Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

____________________________

(Mark One)

Forthe quarterly period ended September 30, 20182019

OR

Commission file number: 000-51026

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Monolithic Power Systems, Inc.

(Exact name of registrant as specified in its charter)

____________________________

4040 Lake Washington Blvd. NE, Suite 201, Kirkland, Washington 98033

(Address of principal executive offices)(Zip code)Code)

  (425) 296-9956

(Registrant’s telephone number, including area code)

____________________________

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

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

There were 42,412,00043,439,000 shares of the registrant’s common stock issued and outstanding as of October 29, 2018.28, 2019.

MONOLITHIC POWER SYSTEMS, INC.

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by Monolithic Power Systems, Inc. (the “Company” or “MPS”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted in accordance with these accounting principles, rules and regulations. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K10-K for the year ended December 31, 2017, 2018, filed with the SEC on March 1, 2018.2019.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The financial statements contained in this Form 10-Q10-Q are not necessarily indicative of the results that may be expected for the year ending December 31, 20182019 or for any other future periods.

Summary of Significant Accounting Policies

Except for the changes related to revenue recognitionleases discussed in “Recently Adopted Accounting Pronouncements” and in Note 2 below,6, there have been no other changes to the Company’s significant accounting policies during the three and nine months ended September 30, 2018 2019, as compared to the significant accounting policies described in the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K10-K for the year ended December 31, 2017.2018.

Recently Adopted Accounting PronouncementsPronouncement

In May 2014, February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,2016-02, Revenue from Contracts with CustomersLeases (Topic 606)842),which outlines a single comprehensive model forrequires entities to userecognize right-of-use (“ROU”) assets and lease liabilities on the balance sheets for leases with terms greater than 12 months. In addition, the standard applies to leases embedded in accounting for revenue arising from contracts with customers. The standard’s core principle is that an entity will recognize revenue when it transfers promised goodsservice or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.other arrangements. The Company adopted the standard on January 1, 2018 2019 using the modified retrospective method appliedand did not restate comparative periods, as permitted by the standard. In addition, the Company elected the transition practical expedients to thosenot reassess its contracts which were not completed as of December 31, 2017. Results for reporting periods beginning after that existed prior to January 1, 2018 are presented under Topic 606, while prior-period amounts have not been retrospectively adjusted and continue to be reported in accordance with Topic 605, Revenue Recognition.2019.

TheUpon adoption, the Company recorded a net increase torecognized ROU assets and lease liabilities of its outstanding operating leases on the opening balance of retained earnings of $0.4 million, net of tax, as of January 1, 2018 due to the cumulative effect of initially applying Topic 606,Condensed Consolidated Balance Sheets, primarily related to real estate. The adoption did not have a material impact on the change in revenue recognition for three U.S.-based distributors. Sales to these distributors are transacted underCondensed Consolidated Statements of Operations or the termsCondensed Consolidated Statements of agreements providing price adjustment rights. Prior to the adoption of Topic 606, revenue and costs related to these sales were deferred until the Company received notification from the distributors that the products had been sold to the end customers and the amount of price adjustments was fixed and finalized. Upon adoption of Topic 606, the transaction price takes into consideration the effect of variable consideration such as price adjustments, which are estimated and recorded at the time the promised goods are transferred to the distributors. Accordingly, effective January 1, 2018, the Company recognizes revenue at the time of shipment to the distributors, adjusted for an estimate of the price adjustments based on management’s review of historical data and other information available at the time.Cash Flows. See Note 2 for further discussion.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230), which requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows. The Company adopted the standard on January 1, 2018 and applied the guidance retrospectively to all periods presented. See Note 96 for further discussion.

Recent Accounting Pronouncements Not Yet Adopted as of September 30, 20182019

In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain disclosure requirements, including the presentation of changes in stockholders’ equity and the dividend per share for interim periods. The final rule will be effective on November 5, 2018. The Company is evaluating the impact of the adoption on its disclosures.

In August 2018, the FASB issued ASU No. 2018-13,2018-13, Fair Value Measurement (Topic 820820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement,, which changes certain disclosure requirements, including those related to Level 3 fair value measurements. The standard will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact of the standard and does not expect the adoption to have a material impact on its disclosures.

