Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2016

 

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

For the transition period from                     

Commission File Number 0-18277

 

 

VICOR CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		04-2742817
(State of Incorporation)		(I.R.S. Employer Identification No.)

25 Frontage Road, Andover, Massachusetts 01810

(Address of Principal Executive Office)

(978) 470-2900

(Registrant’s telephone number)

 

 

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  x    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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)    Yes  x    No  ¨

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

 

Large accelerated filer		¨		Accelerated filer		x
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of each of the issuer’s classes of Common Stock as of July 22, 2016 was:

 

Common Stock, $.01 par value			27,065,340
Class B Common Stock, $.01 par value			11,758,218

 

 

 

---

Table of Contents

VICOR CORPORATION

INDEX TO FORM 10-Q

 

		Page
Part I — Financial Information:
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June  30, 2016 and December 31, 2015			1
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015			2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2016 and 2015			3
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015			4
Notes to Condensed Consolidated Financial Statements			5
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk			29
Item 4 - Controls and Procedures			29
Part II — Other Information:
Item 1 - Legal Proceedings			31
Item 1A - Risk Factors			31
Item 6 - Exhibits			31
Signature(s)			32
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO

---

Table of Contents

VICOR CORPORATION

Part I – Financial Information

Item 1 – Financial Statements

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

		June 30, 2016				December 31, 2015
Assets
Current assets:
Cash and cash equivalents		$	54,153			$	62,980
Accounts receivable, less allowance of $153 in 2016 and $171 in 2015			28,008				25,982
Inventories, net			26,130				23,442
Other current assets			3,288				3,102
Total current assets			111,579				115,506
Long-term investments, net			2,579				2,866
Property, plant and equipment, net			37,853				37,450
Long-term deferred tax assets, net			11				15
Other assets			2,127				1,708
Total assets		$	154,149			$	157,545
Liabilities and Equity
Current liabilities:
Accounts payable		$	8,858			$	7,470
Accrued compensation and benefits			9,702				8,349
Accrued expenses			2,266				2,568
Accrued severance charges			—				195
Income taxes payable			9				31
Deferred revenue			1,894				1,988
Total current liabilities			22,729				20,601
Long-term deferred revenue			410				468
Contingent consideration obligations			327				144
Long-term income taxes payable			180				192
Deferred income taxes payable			—				55
Total liabilities			23,646				21,460
Commitments and contingencies (Note 11)
Equity:
Vicor Corporation stockholders’ equity:
Class B Common Stock			118				118
Common Stock			395				395
Additional paid-in capital			175,055				174,337
Retained earnings			93,790				99,685
Accumulated other comprehensive loss			(146	)			(577	)
Treasury stock, at cost			(138,927	)			(138,927	)
Total Vicor Corporation stockholders’ equity			130,285				135,031
Noncontrolling interest			218				1,054
Total equity			130,503				136,085
Total liabilities and equity		$	154,149			$	157,545

See accompanying notes.

 

-1-

---

Table of Contents

VICOR CORPORATION

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Net revenues		$	52,941			$	56,119			$	98,968			$	120,136
Cost of revenues			28,470				29,609				55,181				64,735
Gross margin			24,471				26,510				43,787				55,401
Operating expenses:
Selling, general and administrative			14,315				15,086				28,331				29,948
Research and development			10,757				10,631				21,486				21,050
Total operating expenses			25,072				25,717				49,817				50,998
Income (loss) from operations			(601	)			793				(6,030	)			4,403
Other income (expense), net:
Total unrealized gains on available-for-sale securities, net			26				54				53				39
Portion of gains recognized in other comprehensive income (loss)			(23	)			(50	)			(46	)			(31	)
Net credit gains recognized in earnings			3				4				7				8
Other income (expense), net			61				35				132				2
Total other income (expense), net			64				39				139				10
Income (loss) before income taxes			(537	)			832				(5,891	)			4,413
Less: Provision for income taxes			13				61				35				200
Consolidated net income (loss)			(550	)			771				(5,926	)			4,213
Less: Net income (loss) attributable to noncontrolling interest			(6	)			(34	)			(31	)			37
Net income (loss) attributable to Vicor Corporation		$	(544	)		$	805			$	(5,895	)		$	4,176
Net income (loss) per common share attributable to Vicor Corporation:
Basic		$	(0.01	)		$	0.02			$	(0.15	)		$	0.11
Diluted		$	(0.01	)		$	0.02			$	(0.15	)		$	0.11
Shares used to compute net income (loss) per common share attributable to Vicor Corporation:
Basic			38,801				38,750				38,798				38,719
Diluted			38,801				39,293				38,798				39,221

See accompanying notes.

 

-2-

---

Table of Contents

VICOR CORPORATION

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Consolidated net income (loss)		$	(550	)		$	771			$	(5,926	)		$	4,213
Foreign currency translation gains (losses), net of tax (1)			244				(60	)			417				(97	)
Unrealized gains on available-for-sale securities, net of tax (2)			23				49				46				34
Other comprehensive income (loss)			267				(11	)			463				(63	)
Consolidated comprehensive income (loss)			(283	)			760				(5,463	)			4,150
Less: Comprehensive income (loss) attributable to noncontrolling interest			13				(39	)			1				32
Comprehensive income (loss) attributable to Vicor Corporation		$	(296	)		$	799			$	(5,464	)		$	4,118

 

(1)	Net of tax provision (benefit) of $0 for the three and six months ended June 30, 2016 and 2015.

(2)

The deferred tax assets associated with cumulative unrealized losses on available-for-sale securities are completely offset by a tax valuation allowance as of June 30, 2016 and 2015. Therefore, there is no net income tax provision (benefit) recognized for the three and six months ended June 30, 2016 and 2015.

See accompanying notes.

