iots-10q_20170630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2017

OR

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

For the Transition Period from                      to                     

Commission File Number: 001-37582

 

ADESTO TECHNOLOGIES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

16-1755067

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Adesto Technologies Corporation

3600 Peterson Way

Santa Clara, CA 95054

(408) 400-0578

(Address and telephone number of Registrant’s executive offices)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuance 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      No  

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

    (Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

Class

 

 

 

Outstanding at August 2, 2017

 

Common Stock, $0.0001 par value per share

 

20,943,397 shares

 

 

 

 


ADESTO TECHNOLOGIES CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017

INDEX

 

 

 

PART I: FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)  

 

3

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016

 

3

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016

 

4

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2017 and 2016

 

5

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for six months ended June 30, 2017 and 2016

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

32

 

 

 

 

 

 

 

PART II: OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

33

 

 

 

 

 

Item 1A.

 

Risk Factors

 

33

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

48

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

48

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

48

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

48

 

 

 

 

 

Item 5.

 

Other Information

 

48

 

 

 

 

 

Item 6.

 

Exhibits

 

49

 

 

 

 

 

Signatures

 

50

 

 

 

 

 

Exhibit Index

 

51

 

 

 

 


PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements

ADESTO TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

(1)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,893

 

 

$

19,719

 

Accounts receivable, net

 

 

9,055

 

 

 

6,111

 

Inventories

 

 

4,361

 

 

 

5,182

 

Prepaid expenses

 

 

488

 

 

 

462

 

Other current assets

 

 

114

 

 

 

105

 

Total current assets

 

 

45,911

 

 

 

31,579

 

Property and equipment, net

 

 

6,349

 

 

 

5,962

 

Intangible assets, net

 

 

7,706

 

 

 

8,324

 

Other non-current assets

 

 

430

 

 

 

296

 

Goodwill

 

 

22

 

 

 

22

 

Total assets

 

$

60,418

 

 

$

46,183

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,247

 

 

$

5,167

 

Accrued compensation and benefits

 

 

2,174

 

 

 

1,599

 

Accrued expenses and other current liabilities

 

 

2,095

 

 

 

2,176

 

Term loan, current

 

 

6,486

 

 

 

6,466

 

Total current liabilities

 

 

17,002

 

 

 

15,408

 

Line of credit

 

 

1,987

 

 

 

1,807

 

Term loan, non-current

 

 

6,527

 

 

 

9,775

 

Deferred rent, non-current

 

 

2,618

 

 

 

2,826

 

Deferred tax liability, non-current

 

 

2

 

 

 

2

 

Total liabilities

 

 

28,136

 

 

 

29,818

 

Commitments and contingencies (See Note 7)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 5,000,000 shares authorized as of June 30, 2017 and December 31, 2016; no shares issued and outstanding as of June 30, 2017 and December 31, 2016

 

 

 

 

 

 

Common stock, $0.0001 par value, 100,000,000 shares authorized; 20,932,205 and 15,494,308 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

131,243

 

 

 

110,749

 

Accumulated other comprehensive loss

 

 

(281

)

 

 

(230

)

Accumulated deficit

 

 

(98,682

)

 

 

(94,156

)

Total stockholders' equity

 

 

32,282

 

 

 

16,365

 

Total liabilities and stockholders' equity

 

$

60,418

 

 

$

46,183

 

 

 

 

 

 

 

 

 

 

(1) The condensed consolidated balance sheet as of December 31, 2016 was derived from the audited consolidated financial statements as of that date.

