iots_Current_Folio_10Q

Table of Contents

 

 

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, 2018

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 July 23, 2018

 

Common Stock, $0.0001 par value per share

 

29,268,482 shares

 

 

 

 

 

 


 

Table of Contents

ADESTO TECHNOLOGIES CORPORATION

QUARTERLY REPORT ON FORM 10‑Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

INDEX

 

PART I FINANCIAL INFORMATION

 

Item 1. 

Condensed Consolidated Financial Statements (unaudited)

3

 

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

3

 

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2018 and 2017

4

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2018 and 2017

5

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017

6

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

Item 2. 

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

29

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4. 

Controls and Procedures

39

 

PART II OTHER INFORMATION

 

Item 1. 

Legal Proceedings

40

Item 1A. 

Risk Factors

40

Item 1B. 

Unresolved Staff Comments

58

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 3. 

Defaults Upon Senior Securities

59

Item 4. 

Mine Safety Disclosures

59

Item 5. 

Other Information

59

Item 6. 

Exhibits

59

Signatures 

 

61

 

 

 

 


 

Table of Contents

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,

 

 

 

2018

 

2017

 

 

 

(unaudited)

 

(1)

 

Assets

 

 

  

 

 

  

 

Current assets:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

7,939

 

$

30,078

 

Accounts receivable, net

 

 

17,172

 

 

8,668

 

Inventories

 

 

11,448

 

 

5,814

 

Prepaid expenses

 

 

1,977

 

 

993

 

Other current assets

 

 

50

 

 

52

 

Total current assets

 

 

38,586

 

 

45,605

 

Property and equipment, net

 

 

8,236

 

 

7,183

 

Intangible assets, net

 

 

21,461

 

 

7,102

 

Other non-current assets

 

 

1,235

 

 

900

 

Goodwill

 

 

34,374

 

 

22

 

Total assets

 

$

103,892

 

$

60,812

 

Liabilities and Stockholders' Equity

 

 

  

 

 

  

 

Current liabilities:

 

 

  

 

 

  

 

Accounts payable

 

$

11,473

 

$

7,075

 

Accrued compensation and benefits

 

 

2,735

 

 

2,614

 

Accrued expenses and other current liabilities

 

 

5,537

 

 

2,359

 

Price adjustments and other revenue reserves

 

 

4,404

 

 

 —

 

Earn-out liability, current

 

 

10,037

 

 

 —

 

Line of credit, current

 

 

 —

 

 

1,500

 

Term loan, current

 

 

 —

 

 

926

 

Total current liabilities

 

 

34,186

 

 

14,474

 

Term loan, non-current

 

 

29,361

 

 

10,908

 

Other non-current liabilities

 

 

3,221

 

 

75

 

Deferred rent, non-current

 

 

2,179

 

 

2,404

 

Deferred tax liability, non-current

 

 

1,884

 

 

 1

 

Total liabilities

 

 

70,831

 

 

27,862

 

Commitments and contingencies (See Note 8)

 

 

  

 

 

  

 

Stockholders' equity:

 

 

  

 

 

  

 

Preferred stock, $0.0001 par value, 5,000,000 shares authorized as of June 30, 2018 and December 31, 2017; no shares issued and outstanding as of June 30, 2018 and December 31, 2017

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value, 100,000,000 shares authorized; 21,523,025 and 21,291,833 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively

 

 

 2

 

 

 2

 

Additional paid-in capital

 

 

139,275

 

 

133,087

 

Accumulated other comprehensive loss

 

 

(212)

 

 

(295)

 

Accumulated deficit

 

 

(106,004)

 

 

(99,844)

 

Total stockholders' equity

 

 

33,061

 

 

32,950

 

Total liabilities and stockholders’ equity

 

$

103,892

 

$

60,812

 


(1)

The condensed consolidated balance sheet as of December 31, 2017 was derived from the audited consolidated financial statements as of that date.

