iots-10q_20170930.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 September 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:

 

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 October 26, 2017

 

Common Stock, $0.0001 par value per share

 

21,138,980 shares

 

 

 

 


ADESTO TECHNOLOGIES CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

INDEX

 

 

 

PART I: FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)  

 

3

 

 

 

 

 

 

 

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

 

3

 

 

 

 

 

 

 

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

 

4

 

 

 

 

 

 

 

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

 

5

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 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

 

23

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 


PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements

ADESTO TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

(1)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

30,508

 

 

$

19,719

 

Accounts receivable, net

 

 

8,810

 

 

 

6,111

 

Inventories

 

 

4,263

 

 

 

5,182

 

Prepaid expenses

 

 

348

 

 

 

462

 

Other current assets

 

 

103

 

 

 

105

 

Total current assets

 

 

44,032

 

 

 

31,579

 

Property and equipment, net

 

 

6,325

 

 

 

5,962

 

Intangible assets, net

 

 

7,397

 

 

 

8,324

 

Other non-current assets

 

 

607

 

 

 

296

 

Goodwill

 

 

22

 

 

 

22

 

Total assets

 

$

58,383

 

 

$

46,183

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,907

 

 

$

5,167

 

Accrued compensation and benefits

 

 

2,132

 

 

 

1,599

 

Accrued expenses and other current liabilities

 

 

1,946

 

 

 

2,176

 

Term loan, current

 

 

 

 

 

6,466

 

Total current liabilities

 

 

9,985

 

 

 

15,408

 

Line of credit

 

 

2,000

 

 

 

1,807

 

Term loan, non-current

 

 

11,396

 

 

 

9,775

 

Deferred rent, non-current

 

 

2,511

 

 

 

2,826

 

Deferred tax liability, non-current

 

 

2

 

 

 

2

 

Total liabilities

 

 

25,894

 

 

 

29,818

 

Commitments and contingencies (See Note 7)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, $0.0001 par value, 100,000,000 shares authorized; 21,121,497 and 15,494,308 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

132,467

 

 

 

110,749

 

Accumulated other comprehensive loss

 

 

(301

)

 

 

(230

)

Accumulated deficit

 

 

(99,679

)

 

 

(94,156

)

Total stockholders' equity

 

 

32,489

 

 

 

16,365

 

Total liabilities and stockholders' equity

 

$

58,383

 

 

$

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue, net

 

$

15,239

 

 

$

11,180

 

 

$

39,958

 

 

$

31,638

 

Cost of revenue

 

 

7,773

 

 

 

5,803

 

 

 

20,215

 

 

 

16,531

 

Gross profit

 

 

7,466

 

 

 

5,377

 

 

 

19,743

 

 

 

15,107

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,606

 

 

 

4,390

 

 

 

10,653

 

 

 

12,527

 

Sales and marketing

 

 

2,897

 

 

 

2,870

 

 

 

8,408

 

 

 

8,315

 

General and administrative

 

 

1,761

 

 

 

1,586

 

 

 

5,569

 

 

 

4,984

 

Gain from settlement with former foundry supplier

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,962

)

Total operating expenses

 

 

8,264

 

 

 

8,846

 

 

 

24,630

 

 

 

23,864

 

Loss from operations

 

 

(798

)

 

 

(3,469

)

 

 

(4,887

)

 

 

(8,757

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(170

)

 

 

(576

)

 

 

(581

)

 

 

(1,058

)

Other income (expense), net

 

 

(12

)

 

 

(18

)

 

 

2

 

 

 

(29

)

Total other income (expense), net

 

 

(182

)

 

 

(594

)

 

 

(579

)

 

 

(1,087

)

Loss before provision for  income taxes

 

 

(980

)

 

 

(4,063

)

 

 

(5,466

)

 

 

(9,844

)

Provision for  income taxes

 

 

17

 

 

 

15

 

 

 

57

 

 

 

46

 

Net loss

 

$

(997

)

 

$

(4,078

)

 

$

(5,523

)

 

$

(9,890

)

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.05

)