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

3


ADESTO TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue, net

 

$

13,412

 

 

$

10,282

 

 

$

24,719

 

 

$

20,458

 

Cost of revenue

 

 

6,689

 

 

 

5,548

 

 

 

12,442

 

 

 

10,728

 

Gross profit

 

 

6,723

 

 

 

4,734

 

 

 

12,277

 

 

 

9,730

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,675

 

 

 

4,200

 

 

 

7,047

 

 

 

8,137

 

Sales and marketing

 

 

2,911

 

 

 

2,842

 

 

 

5,511

 

 

 

5,445

 

General and administrative

 

 

1,673

 

 

 

1,690

 

 

 

3,808

 

 

 

3,398

 

Gain from settlement with former foundry supplier

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,962

)

Total operating expenses

 

 

8,259

 

 

 

8,732

 

 

 

16,366

 

 

 

15,018

 

Loss from operations

 

 

(1,536

)

 

 

(3,998

)

 

 

(4,089

)

 

 

(5,288

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(198

)

 

 

(224

)

 

 

(411

)

 

 

(482

)

Other income (expense), net

 

 

(4

)

 

 

(33

)

 

 

14

 

 

 

(11

)

Total other income (expense), net

 

 

(202

)

 

 

(257

)

 

 

(397

)

 

 

(493

)

Loss before provision for  income taxes

 

 

(1,738

)

 

 

(4,255

)

 

 

(4,486

)

 

 

(5,781

)

Provision for  income taxes

 

 

13

 

 

 

17

 

 

 

40

 

 

 

31

 

Net loss

 

$

(1,751

)

 

 

(4,272

)

 

$

(4,526

)

 

 

(5,812

)

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.11

)

 

$

(0.29

)

 

$

(0.28

)

 

$

(0.39

)

Weighted average number of shares used in computing net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

16,343,248

 

 

 

14,983,132

 

 

 

15,994,703

 

 

 

14,978,925

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

4


ADESTO TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(1,751

)

 

$

(4,272

)

 

$

(4,526

)

 

$

(5,812

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(29

)

 

 

(4

)

 

 

(51

)

 

 

(17

)

Comprehensive loss, net of tax

 

$

(1,780

)

 

$

(4,276

)

 

$

(4,577

)

 

$

(5,829

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

5


ADESTO TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(4,526

)

 

$

(5,812

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

1,806

 

 

 

1,629

 

Depreciation and amortization

 

 

644

 

 

 

429

 

Amortization of intangible assets

 

 

618

 

 

 

618

 

Amortization of debt discount

 

 

45

 

 

 

222

 

Deferred income taxes

 

 

 

 

 

1

 

Gain from settlement with former foundry supplier

 

 

 

 

 

(1,962

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,944

)

 

 

682

 

Inventories

 

 

821

 

 

 

(1,766

)

Prepaid expenses and other current assets

 

 

(35

)

 

 

(226

)

Other non-current assets

 

 

(134

)

 

 

 

Accounts payable

 

 

1,707

 

 

 

191

 

Accrued compensation and benefits

 

 

575

 

 

 

689

 

Accrued expenses and other current liabilities

 

 

(81

)

 

 

469

 

Deferred rent

 

 

(208

)

 

 

 

Net cash used in operating activities

 

 

(1,712

)

 

 

(4,836

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(1,659

)

 

 

(1,099

)

Net cash used in investing activities

 

 

(1,659

)

 

 

(1,099

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from public offering, net of underwriting discounts and commissions

 

 

18,364

 

 

 

 

Proceeds from exercise of stock options

 

 

386

 

 

 

23

 

Tax withholdings related to net share settlement of restricted stock units

 

 

(62

)

 

 

 

Payments on revolving line of credit

 

 

(21,277

)

 

 

 

Proceeds from revolving line of credit

 

 

21,457

 

 

 

 

Payments on term loan

 

 

(3,273

)

 

 

(3,000

)

Net cash provided by (used in) financing activities

 

 

15,595

 

 

 

(2,977

)

Effect of exchange rates on cash and equivalents

 

 

(50

)

 

 

(38

)

Net increase (decrease) in cash and cash equivalents

 

 

12,174

 

 

 

(8,950

)

Cash and cash equivalents - beginning of period

 

 

19,719

 

 

 

23,089

 

Cash and cash equivalents - end of period

 

$

31,893

 

 

$

14,139

 

Supplemental disclosures of other cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest expense

 

$

389

 

 

$

287

 

Supplemental disclosures of non-cash investing information:

 

 

 

 

 

 

 

 

Purchase of property and equipment included in accounts payable

 

$

406

 

 

$

2,029

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

6


 

ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1. Organization and Summary of Significant Accounting Policies.

