS products. Immediately after the closing of the merger transaction, the Company received the full preference value, equal to its gross investment in GWS. Because the net investment on the Company’s Consolidated Balance Sheet had a value of zero, the full preference value was recorded as a gain from sale of equity method investment in the third quarter of 2015. Just prior to the merger, the Company also received, as a dividend from GWS, shares of an entity in which GWS held an investment. Such shares were deemed by the Company to have a value of zero on the date of receipt.

While the Company’s shares of preferred stock were never converted into shares ofnon-voting common stock, as provided for in the terms of the shareholder agreement under which the Company made its investment, the proportionate share of the contingent amounts described above was calculated assuming such a conversion, resulting in a pro forma proportionate share for the Company of any amounts paid of 27.0%. The Company will record its proportionate share of any additional consideration when it is determined to be realizable. As a former stockholder of GWS, the Company is subject to the indemnification provisions in the merger agreement, as noted above. In certain cases, the Company’s indemnification obligation can extend to the full amount of the merger consideration received by the Company, however, the Company believes the likelihood of any such indemnification obligation occurring is remote.

The Company and GWS were parties to an intellectual property cross-licensing agreement, a license agreement, and two supply agreements, under which the Company purchased certain components from GWS. Intersil, through the merger transaction, has assumed all of GWS’ rights and obligations under these agreements. Company purchases from GWS totaled approximately $1,662,000 for the nine months ended September 30, 2015, the approximate time of the sale, and $2,146,000 in 2014.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.  NONCONTROLLING INTEREST TRANSACTIONS

On March 30, 2016, the Company acquired 100% ownership of certain operating assets and cash of its consolidated subsidiary, Converpower Corporation (“Converpower”), in which it held a 49% ownership interest. The operating assets and cash were acquired in exchange for the Company’s common shares representing that 49% interest and the aggregate dollar amount of royalty payments to be made by the Company to Converpower. The transaction was executed through a newly-formed, wholly-owned subsidiary, Granite Power Technologies, Inc. (“GPT”), the business operations of which had formerly existed as a division of Vicor Corporation. The shares of Converpower common stock held by the Company were contributed to GPT prior to the transaction. At the same time that it entered into the Asset Purchase Agreement associated with this transaction, the Company and Converpower entered into a license agreement providing the Company the right to continue manufacturing certain Converpower products in exchange for payment of royalties, quarterly through June 30, 2021, equal to a percentage of the revenue generated by the manufacture and sale of these products by GPT. The estimated present value of total future royalties, included in “Contingent consideration obligations” in the accompanying Consolidated Balance Sheet as of December 31, 2016, is $167,000 (initially $208,000, as of March 31, 2016). Although the Company exchanged its shares representing its 49% equity interest in Converpower, it acquired 100% control of the business operations. Accordingly, this transaction was accounted for as an acquisition of a noncontrolling interest (i.e., an equity transaction). As such, the noncontrolling interest balance in equity associated with Converpower was reduced to zero, and the additionalpaid-in capital account was reduced by $208,000, the estimated present value of total future royalties as of March 31, 2016. As a result of the transactions associated with the consolidation of the Converpower operation into GPT, the Company’s aggregate balance of cash, short-term interest receivable, and long-term investments on its Consolidated Balance Sheet as of March 31, 2016, declined by approximately $718,000. No amounts were recorded in the Consolidated Statement of Operations related to these transactions.

On December 28, 2015, the Company sold its 49% ownership interest in Aegis Power Systems, Inc. (“APS”) to the 51% noncontrolling interest holder for approximately $1,698,000. The amount of the proceeds approximated the Company’s share of the net equity of APS, resulting in a gain of approximately $28,000, which was recorded in Other income (expense), net in the accompanying Consolidated Statements of Operations. As a result of the transaction, cash of approximately $2,090,000 and other net assets of approximately $1,317,000 of APS were fully deconsolidated from the Company’s consolidated balance sheet as of December 31, 2015. After the sale, APS operates independently from the Company, and may purchase the Company’s products going forward, on an arms-length basis.

Also on December 28, 2015, the Company acquired the noncontrolling interest holder’s 18% ownership interest in Mission Power Solutions, Inc. (“MPS”) for approximately $216,000, which equaled the noncontrolling interest holder’s share of the net equity of MPS. This transaction was achieved through a statutory merger of MPS with and into an existing Vicor Custom Power wholly-owned subsidiary, Northwest Power, Inc. (“NPI”). In addition to the payment noted above, the selling principal will be eligible to receive quarterly royalty payments through June 30, 2021 equal to a percentage of the revenue generated by the sale of certain MPS legacy products to be manufactured by NPI going forward. The estimated obligation for total future royalties, recorded as Contingent consideration obligation in the accompanying Consolidated Balance Sheets, was approximately $144,000 as of December 31, 2015. Royalty payments of approximately $58,000 were made during 2016. The acquisition of the noncontrolling interest holder’s 18% ownership interest was accounted for as an equity transaction, and therefore, the noncontrolling interest balance in equity for this subsidiary was reduced to zero. The excess of the acquisition amount, which is inclusive of the cash paid and the value of the contingent consideration obligation, over the noncontrolling interest balance in equity, was recorded as a charge to additionalpaid-in capital.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The respective noncontrolling interest holders of APS, Converpower, and MPS served as key employees of each company prior to the transactions described above.

10.

7.  INTANGIBLE ASSETS

Patent costs, which are included in otherOther assets in the accompanying balance sheets,Consolidated Balance Sheets, as of December 31 were as follows (in thousands):

   2016   2015 

Patent costs

  $2,427   $2,525 

Accumulated amortization

   (1,598)    (1,583) 
  

 

 

   

 

 

 
  $829   $942 
  

 

 

   

 

 

 

 
2019
  
2018
 
Patent costs
 $
  1,992
  $
  1,979
 
Accumulated amortization
  
(1,483
)  
(1,380
)
         
 $
509
  $
599
 
         
Definite lived intangible assets, such as patent rights, are amortized and tested for impairment if a triggering event occurs.

Amortization expense was approximately $134,000, $145,000$108,000, $119,000 and $170,000$130,000 in 2016, 20152019, 2018 and 2014,2017, respectively. The estimated future amortization expense from patent assets held as of December 31, 2016,2019, is projected to be $129,000, $113,000, $106,000, $102,000$104,000, $95,000, $63,000, $52,000 and $92,000,$44,000, in fiscal years 2017, 2018, 2019, 2020, 2021, 2022, 2023, and 2021,2024, respectively.

11.  SEVERANCE AND OTHER CHARGES

In July 2014, the Company’s management authorized the consolidation

64
Table of the manufacturing of its Westcor division products, of the BBU segment, announcing its intent to transfer those operations from Westcor’s Sunnyvale, California facility to the Company’s primary manufacturing facility in Andover, Massachusetts, by the end of 2014. As a result, the Company recorded apre-tax charge of $2,207,000 in the second half of 2014, primarily for the cost of severance and other employee-related costs involving cash payments based on each employee’s respective length of service. The Company also incurred other costs related to the relocation of the manufacturing operations, primarily freight costs for the transfer of inventories and equipment, and employee travel expenses, of which approximately $303,000 was expensed in the second half of 2014. The related liability is presented as “Accrued severance charges” in the Consolidated Balance Sheets.

A summary of the activity related to the accrued severance charges, is as follows (in thousands):

Balance as of December 31, 2014

  $1,904 

Payments

   (1,709) 
  

 

 

 

Balance as of December 31, 2015

   195 

Payments

   (195) 
  

 

 

 

Balance as of December 31, 2016

  $— 
  

 

 

 

Contents

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12.

8.  PRODUCT WARRANTIES

Product warranty activity for the years ended December 31 was as follows (in thousands):

   2016   2015   2014 

Balance at the beginning of the period

  $585   $204   $283 

Accruals for warranties for products sold in the period

   358    715    281 

Fulfillment of warranty obligations

   (527)    (334)    (350) 

Revisions of estimated obligations

   (202)    —    (10) 
  

 

 

   

 

 

   

 

 

 

Balance at the end of the period

  $214   $585   $204 
  

 

 

   

 

 

   

 

 

 

13.

 
2019
  
2018
  
2017
 
Balance at the beginning of the period
 $
  268
  $
  290
  $
  214
 
Accruals for warranties for products sold in the period
  
250
   
173
   
346
 
Fulfillment of warranty obligations
  
(140
)  
(117
)  
(194
)
Revisions of estimated obligations
  
(6
)  
(78
)  
(76
)
             
Balance at the end of the period
 $
  372
  $
  268
  $
  290
 
             
9.  CONTINGENT CONSIDERATION OBLIGATIONS
In connection with noncontrolling interest transactions completed in 2015 and 2016, the Company entered into arrangements with the selling principals such that the principals would receive quarterly royalty payments through June 30, 2021 for the sale of certain legacy products manufactured by the remaining Vicor Custom Power entities. The Company increased the liability by approximately $280,000 in the fourth quarter of 2019 based on
a
reassessment of the total remaining obligation under the royalty arrangements. The amount
 i
s included in selling, general, and administrative expenses.
10.  STOCKHOLDERS’
EQUITY

Each share of Common Stock entitles the holder thereof to one vote on all matters submitted to the stockholders.

Each share of Class B Common Stock entitles the holder thereof to ten votes on all such matters.

Shares of Class B Common Stock are not transferable by a stockholder except to or among the stockholder’s spouse, certain of the stockholder’s relatives, and certain other defined transferees. Class B Common Stock is not listed or traded on any exchange or in any market. Class B Common Stock is convertible at the option of the holder thereof at any time and without cost to the stockholder into shares of Common Stock on a
one-for-one
basis.