In January 2017, the FASB issued ASU No. 2017-04,2017-04, Intangibles – Goodwill and Other (Topic 350)350), which simplifies the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The standard will be applied prospectively, and will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact of the standard and does not expect the adoption to have a material impact on its annual goodwill impairment test.

In June 2016, the FASB issued ASU No. 2016-13,2016-13, Financial Instruments – Credit Losses (Topic 326)326), which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities, with unrealized losses, the lossesstandard eliminates the concept of other-than-temporary impairment and entities will be recognized as allowancesrequired to recognize an allowance for credit losses rather than reductions in the amortized cost of the securities. The standard will be effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. Entities will apply the standard by recording a cumulative-effect adjustment to retained earnings. The Company is evaluating the impact of the adoptionBased on its consolidated financial position, results of operations, cash flows and disclosures.

In February 2016,preliminary assessment, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires entities to recognize a right-of-use asset and a lease liability on the balance sheets for substantially all leases with a lease term greater than 12 months, including leases currently accounted for as operating leases. In addition,Company does not expect the standard applies to leases embedded in service or other arrangements. The standard requires modified retrospective adoption and will be effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company will adopt the standard on January 1, 2019. The Company is evaluating thehave a material impact of the adoption on its consolidated financial statements and disclosures, and expects to elect certain available transitional practical expedients. The Company anticipates recording assets and liabilities primarily related to its real estate leases on its Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Operations.upon adoption.

2. REVENUE RECOGNITION

Revenue from Product Sales

The following table presents the Company’s revenue disaggregated by end market (in thousands, except for percentages):

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The Company generates revenue primarily from product sales, which include assembled and tested integrated circuits, as well as dies in wafer form. These product sales were 99% and 98% of the Company’s total revenue for the three months ended September 30, 2019 and 2018, respectively, and 99% and 98% of the Company’s total revenue for the nine months ended September 30, 2019 and 2018, respectively. The Company also generatesremaining revenue primarily includes royalty revenue from licensing arrangements and revenue from wafer testing services performed for third parties, which have not been significant in all periods presented. See Note 8 for the disaggregation of the Company’s revenue by geographic regions and by product families.

The Company sells its products primarily through third-partythird-party distributors, value-added resellers, original equipment manufacturers, original design manufacturers and electronic manufacturing service providers. For the three months ended September 30, 2018 2019 and 2017, approximately2018, 88% and 87% and 88%, respectively, of the Company’s product sales were made through distribution arrangements. For the nine months ended September 30, 2018 2019 and 2017, approximately2018, 83% and 87% and 88%, respectively, of the Company’s product sales were made through distribution arrangements. These distribution arrangements contain enforceable rights and obligations specific to those distributors and not the end customers. Purchase orders, which are generally governed by sales agreements or the Company's standard terms of sale, stateset the final terms for unit price, quantity, shipping and payment agreed by both parties. The Company considers purchase orders to be the contracts with customers. The unit price as stated on the purchase orders is considered the observable, stand-alone selling price for the arrangements.

Under Topic 606, theThe Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company excludes taxes assessed by government authorities, such as sales taxes, from revenue.

Product sales consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes product revenue from distributors and direct end customers when the following events have occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. In accordance with the shipping terms specified in the contracts, these criteria are generally met when the products are shipped from the Company’s facilities (such as the “Ex Works” shipping term) or delivered to the customers’ locations (such as the “Delivered Duty Paid” shipping term).

Under certain consignment agreements, revenue is not recognized when the products are shipped and delivered to be held at customers’ designated locations because the Company retainscontinues to control the products and retain ownership, and the customers do not have an unconditional obligation to pay. The Company recognizes revenue when the customers pullconsume the products from the consigned inventory locations or, in some cases, after a 60-day period lapses,from the delivery date has passed, at which time control transfers to the customers and the Company invoices them for payment.