Organization and Nature of Operations.

Adesto Technologies Corporation (together with its subsidiaries; “Adesto”, “we”, “our”, “us” or the “Company”) was incorporated in the state of California in January 2006 and reincorporated in Delaware in October 2015. We are a leading provider of application-specific and ultra-low power non-volatile memory (“NVM”) products. Our corporate headquarters are located in Santa Clara, California.

On September 28, 2012, we purchased certain flash memory product assets from Atmel Corporation and our financial results include the operating results of those assets from the date of acquisition.

Basis of Presentation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP to complete annual financial statements. In the opinion of our management, all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the financial position of the Company and its results of operations and cash flows for the interim periods presented have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, for any other interim period or for any other future year.

The condensed consolidated balance sheet as of December 31, 2016 was derived from the audited consolidated financial statements as of that date, but does not include all of the disclosures required by U.S. GAAP. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 24, 2017.

The condensed consolidated financial statements include the results of our operations, and the operations of our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

There have been no material changes to our significant accounting policies described in Note 1, Organization and Summary of Significant Accounting Policies, in Notes to Consolidated Financial Statements in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2016 that have had a material impact on our condensed consolidated financial statements and related notes, except as described below.

Use of Estimates.

The preparation of consolidated financial statements in conformity U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate those estimates, including those related to allowances for doubtful accounts, reserves for sales, warranty accrual, inventory write-downs, valuation of long-lived assets, including property and equipment and identifiable intangible assets and goodwill, loss on purchase commitments, valuation of deferred taxes and contingencies. In addition, we use assumptions when employing the Black-Scholes option-pricing model to calculate the fair value of stock options granted and Monte Carlo simulation techniques to value certain restricted stock units with performance-based vesting conditions. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, when these carrying values are not readily available from other sources. Actual results could differ from these estimates.

Revenue Recognition and Accounts Receivable Allowances.

We recognize revenue from product sales when persuasive evidence of an arrangement exists, the selling price is fixed or determinable, transfer of title occurs, and the collectibility of the resulting receivable is reasonably assured. Due to the historical

7


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

immaterial level of product returns under warranty, we do not record a reserve for estimated returns under warranty at the time of revenue recognition.

Generally, we meet product sale revenue recognition conditions upon shipment because, in most cases, title and risk of loss passes to the customer at that time. In addition, we estimate and record provisions for future returns and other charges against revenue at the time of shipment, consistent with the terms of sale. We sell products to distributors at the price listed in our distributor price book. At the time of sale, we record a sales reserve for ship from stock and debits (“SSDs”), stock rotation rights and any special programs approved by management. We offset the sales reserve against recorded revenues, producing the revenue amount reported in our condensed consolidated statements of operations.

The market price for our products can differ significantly from the book price at which we sold the product to the distributor. When the market price of a particular distributor’s sales opportunity to their customers would result in low or negative margins for the distributor, as compared to our original book price, we negotiate SSDs with the distributor. Management analyzes our SSD history to develop current SSD rates that form the basis of the SSD revenue reserve recorded each period. We obtain the historical SSD rates from the distributor’s records and our internal records.

We typically grant payment terms of between 30 and 60 days to our customers. Our customers generally pay within those terms. Distributors are invoiced for shipments at listed book price. When the distributors pay the invoice, they may claim debits for SSDs previously authorized by us when appropriate. Once claimed, we process the requests against prior authorizations and adjust reserves previously established for that customer.

The revenue we record for sales to our distributors is net of estimated provisions for these programs. Determining net revenue requires significant judgments and estimates on our part. We base our estimates on historical experience rates, the levels of inventory held by our distributors, current trends and other related factors. Because of the inherent nature of estimates, there is a risk actual amounts may differ materially from our estimates. Our consolidated financial condition and operating results depend on our ability to make reliable estimates. We believe that such estimates are reasonable.