In November 2000, the Board of Directors of the Company authorized the repurchase of up to $30,000,000 of the Company’s Common Stock (the “November 2000 Plan”). The plan authorizes the Company to make repurchases from time to time in the open market or through privately negotiated transactions. The timing of this program and the amount of the stock that may be repurchased is at the discretion of management based on its view of economic and financial market conditions. There were no0 repurchases under the November 2000 Plan in 2016, 2015,2019, 2018, and 2014.2017. On December 31, 20162019, the Company had approximately $8,541,000 available for share repurchases under the November 2000 Plan.

Dividends are declared at the discretion of the Company’s Board of Directors and depend on actual cash from operations, the Company’s financial condition and capital requirements and any other factors the Company’s Board of Directors may consider relevant at the time. Common Stock and Class B Common Stock participate in dividends and earnings equally.

During the years ended December 31, 2016 and 2015, one subsidiary paid a total of $750,000 and $250,000, in cash dividends, respectively, all of which were paid to the Company.

During the year ended December 31, 2014, two2019, three subsidiaries paid a total of $3,900,000$3,602,000 in cash dividends, of which $3,738,000$3,463,000 was paid to the Company and $162,000eliminated in consolidation
 and
$
139,000 was paid to outside shareholders. Dividends paid to outside shareholders of our subsidiaries are accounted for as a reduction in noncontrolling interest.

During the year ended December 31, 2018, one subsidiary paid a total of $632,000 in cash dividends, all of which was paid to the Company.

65
Table of Contents
VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On December 31, 2016, 2015,2019, 2018, and 20142017, there were 14,377,880, 14,594,805,20,895,747, 21,233,659, and 14,719,889,21,976,340, respectively, shares of Vicor Common Stock reserved for issuance forupon exercise of Vicor stock options, and upon conversion of Class B Common Stock.

Stock and under the ESPP.

11.  REVENUES
Revenue from the sale of Advanced Products represents the sum of third-party sales of the products sold under the Advanced Products line, which were sold under the former Picor and VI Chip operating segments during periods prior to the second quarter of 2019. Revenue from the sale of Brick Products represents the sum of third-party sales of the products sold under the Brick Products line, which were also sold under the former Brick Business Unit operating segment, inclusive of such sales of our Vicor Custom Power and VJCL subsidiaries. See Note 19
,
Segment Information
,
for a discussion of changes to the Company’s segment reporting.
The following tables present the Company’s net revenues disaggregated by geography based on the location of the customer, by product line (in thousands):
 
    Twelve Months Ended December 31, 2019    
 
 
Brick
  Products  
  
Advanced
  Products  
  
  Total  
 
United States
 $
98,822
  $
22,806
  $
121,628
 
Europe
  
22,172
   
5,090
   
27,262
 
Asia Pacific
  
62,720
   
46,107
   
108,827
 
All other
  
4,182
   
1,078
   
5,260
 
             
 $
187,896
  $
75,081
  $
262,977
 
             
 
    Twelve Months Ended December 31, 2018    
 
 
Brick
Products
  
Advanced
Products
  
Total
 
United States
 $
77,995
  $
32,784
  $
110,779
 
Europe
  
23,484
   
4,205
   
27,689
 
Asia Pacific
  
80,097
   
66,981
   
147,078
 
All other
  
5,128
   
546
   
5,674
 
             
 $
186,704
  $
104,516
  $
291,220
 
             
The following tables present the Company’s net revenues disaggregated by the category of revenue, by product line (in thousands):
 
Twelve Months Ended December 31, 2019
 
 
Brick
Products
  
Advanced
Products
  
Total
 
Direct customers, contract manufacturers and
non-stocking
distributors
 $
159,135
  $
63,567
  $
222,702
 
Stocking distributors, net of sales allowances
  
27,797
   
9,802
   
37,599
 
Non-recurring
engineering
  
843
   
1,614
   
2,457
 
Royalties
  
121
   
24
   
145
 
Other
  
—
   
74
   
74
 
             
 $
187,896
  $
75,081
  $
262,977
 
             
66
Table of Contents
VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
Twelve Months Ended December 31, 2018
 
 
Brick
Products
  
Advanced
Products
  
Total
 
Direct customers, contract manufacturers and
non-stocking
distributors
 $
163,206
  $
91,579
  $
254,785
 
Stocking distributors, net of sales allowances
  
22,362
   
9,370
   
31,732
 
Non-recurring
engineering
  
1,066
   
3,356
   
4,422
 
Royalties
  
70
   
140
   
210
 
Othe
r
  
—
   
71
   
71
 
             
 $
186,704
  $
104,516
  $
291,220
 
             
The following table presents the changes in certain contract assets and (liabilities) (in thousands):
 
December 31,
2019
  
December 31,
2018
  
Change
 
Accounts receivable
 $
38,115
  $
43,673
  $
(5,558
)
Short-term deferred revenue and customer prepayment
s
  
(5,507
)  
(5,069
)  
(438
)
Long-term deferred revenue
  
(1,054
)  
(232
)  
(822
)
Deferred expenses
  
1,897
   
501
   
1,396
 
Sales allowances
  
(741
)  
(548
)  
(193
)
The
decrease
in accounts receivable was primarily due to a decrease in net revenues of approximately $10,595,000 in the fourth quarter of 2019 compared to the fourth quarter of 2018.
Deferred expenses are included in Other current assets, in the accompanying Consolidated Balance Sheets.
Net revenues from unaffiliated customers by country, based on the location of the customer, for the years ended December 31 were as follows (in thousands):
 
2019
  
2018
  
2017
 
United States
 $
121,628
  $
110,779
  $
83,871
 
Europe
  
27,262
   
27,689
   
24,078
 
Asia Pacific
  
108,827
   
147,078
   
114,365
 
All other
  
5,260
   
5,674
   
5,516
 
             
 $
262,977
  $
291,220
  $
227,830
 
             
During 2019, 2018, and 2017, 1 customer accounted for approximately 12.7%, 13.4%, and 13.0% of net revenues, respectively, which  included
net revenues
from
 both business product lines in each of the three years.
Net revenues from customers in China (including Hong Kong),
the Company’s
largest international market, accounted for approximately 22.1% of total net revenues in 2019, 37.4% in 2018 and 35.8% in 2017, respectively.
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Table of Contents
VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12.
STOCK
-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
Vicor currently grants options for the purchase of Common Stock (i.e., “stock options”) under the following equity compensation plan that is stockholder-approved:
Amended
and Restated 2000 Stock Option and Incentive Plan, as amended and restated (the “2000 Plan”)
— Under the 2000 Plan, the Board of Directors or the Compensation Committee of the Board of Directors may grant stock incentive awards based on the Company’s Common Stock, including stock options, stock appreciation rights, restricted stock, performance shares, unrestricted stock, deferred stock, and dividend equivalent rights. Awards may be granted to employees and other key persons, including
non-employee
directors.
Incentive stock options may be granted to employees at a price at least equal to the fair market value per share of the Common Stock on the date of grant, and
non-qualified
options may be granted to
non-employee
directors at a price at least equal to 85% of the fair market value of the Common Stock on the date of grant. A total of 10,000,000 shares of Common Stock have been reserved for issuance under the 2000 Plan. The period of time during which an option may be exercised and the vesting periods are determined by the Compensation Committee. The term of each option may not exceed 10 years from the date of grant.
VI Chip Corporation (“VI Chip”) was a privately held, majority-owned subsidiary of Vicor until June 28, 2019, at which date it was merged with and into Vicor, and its separate corporate existence ceased (see Note 18). Until that time, VI Chip could grant stock options under the
VI Chip Corporation Amended and Restated 2007 Stock Option and Incentive Plan
(the “2007 VI Chip Plan”), that had been approved by its Board of Directors. All awards thereunder were approved by the Compensation Committee of the Company’s Board of Directors. To effect the merger, holders of VI Chip Common Stock and VI Chip stock options received an equivalent value of Vicor Common Stock and Vicor stock options, respectively, pursuant (with respect to the stock options) to the assumption of the 2007 VI Chip Plan, and options outstanding thereunder, by Vicor. No additional awards will be granted under the assumed and restated 2007 VI Chip Plan.
Picor Corporation (“Picor”) was a privately held, majority-owned subsidiary of Vicor until May 30, 2018, at which date it was merged with and into Vicor, and its separate corporate existence ceased (see Note 18). Until that time, Picor could grant stock options under the
Picor Corporation Amended and Restated 2001 Stock Option and Incentive Plan
(the “2001 Picor Plan”) that had been approved by its Board of Directors. All awards thereunder were approved by the Compensation Committee of the Company’s Board of Directors. To effect the merger, holders of Picor Common Stock and Picor stock options received an equivalent value of Vicor Common Stock and Vicor stock options, respectively, pursuant (with respect to the stock options) to the assumption of the 2001 Picor Plan, and options outstanding thereunder, by Vicor. No additional awards will be granted under the assumed and restated 2001 Picor Plan.
All time-based (i.e.,
non-performance-based)
options for the purchase of Vicor common stock are granted at an exercise price equal to or greater than the market price for Vicor Common Stock at the date of the grant. All time-based (i.e.,
non-performance-based)
options for the purchase of VI Chip Common Stock and Picor Common Stock prior to the mergers and assumptions of the 2017 VI Chip Plan and of the 2001 Picor Plan, respectively, had been granted at an exercise price equal to or greater than the estimated fair market value of the respective share price, based on valuation methodologies consistent with U.S. GAAP and the requirements of Section 409A of the Internal Revenue Code, as amended (“the Code”).
Vicor Corporation 2017 Employee Stock Purchase Plan (the “Plan” or the “ESPP”)
. Under the ESPP, the Company has reserved 2,000,000 shares of Common Stock for issuance to eligible employees who elect to participate. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. The ESPP operates in successive periods of approximately six months, each referred to as an “offering period.” Generally, offering periods commence on or around September 1 and
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 1 and end on or around the following February 28 or August 31, respectively. Under the ESPP, an option is granted to participating employees on the first day of an offering period to purchase shares of the Company’s Common Stock at the end of that offering period at a purchase price equal to 85% of the lesser of the fair market value of a share of Common Stock on either the first day or the last day of that offering period. The purchase of shares is funded by means of periodic payroll deductions, which may not exceed 15.0% of the employee’s eligible compensation, as defined in the Plan. Among other provisions, the Plan limits the number of shares that can be purchased by a participant during any offering period and cumulatively for any calendar year.
Stock-based compensation expense for the years ended December 31 was as follows (in thousands):
 