 

$

(0.27

)

 

$

(0.31

)

 

$

(0.66

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

21,058,635

 

 

 

15,034,475

 

 

 

17,701,230

 

 

 

14,997,417

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

4


ADESTO TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(997

)

 

$

(4,078

)

 

$

(5,523

)

 

$

(9,890

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(20

)

 

 

(19

)

 

 

(71

)

 

 

(36

)

Comprehensive loss

 

$

(1,017

)

 

$

(4,097

)

 

$

(5,594

)

 

$

(9,926

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

5


ADESTO TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,523

)

 

$

(9,890

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

2,873

 

 

 

2,508

 

Depreciation and amortization

 

 

1,004

 

 

 

684

 

Amortization of intangible assets

 

 

927

 

 

 

927

 

Amortization of debt discount

 

 

64

 

 

 

606

 

Deferred income taxes

 

 

 

 

 

1

 

Gain from settlement with former foundry supplier

 

 

 

 

 

(1,962

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,699

)

 

 

1,528

 

Inventories

 

 

919

 

 

 

(539

)

Prepaid expenses and other current assets

 

 

116

 

 

 

619

 

Other non-current assets

 

 

(311

)

 

 

 

Accounts payable

 

 

1,426

 

 

 

(1,037

)

Accrued compensation and benefits

 

 

533

 

 

 

448

 

Accrued expenses and other current liabilities

 

 

(230

)

 

 

746

 

Deferred rent

 

 

(315

)

 

 

 

Net cash used in operating activities

 

 

(1,216

)

 

 

(5,361

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(2,054

)

 

 

(2,358

)

Net cash used in investing activities

 

 

(2,054

)

 

 

(2,358

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from public offering, net of underwriting discounts and commissions

 

 

18,363

 

 

 

 

Proceeds from exercise of stock options

 

 

639

 

 

 

238

 

Tax withholdings related to net share settlement of restricted stock units

 

 

(157

)

 

 

 

Proceeds from revolving line of credit

 

 

27,427

 

 

 

2,000

 

Payments on revolving line of credit

 

 

(27,234

)

 

 

 

Proceeds from term loan, net of fees

 

 

 

 

 

17,825

 

Payments on term loan

 

 

(4,909

)

 

 

(14,000

)

Net cash provided by financing activities

 

 

14,129

 

 

 

6,063

 

Effect of exchange rates on cash and equivalents

 

 

(70

)

 

 

(56

)

Net increase (decrease) in cash and cash equivalents

 

 

10,789

 

 

 

(1,712

)

Cash and cash equivalents - beginning of period

 

 

19,719

 

 

 

23,089

 

Cash and cash equivalents - end of period

 

$

30,508

 

 

$

21,377

 

Supplemental disclosures of other cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest expense

 

$

560

 

 

$

494

 

Supplemental disclosures of non-cash investing information:

 

 

 

 

 

 

 

 

Purchase of property and equipment included in accounts payable

 

$

347

 

 

$

1,123

 

 

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 nine months ended September 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 with 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 September 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 September 30, 2017 and December 31, 2016, approximately $226,000 and $41,000, respectively, has been incurred relating to this potential warranty claim. As of September 30, 2017 and December 31, 2016, the warranty accrual was $24,000 and $209,000, respectively, 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 $20,000 and $19,000 for the three months ended September 30, 2017 and 2016, respectively, and $71,000, and $36,000 for the nine months ended September 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 $7,000 and $18,000 for the three months ended September 30, 2017 and 2016, respectively, and a $1,000 gain and a $30,000 loss for the nine months ended September 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 September 30, 2017 and December 31, 2016.

Customer concentrations as a percentage of revenue, net were as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Customer A

 

 

13

%

 

 

12

%

 

 

16

%

 

 

14

%

Customer B

 

 

12

%

 

*

 

 

 

10

%

 

 

11

%

Customer C

 

 

13

%

 

 

10

%

 

 

12

%

 

 

10

%

 

*

less than 10%

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

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

Customer A

 

 

23

%

 

 

16

%

Customer B

 

 

17

%

 

 

13

%

Customer C

 

*

 

 

 

12

%

 

*

less than 10%

 

Recent Accounting Pronouncements.