We also monitor collectibility of accounts receivable primarily through review of our accounts receivable aging. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, record a charge in the period such determination is made. As of June 30, 2017 and December 31, 2016, there was no allowance for doubtful accounts.

Product Warranty.

Our products are sold with a limited warranty for a period of one year, warranting that the product conforms to specifications and is free from material defects in design, materials and workmanship. To date, we have had insignificant returns of any defective production parts. During the year ended December 31, 2015, we recorded $250,000 for a specific potential warranty claim. As of June 30, 2017 and December 31, 2016, approximately $41,000 has been incurred relating to this potential warranty claim. As of June 30, 2017 and December 31, 2016, the warranty accrual was $209,000, and is included in accrued expenses and other current liabilities on the condensed consolidated balance sheets.

Foreign Currency Translation.

The functional currency of our foreign subsidiaries is the local currency. In consolidation, we translate assets and liabilities at exchange rates in effect at the consolidated balance sheet date. We translate revenue and expense accounts at the average exchange rates during the period in which the transaction takes place. Net losses from foreign currency translation of assets and liabilities were $29,000 and $4,000 for the three months ended June 30, 2017 and 2016, respectively, and $51,000 and $17,000 for the six months ended June 30, 2017 and 2016, respectively, and are included in the cumulative translation adjustment component of accumulated other comprehensive loss, net of tax, a component of stockholders’ equity. Net losses arising from transactions denominated in currencies other than the functional currency were $5,000 and $34,000 for the three months ended June 30, 2017 and 2016, respectively, and a $8,000 gain and a $12,000 loss for the six months ended June 30, 2017 and 2016, respectively, and are included in other income (expense), net in the condensed consolidated statements of operations.

8


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Concentration of Risk.

Our products are primarily manufactured, assembled and tested by third-party foundries and other contractors in Asia and we are heavily dependent on a single foundry in Taiwan for the manufacture of wafers and a single contractor in the Philippines for assembly and testing of our products. We do not have long-term agreements with either of these suppliers. A significant disruption in the operations of these parties would adversely impact the production of our products for a substantial period of time, which could have a material adverse effect on our business, financial condition, operating results and cash flows.

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivables. We place substantially all of our cash and cash equivalents on deposit with a reputable, high credit quality financial institution in the United States of America. We believe that the bank that holds substantially all of our cash and cash equivalents is financially sound and, accordingly, subject to minimal credit risk. Deposits held with the bank may exceed the amount of insurance provided on such deposits.

We generally do not require collateral or other security in support of accounts receivable. We periodically review the need for an allowance for doubtful accounts by considering factors such as historical experience, credit quality, the age of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. As a result of our favorable collection experience and customer concentration, there was no allowance for doubtful accounts as of June 30, 2017 and December 31, 2016.

Customer concentrations as a percentage of revenue were as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Customer A

 

 

18

%

 

 

15

%

 

 

18

%

 

 

15

%

Customer B

 

*

 

 

 

13

%

 

*

 

 

*

 

Customer C

 

*

 

 

 

11

%

 

*

 

 

 

13

%

Customer D

 

 

10

%

 

*

 

 

 

10

%

 

*

 

 

*

less than 10%

Customer concentrations as a percentage of gross accounts receivable were as follows:

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

Customer A

 

*

 

 

 

16

%

Customer B

 

 

20

%

 

 

10

%

Customer C

 

 

12

%

 

 

10

%

Customer D

 

*

 

 

 

10

%

 

*

less than 10%

 

Recent Accounting Pronouncements.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers, creating Accounting Standards Codification (“ASC”) Topic 606. Upon adoption, this topic supersedes the existing guidance under ASC 605 and aims to simplify the number of requirements to follow for revenue recognition and make revenue recognition more comparable across various entities, industries, jurisdictions and capital markets. There are five core principles: 1. Identify the contract(s) with a customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to performance obligations in the contract. 5. Recognize revenue when (or as) the entity satisfies a performance obligation. Additional considerations under this update include: accounting for costs to obtain or fulfill a contract with a customer and additional quantitative and qualitative disclosures. We plan to adopt this guidance effective for periods beginning after December 15, 2017 (including interim reporting periods within those periods), or the first quarter of 2018, and are currently evaluating the impact on our consolidated financial statements.