2019
  
2018
  
2017
 
Cost of revenues
 $
342
  $
237
  $
187
 
Selling, general and administrative
  
1,979
   
2,517
   
1,125
 
Research and development
  
715
   
642
   
423
 
             
Total stock-based compensation
 $
3,036
  $
3,396
  $
1,735
 
             
The increase in stock-based compensation in 2018 compared to 2017 was due to an increase in stock options granted between July 1, 2017 and December 31, 2018, an increase in the fair value of those stock option awards due to an increase in the market price of Vicor Common Stock during that period and ESPP expense, which was recorded for only part of 2017.
Compensation expense by type of award for the years ended December 31 was as follows (in thousands):
             
 
2019
  
2018
  
2017
 
Stock options
 $
2,072
  $
2,649
  $
1,546
 
ESPP
  
964
   
747
   
189
 
             
Total stock-based compensation
 $
3,036
  $
3,396
  $
1,735
 
             
The fair value for
non-performance-based
stock options awarded under the 2000 Plan for the years shown below was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:    
             
 
2019
  
2018
  
2017
 
Risk-free interest rate
  
1.8
%  
2.9
%  
2.1
%
Expected dividend yield
  
—
   
—
   
—
 
Expected volatility
  
42
%  
44
%  
43
%
Expected lives (years)
  
6.3
   
6.4
   
7.1
 
Risk-free interest rate:
The Company uses the yield on
zero-coupon
U.S. Treasury “Strip” securities for a period that is commensurate with the expected term assumption for each vesting period.
Expected dividend yield:
The Company determines the expected dividend yield by annualizing the most recent prior cash dividends declared by the Company’s Board of Directors, if any, and dividing that result by the closing stock price on the date of that dividend declaration. Dividends are not paid on options.
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Expected volatility:
Vicor uses historical volatility to estimate the grant-date fair value of the options, using the expected term for the period over which to calculate the volatility (see below). The Company does not expect its future volatility to differ from its historical volatility. The computation of the Company’s volatility is based on a simple average calculation of monthly volatilities over the expected term.
Expected term:
The Company uses historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. The Company believes this historical data is currently the best estimate of the expected term of options, and all groups of the Company’s employees exhibit similar exercise behavior.
Forfeiture rate:
The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. The forfeiture analysis is
re-evaluated
annually and the forfeiture rate is adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.
B
ased on an analysis of historical forfeitures, the Company applied an annual forfeiture rate of 5.25
% in 2019, 2018, and 2017, estimating approximately 85% of its options will actually vest in those three years.
Vicor Stock Options
A summary of the activity under the 2000 Plan as of December 31, 2019 and changes during the year then ended, is presented below (in thousands except for share and weighted-average data):
                 
 
Options
Outstanding
  
Weighted-
Average
Exercise
Price
  
Weighted-
Average
Remaining
Contractual
Life in
Years
  
Aggregate
Intrinsic
Value
 
Outstanding on December 31, 2018
  
1,382,981
  $
13.41
         
Granted
  
115,753
  $
31.76
         
Options transferred from VI Chip Merge
r
  1,476,371  
$
6.79         
Forfeited and expired
  
(36,228
) $
21.37
         
Exercised
  
(250,981
) $
9.71
         
                 
Outstanding on December 31, 2019
  
2,687,896
  $
10.81
   
4.65
  $
96,665
 
                 
Exercisable on December 31, 2019
  
1,475,947
  $
8.74
   
4.10
  $
56,079
 
                 
Vested or expected to vest as of December 31, 2019(1)
  
2,601,076
  $
10.65
   
4.62
  $
93,938
 
                 
(1)In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. The number of options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2018 and 2017 the Company had options exercisable for 888,257 and 707,244 shares respectively, for which the weighted average exercise prices were $8.93 and $8.01, respectively.
During the years ended December 31, 2019, 2018, and 2017
,
the total intrinsic value of Vicor options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was approximately $6,636,000, $22,938,000, and $4,395,000, respectively. The total amount of cash received by the Company from options exercised in 2019, 2018, and 2017, was $2,437,000, $6,782,000, and $3,295,000, respectively. The total grant-date fair value of stock options granted during the years ended December 31, 2019, 2018, and 2017 was approximately $1,657,000, $2,921,000, and $774,000, respectively.
As of December 31, 2019, there was approximately $4,121,000 of total
unrecognized
compensation cost related to unvested
non-performance
based awards for Vicor. That cost is expected to be recognized over a weighted-average period of 1.7 years for those awards. The expense will be recognized as follows: $1,897,000 in 2020, $1,261,000 in 2021, $669,000 in 2022, $184,000 in 2023, and $110,000 in 2024.
The weighted-average fair value of Vicor options granted was $14.30, $17.46, and $8.71, in 2019, 2018, and 2017, respectively.
VI Chip Stock Options
A summary of the activity under the 2007 VI Chip Plan as of June 28, 2019, the date of the merger with and into Vicor and changes during the period then ended,
is
presented below:
 
Options
Outstanding
  
Weighted-
Average
Exercise
Price
 
Outstanding on December 31, 2018
 (1)
  
10,414,000
  $
0.96
 
Granted
  
—
     
Forfeited and expired
  
—
     
Exercised
  
—
     
Options transferred in merger with Vicor
  
(10,414,000
) $
0.96
 
         
Outstanding on June 28, 2019
  
—
    
         
(1)Of the total VI Chip options outstanding on December 31, 2018, 5,500,000 options had been granted to Dr. Vinciarelli, the Company’s Chief Executive Officer.
401(k) Plan
The Company sponsors a savings plan available to all domestic employees, which qualifies under Section 401(k) of the Internal Revenue Code. Employees may contribute to the plan in amounts representing from 1% to 80% of their
pre-tax
salary, subject to statutory limitations. The Company matches employee contributions to the plan at a rate of 50%, up to the first 3% of an employee’s compensation. The Company’s matching contributions currently vest at a rate of 20% per year, based upon years of service. The Company’s contributions to the plan were approximately $1,001,000, $976,000, and $937,000 in 2019, 2018, and 2017, respectively.
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Bonus Plan
Under the Company’s 1985 Stock Bonus Plan, as amended, shares of Common Stock may be awarded to employees from time to time as determined by the Board of Directors. On December 31, 2019, 109,964 shares were available for further award. All shares awarded to employees under this plan have vested. No further awards are contemplated under this plan at the present time.
13.  LEASES
Substantially
all of the Company’s leases are classified as operating leases. The majority of the Company’s leases are for office and manufacturing space, along with several automobiles and certain equipment. Leases with initial terms of less than twelve months are not recorded on the balance sheet. Expense for these leases is recognized on a straight-line basis over the lease term. The Company’s leases have remaining terms of less than one year to just over six years. The majority of the Company’s leases do not have options to renew, although several have renewal terms to extend the lease for one five-year term, and one lease contains two five-year renewal options. None of the renewal options are included in determining the term of the lease, used for calculating the associated lease liabilities. None of the Company’s leases include variable payments, residual value guarantees or restrictive covenants. A number of the Company’s leases for office and manufacturing space include provision for common area maintenance (“CAM”). The Company accounts for CAM separately from lease payments, and therefore costs for CAM are not included in the determination of lease liabilities. The Company is a party to one arrangement as the lessor, for its former Westcor facility located in Sunnyvale, California, with a third party. The lessee under this lease has one option to renew the lease for a term of five years.
As of December 31, 2019, the balance of ROU assets was approximately $4,261,000, and the balances of short-term and long-term lease liabilities were approximately $1,520,000 and $2,855,000, respectively. For the year ended December 31, 2019, the Company recorded operating lease cost, including short-term lease cost, of approximately $1,870,000. The ROU assets are included in “Property, plant and equipment, net” in the accompanying Consolidated Balance Sheets.
The maturities of the Company’s lease liabilities are as follows (in thousands):
2020
 $
1,657
 
2021
  
995
 
2022
  
695
 
2023
  
606
 
2024
  
587
 
Thereafter
  
171
 
     
Total lease payments
 $
4,711
 
Less: Imputed interest
  
336
 
     
Present value of lease liabilities
 $
4,375
 
     
As of December 31, 2019, the weighted-average remaining lease term was 3.9 years and the weighted-average discount rate was 3.78% for the Company’s operating leases. The Company developed the discount rates used based on a London Interbank Offered Rate (“LIBOR”) over a term approximating the term of the related lease, plus an additional interest factor, which was generally 1.375%.
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the year ended December 31, 2019, the Company paid approximately $247,000 for amounts included in the measurement of lease liabilities through operating cash flows, and obtained approximately $1,761,000 in ROU assets for the year ended December 31, 2019, in exchange for new operating lease liabilities.
As of December 31, 2018, prior to the adoption of Topic 842,
Leases
, future minimum rental commitments under
non-cancelable
operating leases with remaining terms in excess of one year were as follows (in thousands):
Year
  
2019
 $
1,962
 
2020
  
1,502
 
2021
  
688
 
2022
  
447
 
2023 and thereafter
  
830
 
     
 
$5,429
 
     
The maturities of the lease payments to be received by the Company under
the lease agreement
for
its
leased facility in California are as follows (in thousands):
2020
 $
874
 
