1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared by Monolithic Power Systems, Inc. (the Company or MPS) in accordance with the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in accordance with these accounting principles, rules and regulations. The information in this report should be read in conjunction with the Companys audited consolidated financial statements and notes thereto included in the Annual Report on Form 10 -K for the year ended December 31, 2017, filed with the SEC on March 1, 2018. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Companys financial position, results of operations and cash flows for the interim periods presented. The financial statements contained in this Form 10 -Q are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or for any other future periods. Summary of Significant Accounting Policies Except for the changes related to revenue recognition discussed in Recently Adopted Accounting Pronouncements and in Note 2 below, there have been no other changes to the Companys significant accounting policies during the three and nine months ended September 30, 2018 as compared to the significant accounting policies described in the Companys audited consolidated financial statements included in the Annual Report on Form 10 -K for the year ended December 31, 2017. Recently Adopted Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014 - 09, Revenue from Contracts with Customers (Topic 606 ), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standards core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the standard on January 1, 2018 using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior-period amounts have not been retrospectively adjusted and continue to be reported in accordance with Topic 605, Revenue Recognition . The Company recorded a net increase to the opening balance of retained earnings of $0.4 million, net of tax, as of January 1, 2018 due to the cumulative effect of initially applying Topic 606, primarily related to the change in revenue recognition for three U.S.-based distributors. Sales to these distributors are transacted under the terms of agreements providing price adjustment rights. Prior to the adoption of Topic 606, revenue and costs related to these sales were deferred until the Company received notification from the distributors that the products had been sold to the end customers and the amount of price adjustments was fixed and finalized. Upon adoption of Topic 606, the transaction price takes into consideration the effect of variable consideration such as price adjustments, which are estimated and recorded at the time the promised goods are transferred to the distributors. Accordingly, effective January 1, 2018, the Company recognizes revenue at the time of shipment to the distributors, adjusted for an estimate of the price adjustments based on managements review of historical data and other information available at the time. See Note 2 for further discussion. In November 2016, the FASB issued ASU No. 2016 - 18, Statement of Cash Flows - Restricted Cash (Topic 230 ), which requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows. The Company adopted the standard on January 1, 2018 and applied the guidance retrospectively to all periods presented. See Note 9 for further discussion. Recent Accounting Pronounce ments Not Yet Adopted as of September 30, 2018 In August 2018, the SEC issued Final Rule Release No. 33 - 10532, Disclosure Update and Simplification, which amends certain disclosure requirements, including the presentation of changes in stockholders equity and the dividend per share for interim periods. The final rule will be effective on November 5, 2018. The Company is evaluating the impact of the adoption on its disclosures. In August 2018, the FASB issued ASU No. 2018 - 13, Fair Value Measurement (Topic 82 0 ) : Disclosure Framework  Changes to the Disclosure Requirements for Fair Value Measurement , which changes certain disclosure requirements, including those related to Level 3 fair value measurements. The standard will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact of the adoption on its disclosures. In January 2017, the FASB issued ASU No. 2017 - 04, Intangibles  Goodwill and Other (Topic 350 ), which simplifies the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The standard will be applied prospectively, and will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact of the adoption on its annual goodwill impairment test. In June 2016, the FASB issued ASU No. 2016 - 13, Financial Instruments  Credit Losses (Topic 326 ), which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard will be effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. Entities will apply the standard by recording a cumulative-effect adjustment to retained earnings. The Company is evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures. In February 2016, the FASB issued ASU No. 2016 - 02, Leases (Topic 842 ), which requires entities to recognize a right-of-use asset and a lease liability on the balance sheets for substantially all leases with a lease term greater than 12 months, including leases currently accounted for as operating leases. In addition, the standard applies to leases embedded in service or other arrangements. The standard requires modified retrospective adoption and will be effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company will adopt the standard on January 1, 2019. The Company is evaluating the impact of the adoption on its consolidated financial statements and disclosures, and expects to elect certain available transitional practical expedients. The Company anticipates recording assets and liabilities primarily related to its real estate leases on its Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Operations.