 

-3-

---

Table of Contents

VICOR CORPORATION

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Six Months Ended
		June 30,
		2016				2015
Operating activities:
Consolidated net income (loss)		$	(5,926	)		$	4,213
Adjustments to reconcile consolidated net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization			4,311				4,723
Stock-based compensation expense			669				1,051
Increase in other assets			(505	)			—
Decrease in long-term deferred revenue			(58	)			(69	)
Deferred income taxes			(51	)			—
(Benefit) provision for doubtful accounts			(23	)			8
Loss (gain) on disposal of equipment			4				(52	)
Credit gain on available-for-sale securities			(7	)			(8	)
(Decrease) increase in long-term income taxes payable			(12	)			2
Change in current assets and liabilities, net			(2,407	)			2,408
Net cash (used for) provided by operating activities			(4,005	)			12,276
Investing activities:
Additions to property, plant and equipment			(4,646	)			(3,324	)
Sales and maturities of investments			—				360
Proceeds from sale of equipment			2				52
Decrease (increase) in other assets			57				(75	)
Net cash used for investing activities			(4,587	)			(2,987	)
Financing activities:
Proceeds from issuance of Common Stock			129				685
Payment of contingent consideration obligations			(25	)			—
Acquisition of noncontrolling interest			(372	)			—
Net cash (used for) provided by financing activities			(268	)			685
Effect of foreign exchange rates on cash			33				(13	)
Net (decrease) increase in cash and cash equivalents			(8,827	)			9,961
Cash and cash equivalents at beginning of period			62,980				55,187
Cash and cash equivalents at end of period		$	54,153			$	65,148

See accompanying notes.

 

-4-

---

Table of Contents

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(unaudited)

1. Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Vicor Corporation and its consolidated subsidiaries (collectively, the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2016. The balance sheet at December 31, 2015 presented herein has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed by the Company with the Securities and Exchange Commission on March 8, 2016.

2. Long-Term Investments

As of June 30, 2016 and December 31, 2015, the Company held one auction rate security that had experienced failed auctions of $3,000,000 at par value, which was purchased through and is held by a broker-dealer affiliate of Bank of America, N.A. (the “Failed Auction Security”). The Failed Auction Security held by the Company 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. Management is not aware of any reason to believe the issuer of the Failed Auction Security is presently at risk of default. Through June 30, 2016, 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 June 30, 2016.

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

 

						Gross				Gross				Estimated
						Unrealized				Unrealized				Fair
June 30, 2016		Cost				Gains				Losses				Value
Failed Auction Security		$	3,000			$	—			$	421			$	2,579
						Gross				Gross				Estimated
						Unrealized				Unrealized				Fair
December 31, 2015		Cost				Gains				Losses				Value
Failed Auction Security		$	3,000			$	—			$	474			$	2,526
Brokered certificates of deposit			340				—				—				340
		$	3,340			$	—			$	474			$	2,866

 

-5-

---

Table of Contents

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(unaudited)

 

As of June 30, 2016, 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 Failed Auction Security on June 30, 2016, by contractual maturity, is shown below (in thousands):

 

		Cost				Estimated Fair Value
Due in twenty to forty years		$	3,000			$	2,579

Based on the fair value measurements described in Note 3, the fair value of the Failed Auction Security on June 30, 2016, with a par value of $3,000,000, was estimated by the Company to be approximately $2,579,000. The gross unrealized loss of $421,000 on the Failed Auction Security consists of two types of estimated loss: an aggregate credit loss of $65,000 and an aggregate temporary impairment of $356,000. 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 3).

The following table represents a rollforward of the activity related to the credit loss recognized in earnings on the Failed Auction Security for the six months ended June 30 (in thousands):

 

		2016				2015
Balance at the beginning of the period		$	72			$	84
Reductions in the amount related to credit gain for which other-than- temporary impairment was not previously recognized			(7	)			(8	)
Balance at the end of the period		$	65			$	76

At this time, the Company has no intent to sell the impaired Failed Auction Security and does not believe it is more likely than not the Company will be required to sell this 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 Condensed Consolidated Statements 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.

3. 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.

 

-6-

---

Table of Contents

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(unaudited)

 

Assets measured at fair value on a recurring basis included the following as of June 30, 2016 (in thousands):

 

		Using												Total Fair Value as of June 30, 2016
		Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Cash equivalents:
Money market funds		$	9,641			$	—			$	—			$	9,641
Long-term investments:
Failed Auction Security			—				—				2,579				2,579
Liabilities:
Contingent consideration obligations			—				—				(327	)			(327	)

Assets measured at fair value on a recurring basis included the following as of December 31, 2015 (in thousands):

 

		Using												Total Fair Value as of December 31, 2015
		Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
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 these liabilities was determined using unobservable inputs. The liabilities were based on estimated sales of legacy products over the period of royalty payments at the royalty rate (see Note 7), 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 from non-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.

As of June 30, 2016, 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 June 30, 2016. The major assumptions used in preparing the DCF model included: estimates for the amount and

 

-7-

---

Table of Contents

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(unaudited)

 

timing of future interest and principal payments based on default probability assumptions used to measure the credit loss of 2.2%; the rate of return required by investors to own this type of security in the current environment, which management estimates to be 5.0% above the risk free rate of return; and an estimated timeframe 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 the 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 the security, 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, 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 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 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 security’s specific underlying assets and published recovery rate indices.

 

-8-

---

Table of Contents

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(unaudited)

 

Quantitative information about Level 3 fair value measurements as of June 30, 2016 is as follows (dollars in thousands):

 

		Fair Value				Valuation Technique		Unobservable Input		Weighted Average
Failed Auction Security		$	2,579			Discounted cash flow		Cumulative probability of earning the maximum rate until maturity		0.03%
								Cumulative probability of principal return prior to maturity		94.38%
								Cumulative probability of default		5.59%
								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 six months ended June 30, 2016 was as follows (in thousands):

 

Balance at the beginning of the period		$	2,526
Credit gain on available-for-sale securities included in Other income (expense), net			7
Gain included in Other comprehensive income (loss)			46
Balance at the end of the period		$	2,579

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 six months ended June 30, 2016 was as follows (in thousands):

 

Balance at the beginning of the period		$	144
Obligation incurred upon acquisition of noncontrolling interest (see Note 7)			208
Payments			(25	)
Balance at the end of the period		$	327

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2016.

4. Stock-Based Compensation

The Company uses the Black-Scholes option pricing model to calculate the fair value of stock option awards as of their grant date. Stock-based compensation expense for the three and six months ended June 30 was as follows (in thousands):

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Cost of revenues		$	54			$	58			$	106			$	119
Selling, general and administrative			237				352				475				760
Research and development			49				78				88				172
Total stock-based compensation		$	340			$	488			$	669			$	1,051

 

-9-

---

Table of Contents

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(unaudited)

 

On December 31, 2010, the Company granted 2,984,250 non-qualified stock options under the VI Chip 2007 Stock Option and Incentive Plan with performance-based vesting provisions tied to achievement of certain margin targets by VI Chip Corporation. As of December 31, 2010, the Company determined it was probable the margin targets could be achieved and, accordingly, began recording stock-based compensation expense relating to these options beginning on January 1, 2011. This determination remains the same as of June 30, 2016 and, accordingly, expense has been recorded through that date. The unrecognized compensation expense for these performance-based options was approximately $419,000 as of June 30, 2016.