2021
  
901
 
2022
  
928
 
2023
  
955
 
2024
  
402
 
     
Total lease payments to be received
 $
4,060
 
     
For the year ended December 31, 2019, the Company recorded lease income under this lease of approximately $856,000.
14.
Severance and other Charges
In May 2018, the Company’s management authorized the closure of its Granite Power Technologies, Inc. (“GPT”) subsidiary, which was part of the former Brick Business Unit (“BBU”) segment
, by the end of 2018. The closure was completed in December 2018. GPT, located in Manchester, N.H., was one of three Vicor Custom Power (“VCP”) entities. Certain of GPT’s products will continue to be manufactured and sold by the two remaining VCP entities. As a result, the Company recorded a
pre-tax
charge of $350,000 in the second quarter of 2018, for the cost of severance and other employee-related costs involving cash payments based on each employee’s respective length of service. This was recorded as “Severance and other charges” in the Consolidated Statement of Operations. The related liability is presented as “Accrued severance and other charges” in the Consolidated Balance Sheets. Adjustments to reduce the liability were due to certain GPT employees accepting positions with Vicor, and for severance payments made to employees who had left GPT after the authorization of the closure. Adjustments to increase the liability, and the expense, were due to an early termination fee under GPT’s lease and for freight costs to transport GPT inventory and fixed assets to the two remaining VCP entities. The adjustments were recorded in the third and fourth quarters of 2018 for a total expense of $402,000 in 2018, as reported in the Consolidated Statement of Operations.
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15.
OTHER INCOME (EXPENSE), NET

The major changes in the components of Other income (expense), net for the years ended December 31 were as follows (in thousands):

   2016   2015   2014 

Rental income

  $462   $—   $— 

Foreign currency losses, net

   (268)    (161)    (196) 

Interest income

   68    47    80 

Credit gains on available for sale securities

   13    12    311 

(Loss) gain on disposal of equipment

   (4)    60    22 

Other

   13    67    51 
  

 

 

   

 

 

   

 

 

 
  $284   $25   $268 
  

 

 

   

 

 

   

 

 

 

During the second quarter of 2016, the Company began recognizing rental income under a new leasing agreement with a third party for the former Westcor facility.

15.  

 
2019
  
2018
  
2017
 
Rental income
 $
792
  $
792
  $
792
 
Interest income
  
300
   
257
   
124
 
Foreign currency losses, net
  
(108
)  
(260
)  
323
 
Gain on disposal of equipment
  
38
   
57
   
14
 
Credit gains on
available-for-sale
securities
  
4
   
7
   
11
 
Other
  
40
   
21
   
(2
)
             
 $
1,066
  $
874
  $
1,262
 
             
16.
INCOME TAXES

The tax provision is based on the annual effective tax rate for the year, which includes estimated federal, state and foreign income taxes on the Company’s
pre-tax income and, in 2015 and 2014, estimated federal and state income taxes for certain noncontrolling interest subsidiaries that were not part of the Company’s consolidated income tax returns.
income. The tax provisions also may include discrete items, principally related to tax credits, increases or decreases in tax reserves, tax provision vs. tax return differences and accrued interest for potential liabilities.

On December 22, 2017, H.R.1., known as the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law. The Tax Act did not have a significant impact on the Company’s consolidated financial statements for the year ended December 31, 2017. However, the reduction of the U.S. federal corporate tax rate from 35% to 21
%
 which was effective January 1, 2018, is reflected in the Company’s deferred tax table below. Effective for the 2018 tax year, the Tax Act implements certain additional provisions including the Global Intangible
Low-Taxes
Income (“GILTI”) inclusion and the Foreign Derived Intangible Income (“FDII”) deduction. The Company is electing to account for the GILTI inclusion as a period cost.
Also, on December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The Company did not record any adjustments in the year ended December 31, 2018 to these provisional amounts that were material to its financial statements. As of December 31, 2018, the Company’s accounting treatment with regards to the Tax Act was complete.
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The reconciliation of the federal statutory rate on the lossincome (loss) before income taxes and before the gain from sale of equity method investment to the effective income tax rate for the years ended December 31 is as follows:

   2016  2015  2014 

Statutory federal tax rate

   (34.0)%   (34.0)%   (34.0)% 

State income taxes, net of federal income tax benefit

   1.9   46.4   0.8 

(Decrease) increase in valuation allowance

   46.5   (138.4)   46.9 

Tax credits

   (13.6)   29.9   (12.4) 

Capital gain on sale to noncontrolling interest

   3.9   237.8   — 

Permanent items

   0.9   21.2   0.4 

Decrease in unremitted Vicor Custom Power earnings

   (0.9)   (108.7)   — 

Foreign rate differential and deferred items

   (0.8)   (18.2)   (0.3) 

Book income attributable to noncontrolling interest

   0.1   47.0   (0.6) 

Decrease in tax reserves

   —   (248.6)   (3.7) 

Other

   (0.2)   (0.1)   — 
  

 

 

  

 

 

  

 

 

 
   3.8%   (165.7)%   (2.9)% 
  

 

 

  

 

 

  

 

 

 

 
2019
  
2018
  
2017
 
Statutory federal tax rate
  
21.0
%  
21.0
%  
(34.0
)%
State income taxes, net of federal income tax benefit
  
(8.1
)  
3.6
   
97.2
 
Increase (decrease) in valuation allowance
  
2.2
   
(9.1
)  
(936.1
)
Permanent items
  
(3.9
)  
(5.9
)  
(861.2
)
Tax credits
  
(15.6
)  
(5.5
)  
(1,222.3
)
Provision vs. tax return differences
  
9.0
   
(1.7
)  
—
 
Foreign rate differential and deferred items
  
0.6
   
0.7
   
(91.8
)
Change in tax reserves
  
—
   
0.1
   
(5.1
)
Rate change due to tax reform
  
—
   
—
   
3,441.1
 
Refundable income taxes—AMT credit
  
—
   
—
   
(751.0
)
Other
  
—
   
0.1
   
(0.1
)
             
  
5.2
%  
3.3
%  
(363.3
)%
             
In 2016, 2015, and 2014,2019, the Company could notutilized net operating loss carryforwards and tax credits to offset federal income tax expense.
In 2018, the Company utilized net operating loss carryforwards to offset federal income tax expense.
In 2017, the Company did 0t recognize a tax benefit for the majority of its losses due toas it maintained a full valuation allowance against all net domestic deferred tax assets as described below.

In 2016, in connection with the Company’s acquisition of 100% ownership of certain operating assets and cash of Converpower, the related deferred tax liability for unremitted earnings of $55,000 was reversed and recorded as a discrete benefit in the first quarter of 2016 (see Note 9).

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In 2015, the Company entered into voluntary disclosure agreements with several states. As a result, the Company recognized a tax benefit of approximately $555,000 as a discrete item in the fourth quarter of 2015 for the release of tax reserves. In addition, in connection with the Company’s sale of its 49% interest in APS, recognized as a capital gain, the related deferred tax liability for unremitted earnings of $274,000 was reversed and recorded as a deferred tax benefit in the fourth quarter of 2015 (see Note 9).

During the third quarter of 2014, the Company recognized a tax benefit of approximately $552,000 as a discrete item for the release of certain income tax reserves, due to the completioninability to project net future taxable income, as described below. The benefit for income taxes in 2017 was primarily due to the Company’s

alternative minimum tax (“AMT”)
credit carryforwards of an Internal Revenue Service examinationapproximately $736,000 becoming fully refundable in future years, due to the repeal of its 2010 and 2011 federalthe corporate income tax returns duringAMT under the quarter.

Tax Act.

For financial reporting purposes, income (loss) before income taxes and before the gain from sale of equity method investment for the years ended December 31 include the following components (in thousands):

   2016   2015   2014 

Domestic

  $(6,034)   $1,373   $(14,223) 

Foreign

   4    (1,615)    (272) 
  

 

 

   

 

 

   

 

 

 
  $(6,030)   $(242)   $(14,495) 
  

 

 

   

 

 

   

 

 

 

 
2019
  
2018
  
2017
 
Domestic
 $
13,493
  $
31,455
  $
(1,591
)
Foreign
  
1,394
   
1,478
   
1,493
 
             
 $
14,887
  $
32,933
  $
(98
)
             
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of the provision (benefit) for income taxes for the years ended December 31 are as follows (in thousands):

   2016   2015   2014 

Current:

      

Federal

  $—   $144   $(690) 

State

   172    (473)    147 

Foreign

   137    111    124 
  

 

 

   

 

 

   

 

 

 
   309    (218)    (419) 

Deferred:

      

Federal

   (55)    (274)    (6) 

Foreign

   (23)    91    — 
  

 

 

   

 

 

   

 

 

 
   (78)    (183)    (6) 
  

 

 

   

 

 

   

 

 

 
  $231   $(401)   $(425) 
  

 

 

   

 

 

   

 

 

 

 
2019
  
2018
  
2017
 
Current:
         
Federal
 $
—
  $
—
  $
(736
)
State
  
268
   
231
   
156
 
Foreign
  
450
   
911
   
396
 
             
  
718
   
1,142
   
(184
)
Deferred:
         
Foreign
  
60
   
(55
)  
(172
)
             
  
60
   
(55
)  
(172
)
             
 $
778
  $
1,087
  $
(356
)
             
The Tax Act eliminates the deferral of U.S. income tax on accumulated foreign earnings by imposing a
one-time
mandatory transition tax on such earnings. As discusseda result, a provisional amount of approximately $122,000 was recorded in Note 8,2017 as additional tax expense related to approximately $813,000 of untaxed accumulated unremitted foreign earnings.
As noted above, the Company recorded a gain from equity method investmentadditional tax of $122,000 was fully offset by existing net operating losses in the third quarter of 2015 for cash consideration received equal to its gross investment in GWS of $4,999,719U.S. Effective for the full preference value of itsnon-voting convertible preferred stock upon GWS’ acquisition by Intersil, asCompany’s 2018 tax year, foreign earnings were taxed in the valueU.S. under GILTI and FDII provisions of the investment for financial reporting purposes was zero. For income tax purposes, though, the tax basis of the investment was $4,999,719 at the time of the redemption as it was not previously deducted for tax purposes and, therefore, there was no gain or loss on the transaction for income tax purposes.