Variable Consideration

The Company recordsaccounts for price adjustment and stock rotation rights as variable consideration as athat reduces the transaction price, and recognizes that reduction to revenue in the same period the associated revenue is recognized. Three U.S.-based distributors have price adjustment rights when they sell the Company’s products to their end customers at a price that is lower than the distribution price invoiced by the Company. When the Company receives claims from the distributors that products have been sold to the end customers at the lower price, the Company issues the distributors credit memos for the price adjustments. The Company estimates the price adjustments using the expected value method based on analysesan analysis of historical claims, at both the distributor and product level, as well as an assessment of any known trends of product sales mix. Other U.S. distributors and non-U.S. distributors, which make up the majority of the Company’s total sales to distributors, do not have price adjustment rights. The Company records a credit against accounts receivable for the estimated price adjustments, with a corresponding reduction to revenue.

In addition, certain

Certain distributors have limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases.purchases in accordance with the contract terms. The Company estimates the stock rotation returns using the expected value method based on analysesan analysis of historical returns, and the current level of inventory in the distribution channel. The Company records a liability for the stock rotation reserve, with a corresponding reduction to revenue. In addition, the Company recognizes an asset for product returns which represents the right to recover products from the customers related to stock rotations, with a corresponding reduction to cost of goods sold.revenue.

Contract Balances

The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of September 30, 2018 2019 and December 31, 2017, 2018, accounts receivable totaled $59.9$58.3 million and $38.0$55.2 million, respectively. To manage credit risk, management performs ongoing credit evaluations of its customers’ financial condition. The Company did not recognize record any impairment losses related to its receivables in anyallowance for doubtful accounts as of the periods presented.September 30, 2019 and December 31, 2018.

For certain customers located in Asia, the Company requires cash payments two weeks before the products are scheduled to be shipped to the customers. The Company records these payments received in advance of performance as customer prepayments within current accrued liabilities. As of September 30, 2018 2019 and December 31, 2017, 2018, customer prepayments totaled $1.8$4.2 million and $4.7$2.5 million, respectively. The decreaseincrease in the customer prepayment balance for the nine months ended September 30, 2018 2019 resulted from a decreasean increase in unfulfilled customer orders for which the Company has received payments. For the nine months ended September 30, 2018, 2019, the Company recognized $4.7$2.5 million of revenue that was included in the customer prepayment balance as of December 31, 2017.2018.

Contract Costs

The Company pays sales commissions based on the achievement of pre-determined product sales targets. As the Company recognizes product sales at a point in time, sales commissions are expensed as incurred.

WarrantyPractical Expedients

The Company generally provides onehas elected the practical expedient to two-year warranties against defects in materials and workmanship and will either repairexpense sales commissions as incurred because the products, provide replacements at no charge to customersamortization period would have been one year or issue a refund. As they are considered assurance-type warranties, the Company does not account for them as separate performance obligations. Warranty reserve requirements are generally based on a specific assessment of the products sold with warranties when a customer asserts a claim for warranty or a product defect. 

Practical Expedientsless. 

The Company’s standard payment terms generally require customers to pay 30 to 60 days after the Company satisfies the performance obligations. For those customers who are required to pay in advance, the Company satisfies the performance obligations typicallygenerally within one quarter.two weeks. The Company has elected not to determine whether contacts with customers contain significant financing components.

As of September 30, 2018, theThe Company’s unsatisfied performance obligations primarily includedinclude products held in consignment arrangements and customer purchase orders for products that the Company has not yet shipped. Because the Company expects to fulfill these performance obligations within one year, the Company has elected not to disclose the amount of these remaining performance obligations or the timing of recognition.

Changes to Financial Statement Line Items

The following tables compare the impact on the financial statement line items between the application of Topic 606 and Topic 605 as of September 30, 2018, and for the three and nine months ended September 30, 2018. The significant changes between the two standards are primarily attributable to the following:

Condensed Consolidated Balance Sheet (in thousands):

Condensed Consolidated Statement of Operations (in thousands, except per-share amounts):

Condensed Consolidated Statement of Comprehensive Income (in thousands):

Condensed Consolidated Statement of Cash Flows (in thousands):

3. STOCK-BASED COMPENSATION

2014 Equity Incentive Plan (the “2014(as amended, the “2014 Plan”)

The Board of Directors adopted the 2014 Plan in April 2013, and the stockholders approved it in June 2013. In October 2014, the Board of Directors approved certain amendments to the 2014 Plan. The 2014 Plan, as amended, became effective on November 13, 2014 and provides for the issuance of up to 5.5 million shares. The 2014 Plan will expire on November 13, 2024. As of September 30, 2018, 2.72019, 1.6 million shares remained available for future issuance under the 2014 Plan. 