5. Net Income (Loss) per Share

The following table sets forth the computation of basic and diluted net income (loss) per share for the three and six months ended June 30 (in thousands, except per share amounts):

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Numerator:
Net income (loss) attributable to Vicor Corporation		$	(544	)		$	805			$	(5,895	)		$	4,176
Denominator:
Denominator for basic net income (loss) per share-weighted average shares (1)			38,801				38,750				38,798				38,719
Effect of dilutive securities:
Employee stock options (2)			—				543				—				502
Denominator for diluted net income (loss) per share – adjusted weighted-average shares and assumed conversions			38,801				39,293				38,798				39,221
Basic net income (loss) per share		$	(0.01	)		$	0.02			$	(0.15	)		$	0.11
Diluted net income (loss) per share		$	(0.01	)		$	0.02			$	(0.15	)		$	0.11

 

(1)	Denominator represents weighted average number of shares of Common Stock and Class B Common Stock outstanding.

(2)

Options to purchase 1,889,038 shares of Common Stock for the three and six months ended June 30, 2016 were not included in the calculation of net loss per share as the effect would have been antidilutive. Options to purchase 110,928 and 86,179 shares of Common Stock for the three and six months ended June 30, 2015, respectively, were not included in the calculation of net income per share as the effect would have been antidilutive.

6. 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.

 

-10-

---

Table of Contents

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(unaudited)

 

The Company provides reserves for inventories estimated to be excess, obsolete or unmarketable. The Company’s estimation process for assessing net realizable value is based upon its known backlog, projected future demand, historical consumption and expected market conditions. If the Company’s estimated demand and/or market expectation 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.

Inventories were as follows (in thousands):

 

		June 30, 2016				December 31, 2015
Raw materials		$	19,303			$	16,257
Work-in-process			2,462				2,879
Finished goods			4,365				4,306
Net balance		$	26,130			$	23,442

7. 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 Condensed Consolidated Balance Sheet as of June 30, 2016, is $198,000 (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 has been 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 additional paid-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 Condensed Consolidated Balance Sheet as of March 31, 2016, declined by approximately $718,000. No amounts were recorded in the Condensed Consolidated Statement of Operations related to these transactions.

The respective noncontrolling interest holders of Converpower served as key employees of Converpower prior to the transactions described above.

 

-11-

---

Table of Contents

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(unaudited)

 

8. Severance and Other Charges

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

 

Balance as of December 31, 2015		$	195
Payments			(158	)
Balance as of March 31, 2016			37
Payments			(37	)
Balance as of June 30, 2016		$	—

9. Product Warranties

The Company generally offers a two-year warranty for all of its products, though it 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. 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 Condensed Consolidated Balance Sheets.

Product warranty activity for the three and six months ended June 30 was as follows (in thousands):

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Balance at the beginning of the period		$	587			$	187			$	584			$	204
Accruals for warranties for products sold in the period			107				170				229				185
Fulfillment of warranty obligations			(198	)			(25	)			(267	)			(57	)
Revisions of estimated obligations			—				—				(50	)			—
Balance at the end of the period		$	496			$	332			$	496			$	332

10. Income Taxes

The tax provision is based on the estimated annual effective tax rate for the year, which includes estimated federal, state and foreign income taxes on the Company’s projected pre-tax income (loss) and, in 2015, for estimated federal and state income taxes for certain noncontrolling interest subsidiaries that were not part of the Company’s consolidated income tax returns.

 

-12-

---

Table of Contents

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(unaudited)

 

The provisions for income taxes and the effective income tax rates for the three and six months ended June 30 were as follows (dollars in thousands):

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Provision for income taxes		$	13			$	61			$	35			$	200
Effective income tax rate			2.4	%			7.3	%			0.6	%			4.5	%

The provisions for the three and six months ended June 30, 2016 were primarily due to estimated state taxes in jurisdictions in which the Company does not have net operating loss carryforwards. No tax benefit could be recognized for the majority of the Company’s losses during the periods due to a full valuation allowance against all net domestic deferred tax assets. In addition, 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 7). The Company’s effective tax rate was lower than the statutory tax rate in each 2015 period due to the utilization of net operating losses. The provisions for the three and six months ended June 30, 2015 were primarily due to estimated federal and state taxes for one noncontrolling interest subsidiary, and for estimated state taxes in jurisdictions in which the Company does not have net operating loss carryforwards.

As of June 30, 2016, the Company continues to maintain a valuation allowance of approximately $25,855,000 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.

11. Commitments and Contingencies

At June 30, 2016, the Company had approximately $1,664,000 of capital expenditure commitments.

On January 28, 2011, 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’s complaint in the Texas Action 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 numbers 7,072,190, 7,272,021, and 7,564,702 (“the ‘190 patent”, “the ‘021 patent” and “the ‘702 patent”, respectively). SynQor’s complaint 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 denying that it infringes any of the SynQor patents, and asserting that the SynQor patents are invalid. The Company has further alleged that the SynQor ‘290 patent is unenforceable due to inequitable conduct by SynQor or its agents during the examination of the ‘290 patent at the United States Patent and Trademark Office (“USPTO”). The Company has also asserted counterclaims seeking damages against 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 proceedings at the United States Patent and Trademark Office (“PTO”) challenging 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. 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 to the United States Court of Appeals for the Federal Circuit (“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 PTAB for further proceedings. On May 2, 2016, the PTAB issued a

 

-13-

---

Table of Contents

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(unaudited)

 

decision determining 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. In addition, on that date, the PTAB issued decisions finding all challenged claims of SynQor’s ‘021 patent invalid and upholding the validity of all challenged claims of SynQor’s ‘702 and ‘290 patents. The Company has filed an appeal with the Federal Circuit from the PTAB’s decision upholding the validity of the challenged claims of the ‘702 and ‘290 patents. SynQor has filed an appeal with the Federal Circuit from the PTAB’s decision that the challenged claims of the ‘021 patent are invalid. Decisions in these appeals are not expected until 2017. On May 23, 2016, the Texas Court issued an order staying the Texas Action until the completion of all of the administrative review proceedings concerning the asserted SynQor patents, including any appeals from such proceedings to the Federal Circuit.