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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ADESTO TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Revenue, net

 

$

18,183

 

$

13,412

 

$

33,485

 

$

24,719

 

Cost of revenue

 

 

10,419

 

 

6,689

 

 

18,541

 

 

12,442

 

Gross profit

 

 

7,764

 

 

6,723

 

 

14,944

 

 

12,277

 

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

Research and development

 

 

4,421

 

 

3,675

 

 

8,086

 

 

7,047

 

Sales and marketing

 

 

3,615

 

 

2,911

 

 

6,367

 

 

5,511

 

General and administrative

 

 

3,641

 

 

1,673

 

 

5,354

 

 

3,808

 

Total operating expenses

 

 

11,677

 

 

8,259

 

 

19,807

 

 

16,366

 

Loss from operations

 

 

(3,913)

 

 

(1,536)

 

 

(4,863)

 

 

(4,089)

 

Other income (expense):

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest expense, net

 

 

(1,181)

 

 

(198)

 

 

(1,322)

 

 

(411)

 

Other income (expense), net

 

 

(1)

 

 

(4)

 

 

 9

 

 

14

 

Total other income (expense), net

 

 

(1,182)

 

 

(202)

 

 

(1,313)

 

 

(397)

 

Loss before provision for income taxes

 

 

(5,095)

 

 

(1,738)

 

 

(6,176)

 

 

(4,486)

 

Provision for (benefit from) income taxes

 

 

(37)

 

 

13

 

 

(16)

 

 

40

 

Net loss

 

$

(5,058)

 

$

(1,751)

 

$

(6,160)

 

$

(4,526)

 

Net loss per share:

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic and diluted

 

$

(0.24)

 

$

(0.11)

 

$

(0.29)

 

$

(0.28)

 

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

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic and diluted

 

 

21,475,913

 

 

16,343,248

 

 

21,423,710

 

 

15,994,703

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADESTO TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Net loss

 

$

(5,058)

 

$

(1,751)

 

$

(6,160)

 

$

(4,526)

 

Other comprehensive loss, net of tax:

 

 

 

 

 

  

 

 

 

 

 

  

 

Foreign currency translation adjustment

 

 

100

 

 

(29)

 

 

83

 

 

(51)

 

Comprehensive loss

 

$

(4,958)

 

$

(1,780)

 

$

(6,077)

 

$

(4,577)

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADESTO TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

    

2018

    

2017

    

Cash flows from operating activities:

 

 

  

 

 

  

 

Net loss

 

$

(6,160)

 

$

(4,526)

 

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

 

 

 

 

 

  

 

Stock-based compensation expense

 

 

1,163

 

 

1,806

 

Depreciation and amortization

 

 

1,062

 

 

644

 

Amortization of intangible assets

 

 

981

 

 

618

 

Amortization of debt discount

 

 

285

 

 

45

 

Deferred income taxes

 

 

(35)

 

 

 —

 

Gain on sale of equipment

 

 

(18)

 

 

 —

 

Changes in assets and liabilities:

 

 

 

 

 

  

 

Accounts receivable

 

 

(8,312)

 

 

(2,944)

 

Inventories

 

 

(5,634)

 

 

821

 

Prepaid expenses and other current assets

 

 

(109)

 

 

(35)

 

Other non-current assets

 

 

 —

 

 

(134)

 

Accounts payable

 

 

4,423

 

 

1,707

 

Accrued compensation and benefits

 

 

121

 

 

575

 

Accrued expenses and other current liabilities

 

 

2,388

 

 

(81)

 

Price adjustments and other revenue reserves

 

 

4,404

 

 

 —

 

Other non-current liabilities

 

 

(75)

 

 

 —

 

Deferred rent

 

 

(225)

 

 

(208)

 

Net cash used in operating activities

 

 

(5,741)

 

 

(1,712)

 

Cash flows from investing activities:

 

 

  

 

 

  

 

Acquisition of property and equipment

 

 

(2,104)

 

 

(1,659)

 

Acquisition of S3, net of cash acquired

 

 

(34,616)

 

 

 —

 

Investment in unconsolidated affiliate

 

 

(225)

 

 

 —

 

Net cash used in investing activities

 

 

(36,945)

 

 

(1,659)

 

Cash flows from financing activities:

 

 

  

 

 

  

 

Proceeds from public offering, net of underwriting discounts and commissions

 

 

 —

 

 

18,364

 

Proceeds from exercise of stock options and employee stock purchase plan

 

 

281

 

 

386

 

Tax withholdings related to net share settlement of restricted stock units

 

 

(55)

 