In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The ASU provides alternative methods of initial adoption and is effective for annual and interim periods beginning after December 15, 2017. The FASB has issued several updates to the standard which i) defer the original effective date from January 1, 2017 to January 1, 2018, while allowing for early adoption as of January 1, 2017 (ASU 2015-14); ii) clarify the application of the principal versus agent guidance (ASU  2016-08); iii) clarify the guidance on inconsequential and perfunctory promises and licensing (ASU 2016-10); and (iv) clarify the guidance on

9


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

certain sections of the guidance providing technical corrections and improvements (ASU 2016-10). In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606) Narrow-Scope Improvements and Practical Expedients”, to address certain narrow aspects of the guidance including collectibility criterion, collection of sales taxes from customers, noncash consideration, contract modifications and completed contracts. This issuance does not change the core principle of the guidance in the initial topic issued in May 2014. We currently anticipate adopting the standard using the modified retrospective method. We are currently evaluating the impact of this new standard on our 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 September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendment to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (SEC Update). The amendments in ASU No. 2017-13 amends the early adoption date option for certain companies related to the adoption of ASU No. 2014-09 and ASU No. 2016-02.

 

Note 2. Balance Sheet Components.

Accounts Receivable, Net.

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Accounts receivable

 

$

12,391

 

 

$

8,800

 

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

 

 

(3,581

)

 

 

(2,689

)

Total accounts receivable, net

 

$

8,810

 

 

$

6,111

 

 

Inventories.

Inventories consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Raw materials

 

$

1,018

 

 

$

212

 

Work-in-process

 

 

2,299

 

 

 

3,793

 

Finished goods

 

 

946

 

 

 

1,177

 

Total inventories

 

$

4,263

 

 

$

5,182

 

 

For the three months ended September 30, 2017 and 2016, we realized a benefit of $0.4 million and $0.1 million, respectively, from the sales of previously reserved products.

For the nine months ended September 30, 2017 and 2016, we realized a benefit of $1.0 million and $0.8 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.  

 

10


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

Property and Equipment, Net.

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Machinery and equipment

 

$

8,561

 

 

$

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

 

 

14,872

 

 

 

13,446

 

Accumulated depreciation and amortization

 

 

(8,547

)

 

 

(7,484

)

Property and equipment, net

 

$

6,325

 

 

$

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 nine months ended September 30, 2017 was $0.4 million and $1.0 million, respectively.

Depreciation and amortization expense of property and equipment for the three and nine months ended September, 30, 2016 was $0.3 million and $0.7 million, respectively.

Accrued Expenses and Other Current Liabilities.

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Accrued sales commission payable

 

$

329

 

 

$

366

 

Accrued manufacturing expenses

 

 

228

 

 

 

149

 

Deferred rent, current portion

 

 

413

 

 

 

388

 

Liabilities to certain customers

 

 

474

 

 

 

663

 

Product warranty

 

 

24

 

 

 

209

 

Other accrued liabilities

 

 

478

 

 

 

401

 

Total accrued expenses and other current liabilities

 

$

1,946

 

 

$

2,176

 

 

 

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.

11


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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 September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

11,497

 

 

$

 

 

$

 

 

$

11,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

16,540

 

 

$

 

 

$

 

 

$

16,540

 

 

As of September 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):

 

 

 

September 30, 2017

 

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Amount

 

Developed technology

 

$

4,282

 

 

$

2,142

 

 

$

2,140

 

Customer relationships

 

 

9,011

 

 

 

3,754

 

 

 

5,257

 

Customer backlog

 

 

2,779

 

 

 

2,779

 

 

 

 

Non-compete agreement

 

 

282

 

 

 

282

 

 

 

 

Total intangible assets subject to amortization

 

$

16,354

 

 

$

8,957

 

 

$

7,397

 

 

 

 

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

 

 

12


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Operating expense category:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

121

 

 

$

121

 

 

$

364

 

 

$

363

 

Sales and marketing

 

 

188

 

 

 

188

 

 

 

563

 

 

 

564

 

Total

 

$

309

 

 

$

309

 

 

$

927

 

 

$

927

 

 

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

 

Year Ended December 31,

 

 

 

 

2017 (remaining 3 months)

 

$

295

 

2018

 

 

1,179

 

2019

 

 

1,179

 

2020

 

 

1,179

 

2021

 

 

1,179

 

Thereafter

 

 

2,386

 

Total

 

$

7,397

 

 

 

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.