The Company intends to continue to reinvest certain of its foreign earnings indefinitely. Accordingly, no U.S. income taxes have been provided for approximately $909,000 of unremitted earnings of international subsidiaries.Tax Act. As of December 31, 2016,2019 and 2018, unremitted foreign earnings, which were not significant, were permanently

re-invested
in the amountCompany’s foreign subsidiaries. Upon repatriation of unrecognized deferred tax liability on thesethose earnings, was $80,000.

in the form of dividends or otherwise, the Company could be subject to immaterial withholding taxes payable to the various foreign countries.

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VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As noted above, the change in the U.S. federal corporate tax rate, which was effective January 1, 2018, is reflected in the Company’s deferred tax table below. Significant components of the Company’s deferred tax assets and liabilities as of December 31 were as follows (in thousands):

   2016   2015 

Deferred tax assets:

    

Research and development tax credit carryforwards

  $13,967   $12,503 

Net operating loss carryforwards

   4,902    3,393 

Stock-based compensation

   4,066    3,993 

Inventory reserves

   3,143    2,979 

Vacation accrual

   1,928    1,768 

Investment tax credit carryforwards

   1,576    1,399 

Alternative minimum tax credit carryforward

   340    340 

Deferred revenue

   154    192 

Unrealized loss on investments

   136    149 

Warranty reserves

   73    202 

Bad debt reserves

   52    58 

Other

   331    735 
  

 

 

   

 

 

 

Total deferred tax assets

   30,668    27,711 

Less: Valuation allowance for deferred tax assets

   (29,274)    (25,862) 
  

 

 

   

 

 

 

Net deferred tax assets

   1,394    1,849 

Deferred tax liabilities:

    

Prepaid expenses

   (654)    (713) 

Depreciation

   (406)    (787) 

Patent amortization

   (296)    (334) 

Unremitted Vicor Custom Power earnings

   —    (55) 
  

 

 

   

 

 

 

Total deferred tax liabilities

   (1,356)    (1,889) 
  

 

 

   

 

 

 

Net deferred tax assets (liabilities)

  $38   $(40) 
  

 

 

   

 

 

 

 
2019
  
2018
 
Deferred tax assets:
      
Research and development tax credit carryforwards
 $
 27,607
  $
 23,244
 
Investment tax credit carryforwards
  
2,102
   
1,976
 
Stock-based compensation
  
1,587
   
3,133
 
Inventory reserves
  
1,522
   
2,109
 
Vacation accrual
  
1,280
   
1,218
 
Deferred revenue, net
  
796
   
66
 
Lease liabilities
  
679
   
—
 
UNICAP
  
351
   
275
 
Net operating loss carryforwards
  
328
   
1,091
 
International deferred tax assets
  
205
   
265
 
Sales allowances
  
172
   
128
 
Unrealized loss on investments
  
132
   
132
 
Contingent consideration liabilities
  
98
   
88
 
Warranty reserves
  
66
   
35
 
Bad debt reserves
  
14
   
52
 
Other
  
225
   
233
 
         
Total deferred tax assets
  
37,164
   
34,045
 
Less: Valuation allowance for deferred tax assets
  
(30,363
)  
(30,031
)
         
Net deferred tax assets
  
6,801
   
4,014
 
Deferred tax liabilities:
      
Depreciation
  
(5,296
)  
(3,144
)
ROU assets
  
(653
)  
—
 
Prepaid expenses
  
(552
)  
(473
)
Patent amortization
  
(91
)  
(107
)
Other
  
(4
)  
(25
)
         
Total deferred tax liabilities
  
(6,596
)  
(3,749
)
         
Net deferred tax assets (liabilities)
 $
205
  $
265
 
         
As of December 31, 2016,2019, the Company has a valuation allowance of approximately $29,274,000 primarily$30,363,000 against all domestic net deferred tax assets and the majority of foreign net deferred tax assets, for which realization cannot be considered more likely than not at this time. Management assesses the need for the valuation allowance on a quarterly basis. In assessing the need for a valuation allowance, the Company considers all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance. TheWhile recent positive operating results caused the Company remainsto be in a significant cumulative lossincome position as of December 31, 20162019, its overall profitability has been declining since the third quarter of 2018, primarily due to overall reduced bookings for both Advanced and asBrick products, reflecting U.S.-China trade/tariff dynamics and elements of macro uncertainty. The uncertain impact of the coronavirus on the supply chain and certain process issues with the production of Advanced Products is contributing to near-term uncertainty. As a result, management believeshas concluded a full valuation allowance against all net domestic net deferred tax assets is still warranted as of December 31, 2016.2019. The valuation allowance against these deferred tax assets may require
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
adjustment in the future based on changes in the mix of temporary differences, changes in tax laws, and operating performance. If the positive quarterly earnings continue and the Company’s concerns about industry uncertainty, process issues with the production of Advanced Products are resolved, and order volumes are alleviated to the point that the Company believes future profits can be more reliably forecasted, the Company may release all or a portion of the valuation in the near-term. Certain state tax credits, though, will likely never be uncovered by the valuation allowance. If and when the Company determines the valuation allowance should be released (i.e., reduced), the adjustment would result in a tax benefit reported in that period’s Consolidated Statements of Operations, the effect of which would be an increase in reported net income. A portion of such an adjustment may be accounted for through an increase to “Additionalpaid-in capital”, a component of Stockholders’ Equity.
The amount of any such tax benefit associated with release of our valuation allowance in a particular quarter may be material.

As a result of certain realization requirements under the stock-based compensation guidance, the table of deferred tax assetsstate and liabilities shown above does not include certain deferred tax assets as of December 31, 2016, that arose directly from tax deductions related to stock-based compensation greater than stock-based

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

compensation recognized for financial reporting. Equity will be increased, net of any valuation allowance, by $3,485,000 if and when such deferred tax assets are ultimately realized. Beginning in 2017, upon the adoption of new guidance for employee share-based accounting described in Note 2 — Significant Accounting Policies —Impact of recently issued accounting standards, this amount will be allocated and added to the deferred tax assets forfederal research and development tax credit carryforwards of approximately $14,451,000 and net operating loss carryforwards, but will be fully offset by the valuation allowance for deferred tax assets. The Company uses ASC 740 ordering when determining when excess tax benefits have been realized.

The research and development tax credit carryforwards$17,744,000, respectively, expire beginning in 20172020 for state purposes and in 20222025 for federal purposes. The Company has federal net operating loss carryforwards which expire beginning in 2033, as well as net operating loss carryforwards in certain states of approximately $4,913,000, which expire beginning in 20172022 through 2036.

2037.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

   2016   2015   2014 

Balance on January 1

  $830   $1,254   $2,072 

Additions based on tax provisions related to the current year

   125    120    161 

Reductions for tax positions of prior years

   —    —    (967) 

Settlements

   —    (480)    — 

Lapse of statute

   (9)    (64)    (12) 
  

 

 

   

 

 

   

 

 

 

Balance on December 31

  $946   $830   $1,254 
  

 

 

   

 

 

   

 

 

 

 
2019
  
2018
  
2017
 
Balance on January 1
 $
  1,462
  $
  1,104
  $
946
 
Additions based on tax positions related to the current year
  
571
   
245
   
138
 
Additions for tax positions of prior years
  
43
   
120
   
29
 
Settlements
  
—
   
—
   
(1
)
Lapse of statute
  
(6
)  
(7
)  
(8
)
             
Balance on December 31
 $
 2,070
  $
 1,462
  $
 1,104
 
             
The Company has reviewed the tax positions taken, or to be taken, in its tax returns for all tax years currently open to examination by a taxing authority. The total amount of unrecognized tax benefits, that is the aggregate tax effect of differences between tax return positions and the benefits recognized in the Company’s financial statements, as of December 31, 2016, 2015,2019, 2018, and 20142017 of $946,000, $830,000,$2,070,000, $1,462,000, and $1,254,000,$1,104,000, respectively, if recognized, may decrease the Company’s income tax provision and effective tax rate. None of the unrecognized tax benefits as of December 31, 2016,2019, are expected to significantly change during the next twelve months.

The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. During the years ended December 31, 2016, 2015,2019, 2018, and 2014,2017, the Company recognized approximately $6,000, $21,000,$7,000, $7,000, and $32,000,$6,000, respectively, in net interest expense. As of December 31, 20162019 and 2015,2018, the Company had accrued approximately $25,000$41,000 and $24,000,$35,000, respectively, for the potential payment of interest.

The Company files income tax returns in the United States and various foreign tax jurisdictions. These tax returns are generally open to examination by the relevant tax authorities from three to seven years from the date they are filed. The tax filings relating to the Company’s federal and state taxes are currently open to examination for tax years 20132016 through 2018 and 2015 and 20072010 through 2015,2018, respectively. In addition, the 2003, 2004,2012 and 20072014 tax years resulted in losses.losses and the Company generated federal research and development credits in tax years 2005 through 2015. These years may also be subject to examination sincewhen the losses wereor credits are carried forward and utilized in future years.

The Company’s subsidiary in Italy, Vicor Italy S.r.l. (“Vicor Italy”), underwent during 2014 a tax inspection during 2014 for tax years 2009 through 2013, covering corporation, regional and value added taxes. Vicor Italy received a
7
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VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
preliminary tax audit report dated June 30, 2014. The Company filed a response to the preliminary tax audit report in the third quarter of 2014. The statute of limitations for the tax authorities in Italy to file an assessment, if any, expired on December 31, 20152019 for tax year 2009all years under the inspection. Due to the
non-response
by Italian authorities after nearly six years, and on December 31, 2016 for tax year 2010. While management believes it is too early to determine the likelihood or amountlapse of potential liability at this time, itall five years under examination, the Company does not believe the ultimate impact of this matterthere will be materialany impact to the Company’s financial statements.

VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other than

In May 2017, the Vicor Italy matter discussed above thereCompany received notice from the Internal Revenue Service that its federal corporate tax return for tax year 2015 had been selected for examination. The examination was completed in May 2018 resulting in no tax liability to the Company. In January 2018, the Company received notice from the New York State Department of Taxation and Finance that its New York State tax returns for tax years 2014 through 2016 were selected for audit. The audit was completed in the third quarter of 2018, resulting in an immaterial assessment.
There are no other income tax examinations or audits currently in process.

16.

17.  COMMITMENTS
AND CONTINGENCIES

contingencies
The Company leases certain of its office and manufacturing space. The future minimum rental commitments undernon-cancelable operating leases with remaining termsis the defendant in excess of one year are as follows (in thousands):

Year

    

2017

  $1,572 

2018

   1,013 

2019

   556 

2020

   411 

2021 and thereafter

   1,219 

Rent expense was approximately $1,866,000, $1,902,000 and $1,824,000 in 2016, 2015 and 2014, respectively. The Company also pays tenant-related executory costs such as taxes, maintenance, and insurance.

Ona patent infringement lawsuit originally filed on January 28, 2011 by SynQor, Inc. (“SynQor”) filed a complaint for patent infringement against Ericsson, Inc. (“Ericsson”), Cisco Systems, Inc. (“Cisco”) and the Company in the U.S. District Court for the Eastern District of Texas (the “Texas Action”). Ericsson and Cisco subsequently settled with SynQor and are no longer parties to the Texas Action. With respect to the Company, SynQor’sThe complaint, in the Texas Action allegedas amended, alleges that the Company’s products, including but not limited to, unregulated bus converters used in intermediate bus architecture power supply systems, infringe SynQor’s U.S. patent numbers 7,072,190, 7,272,021, 7,564,702, and 7,564,7028,023,290 (“the ‘190 patent”, “the ‘021 patent” and, “the ‘702 patent”, and “the ‘290 patent”, respectively). SynQor’s complaintcompliant sought an injunction against further infringement and an award of unspecified compensatory and enhanced damages, interest, costs and attorney fees. On September 20, 2011, SynQor filed an amended complaint in the Texas Action that further alleged that the Company’s products, including, but not limited to, unregulated bus converters used in intermediate bus architecture power supply systems, infringe SynQor’s U.S. patent number 8,023,290 (“the ‘290 patent”). The Company responded to SynQor’s amended complaint in the Texas Action by denyinghas denied that its products infringe any of the SynQor patents, and assertinghas asserted that the SynQor patents are invalid. The Company has further alleged that the SynQor ‘290 patent is unenforceable due to inequitable conduct by SynQor invalid and/or its agents during the examination of the ‘290 patent at the United States Patent and Trademark Office (“USPTO”).unenforceable. The Company has also asserted counterclaims seeking damages againstfrom SynQor for deceptive trade practices and tortious interference with prospective economic advantage arising from SynQor’s attempted enforcement of its patents against the Company.

The Company has initiated administrative review

On May 23, 2016, after extensive discovery, the Texas Action was stayed by the court pending completion of certain inter partes reexamination (“IPRx”) proceedings at the United States Patent and Trademark Office (“USPTO”) (including any appeals from such proceedings to the Federal Circuit (as defined below)) concerning the SynQor patents, which are described below. That stay remains in force.
In 2011, in response to the filing of the Texas Action, the Company’s IPRx proceedings at the USPTO challengingchallenged the validity of certain claims of the SynQor patents asserted in the Texas Action, including all claims that were asserted against the Company by SynQor. The current status of these proceedings is as follows. Regarding the ‘190 patent the Patent Trial and Appeal Board (“PTAB”) of the USPTO issued a decision upholding the validity of the ‘190 patent claims. That decision was appealed by the Company toIPRx, the United States Court of Appeals for the Federal Circuit (“the Federal(the “Federal Circuit”), which issued a decision on March 13, 2015, reversing the PTAB, determining that certain claims were invalid and remanding the matter to the PTABPatent Trial and Appeal Board (“PTAB”) of the USPTO for further proceedings. On May 2, 2016,February 20, 2019, the PTAB issued a decision determiningfinding that all but one of the remaining claims of the ‘190 patent were invalid and remanding the remaining claim to a patent examiner for further examination, where it remains under review. In addition, on that date, the PTAB issued decisions finding all challenged claims of SynQor’s ‘021 patent invalidwere unpatentable. SynQor has appealed that decision to the Federal Circuit, and upholding the validity of all challenged claims of SynQor’sappeal remains pending. On August 30, 2017, the Federal Circuit issued rulings with regard to the IPRx proceedings for the ’021, ‘702 and ‘290 patents. With respect to the ‘021 patent, the Federal Circuit affirmed the PTAB’s determination that all of the challenged claims of the ‘021 patent were invalid. The CompanyFederal Circuit remanded the case to the PTAB for further consideration of the patentability of certain claims that had been added by amendment during the reexamination. On February 20, 2019, the PTAB issued a decision affirming the examiner’s rejections of all challenged claims. SynQor has filed an appeal withof that decision in the Federal Circuit, fromand that appeal remains pending. With respect to the ‘702 patent, the Federal Circuit affirmed the PTAB’s

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VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

decision upholding the validity

determination that all of the challenged claims of the ‘702 andpatent were patentable. With respect to the ‘290 patents. SynQor has filed an appeal withpatent, the Federal Circuit fromvacated the PTAB’s decision thatupholding the challenged claimspatentability of the ‘021‘290 patent are invalid. Decisions in these appeals are expected later in 2017.claims, and remanded the case to the PTAB for further consideration. On May 23, 2016,February 20, 2019, the Texas CourtPTAB issued an order stayinga decision reversing its prior affirmance of the Texas Action untilexaminer’s
non-adoption
of rejections with respect to the completion‘290 patent, and entering rejections of all of the administrative review proceedings concerningclaims of the ‘290 patent. On May 20, 2019, as permitted by USPTO rules, SynQor requested the USPTO to reopen prosecution of this proceeding to address the new rejections made by the PTAB. While prosecution was reopened, the examiner has yet to issue a further substantive ruling.
On October 31, 2017, the Company filed a request with the USPTO for ex parte reexamination (“EPRx”) of the asserted claims of the ‘702 patent, based on different prior art references than had been at issue in the previous IPRx of the ‘702 patent. On September 12, 2018, a patent examiner found that all of the asserted claims were invalid.
SynQor has appealed that ruling to the PTAB, where the appeal remains pending. On August 6, 2018, the Company filed a request with the USPTO for EPRx of the asserted claims of the ‘190 patent, based on different prior art references than had been at issue in the previous IPRx of the ‘190 patent. On August 9, 2019, the USPTO issued a final rejection of all of the asserted claims of the ‘190 patent. SynQor has appealed that ruling to the PTAB, where the appeal remains pending.
On January 23, 2018, the
20-year
terms of the ‘190 patent, the ‘021 patent, the ‘702 patent and the ‘290 patent expired. As a consequence of these expirations, the Company cannot be liable under any of the SynQor patents includingfor allegedly infringing activities occurring after the patents’ respective expiration dates. In addition, any appeals from suchamended claims that may issue as a result of any of the still-pending reexamination proceedings towill have no effective term and cannot be the Federal Circuit.

basis for any liability by the Company.

The Company continues to believe none of its products, including its unregulated bus converters, infringe any valid claim of the asserted SynQor patents, either alone or when used in an intermediate bus architecture implementation, including such use by Cisco.implementation. The Company believes SynQor’s claims lack merit and, therefore, it continues to vigorously defend itself against SynQor’s patent infringement allegations. The Company does not believe a loss is probable for this matter. If a loss were to be incurred, however, the Company cannot estimate the amount of possible loss or range of possible loss at this time.

In addition to the SynQor matter, the Company is involved in certain other litigation and claims incidental to the conduct of its business. While the outcome of lawsuits and claims against the Company cannot be predicted with certainty, management does not expect any current litigation or claims will have a material adverse impact on the Company’s financial position or results of operations.

17.  SEGMENT INFORMATION

The Company has organized its business segments according to its key product lines. The BBU segment designs, develops, manufactures, and markets

18.  VI CHIP AND PICOR
MERGERS
On June 28, 2019, the Company’s modularDC-DC converters and configurable products, and also includesBoard of Directors unanimously approved the entities comprising Vicor Custom Power, the BBU operationsmerger of VJCL, and the operations of the Company’s Westcor division through its closure in December 2014. The VI Chip, segment includesa subsidiary of Vicor that was fully consolidated for financial reporting purposes, with and into the Company. The merger was completed as of June 28, 2019, at which time the separate corporate existence of VI Chip Corporation, which designs, develops, manufactures, and markets manyceased. To effect the merger, holders of the Company’s advanced power component products. The VI Chip segment also includes the VI Chip business conducted through VJCL. The Picor segment consists of Picor Corporation, which designs, develops, manufactures, and markets integrated circuits and related products for use in a variety of power management and power system applications. The Picor segment develops these products for use in the Company’s BBUcommon stock and VI Chip modules, to be sold as complementsstock options received an equivalent value of Vicor Common Stock and Vicor stock options, respectively, pursuant (with respect to the Company’s BBU andstock options) to the assumption of the 2007 VI Chip products, or for sale to third parties for separate (i.e., stand-alone) applications.

The Company’s Chief Executive Officer (i.e.,Plan, and options outstanding thereunder, by the chief operating decision maker) evaluates performance and allocates resources based on segment revenues and segment operating income (loss). The operating income (loss) for each segment includes selling, general, and administrative and research and development expenses directly attributable to the segment. Certain ofCompany.