 

(62)

 

Proceeds from revolving line of credit

 

 

 —

 

 

21,457

 

Payments on revolving line of credit

 

 

(1,500)

 

 

(21,277)

 

Proceeds from term loan, net of fees

 

 

33,941

 

 

 —

 

Payments on term loan

 

 

(12,000)

 

 

(3,273)

 

Net cash provided by financing activities

 

 

20,667

 

 

15,595

 

Effect of exchange rates on cash and equivalents

 

 

(120)

 

 

(50)

 

Net increase (decrease) in cash and cash equivalents

 

 

(22,139)

 

 

12,174

 

Cash and cash equivalents - beginning of period

 

 

30,078

 

 

19,719

 

Cash and cash equivalents - end of period

 

$

7,939

 

$

31,893

 

Supplemental disclosures of other cash flow information:

 

 

  

 

 

  

 

Cash paid for interest expense

 

$

793

 

$

389

 

Supplemental disclosures of non-cash investing and financing information:

 

 

  

 

 

  

 

Purchase of property and equipment included in accounts payable

 

$

258

 

$

406

 

Fair value of warrants issued in connection with term loan

 

$

4,799

 

$

 —

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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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 consolidated 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 six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, for any other interim period or for any other future year.

The condensed consolidated balance sheet as of December 31, 2017 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, 2017, filed with the Securities and Exchange Commission on March 13, 2018.

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, 2017 that have had a material impact on our condensed consolidated financial statements and related notes, except as described below.

Recent Accounting Pronouncements.

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 applies to all entities that enter into share-based payment transactions for acquiring goods and services from nonemployees. The amendments in ASU 2018-07 expand the scope of Topic 718, Compensation - Stock Compensation, to include share-based payments transactions to nonemployees. Changes to the accounting for nonemployee awards as a result of ASU 2018-07 include: 1) equity-classified nonemployee share-based payment awards are measured at the grant date, instead of the previous requirement to remeasure the awards through the performance completion date, 2) for awards with performance conditions, compensation cost is recognized when the achievement of the performance condition is probable, rather than upon achievement, and 3) the current requirement to reassess the classification (equity or liability) for nonemployee awards upon vesting is eliminated. ASU 2018-07

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ADESTO TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

clarifies that Topic 718 does not apply to financing transactions or awards granted to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in ASU 2018-07 are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within that fiscal year. An entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which the measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company expects that the adoption will not have a material impact on its consolidated financial statements. 

In February 2018, FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company expects that the adoption will not have a material impact on its consolidated financial statements. 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, an entity should recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the effect of the adoption of this ASU, but anticipates that the adoption will not have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires instruments measured at amortized cost to be presented at the net amount expected to be collected. Entities are also required to record allowances for available-for-sale debt securities rather than reduce the carrying amount. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company expects that the adoption will not have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the effect that the adoption of this ASU will have on its consolidated financial statements. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as right-of-use assets and operating lease liabilities upon the adoption of ASU 2016-02, which will increase the total assets and total liabilities that it reports relative to such amounts prior to adoption.

Recently Adopted Accounting Pronouncements.

Adoption of ASC 606:

In May 2014, the FASB issued an ASU on revenue from contracts with customers, ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”). This standard update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The guidance is effective for annual reporting periods including interim reporting reports beginning after December 15, 2017. Collectively, we refer to Topic 606, its related amendments and Subtopic 340-40 as the “new standard”.

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ADESTO TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

On January 1, 2018, we adopted the new standard using the modified retrospective method applied to all contracts that are not completed contracts at the date of initial application (i.e., January 1, 2018). Results for reporting periods after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting. There was no impact on the opening accumulated deficit as of January 1, 2018 due to the adoption of the new standard. We reclassified the allowance for ship from stock and debits (“SSDs”), price protection, rights of return and other activities to current liabilities presented as "Price adjustments and other revenue reserves" from the allowance for accounts receivable due to the adoption of the new standard.