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. The Company believes SynQor’s claims lack merit and, therefore, 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 to have a material adverse impact on the Company’s financial position or results of operations.

12. Segment Information

The Company has organized its business segments according to its key product lines. The Brick Business Unit segment (“BBU”) designs, develops, manufactures and markets the Company’s modular DC-DC converters and configurable products, and also includes the entities comprising Vicor Custom Power and the BBU operations of Vicor Japan Company, Ltd. (“VJCL”). The VI Chip segment includes VI Chip Corporation, which designs, develops, manufactures and markets many of the Company’s advanced power component products. The VI Chip segment also includes the VI Chip business conducted through VJCL. The Picor segment includes 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 BBU and VI Chip modules, to be sold as complements to the Company’s BBU and VI Chip products, or for sale to third parties for separate (i.e., stand-alone) applications.

The Company’s 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 of the Company’s indirect overhead costs, which include corporate selling, general and administrative expenses, are allocated among the segments based upon an estimate of costs associated with each segment. Assets allocated to each segment are based upon specific identification 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 Condensed Consolidated Financial Statements.

 

-14-

---

Table of Contents

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(unaudited)

 

The following table provides segment financial data for the three months ended June 30 (in thousands):

 

The following table provides segment financial data for the six months ended June 30 (in thousands):

 

 

(1)

The elimination for net revenues is principally related to inter-segment sales by Picor to BBU and VI Chip and for inter-segment sales by 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.

13. Impact of Recently Issued Accounting Standards

In March 2016, the Financial Accounting Standards Board (“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. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company has not yet determined the impact this new guidance will have on its consolidated financial statements and related disclosures.

 

-15-

---

Table of Contents

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(unaudited)

 

In February 2016, the FASB issued new guidance for lease accounting, which will require lessees to recognize all leases with a duration of greater than twelve months on the balance sheet. 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 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 using last-in, first-out (“LIFO”) or retail inventory methods. The guidance applies to all other inventory, which includes inventory that is measured using first-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 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective which, for the Company, will now be on January 1, 2018, as on July 9, 2015, the FASB voted to defer the effective date of the new standard by one year. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect the new guidance will have on its consolidated financial statements and related disclosures. While the Company has begun its assessment of the new standard, it has not yet selected a transition method nor has it determined the effect the standard will have on its ongoing financial reporting.

 

-16-

---

Table of Contents

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

June 30, 2016

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except for statements of historical fact contained herein, statements in this report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “assumes,” “may,” “will,” “would,” “should,” “continue,” “prospective,” “project,” and other similar words or expressions identify forward-looking statements. Forward-looking statements include, without limitation, statements regarding the transition of the Company’s business strategically and organizationally 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; the level 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 the Company’s sales in each quarter from orders booked in the same quarter; the Company’s ongoing development of power conversion architectures, switching topologies, packaging technologies, and products; the Company’s plans to invest in expanded manufacturing capacity and the timing and location thereof; the Company’s continued success depending in part on its ability to attract and retain qualified personnel; the Company’s belief that cash generated from operations and the total of its cash and cash equivalents will be sufficient to fund operations for the foreseeable future; the Company’s belief that it has limited exposure to currency risks; the Company’s intentions regarding the declaration and payment of cash dividends; the Company’s intentions regarding protecting its rights under its patents; and the Company’s expectation that no current litigation or claims will have a material adverse impact on its financial position or results of operations. These statements are based upon the Company’s current expectations and estimates as to the prospective events and circumstances which may or may not be within the Company’s control and as to which there can be no assurance. Actual results could differ materially from those expressed or implied by forward-looking statements as a result of various factors, including the Company’s ability to: grow its revenues, establish and maintain profitability, develop and market new products and technologies cost effectively, and on a timely basis leverage the Company’s new technologies in standard products to promote market acceptance of the Company’s new 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 the Company’s market opportunity and accelerating market penetration; realize significant royalties under such licensing agreements; achieve sustainable bookings rates for the Company’s products across served markets and geographies; improve manufacturing and operating efficiencies; successfully enforce the Company’s intellectual property rights; successfully defend outstanding litigation; hire and retain key personnel; and maintain an effective system of internal controls over financial reporting, including the Company’s ability to obtain required financial information for investments on a timely basis, the Company’s ability to assess the value of assets, including illiquid investments, and the accounting therefor. These and other factors that may influence actual results are described in the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, under Part I, Item I — “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.” The risk factors contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 may not be exhaustive. Therefore, the information contained therein should be read together with other reports and documents that the Company files with the Securities and Exchange Commission from time to time, including Forms 10-Q, 8-K and 10-K, which may supplement, modify, supersede or update those risk factors. Except as required by law, the Company does not undertake any obligation to update any forward-looking statements as a result of future events or developments.

Overview

We design, develop, manufacture, and market modular power components and power systems for converting, regulating, and controlling electric current. We also license certain rights to our technology in return for recurring royalties. The principal customers for our power converters and systems are large original equipment manufacturers (“OEMs”) and their contract manufacturers, and smaller, lower volume users. We serve a broad range of market segments and geographies worldwide.

We have organized our business segments according to our key product lines. 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.

 

-17-

---

Table of Contents

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

June 30, 2016

 

The BBU segment designs, develops, manufactures and markets our legacy lines of DC-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 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% ownership of certain operating assets and cash 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 closing of the Converpower transaction, we have completed the consolidation of our Vicor Custom Power operations into three wholly-owned subsidiaries.

The VI Chip segment consists of our subsidiary, VI Chip Corporation, which designs, develops, manufactures, and markets many of our advanced power component products. The VI Chip segment also includes the VI Chip business conducted through VJCL. VI Chip targets large, high-volume customers concentrated in the datacenter and supercomputer segments of the computing market, although we also target applications in aerospace and aviation, defense electronics, electric and hybrid vehicles, instrumentation and test equipment, and networking equipment.

The Picor segment consists of our subsidiary, Picor Corporation, which designs, develops, manufactures, and markets integrated circuits and related solid-state products for use in a variety of power management and power system applications. Picor develops these products for use in our BBU and VI Chip modules, 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, particularly in the datacenter and supercomputer segments of the computing market.