On May 25, 2018, the Company’s indirect overhead costs,Board of Directors unanimously approved the merger of Picor, a subsidiary of Vicor that was fully consolidated for financial reporting purposes, with and into the Company. The merger was completed as of May 30, 2018, at which includetime the separate corporate selling, general,existence of Picor ceased. To effect the merger, holders of Picor Common Stock and administrative expenses, are allocated among the segments based uponPicor stock options received an estimateequivalent value of costs associated with each segment. Assets allocated to each segment are based upon specific identificationVicor
80
Table of such assets, which include accounts receivable, inventories, fixed assets and certain other assets. The Corporate segment consists of those operations and assets shared by all segments. The costs of certain centralized executive and administrative functions are recorded in this segment, as are certain shared assets, most notably cash and cash equivalents, deferred tax assets, long-term investments, the Company’s facilities in Massachusetts, real estate, and other assets. The Company’s accounting policies and method of presentation for segments are consistent with that used throughout the Consolidated Financial Statements.

Contents

VICOR
CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table provides significant segment

Common Stock and Vicor stock options, respectively, pursuant (with respect to the stock options) to the assumption of the 2001 Picor Plan, and options outstanding thereunder, by the Company.
There was no net impact on the Company’s consolidated financial data as of andstatements for the years ended December 31, (in thousands):

   BBU   VI Chip  Picor  Corporate  Eliminations  Total 
                (1)    

2016:

        

Net revenues

  $151,428   $39,947  $16,684  $—  $(7,779)  $200,280 

Income (loss) from operations

   11,750    (16,494)   (637)   (933)   —   (6,314) 

Total assets

   196,987    21,389   8,583   73,253   (146,145)   154,067 

Depreciation and amortization

   4,258    2,235   545   1,400   —   8,438 

2015:

        

Net revenues

  $173,064   $36,688  $17,304  $—  $(6,862)  $220,194 

Income (loss) from operations

   21,743    (21,040)   (290)   (680)   —   (267) 

Total assets

   170,939    15,577   5,369   81,824   (116,164)   157,545 

Depreciation and amortization

   4,538    2,740   442   1,422   —   9,142 

2014:

        

Net revenues

  $184,224   $34,701  $15,570  $—  $(8,764)  $225,731 

Income (loss) from operations

   15,499    (29,015)   (407)   (840)   —   (14,763) 

Total assets

   151,923    17,677   5,691   75,758   (95,507)   155,542 

Depreciation and amortization

   4,711    3,265   410   1,419   —   9,805 

(1)The elimination for net revenues is principally related to inter-segment revenues of Picor to BBU and VI Chip and for inter-segment revenues of VI Chip to BBU. The elimination for total assets is principally related to inter-segment accounts receivable due to BBU for the funding of VI Chip and Picor operations.

18.2019 and 2018 as a result of the mergers.

19.  Segment Information
In the second quarter of 2019, management determined, with the approval of the Company’s Board of Directors and Chief Operating Decision Maker (“CODM”), Dr. Vinciarelli, the Company would report as one segment, rather than under the three segment approach employed since 2007. The Company’s strategy has evolved with a transition in organizational focus, emphasizing investment in Advanced Products, targeting high growth market segments with a
low-mix,
high-volume operational model, while maintaining a profitable business in mature market segments we serve with Brick Products with a
high-mix,
low-volume
operational model. Dr. Vinciarelli and management began to make incremental changes in management practices and organizational structure based on a management plan established in 2018 for the definitive reconfiguration of the three business units into one business focused on the Advanced Products and Brick Products product line categorizations, including three significant changes: the merger of Picor with and into Vicor, which was completed on May 30, 2018; the reconfiguration of the Company’s internal reporting systems, which was completed on December 31, 2018; and the merger of VI Chip with and into Vicor, which, as stated, was completed on June 28, 2019. Our CODM now determines the allocation of resources of the Company based upon the two product groupings, which constitute one segment. Both product lines are built in the Company’s manufacturing facility in Andover, Massachusetts employing similar processing and production techniques, and are supported by the same sales and marketing organizations. As such, the Company has conformed the segment reporting to the new reporting structure utilized by the CODM. Accordingly, three-segment information for prior periods has not been presented, to conform with the new presentation.
20.  QUARTERLY RESULTS OF OPERATIONS (Unaudited)

The following table sets forth certain unaudited quarterly financial data for the years ended December 31 (in thousands, except per share amounts):

   First   Second   Third   Fourth   Total 

2016:

          

Net revenues

  $46,027   $52,941   $53,227   $48,085   $200,280 

Gross margin

   19,316    24,471    25,923    21,499    91,209 

Consolidated net income (loss)

   (5,376)    (550)    2,351    (2,686)    (6,261) 

Net income (loss) attributable to noncontrolling interest

   (25)    (6)    15    2    (14) 

Net income (loss) attributable to Vicor Corporation

   (5,351)    (544)    2,336    (2,688)    (6,247) 

Net income (loss) per share attributable to Vicor Corporation:

          

Basic and diluted

   (0.14)    (0.01)    0.06    (0.07)    (0.16) 

 
First
  
Second
  
Third
  
Fourth
  
Total
 
2019:
               
Net revenues
 $
 65,725
  $
 63,355
  $
 70,772
  $
 63,125
  $
 262,977
 
Gross margin
  
31,086
   
29,117
   
33,002
   
29,761
   
122,966
 
Consolidated net income
  
4,306
   
2,556
   
5,932
   
1,315
   
14,109
 
Net income (loss) attributable to noncontrolling interest
  
20
   
(7
)  
(5
)  
3
   
11
 
Net income attributable to Vicor Corporation
  
4,286
   
2,563
   
5,937
   
1,312
   
14,098
 
Net income per share attributable to Vicor Corporation:
               
Basic
  
0.11
   
0.06
   
0.15
   
0.03
   
0.35
 
Diluted
  
0.10
   
0.06
   
0.14
   
0.03
   
0.34
 
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VICOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

   First   Second   Third   Fourth   Total 

2015:

          

Net revenues

  $64,017   $56,119   $48,664   $51,394   $220,194 

Gross margin

   28,891    26,510    21,286    22,831    99,518 

Consolidated net income (loss)

   3,442    771    2,609    (1,663)    5,159 

Net income (loss) attributable to noncontrolling interest

   71    (34)    106    89    232 

Net income (loss) attributable to Vicor Corporation

   3,371    805    2,503    (1,752)    4,927 

Net income (loss) per share attributable to Vicor Corporation:

          

Basic and diluted

   0.09    0.02    0.06��   (0.05)    0.13 

 
First
  
Second
  
Third
  
Fourth
  
Total
 
2018:
               
Net revenues
 $
 65,269
  $
 74,196
  $
 78,035
  $
 73,720
  $
 291,220
 
Gross margin
  
30,211
   
35,883
   
39,004
   
33,873
   
138,971
 
Consolidated net income
  
3,982
   
7,909
   
13,048
   
6,907
   
31,846
 
Net income (loss) attributable to noncontrolling interest
  
39
   
49
   
36
   
(3
)  
121
 
Net income attributable to Vicor Corporation
  
3,943
   
7,860
   
13,012
   
6,910
   
31,725
 
Net income per share attributable to Vicor Corporation:
               
Basic
  
0.10
   
0.20
   
0.32
   
0.17
   
0.80
 
Diluted
  
0.10
   
0.19
   
0.32
   
0.17
   
0.78
 
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ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.
CONTROLS AND PROCEDURES
Controls and procedures

Attached as exhibits to this Annual Report onForm
 10-K
are certifications of our CEO and Chief Financial Officer (“CFO”), which are required in accordance withRule
 13a-14
of the Exchange Act. This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications.

(a) Evaluation of disclosure controls and procedures

As required byRule
 13a-15
under the Exchange Act, management, with the participation of our CEO and CFO, conducted an evaluation regarding the effectiveness of our disclosure controls and procedures, as of the end of the last fiscal year. The term “disclosure controls and procedures,” as defined inRules
 13a-15(e)
and
15d-15(e)
under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. We recognize any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and we necessarily apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of December 31, 2016,2019, the Chief Executive OfficerCEO and Chief Financial OfficerCFO concluded, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

(b) Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures;procedures: (a) pertaining to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (b) providing reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and Board of Directors; and (c) providing reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

Management assessed our internal control over financial reporting as of December 31, 2016,2019, the end of our fiscal year. Management based its assessment on criteria established in
Internal Control — Integrated Framework (2013)
 issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.

Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2016.

2019.

The effectiveness of our internal control over financial reporting as of December 31, 20162019 has been audited by KPMG LLP, our independent registered public accounting firm, as stated in their report which is included immediately below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The

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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors and Stockholders

Vicor Corporation:

Opinion on Internal Control Over Financial Reporting
We have audited Vicor Corporation’sCorporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2016,2019, based on criteria established in
Internal Control —– Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Vicor Corporation’sCommission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, cash flows, and equity for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedule listed in Item 15(a)(2) (collectively, the consolidated financial statements), and our report dated February 28, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Vicor Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vicor Corporation and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), cash flows, and equity for each of the years in the three-year period ended December 31, 2016, and our report dated March 7, 2017 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Boston, Massachusetts

March 7, 2017

February 28, 2020
(c)  Inherent Limitations on Effectiveness of Controls

The Company’s management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

(d)  Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2016,2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 9B.
OTHER INFORMATION9b.

None.

PART

Part III

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors, executive officers and corporate governance

Incorporated by reference from the Company’s Definitive Proxy Statement for its 20172020 annual meeting of stockholders.

ITEM 11.
EXECUTIVE COMPENSATION
Executive Compensation

Incorporated by reference from the Company’s Definitive Proxy Statement for its 20172020 annual meeting of stockholders.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS

Incorporated by reference from the Company’s Definitive Proxy Statement for its 20172020 annual meeting of stockholders.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE

Incorporated by reference from the Company’s Definitive Proxy Statement for its 20172020 annual meeting of stockholders.

ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal accountant fees and services

Incorporated by reference from the Company’s Definitive Proxy Statement for its 20172020 annual meeting of stockholders.