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.    

13


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Western Alliance Bank Term Loan.

The Company is a party to that certain Business Financing Agreement dated July 7, 2016, by and between Western Alliance Bank and the Company, as amended (“Credit Facility”). The Credit Facility originally provided for (i) a term loan of up to $18.0 million (the “Term Loan”) and (ii) a revolving credit line advance (the “Line of Credit”) in the aggregate amount of the lower of (x) $2.0 million and (y) 80% of certain of the Company’s receivables. Prior to the Amendment (as defined below), the Term Loan bore interest at a rate per annum equal to the greater of the prime rate or 3.5%, plus 0.75% (5.00% on September 30, 2017), and was scheduled to mature in June 2019.  Prior to the Amendment, the Line of Credit bore interest at a rate per annum equal to the greater of the prime rate or 3.5% plus 0.50% (4.75% on September 30, 2017), and was scheduled to mature in July 2018.Prior to the Amendment, we 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. Prior to the Amendment, the Credit Facility provided that any indebtedness we incurred thereunder was collateralized by substantially all assets of the Company and any domestic subsidiaries, subject to certain customary exceptions. We 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 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 nine months ended September 30, 2017, amortization of debt discount was $64,000 and the unamortized debt discount was $59,000 as of September 30, 2017.    

 

The Credit Facility contains customary representations and warranties and affirmative and negative covenants. Among other negative covenants, prior to the Amendment, the Credit Facility provided that 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, under the Credit Facility 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 September 30, 2017, we were in compliance with all financial covenants and restrictions.

 

On September 29, 2017, we amended the Credit Facility by entering into that certain Second Business Financing Modification Agreement, dated September 29, 2017 (the “Amendment”) with Western Alliance Bank. The Amendment extended the maturity dates of the Line of Credit and the Term Loan to July 2019 and September 2021, respectively, from July 2018 and June 2019, respectively.  In addition, the Amendment increased the amount available under the Line of Credit in the aggregate amount to $5.0 million.

 

The Amendment also decreased the interest rates under the Line of Credit and the Term Loan and changed the payment schedule under the Term Loan.  Under the Agreement, we will make interest-only payments on the Term Loan from October 10, 2017 and on the 10th calendar day of each month thereafter, and will make principal and interest payments in 36 equal installments beginning on October 10, 2018, and on the 10th calendar day of each month thereafter, until the maturity date of the Term Loan. Pursuant to the Amendment, our Intellectual Property (as defined in the Amendment) is excluded from the collateral used to secure the indebtedness we incurred under the Credit Facility.

 

Under the Amendment, we have agreed to modified and additional negative covenants, requiring us to maintain a ratio of at least 1.25 to 1.00 with respect to either of the following: (x) the sum of our cash and certain receivables to our indebtedness under the Credit Facility; or (y) our Adjusted EBITDA (as defined in the Amendment), less certain capital expenditures, to the sum of (a) all principal payments and interest expense that we would have owed to the Lender if the Term Loan’s amortization were to start on September 29, 2017, all measured on a trailing 4-quarter basis, plus (b) all principal payments and interest expense on any of our other debt.  The Amendment also subjects us to the requirement that our quarterly revenues shall not negatively deviate more than 25% from the projections provided to Western Alliance Bank in accordance with the Credit Facility.