For the second quarter of 2016, our consolidated results continued to reflect recent trends and circumstances, particularly the negative influence on our revenue and profitability of the combination of delayed uptake of our new products and general weakness of demand for our legacy products due to broad macroeconomic uncertainty. However, second quarter volume did improve, as product revenue increased 15% sequentially from the first quarter’s particularly weak results, contributing to an increase in consolidated gross profit margin, which rose from 42.0% for the first quarter to 46.2% for second quarter.

We believe the following factors influenced our results for the second quarter of 2016 and may continue to influence our results for the foreseeable future:

 

•

Global demand for our legacy brick converters, configurable products, and associated components remains weak and unpredictable, given the macroeconomic variables underlying customer confidence across industries and geographies. Our legacy products are commonly used in high-value capital goods and sizeable infrastructure projects, the end demand for which has lagged, reflecting low-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 macroeconomic trends improve.

 

•

Our profitability is closely aligned with production volumes, as evidenced by our improved second quarter performance. We manufacture our products in Andover, Massachusetts, in a state-of-the-art, highly automated factory. While direct labor and associated costs are scaled with volume, extended periods of low activity and/or small production runs contribute to lower profitability, largely due to lower overhead absorption, which is less scalable, given the sophistication and complexity of our manufacturing processes. An additional influence on product-level profitability has been the availability and delivery timing of certain materials and components we use in our products. Due to the same economic uncertainty we and our customers are experiencing, our suppliers are facing production and scheduling challenges. While first quarter shipments of legacy products were lower, in part, due to supplier delays, our aggressive efforts to improve supply continuity and inventory management resulted in no such delays during the second quarter. Although our actions have reduced the likelihood and potential impact of supply chain disruption, we anticipate supplier delays may again be an influence on production volumes for the foreseeable future.

 

-18-

---

Table of Contents

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

June 30, 2016

 

•

We have focused our organization on the promising opportunities for our advanced products, in which we have invested a substantial amount of research and development effort and dollars. Many of these opportunities are in the early phases of expansion, and we are committed to expanding our product lines and our ability to serve and support customers in pursuit of these opportunities. As such, our operating costs have been high, relative to revenue levels, and likely will remain relatively high until revenue from our legacy products recovers and we achieve sustained revenue from our newer advanced products.

 

•

Customer adoption of certain new products has been delayed by unanticipated market influences beyond our control. For example, our leadership position in the transition of datacenter computing to 48 Volt to Point-of-Load solutions using our Factorized Power Architecture was 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 in the transition of processor generations and associated supply chain disruption caused repeated delays in customer purchase orders. We continue to believe our new products, notably our 48 Volt to Point-of-Load solutions for datacenters, will be adopted in volume by multiple, leading customers, particularly in light of various announcements during the first and second quarters from two industry trade organizations regarding adoption and support of 48 Volt bus architectures. However, we cannot control the actions by, nor the timing, of our customers, their contract manufacturers, or the significant vendors also participating in the market.

 

•

Our consolidated financial results have recently been influenced by adjustments associated with operational restructuring initiatives. As addressed in prior filings regarding first quarter performance, during the first quarter, we completed the consolidation of our Vicor Custom Power operations, reducing our six domestic locations to three. While this consolidation disrupted the sales, bookings, and manufacturing patterns of the custom operations for the fourth quarter of 2015 and the first quarter of 2016, we believe second quarter results for the custom operations reflect the initial achievement of our goals of reducing excess capacity and lowering cost structure.

 

•

Prior quarterly consolidated financial results have recently been influenced by certain non-operations related factors, including investment transactions, legal fees associated with ongoing litigation, and circumstance specific tax transactions. Notably, our results for the first and second quarters of 2016 were not meaningfully influenced by such factors. Although such factors, which are inherently unpredictable, may meaningfully influence our financial results, we currently do not anticipate any positive or negative non-operating factors in the near term.

Consolidated net revenues for the second quarter of 2016 decreased by 5.7% to $52,941,000 from $56,119,000 for the second quarter of 2015, primarily due to lower customer bookings in the first quarter of 2016 compared to the first quarter of 2015, but increased by 15.0% on a sequential basis from $46,027,000 for the first quarter of 2016, due to sequential increases in customer bookings in the first and second quarters of 2016. Export sales as a percentage of total revenues for the respective quarters ended June 30, 2016 and 2015 were approximately 60% and 58%, reflecting the relatively high volume, during the second quarter of 2016, of shipments to off-shore contract manufactures serving customers of our 48 Volt to Point-of-Load solutions. Gross margin decreased to $24,471,000 for the second quarter of 2016 from $26,510,000 for the second quarter of 2015, but increased on a sequential basis from $19,316,000 for the first quarter of 2016. Gross margin as a percentage of net revenue decreased to 46.2% for the second quarter of 2016 compared to 47.2% for the second quarter of 2015, due to the decrease in revenues, but increased on a sequential basis from 42.0% for the first quarter of 2016, due to the sequential increase in revenues.

Consolidated net revenues for the six months ended June 30, 2016 decreased by 17.6% to $98,968,000 from $120,136,000 for the six months ended June 30, 2015, primarily due to an overall 21.5% decrease in bookings for the six months ended March 31, 2016 compared to the six months ended March 31, 2015. Export sales as a percentage of total revenues for the six months ended June 30, 2016 and 2015 were approximately 60% and 61%, respectively. Gross margin decreased to $43,787,000 for the six months ended June 30, 2016 from $55,401,000 for the six months ended June 30, 2015. Gross margin as a percentage of revenue decreased to 44.2% for the six months ended June 30, 2016 compared to 46.1% for the six months ended June 30, 2015. The lower gross margin dollars and percentage were primarily due to the lower net revenues.

Backlog, representing the total of orders for products for which shipment is scheduled within the next 12 months, was $41,674,000 at the end of the second quarter of 2016, as compared to $42,096,000 at the end of the first quarter of 2016.