Stock-Based Compensation Expense

The Company recognized stock-based compensation expenses as follows (in thousands):

Restricted Stock Units (“RSUs”)

The Company’s restricted stock units (“RSUs”)RSUs include time-based RSUs, RSUs with only performance conditions (“PSUs”), RSUs with market conditions (“MSUs”), and RSUs with both market and performance conditions (“MPSUs”), and RSUs with only market conditions (“MSUs”). Vesting of all awards requires continued service for the Company. In addition, vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals. goals and the approval of such achievement by the Compensation Committee of the Board of Directors (the “Compensation Committee”). All awards include service conditions which require continued employment with the Company.

A summary of RSU activity is presented in the table below (in thousands, except per-share amounts):

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The intrinsic value related to vested RSUs was $13.9$26.1 million and $12.5$13.9 million for the three months ended September 30, 2018 2019 and 2017,2018, respectively. The intrinsic value related to vested RSUs was $79.0$110.1 million and $61.3$79.0 million for the nine months ended September 30, 2018 2019 and 2017,2018, respectively. As of September 30, 2018, 2019, the total intrinsic value of all outstanding RSUs was $465.9$617.6 million, based on the closing stock price of $125.53.$155.63. As of September 30, 2018, 2019, unamortized compensation expense related to all outstanding RSUs was $89.3$120.5 million with a weighted-average remaining recognition period of approximately three3.4 years. 

Cash proceeds from vested PSUs with a purchase price feature totaled $14.6 million and $9.6 million for the nine months ended September 30, 2018. There were no proceeds for the nine months ended September 30, 2017.2019 and 2018, respectively. 

Time-Based RSUs:

For the nine months ended September 30, 2018, 2019, the Compensation Committee of the Board of Directors (the "Compensation Committee") granted 93,00088,000 RSUs with time-based vestingservice conditions to non-executive employees and non-employee directors. The RSUs vest over four years for employees and one year for directors, subject to continued service with the Company.

20182019 PSUs:

In February 2018, 2019, the Compensation Committee granted 188,000151,000 PSUs to the executive officers, which represent a target number of shares to be awardedearned based on the Company’s average two-year (2018two-year (2019 and 2019)2020) revenue growth rate compared against the analog industry’s average two-yeartwo-year revenue growth rate as published by the Semiconductor Industry Association (“2018(“2019 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the 20182019 Executive PSUs. 50% of the 20182019 Executive PSUs will vest in the first quarter of 20202021 if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee.period. The remaining 20182019 Executive PSUs will vest over the following two years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 20182019 Executive PSUs is $46.1$46.6 million.

In February 2018, the Compensation Committee granted 44,000 PSUs to certain non-executive employees, which represent a target number of shares to be awarded based on the Company’s 2019 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2018 and 2019) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2018 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2018 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2018 Non-Executive PSUs will vest in the first quarter of 2020 if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee. The remaining 2018 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2018 Non-Executive PSUs, excluding cancelled shares, is $8.8 million.

The 20182019 Executive PSUs and the 2018 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30 per share upon vesting of the shares. Shares that do not vest will not be subject to the purchase price payment. The Company determined the grant date fair value of the 20182019 Executive PSUs and the 2018 Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of $110.00,$130.67, expected term of 2.6 years, expected volatility of 27.5%29.0% and risk-free interest rate of 2.3%. 

2015 MPSUs:

On December 31, 2015, the Compensation Committee granted 86,000 MPSUs to the executive officers and 41,000 MPSUs to certain non-executive employees, which represent a target number of shares to be awarded upon achievement of both market conditions and performance conditions (“2015 MPSUs”). The maximum number of shares that an employee can earn is 500% of the target number of the 2015 MPSUs. The 2015 MPSUs consist of four separate tranches with various performance periods ending on December 31, 2019. The first tranche contains market conditions only, which require the achievement of five stock price targets ranging from $71.36 to $95.57 with a performance period from January 1, 2016 to December 31, 2019. As of September 30, 2017, all five stock price targets for the first tranche have been achieved and approved by the Compensation Committee.