9


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, amending ASC 330. Upon adoption, this topic supersedes the existing guidance under ASC 330 and aims to simplify the subsequent measurement of inventory. Currently, inventory can be measured at the lower of cost or market, which could result in several potential outcomes, as market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. The major amendments would be as follows: 1. Inventory should be measured at the lower of cost or net realizable value. 2. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. 3. The amendment does not apply to inventory measured under LIFO or the retail inventory method. 4. The amendment does apply to all other inventory, which includes inventory measured via FIFO or average cost. We adopted this guidance effective January 1, 2017 and it did not have a significant impact on our condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, Topic 842. This ASU requires lease assets and lease liabilities arising from leases, including operating leases, to be recognized on the balance sheet, ASU 2016-02 will become effective for us on January 1, 2019. We are currently evaluating the impact of this guidance on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation, ASC Topic 718: Improvements to Employee Share-Based Payment Accounting. Under this ASU, several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. We adopted this guidance effective January 1, 2017. We elected to continue to account for forfeitures on an estimated basis. We have elected to present the condensed consolidated statements of cash flows on a prospective transition method and no prior periods have been adjusted.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, Topic 606. The ASU, among other things: (1) clarifies the objective of the collectibility criterion for applying paragraph 606-10-25-7; (2) permits an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specifies that the measurement date for noncash consideration is contract inception; (4)  provides a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarifies that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. We plan to adopt this guidance effective for periods beginning after December 15, 2017 (including interim reporting periods within those periods), or the first quarter of 2018, and are currently evaluating the impact on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, ASC Topic 230.  This ASU is a clarification of how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  This update provides guidance on eight identified issues: 1) debt prepayment or extinguishment costs, 2) settlement of zero-coupon debt, 3) contingent consideration for payments, 4) proceeds from settlement of insurance claims, 5) proceeds from settlement of corporate-owned life insurance policies, 6) distributions from equity method investees, 7) beneficial interests in securitization transactions, and 8) separately identifiable cash flows. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.  If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.  An entity that elects early adoption must adopt all of the amendments in the same period. We plan to adopt this guidance effective for periods beginning after December 15, 2017 (including interim reporting periods within those periods), or the first quarter of 2018, and are currently evaluating the impact on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset upon transfer other than inventory, eliminating the current recognition exception. Prior to this ASU, U.S. GAAP prohibited the recognition of current and deferred income taxes for the intra-entity asset transfers until the asset was sold to an outside party. For public business entities, the amendments in the ASU are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted and should be applied on a modified retrospective basis though a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We plan to adopt this guidance effective for periods beginning after December 15, 2017 (including interim reporting periods within those periods), or the first quarter of 2018, and are currently evaluating the impact on our consolidated financial statements.

10


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in the update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This ASU will become effective for public business entities on December 15, 2017. We plan to adopt this guidance effective for periods beginning after December 15, 2017 (including interim reporting periods within those periods), or the first quarter of 2018, and are currently evaluating the impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). The objective of this ASU is to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments in this update are effective for a public business entity that is a U.S. Securities and Exchange Commission filer for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The amendments should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We plan to adopt this guidance effective for periods beginning after December 15, 2017 (including interim reporting periods within those periods), or the first quarter of 2018, and are currently evaluating the impact on our consolidated financial statements

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms of conditions of a share-based payment award. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. We plan to adopt this guidance effective for periods beginning after December 15, 2017 (including interim reporting periods within those periods), or the first quarter of 2018, and are currently evaluating the impact on our consolidated financial statements

 

Note 2. Balance Sheet Components.

Accounts Receivable, Net.

Accounts receivable, net consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Accounts receivable

 

$

11,956

 

 

$

8,800

 

Allowance for SSDs, price protection, rights of return and other activities

 

 

(2,901

)

 

 

(2,689

)

Total accounts receivable, net

 

$

9,055

 

 

$

6,111

 

 

Inventories.