PART

Part IV

ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

ITEM 15.
(a) (1)
 Financial Statements

See index in Item 8.

(a) (2)
 Schedules

Schedule II Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

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(b)
 Exhibits

Exhibits

 

Exhibits
Description of Document

    3.1

 •
Restated Certificate of Incorporation, dated February 28, 1990 (1)

    3.2

 •
Certificate of Ownership and Merger Merging Westcor Corporation, a Delaware Corporation, into Vicor Corporation, a Delaware Corporation, dated December 3, 1990 (1)

    3.3

 •
Certificate of Amendment of Restated Certificate of Incorporation, dated May 10, 1991 (1)

    3.4

 •
Certificate of Amendment of Restated Certificate of Incorporation, dated June 23, 1992 (1)

    3.5

 •
Bylaws, as amended (9)(8)

    4.1

 •
Specimen Common Stock Certificate (2)

  10.1*

    4.2
 •
Description of Securities Registered under Section 12 of the Exchange Act (16)
  10.1*
 1984 Stock Option Plan of the Company, as amended (2)

  10.2*

•1993 Stock Option Plan (3)

  10.3*

•
1998 Stock Option and Incentive Plan (4)(3)

  10.4*

  10.2*
 •
Vicor Corporation Amended and Restated 2000 Stock Option and Incentive Plan, (5)as amended and restated (4)

  10.5*

  10.3*
 •
Form ofNon-Qualified Stock Option under the Vicor Corporation Amended and Restated 2000 Stock Option and Incentive Plan (6)(5)

  10.6*

  10.4*
 •
Sales Incentive Plan (7)(6)

  10.7*

  10.5*
 •
Picor Corporation Amended and Restated 2001 Stock Option and Incentive Plan, (8)dated May 30, 2018 (14)

  10.8*

  10.6*
 •
Form ofNon-Qualified Stock Option under the Picor Corporation 2001 Stock Option and Incentive Plan (8)(7)

  10.9*

  10.7*
 •
VI Chip Corporation Amended and Restated 2007 Stock Option and Incentive Plan (11)

  10.10*

  10.8*
 •
Form ofNon-Qualified Stock Option Agreement under the VI Chip Corporation Amended 2007 Stock Option and Incentive Plan (10)(9)

  10.11*

  10.9*
 •
Form of Incentive Stock Option Agreement under the VI Chip Corporation Amended 2007 Stock Option and Incentive Plan (11)(10)

  10.12*

  10.10*
 •
Form of Stock Restriction Agreement under the VI Chip Corporation Amended 2007 Stock Option and Incentive Plan (11)(10)

  21.1

  10.11*
 •
Vicor Corporation 2017 Employee Stock Purchase Plan (13)
  10.12*
 
VI Chip Corporation Amended and Restated 2007 Stock Option and Incentive Plan, as Amended and Restated (15)
  21.1
Subsidiaries of the Company (12)(16)

  23.1

 •
Consent of KPMG LLP (12)(16)

  31.1

 •
Certification of Chief Executive Officer pursuant to Rule13a-14(a) of the Exchange Act (12)(16)

  31.2

 •
Certification of Chief Financial Officer pursuant to Rule13a-14(a) of the Exchange Act (12)(16)

  32.1

 •
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (12)(16)

  32.2

 •
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (12)(16)

101

  101.INS**
 •
Inline XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
  101.SCH**
 The following material from the Company’s Annual Report on Form10-K, for the year ended December 31, 2016, formatted
Inline XBRL Taxonomy Extension Schema Document.
  101.CAL**
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
  101.DEF**
Inline XBRL Taxonomy Extension Definition Linkbase Document.
  101.LAB**
Inline XBRL Taxonomy Extension Label Linkbase Document.
  101.PRE**
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
  104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statements of Cash Flows; (v) the Consolidated Statements of Equity; and (vi) the Notes to Consolidated Financial Statements.Exhibit 101)

  *Indicates a management contract or compensatory plan or arrangement required to be filled pursuant to Item 15(b) of Form
10-K.
  **Filed with this Annual Report on Form
10-K
for the year ended December 31, 2019 are the following documents formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated
87
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Balance Sheets for the years ended December 31, 2019 and 2018; (ii) the Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017; (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017; (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017; (v) the Consolidated Statements of Equity for the years ended December 31, 2019, 2018 and 2017; and (vi) the Notes to Consolidated Financial Statements.
  (1)Filed as an exhibit to the Company’s Annual Report onForm
 10-K
filed on March 29, 2001 and incorporated herein by reference.
  (2)Filed as an exhibit to the Company’s Registration Statement on Form 10, as amended, under the Securities Exchange Act of 1934 (FileNo.
 0-18277),
and incorporated herein by reference. (P)
  (3)Filed as an exhibit to the Company’s Registration Statement onForm
 S-8,
as amended, under the Securities Act of 1933(No. 33-65154) (No.
 333-61177),
and incorporated herein by reference.

  (4)Filed as an exhibitAppendix A to the Company’s RegistrationDefinitive Proxy Statement onForm S-8, as amended, under Schedule 14A filed with the Securities Act of 1933(SEC on May 1, 2017 (File No. 333-61177)
 000-18277),
and incorporated herein by reference.
  (5)Filed as an exhibit to the Company’s Proxy Statement for use in connection with its 2002 Annual Meeting of Stockholders, which was Quarterly Report on Form
 10-Q
filed on April 29, 2002November 4, 2004 (FileNo.
 0-18277),
and incorporated herein by reference.
  (6)Filed as an exhibit to the Company’s QuarterlyAnnual Report onForm 10-Q
 10-K
filed on November 4, 2004March 16, 2005 (FileNo.
 0-18277)
and incorporated herein by reference.
  (7)Filed as an exhibit to the Company’s Annual Report onForm
 10-K
filed on March 16, 200514, 2006 (FileNo.
 0-18277)
and incorporated herein by reference.
  (8)Filed as an exhibit to the Company’s AnnualQuarterly Report onForm 10-K
 10-Q
filed on March 14,November 8, 2006 (FileNo.
 0-18277)
and incorporated herein by reference.
  (9)Filed as an exhibit to the Company’s QuarterlyCurrent Report onForm 10-Q filed on November 8, 2006
 8-K,
dated June 6, 2007 (FileNo.
 0-18277)
and incorporated herein by reference.
(10)Filed as an exhibit to the Company’s Current Report onand Form
 8-K,
dated JuneMarch 6, 20072008 (FileNo.
 0-18277)
incorporated herein by reference.
  (11)Filed as Appendix B to the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on May 1, 2017 (File No.
 000-18277),
and incorporated herein by reference.
(11)  (12)Filed as an exhibitAppendix C to the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on May 1, 2017 (File No.
 000-18277),
and incorporated herein by reference.
  (13)Filed as Appendix D to the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on May 1, 2017 (File No. 000-18277), and incorporated herein by reference.
  (14)Filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K
filed with the SEC on June 5, 2018 (File No.
 000-18277),
andForm 8-K, dated March 6, 2008 (FileNo. 0-18277) incorporated herein by reference.
(12)  (15)Filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-8, under the Securities Act of 1933 (No. 333-232864), and incorporated herein by reference.
  (16)Filed herewith.

ITEM

Item 16. Form 10-K Summary

None.

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VICOR CORPORATION

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

Years ended December 31, 2016, 20152019, 2018 and 2014

Description

  Balance at
Beginning of Period		   Charge (Recovery)
to Costs and
Expenses		  Other Charges,
Deductions (1)		  Balance at
End of Period		 

Allowance for doubtful accounts:

      

Year ended:

      

December 31, 2016

  $171,000   $(22,000)  $4,000  $153,000 

December 31, 2015

   183,000    18,000   (30,000)   171,000 

December 31, 2014

   198,000    66,000   (81,000)   183,000 

2017
Description
 
Balance at
Beginning
of Period
  
Charge
(Recovery)
to Costs and
Expenses
  
Other Charges,
Deductions (1)
  
Balance at
End of Period
 
Allowance for doubtful accounts:
            
Year ended:
            
December 31, 2019
 $
224,000
  $
(144,000
) $
(21,000
) $
59,000
 
December 31, 2018
  
159,000
   
65,000
   
—
   
224,000
 
December 31, 2017
  
153,000
   
6,000
   
—
   
159,000
 
(1)Reflects uncollectible accounts written off, net of recoveries.

8
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Table of Contents
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Vicor Corporation
By: 

By:
/s/    James A. Simms

 
James A. Simms
 
Vice President, Chief Financial Officer

Date: March 7, 2017

February 28, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature

 

Title

 

Date

/s/    Patrizio Vinciarelli

Patrizio Vinciarelli

 

President, Chief Executive Officer

and

Chairman of the Board (Principal

Executive Officer)

 March 7, 2017
February 28, 2020

/s/    James A. Simms

James A. Simms

 

Chief Financial Officer and Vice President

(Principal Financial Officer and Principal

Accounting Officer)

 March 7, 2017
February 28, 2020

/s/    Estia J. Eichten

Estia J. Eichten

 
Director
 March 7, 2017
February 28, 2020

/s/    David T. Riddiford

        David T. Riddiford

 Director March 7, 2017

/s/    Barry Kelleher

        Barry Kelleher

Michael S. McNamara
Michael S. McNamara
 
Director
 March 7, 2017
February 28, 2020

/s/    Samuel J. Anderson

Samuel J. Anderson

 
Director
 March 7, 2017
February 28, 2020

/s/    Claudio Tuozzolo

Claudio Tuozzolo

 
Director
 March 7, 2017
February 28, 2020

/s/    Jason L. Carlson

Jason L. Carlson

 
Director
 March 7, 2017
February 28, 2020

/s/    Liam K. Griffin

        Liam K. Griffin

 Director March 7, 2017

/s/    H. Allen Henderson

        H. Allen Henderson

Philip D. Davies
Philip D. Davies
 
Director
 March 7, 2017
February 28, 2020

90