 

-19-

---

Table of Contents

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

June 30, 2016

 

Operating expenses for the second quarter of 2016 decreased $645,000, or 2.5%, to $25,072,000 from $25,717,000 for the second quarter of 2015, due to a decrease in selling, general and administrative expenses of $771,000, partially offset by an increase in research and development expense of $126,000. The primary components of the decrease in selling, general and administrative expenses were declines in compensation expenses of $297,000, commissions expense of $251,000, supplies expense of $124,000, and audit, tax, and accounting fees of $109,000, partially offset by increases in travel expenses of $94,000, and outside services of $55,000. The primary elements of the increase in research and development expenses were project and pre-production materials of $276,000 and compensation expenses of $194,000, partially offset by decreases in depreciation and amortization of $148,000, supplies expense of $114,000, and facilities expenses of $48,000.

Operating expenses for the six months ended June 30, 2016 decreased $1,181,000, or 2.3%, to $49,817,000 from $50,998,000 for the six months ended June 30, 2015, primarily due to a decrease in selling, general and administrative expenses of $1,617,000, partially offset by an increase in research and development expense of $436,000. The primary components of the decrease in selling, general and administrative expenses were declines in compensation expenses of $564,000, commissions expense of $485,000, legal fees of $240,000, supplies expense of $182,000, and audit, tax, and accounting fees of $149,000, partially offset by increases in outside services of $127,000, advertising expenses of $121,000, and travel expenses of $94,000. The primary elements of the increase in research and development expenses were project and pre-production materials of $393,000 and compensation expenses of $302,000, partially offset by decreases in facilities expenses of $122,000, supplies expense of $103,000, and depreciation and amortization of $68,000.

Net loss attributable to Vicor Corporation for the second quarter of 2016 was $(544,000), or $(0.01) per share, compared to net income attributable to Vicor Corporation of $805,000, or $0.02 per diluted share, for the second quarter of 2015, and net loss attributable to Vicor Corporation of $(5,351,000), or $ (0.14) per share, for the first quarter of 2016.

Net loss attributable to Vicor Corporation for the six months ended June 30, 2016, was $(5,895,000), or $(0.15) per share, compared to net income attributable to Vicor Corporation of $4,176,000, or $0.11 per diluted share, for the six months ended June 30, 2015.

For the six months ended June 30, 2016, depreciation and amortization totaled $4,311,000, and capital additions totaled $4,646,000, compared to totals of $4,723,000 and $3,324,000, respectively, for the six months ended June 30, 2015.

Inventories increased by approximately $2,688,000, or 11.5%, to $26,130,000, compared to $23,442,000 at December 31, 2015. This increase was primarily associated with increases in VI Chip and Picor inventories of $2,276,000 and $282,000, respectively.

Critical Accounting Policies and Estimates

Please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a summary of the Company’s critical accounting policies and estimates.

Three months ended June 30, 2016, compared to three months ended June 30, 2015

Consolidated net revenues for the second quarter of 2016 were $52,941,000, a decrease of $3,178,000, or 5.7%, as compared to $56,119,000 for the second quarter of 2015, and an increase of $6,914,000, or 15.0%, on a sequential basis from $46,027,000 for the first quarter of 2016.

 

-20-

---

Table of Contents

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

June 30, 2016

 

Net revenues, by segment, for the second quarter of 2016 and the second quarter of 2015 were as follows (dollars in thousands):

 

										Increase (decrease)
		2016				2015				$				%
BBU		$	40,576			$	45,399			$	(4,823	)			(10.6	)%
VI Chip			10,080				8,178				1,902				23.3	%
Picor			2,285				2,542				(257	)			(10.1	)%
Total		$	52,941			$	56,119			$	(3,178	)			(5.7	)%

The decrease in consolidated net revenues for the second quarter of 2016 from the second quarter of 2015 was primarily due to a 17.7% decrease in bookings in the first quarter of 2016, compared to the first quarter of 2015. The decrease in BBU revenues was primarily attributable to a decrease in BBU module and configurable product revenues of approximately $4,114,000 and a decrease in Vicor Custom Power revenues of $1,023,000. Revenues recorded by VI Chip for the second quarter of 2016 were associated largely with fulfillment of increased orders for our 48 Volt to Point-of-Load solutions. Customer bookings patterns continue to be unpredictable, particularly for the VI Chip and Picor segments.

Gross margin for the second quarter of 2016 decreased $2,039,000, or 7.7%, to $24,471,000, from $26,510,000 for the second quarter of 2015. Gross margin as a percentage of net revenue decreased to 46.2% for the second quarter of 2016 compared to 47.2% for the second quarter of 2015. The decreases were primarily due to the decrease in BBU net revenues.

 

-21-

---

Table of Contents

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

June 30, 2016

 

Selling, general, and administrative expenses were $14,315,000 for the second quarter of 2016, a decrease of $771,000, or 5.1%, from $15,086,000 for the second quarter of 2015. Selling, general, and administrative expenses as a percentage of net revenues increased to 27.0% for the second quarter of 2016 from 26.9% for the second quarter of 2015.

The components of the $771,000 decrease in selling, general and administrative expenses for the second quarter of 2016 from the second quarter of 2015 were as follows (dollars in thousands):

 

		Increase (decrease)
Compensation		$	(297	)			(3.3	)%(1)
Commissions expense			(251	)			(20.5	)%(2)
Supplies expense			(124	)			(61.1	)%(3)
Audit, tax, and accounting fees			(109	)			(27.3	)%(4)
Project materials			(33	)			(71.6	)%
Employment recruiting			(30	)			(45.8	)%
Outside services			55				13.8	%
Travel expenses			94				13.2	%
Other, net			(76	)			(2.6	)%
		$	(771	)			(5.1	)%

 

(1)	Decrease primarily attributable to the consolidation of Westcor operations and the disposition of certain Vicor Custom Power subsidiaries.

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

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

(4)	Decrease primarily attributable to a decrease in international accounting fees and variability in the timing of services for the 2015 audit compared to the 2014 audit.

 

-22-

---

Table of Contents

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

June 30, 2016

 

Research and development expenses were $10,757,000 for the second quarter of 2016, an increase of $126,000, or 1.2%, compared to $10,631,000 for the second quarter of 2015. As a percentage of net revenues, research and development expenses increased to 20.3% for the second quarter of 2016 from 18.9% for the second quarter of 2015, primarily due to the decrease in net revenues.