Inventories consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Raw materials

 

$

1,215

 

 

$

212

 

Work-in-process

 

 

2,215

 

 

 

3,793

 

Finished goods

 

 

931

 

 

 

1,177

 

Total inventories

 

$

4,361

 

 

$

5,182

 

 

For the three months ended June 30, 2017 and 2016, we realized a benefit of $0.2 million and $0.6 million, respectively, from the sales of previously reserved products.

11


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

For the six months ended June 30, 2017 and 2016, we realized a benefit of $0.6 million and $0.7 million, respectively, from the sales of previously reserved products.

Inventory write-downs were primarily associated with products built in excess of customer demand which resulted in excess inventory levels, legacy products for which no demand exists and lower of cost or net realizable value write-downs associated with CBRAM products for which costs exceeded net realizable value.  

 

 

Property and Equipment, Net.

Property and equipment, net consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Machinery and equipment

 

$

8,206

 

 

$

7,351

 

Furniture and fixtures

 

 

83

 

 

 

77

 

Leasehold improvements

 

 

4,252

 

 

 

4,252

 

Computer software

 

 

675

 

 

 

668

 

Construction in progress

 

 

1,301

 

 

 

1,098

 

Property and equipment, at cost

 

 

14,517

 

 

 

13,446

 

Accumulated depreciation and amortization

 

 

(8,168

)

 

 

(7,484

)

Property and equipment, net

 

$

6,349

 

 

$

5,962

 

 

The Company incurs costs for the fabrication of masks used by its foundry partners to manufacture its products. Beginning the first fiscal quarter of 2017, the Company capitalizes mask costs that are expected to be utilized in production manufacturing as the Company’s product development process has become more predictable and thus supports capitalization of the mask. The capitalized mask costs begin depreciating to cost of revenue once the products go into production. Depreciation is computed using the straight-line method over a three year period which is the expected useful life of the mask. Previously mask sets were expensed to research and development.

 

Depreciation and amortization expense of property and equipment for the three and six months ended June 30, 2017 was $0.3 million and $0.6 million, respectively.

Depreciation and amortization expense of property and equipment for the three and six months ended June, 30, 2016 was $0.2 million and $0.4 million, respectively.

Accrued Expenses and Other Current Liabilities.

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Accrued sales commission payable

 

$

319

 

 

$

366

 

Accrued manufacturing expenses

 

 

180

 

 

 

149

 

Deferred rent, current portion

 

 

405

 

 

 

388

 

Liabilities to certain customers

 

 

287

 

 

 

663

 

Product warranty

 

 

209

 

 

 

209

 

Other accrued liabilities

 

 

695

 

 

 

401

 

Total accrued expenses and other current liabilities

 

$

2,095

 

 

$

2,176

 

 

 

12


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 3. Fair Value Measurements.

Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We measure financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:

Level 1. Quoted prices in active markets for identical assets or liabilities.

Level 2. Quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices which are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

Level 3. Unobservable inputs which are supported by little or no market activity and which are significant to the fair value of the assets or liabilities.

Financial assets measured at fair value on a recurring basis were as follows:

 

 

Fair Value Measurement at Reporting Date Using

 

 

 

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

 

 

(in thousands)

 

As of June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

13,139

 

 

$

 

 

$

 

 

$

13,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

16,540

 

 

$

 

 

$

 

 

$

16,540

 

 

As of June 30, 2017 and December 31, 2016, we had no financial liabilities measured at fair value on a recurring basis.

 

 

Note 4. Intangible Assets, net.

In 2012, in connection with our purchase of the serial flash memory product line assets from Atmel Corporation, we recorded $16.4 million of intangible assets.