Outstanding borrowings consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Term loan, current

 

$

 

 

$

6,466

 

Term loan, non-current

 

 

11,396

 

 

 

9,775

 

Line of credit

 

 

2,000

 

 

 

1,807

 

Total

 

$

13,396

 

 

$

18,048

 

 

14


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Future repayments on outstanding borrowings (excluding unamortized discount of $59,000 as of September 30, 2017) are as follows (in thousands):

 

Year ending December 31,

 

 

 

 

2017 (remaining 3 months)

 

$

 

2018

 

 

1,000

 

2019

 

 

6,000

 

2020

 

 

4,000

 

2021

 

 

2,455

 

 

 

$

13,455

 

 

Interest expense incurred under our borrowings was $0.2 million and $0.6 million for the three and nine months ended September 30, 2017, respectively.  

Interest expense incurred under our borrowings was $0.6 million and $1.1 million for the three and nine months ended September 30, 2016, respectively.

 

 

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

United States

 

$

3,331

 

 

$

1,873

 

 

$

8,853

 

 

$

4,780

 

Rest of Americas

 

 

58

 

 

 

64

 

 

 

189

 

 

 

335

 

Europe

 

 

2,044

 

 

 

1,466

 

 

 

6,054

 

 

 

4,313

 

Asia Pacific

 

 

9,729

 

 

 

7,730

 

 

 

24,540

 

 

 

21,979

 

Rest of world

 

 

77

 

 

 

47

 

 

 

322

 

 

 

231

 

Total

 

$

15,239

 

 

$

11,180

 

 

$

39,958

 

 

$

31,638

 

 

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

United States

 

$

5,646

 

 

$

5,489

 

Asia Pacific

 

 

679

 

 

 

472

 

Europe

 

 

 

 

 

1

 

Total property and equipment, net

 

$

6,325

 

 

$

5,962

 

 

 

Note 7. Commitments and Contingencies.

Operating Leases.

The Company leases office facilities under various non-cancelable operating lease agreements. Certain lease agreements contain free or escalating rent payment provisions. The Company recognizes rent expense under such leases on a straight-line basis over the term of the lease with the difference between the expense and the payments recorded as deferred rent on the condensed consolidated balance sheets. Any reimbursements by the landlord for tenant improvements are considered lease incentives, the balance of which is

15


ADESTO TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

recorded as a lease incentive obligation within deferred rent on the condensed consolidated balance sheets, and amortized as a reduction of rent expense over the life of the lease. Lease renewal periods are considered on a lease-by-lease basis in determining the lease term.

On November 2, 2015, the Company extended the lease for its headquarters by six months to July 2016 by entering into that certain Amendment to Commercial Sublease (“Amendment”), dated November 2, 2015, between the Company and eGain Corporation. The Amendment provides for a base rent during the extension period of $47,000 per month. Subsequently, we extended the lease to August 31, 2016.

Additionally, on November 2, 2015, the Company entered into a lease with Peterson Ridge LLC pursuant to which the Company leased a new headquarters facility, consisting of an aggregate of approximately 34,000 square feet of space in Santa Clara, California. The initial term of the lease commenced on November 2, 2015 and is scheduled to end on July 31, 2023 and may be extended, at the Company’s option, for an additional five-year period following the initial lease term.

Pursuant to the lease, monthly base rental payments due under the lease are approximately $93,000 per month between August 1, 2016 and February 27, 2017, with annual increases of approximately 3% thereafter. The Company must also pay for certain other operating costs under the lease, including operating expenses, taxes, assessments, insurance, utilities, securities and property management fees. Peterson Ridge LLC is obligated to reimburse the Company for up to approximately $2.5 million of the Company’s out-of-pocket costs associated with any tenant improvements, as defined in the lease. The Company was reimbursed for this amount during the year ended December 31, 2016. As of September 30, 2017, the Company recorded a lease incentive obligation of $2.1 million in deferred rent on the condensed consolidated balance sheet.

Rent expense under operating leases was $0.3 million and $0.8 million for the three and nine months ended September 30, 2017, respectively.

Rent expense under operating leases was $0.4 million and $1.5 million for the three and nine months ended September 30, 2016, respectively.

 

 

 

Total