The components of the $126,000 increase in research and development expenses were as follows (dollars in thousands):

 

		Increase (decrease)
Project and pre-production materials		$	276				24.0	%(1)
Compensation			194				2.7	%(2)
Set-up and tooling expenses			40				42.3	%
Certification expenses			(28	)			(48.7	)%
Facilities expenses			(48	)			(9.1	)%
Supplies expense			(114	)			(36.0	)%(3)
Depreciation and amortization			(148	)			(24.6	)%(4)
Other, net			(46	)			(8.1	)%
		$	126				1.2	%

 

(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 and an increase in VI Chip headcount.

(3)	Decrease primarily attributable to a decrease in engineering supplies for new Picor products.

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

The significant components of ‘‘Other income (expense), net’’ for the three months ended June 30, and the changes between the periods were as follows (in thousands):

 

										Increase
		2016				2015				(decrease)
Rental income		$	66			$	—			$	66
Interest income			12				11				1
Credit gains on available-for-sale securities			3				4				(1	)
(Loss) gain on disposals of equipment			(6	)			18				(24	)
Foreign currency (losses) gains, net			(7	)			2				(9	)
Other, net			(4	)			4				(8	)
		$	64			$	39			$	25

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. 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.

 

-23-

---

Table of Contents

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

June 30, 2016

 

Loss before income taxes was $(537,000) for the second quarter of 2016, as compared to income before taxes of $832,000 for the second quarter of 2015.

The provision for income taxes and the effective income tax rates for the second quarter of 2016 and the second quarter of 2015 were as follows (dollars in thousands):

 

		2016				2015
Provision for income taxes		$	13			$	61
Effective income tax rate			2.4	%			7.3	%

The provision for the three months ended June 30, 2016 was primarily due to estimated state taxes in jurisdictions in which the Company does not have net operating loss carryforwards. No tax benefit could be recognized for the majority of the Company’s losses during the period due to a full valuation allowance against all net domestic deferred tax assets. The provision for the three months ended June 30, 2015 was primarily due to estimated federal and state taxes for one noncontrolling interest subsidiary, and for estimated state taxes in jurisdictions in which the Company does not have net operating loss carryforwards.

Net loss per share attributable to Vicor Corporation was $(0.01) for the second quarter of 2016, compared to net income per diluted share of $0.02 for the second quarter of 2015.

Six months ended June 30, 2016, compared to six months ended June 30, 2015

Consolidated net revenues for the six months ended June 30, 2016 were $98,968,000, a decrease of $21,168,000, or 17.6%, from $120,136,000 for the six months ended June 30, 2015.

Net revenues, by segment, for the six months ended June 30, 2016 and the six months ended June 30, 2015 were as follows (dollars in thousands):

 

										Decrease
		2016				2015				$				%
BBU		$	77,445			$	90,277			$	(12,832	)			(14.2	)%
VI Chip			17,420				22,055				(4,635	)			(21.0	)%
Picor			4,103				7,804				(3,701	)			(47.4	)%
Total		$	98,968			$	120,136			$	(21,168	)			(17.6	)%

The overall decrease in consolidated net revenues for the six months ended June 30, 2016 from the six months ended June 30, 2015 was primarily due to an overall 21.5% decrease in bookings for the six months ended March 31, 2016 compared to the six months ended March 31, 2015. The bookings declines were across all three business segments. 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 $10,159,000 and a decrease in Vicor Custom Power revenues of $2,148,000.

Gross margin for the six months ended June 30, 2016 decreased $11,614,000, or 21.0%, to $43,787,000 from $55,401,000 for the six months ended June 30, 2015. Gross margin as a percentage of net revenues decreased to 44.2% for the six month period ended June 30, 2016 from 46.1% for the six month period ended June 30, 2015. The decreases were primarily due to the decrease in consolidated net revenues.

 

-24-

---

Table of Contents

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

June 30, 2016

 

Selling, general and administrative expenses were $28,331,000 for the six months ended June 30, 2016, a decrease of $1,617,000, or 5.4%, compared to $29,948,000 for the six months ended June 30, 2015. Selling, general and administrative expenses as a percentage of net revenues increased to 28.6% for the six month period ended June 30, 2016 from 24.9% for the six month period ended June 30, 2015.

The components of the $1,617,000 decrease in selling, general and administrative expenses for the six months ended June 30, 2016 from the six months ended June 30, 2015 were as follows (dollars in thousands):

 

		Increase (decrease)
Compensation		$	(564	)			(3.2	)%(1)
Commissions expense			(485	)			(20.7	)%(2)
Legal fees			(240	)			(20.6	)%(3)
Supplies expense			(182	)			(51.5	)%(4)
Audit, tax, and accounting fees			(149	)			(14.7	)%(5)
Project expenses			(85	)			(72.3	)%
Employment recruiting			(78	)			(43.4	)%
Depreciation and amortization			(46	)			(3.2	)%
Bad debt expense			(36	)			(285.9	)%
Telephone expense			(31	)			(5.3	)%
Travel expenses			94				7.0	%(6)
Advertising expenses			121				12.8	%(7)
Outside services			127				14.3	%(8)
Other, net			(63	)			(3.8	)%
		$	(1,617	)			(5.4	)%

 

(1)	Decrease primarily attributable to the consolidation of Westcor operations and the disposition of certain Vicor Custom Power subsidiaries.

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

(3)	Decrease attributable to reduced activity associated with the patent infringement claims filed against the Company during the first quarter of 2011 by SynQor. See Note 11 to the Condensed Consolidated Financial Statements.

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

(5)	Decrease primarily attributable to a decrease in international accounting fees and variability in the timing of services for the 2015 audit compared to the 2014 audit.

(6)	Increase primarily attributable to increased travel by the Company’s sales and marketing personnel.

(7)	Increase primarily attributable to increases in sales support expenses, direct mailings, and advertising in trade publications.

(8)	Increase primarily attributable to an increase in the use of outside consultants by our information systems and technology department.

 

-25-

---

Table of Contents

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

June 30, 2016

 

Research and development expenses were $21,486,000 for the six months ended June 30, 2016, an increase of $436,000, or 2.1%, from $21,050,000 for the six months ended June 30, 2015. As a percentage of net revenues, research and development expenses increased to 21.7% for the six month period ended June 30, 2016 from 17.5% for the six month period ended June 30, 2015, primarily due to the lower revenues for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.