Intangible assets, net were as follows (in thousands):

 

 

 

June 30, 2017

 

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Amount

 

Developed technology

 

$

4,282

 

 

$

2,034

 

 

$

2,248

 

Customer relationships

 

 

9,011

 

 

 

3,566

 

 

 

5,445

 

Customer backlog

 

 

2,779

 

 

 

2,779

 

 

 

 

Non-compete agreement

 

 

282

 

 

 

269

 

 

 

13

 

Total intangible assets subject to amortization

 

$

16,354

 

 

$

8,648

 

 

$

7,706

 

13


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

 

 

December 31, 2016

 

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Amount

 

Developed technology

 

$

4,282

 

 

$

1,820

 

 

$

2,462

 

Customer relationships

 

 

9,011

 

 

 

3,191

 

 

 

5,820

 

Customer backlog

 

 

2,779

 

 

 

2,779

 

 

 

 

Non-compete agreement

 

 

282

 

 

 

240

 

 

 

42

 

Total intangible assets subject to amortization

 

$

16,354

 

 

$

8,030

 

 

$

8,324

 

 

We recorded amortization expense related to the acquisition-related intangible assets as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Operating expense category:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

121

 

 

$

121

 

 

$

243

 

 

$

242

 

Sales and marketing

 

 

188

 

 

 

188

 

 

 

375

 

 

 

376

 

Total

 

$

309

 

 

$

309

 

 

$

618

 

 

$

618

 

 

The estimated future amortization expense of acquisition-related intangible assets subject to amortization after June 30, 2017 is as follows (in thousands):

 

Year Ended December 31,

 

 

 

 

2017 (remaining 6 months)

 

$

604

 

2018

 

 

1,179

 

2019

 

 

1,179

 

2020

 

 

1,179

 

2021

 

 

1,179

 

Thereafter

 

 

2,386

 

Total

 

$

7,706

 

 

 

Note 5. Borrowings.

Opus Bank Term Loan.

In April 2015, we entered into a three-year $15.0 million credit agreement, or the term loan facility. The agreement provided for a senior secured term loan facility, in an aggregate principal amount of up to $15.0 million to be used for general corporate purposes including working capital, to repay certain indebtedness and for capital expenditures and other expenses. Interest accrued on outstanding borrowings at a rate equal to (a) the higher of (i) the prime rate (as publicly announced from time to time by the Wall Street Journal) and (ii) 3.25% plus (b) (i) 1.00% if our cash equivalents are greater than 125% of the outstanding principal of our borrowings under the term loan facility, or (ii) 2.00% if our cash and cash equivalents are less than or equal to 125% of such borrowings. Indebtedness we incurred under this agreement was collateralized by substantially all of our assets and the agreement contained financial covenants requiring us to maintain a monthly asset coverage ratio after September 30, 2015 of not less than 1.10 to 1.00, and quarterly adjusted EBITDA (measured on a trailing three-month basis) of $1 through September 30, 2016 and increasing to higher levels thereafter. Under the agreement, the quarterly EBITDA covenant was not applicable if the asset coverage ratio is met at all times during any particular quarter. The agreement contained customary affirmative and negative covenants, including covenants that limited or restricted our ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets, merge or consolidate and make acquisitions. Upon an occurrence of an event of default, we could have been required to pay interest on all outstanding obligations under the agreement at a rate of 5% above the otherwise applicable interest rate, and the lender may accelerate our obligations under the agreement.   

Borrowings of $14.0 million under this facility were repaid in full in July 2016.

14


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

In connection with the term loan facility, Opus Bank received a warrant to purchase 31,897 shares of Series E convertible preferred stock. Upon the completion of our initial public offering (“IPO”) on October 30, 2015 the preferred stock warrants were converted into 315,282 of our common stock warrants. In addition, we paid financing costs of $0.1 million. The financing costs and the value of the warrant, $1.0 million, were recorded as a debt discount and were being amortized over the life of the agreement. Amortization of debt discount was $0.2 million for the six months ended June 30, 2016. In connection with the repayment of this facility in July 2016, the remaining unamortized debt discount of $0.4 million was recorded as interest expense in the condensed consolidated statements of operations.    

Western Alliance Bank Term Loan.