The second, third and fourth tranches contain both market conditions and performance conditions. Each tranche requires the achievement of five stock price targets measured against a base price equal to the greater of: (1) the average closing stock price during the 20 consecutive trading days immediately before the start of the performance period for that tranche, or (2) the closing stock price immediately before the start of the performance period for that tranche. The stock price targets for the second tranche range from $89.56 to $106.81 with a performance period from January 1, 2017 to December 31, 2019. As of December 31, 2017, all five stock price targets for the second tranche have been achieved and approved by the Compensation Committee. The stock price targets for the third tranche range from $120.80 to $135.48 with a performance period from January 1, 2018 to December 31, 2019. As of September 30, 2018, all five stock price targets for the third tranche have been achieved and approved by the Compensation Committee. The stock price targets for the fourth tranche will be determined on December 31, 2018 with a performance period from January 1, 2019 to December 31, 2019.

In addition, each of the second, third and fourth tranches requires the achievement of one of following six operating metrics:

As of October 30, 2018, the first and the second operating metrics have been achieved and the determination of achievement was approved by the Compensation Committee.

Subject to the employees’ continued employment with the Company, the 2015 MPSUs will fully vest on January 1, 2020 if the pre-determined individual market and performance goals in each tranche are met during the performance periods and approved by the Compensation Committee. In addition, the 2015 MPSUs contain sales restrictions on the vested shares by employees for up to two years.

The Company determined the grant date fair value of the 2015 MPSUs using a Monte Carlo simulation model with the following weighted-average assumptions: stock price of $61.35, expected volatility of 33.2%, risk-free interest rate of 1.3%, and an illiquidity discount of 7.8% to account for the post-vesting sales restrictions. Assuming the achievement of all of the required market and performance goals, the total stock-based compensation cost for the 2015 MPSUs, excluding cancelled shares, is $24.6 million ($8.3 million for the first tranche, $4.5 million for the second tranche, $5.2 million for the third tranche, and $6.6 million for the fourth tranche)2.5%.

For the first tranche, stock-based compensation expense is being recognized over the requisite service period. For the second, third and fourth tranches, stock-based compensation expense for each tranche is recognized if an operating metric has been achieved, or if management believes it is probable that an operating metric will be achieved during the performance periods in each reporting period. As of October 30, 2018, two operating metrics have been achieved, and based on management’s quarterly assessment, one additional operating metric was considered probable of being achieved during the performance periods. Accordingly, stock-based compensation expense is being recognized for the second, third and fourth tranches over the requisite service period.

2004Employee Stock Purchase Plan (“ESPP”)

For the three months ended September 30, 2018 2019 and 2017,2018, 14,000 and 15,000 and 18,000 shares, respectively, were issued under the ESPP.issued. For the nine months ended September 30, 2018 2019 and 2017,2018, 28,000 and 33,000 and 40,000 shares, respectively, were issued under the ESPP.issued. As of September 30, 2018, 4.62019, 4.5 million shares were available for future issuance.issuance under the ESPP.

The intrinsic value of the shares issued was $0.6$0.4 million and $0.5$0.6 million for the three months ended September 30, 2018 2019 and 2017,2018, respectively. The intrinsic value of the shares issued was $1.1$0.7 million and $1.0$1.1 million for the nine months ended September 30, 2018 2019 and 2017,2018, respectively. As of September 30, 2018, 2019, the unamortized expense was $0.4 million, which will be recognized through the first quarter of 2019.2020. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions: 

Cash proceeds from the shares issued under the ESPP were $3.0$3.3 million and $2.7$3.0 million for the nine months ended September 30, 2018 2019 and 2017,2018, respectively.  

4. BALANCE SHEET COMPONENTS

Inventories 

Inventories consist of the following (in thousands): 

Other Current Assets

Other current assets consist of the following (in thousands):

Under Topic 606, “assets for product returns” primarily represent the carrying value of inventory the Company expects to recover from customers related to stock rotation returns. Prior to the adoption of Topic 606, such amounts were netted against the stock rotation reserve within current accrued liabilities.

Other Long-Term Assets

Other long-term assets consist of the following (in thousands):