The components of the $436,000 increase in research and development expenses for the six months ended June 30, 2016 from the six months ended June 30, 2015 were as follows (dollars in thousands):

 

		Increase (decrease)
Project and pre-production materials		$	393				16.4	%(1)
Compensation			302				2.1	%(2)
Set-up and tooling expenses			76				46.7	%
Outside services			(44	)			(7.9	)%
Depreciation and amortization			(68	)			(5.7	)%
Supplies expense			(103	)			(19.3	)%(3)
Facilities expenses			(122	)			(11.2	)%(4)
Other, net			2				0.3	%
		$	436				2.1	%

 

(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 and an increase in VI Chip headcount.

(3)	Decrease primarily attributable to a decrease in Picor engineering supplies.

(4)	Decrease primarily attributable to a decrease in utilities and building maintenance expenses.

The significant components of ‘‘Other income (expense), net’’ for the six months ended June 30, 2016 and the six months ended June 30, 2015 and the changes from period to period were as follows (in thousands):

 

										Increase
		2016				2015				(decrease)
Rental income		$	66			$	—			$	66
Foreign currency gains (losses), net			48				(78	)			126
Interest income			26				16				10
Credit gains on available-for-sale securities			7				8				(1	)
(Loss) gain on disposals of equipment			(4	)			52				(56	)
Other, net			(4	)			12				(16	)
		$	139			$	10			$	129

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. 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 the Company’s subsidiaries in Europe and other subsidiaries in Asia is the U.S. Dollar. The increase in interest income for the period was due to a general increase in interest rates.

 

-26-

---

Table of Contents

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

June 30, 2016

 

Income (loss) before income taxes was $(5,891,000) for the six months ended June 30, 2016 compared to $4,413,000 for the six months ended June 30, 2015.

The provision for income taxes and the effective income tax rates for the six months ended June 30, 2016 and the six months ended June 30, 2015 were as follows (dollars in thousands):

 

		2016				2015
Provision for income taxes		$	35			$	200
Effective income tax rate			0.6	%			4.5	%

The provision for the six months ended June 30, 2016 was primarily due to estimated state taxes in jurisdictions in which the Company does not have net operating loss carryforwards. No tax benefit could be recognized for the majority of the Company’s losses during the period due to a full valuation allowance against all net domestic deferred tax assets. In addition, 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 7 to the Condensed Consolidated Financial Statements). The provision for the six months ended June 30, 2015 was primarily due to estimated federal and state taxes for one noncontrolling interest subsidiary, and for estimated state taxes in jurisdictions in which the Company does not have net operating loss carryforwards.

Net loss per share attributable to Vicor Corporation was $(0.15) for the six months ended June 30, 2016, compared to net income per diluted share of $0.11 for the six months ended June 30, 2015.

Liquidity and Capital Resources

As of June 30, 2016, we had $54,153,000 in cash and cash equivalents. The ratio of total current assets to total current liabilities was 4.9:1 as of June 30, 2016 and 5.6:1 as of December 31, 2015. Working capital, defined as total current assets less total current liabilities, decreased $6,055,000 to $88,850,000 as of June 30, 2016 from $94,905,000 as of December 31, 2015.

The changes in working capital from December 31, 2015 to June 30, 2016 were as follows (in thousands):

 

		Increase (decrease)
Cash and cash equivalents		$	(8,827	)
Accounts receivable			2,026
Inventories, net			2,688
Other current assets			186
Accounts payable			(1,388	)
Accrued compensation and benefits			(1,353	)
Accrued expenses			302
Accrued severance charges			195
Income taxes payable			22
Deferred revenue			94
		$	(6,055	)

The primary uses of cash for the six months ended June 30, 2016 was for operating activities of $4,005,000 and the purchase of equipment of $4,646,000.

 

-27-

---

Table of Contents

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

June 30, 2016

 

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. We did not repurchase shares of Common Stock under the November 2000 Plan during the six months ended June 30, 2016. As of June 30, 2016, we had approximately $8,541,000 remaining under the November 2000 Plan.

Our primary liquidity needs are for making continuing investments in manufacturing equipment. We believe cash generated from operations and the total of our cash and cash equivalents will be sufficient to fund planned operations and capital equipment purchases for the foreseeable future. We had approximately $1,664,000 of capital expenditure commitments, principally for manufacturing equipment, as of June 30, 2016.

 

-28-

---

Table of Contents

Vicor Corporation

June 30, 2016

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

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 June 30, 2016, our long-term investment portfolio, recorded on our Condensed Consolidated Balance Sheet as “Long-term investments, 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 (loss) income”, a component of Stockholders’ Equity. Should we conclude a decline in the fair value of the Failed Auction 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 June 30, 2016.

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. As the functional currency of all other subsidiaries in Europe and other subsidiaries in Asia is the U.S. Dollar, we believe risk to fluctuations in foreign currency exchange rates is not significant, as these operations do not incur material foreign exchange exposures.

Item 4 — Controls and Procedures

 

(a)	Disclosure regarding controls and procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), management, with the participation of our Chief Executive Officer (“CEO”) (who is our principal executive officer) and Chief Financial Officer (“CFO”) (who is our principal financial officer), conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the last fiscal quarter (i.e., June 30, 2016). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure 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 information required to be disclosed by a company in the reports 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. Management recognizes any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2016, our CEO and CFO concluded, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

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. Accordingly, management, including the CEO and CFO, recognizes our disclosure controls or our internal control over financial reporting may not prevent or detect all errors and all fraud. The design of a control system must reflect the fact 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 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 control’s 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.

 

-29-

---

Table of Contents

Vicor Corporation

June 30, 2016

 

(b)	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 June 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

-30-

---

Table of Contents

Vicor Corporation

Part II – Other Information

June 30, 2016

Item 1 — Legal Proceedings

See Note 11. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 – “Financial Statements.”

Item 1A — Risk Factors

There have been no material changes in the risk factors described in Part I, Item 1A – “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Item 6 — Exhibits

 

Exhibit Number		Description
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.
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.
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.
101		The following material from the Company’s Quarterly Report on Form 10-Q, for the quarter ended June 30, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss); (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements.

 

-31-

---

Table of Contents

SIGNATURES

Pursuant to the requirements 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
Date: July 29, 2016				By:		/s/ Patrizio Vinciarelli
						Patrizio Vinciarelli
						Chairman of the Board, President and
						Chief Executive Officer
						(Principal Executive Officer)
Date: July 29, 2016				By:		/s/ James A. Simms
						James A. Simms
						Vice President, Chief Financial Officer
						(Principal Financial Officer)

 

-32-