On July 7, 2016, the Company entered into a business financing agreement (“Credit Facility”) with Western Alliance Bank. The Credit Facility provides for (i) a term loan of up to $18.0 million and (ii) a revolving credit line advance in the aggregate amount of the lower of (x) $2.0 million and (y) 80% of certain of the Company’s receivables. The term loan made pursuant to the Credit Facility bears interest at a rate per annum equal to the greater of the prime rate or 3.5%, plus 0.75% (5.00% on June 30, 2017), and matures in June 2019.  The line of credit bears interest at a rate per annual equal to the greater of the prime rate or 3.5% plus 0.50% (4.75% on June 30, 2017), and matures in July 2018.The Company made interest-only payments on the term loan from July 2016 through September 2016 and began making interest payments and principal payments in 33 equal monthly installments starting October 2016. Indebtedness we incur under this agreement is collateralized by substantially all assets of the Company and any domestic subsidiaries, subject to certain customary exceptions. The Company paid a facility fee of $150,000 as well as a $25,000 diligence fee upon entry into the Credit Facility and an additional $10,000 is due on July 7, 2017. These fees have been recorded as a debt discount and are being amortized over the life of the agreement. During the six months ended June 30, 2017, amortization of debt discount was $45,000 and the unamortized debt discount was $78,000 as of June 30, 2017.    

 

The Credit Facility, as amended, contains customary representations and warranties and affirmative and negative covenants. Among other negative covenants, we may not (i) permit the ratio of the balance of unrestricted cash deposited at the financial institution, plus eligible receivables, net of reserve to the total amounts owed with respect to advances under the revolving credit line to be less than 1.50 to 1.00 and (ii) permit cash held at the financial institution in a deposit account to be less than 100% of the term loan outstanding. Upon an occurrence of an event of default, we could be required to pay interest on all outstanding obligations under the agreement at a rate of 5% above the otherwise applicable interest rate, and the lender may accelerate our obligations under the agreement. As of June 30, 2017, we were in compliance with all financial covenants and restrictions.

Outstanding borrowings consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Term loan, current

 

$

6,486

 

 

$

6,466

 

Term loan, non-current

 

 

6,527

 

 

 

9,775

 

Line of credit

 

 

1,987

 

 

 

1,807

 

Total

 

$

15,000

 

 

$

18,048

 

 

Future repayments on outstanding borrowings (excluding unamortized discount of $78,000 as of June 30, 2017) are as follows (in thousands):

 

Year ending December 31,

 

 

 

 

2017 (remaining 6 months)

 

$

3,273

 

2018

 

 

8,532

 

2019

 

 

3,273

 

 

 

$

15,078

 

 

Interest expense incurred under our borrowings was $0.2 million and $0.4 million for the three and six months ended June 30, 2017, respectively.  

Interest expense incurred under our borrowings was $0.2 million and $0.5 million for the three and six months ended June 30, 2016, respectively.

 

15


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

Note 6. Segment Information.

We operate in one business segment, application-specific and feature-rich, ultra-low power NVM products. Our chief decision-maker, the President and Chief Executive Officer, evaluates our performance based on company-wide consolidated results. Revenue is evaluated based on product category and by geographic region.

Product revenue from customers is designated based on the geographic region to which the product is delivered. Revenue by geographic region was as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

United States

 

$

2,713

 

 

$

1,197

 

 

$

5,522

 

 

$

2,907

 

Rest of Americas

 

 

70

 

 

 

67

 

 

 

131

 

 

 

271

 

Europe

 

 

2,142

 

 

 

1,303

 

 

 

4,010

 

 

 

2,847

 

Asia Pacific

 

 

8,340

 

 

 

7,651

 

 

 

14,811

 

 

 

14,249

 

Rest of world

 

 

147

 

 

 

64

 

 

 

245

 

 

 

184

 

Total

 

$

13,412

 

 

$

10,282

 

 

$

24,719

 

 

$

20,458

 

 

Long-lived assets are attributed to the geographic region were they are located. Long-lived assets by geographic region were as follows (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

United States

 

$

5,868

 

 

$

5,489

 

Asia Pacific

 

 

481

 

 

 

472

 

Europe

 

 

 

 

 

1

 

Total property and equipment, net

 

$