We recorded s cumulative effect adjustment to our January 1, 2018 condensed consolidated balance sheet for the impact of the reclassification of the allowance for SSDs, price protection, rights of return and other activities to current liabilities presented as “Price adjustments and other revenue reserves”. The cumulative effect of the changes made to our January 1, 2018 condensed consolidated balance sheet for the adoption of the new revenue standard were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Balance as of

    

Adjustments

    

Balance as of

 

 

 

December 31, 

 

 

Due to

 

 

January 1,

 

 

2017

 

ASC 606

 

2018

Accounts receivable, net

 

$

8,668

 

$

3,832

 

$

12,500

Price adjustments and other revenue reserves

 

$

 —

 

$

(3,832)

 

$

(3,832)

In accordance with the new standard requirements, the disclosure of the impact of adoption on select condensed consolidated balance sheet line items was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

As of June 30, 2018

 

 

 

As

 

 

Balances without

 

 

Effect of

 

 

Reported

 

ASC 606

 

Change

Accounts receivable, net

 

$

17,172

 

$

12,768

 

$

(4,404)

Price adjustments and other revenue reserves

 

$

4,404

 

$

 —

 

$

4,404

 

Revenue Recognition.

 Revenue is recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Sales of products with alternative use account for the majority of our revenue and are recognized at a point in time, the timing of such recognition remained the same under Topic 606.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer and deposited with the relevant government authority, are excluded from revenue. Our revenue arrangements do not contain significant financing components.

Revenue is recognized over a period of time when it is assessed that performance obligations are satisfied over a period rather than at a point in time. When any of the following criteria is fulfilled, revenue is recognized over a period of time:

 

 

(a)

The customer simultaneously receives and consumes the benefits provided by the performance as Adesto performs.

 

 

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ADESTO TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

(b)

Adesto’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced.

 

 

(c)

Adesto’s performance does not create an asset with an alternative use, and Adesto has an enforceable right to payment for performance completed to date.

 

If revenue is recognized over a period of time, we would then select an appropriate method for measuring progress toward complete satisfaction of the performance obligation, usually costs incurred to date relative to the total expected costs to the satisfaction of that performance obligation. Typically, our revenue is recognized at a point in time.

Sales to certain distributors are made under arrangements which provide the distributors with price adjustments, price protection, stock rotation and other allowances under certain circumstances. These adjustments and allowances are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized. We believe that there will not be significant changes to our estimates of variable consideration.

If a customer pays consideration, or Adesto has a right to an amount of consideration that is unconditional before we transfer a good or service to the customer, those amounts are classified as deferred income/ advances received from customers which are included in other current liabilities or other long-term liabilities when the payment is made or it is due, whichever is earlier.

If the arrangement includes variable contingent consideration, we recognize revenue over time if we can reasonably measure its progress, or we are capable of providing reliable information that would be required to apply an appropriate method of measuring progress. To date, we have not had any arrangements incorporating contingent consideration.

Practical Expedients and Elections

 

Sales commissions are owed and are recorded at the time of sell through of our products to end customers. These costs are recorded within sales and marketing expenses.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods. These costs are recorded in cost of revenue.

Reclassifications.

Certain reclassifications have been made to prior periods’ condensed consolidated financial statements to conform to the current period presentation. These reclassifications did not result in any change in previously reported total assets, stockholders’ equity or net loss.

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

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ADESTO TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

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, price adjustments and other revenue reserves, 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 market-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.

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. During the years ended December 31, 2017 and 2016, $185,000 and $41,000, respectively, has been incurred relating to this potential warranty claim and during the year ended December 31, 2017 we recorded $27,000 for an additional potential warranty claim. As of June 30, 2018 and December 31, 2017, the warranty accrual was $51,000 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 gains and losses from foreign currency translation of assets and liabilities were a gain of $100,000 and a loss of $29,000 for the three months ended June 30, 2018 and 2017, respectively, and a gain of $83,000 and a loss of $51,000 for the six months ended June 30, 2018 and 2017, respectively, and are included in the cumulative translation adjustment component of accumulated other comprehensive loss, net of tax, a component of stockholders’ equity. Net gains and losses arising from transactions denominated in currencies other than the functional currency were losses of $2,000 and $5,000 for the three months ended June 30, 2018 and 2017, respectively, and a loss of $10,000 and a gain of $8,000 for the six months ended June 30, 2018 and 2017, respectively, and are included in other expense, net in the condensed consolidated statements of operations.

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.

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ADESTO TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

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, 2018 and December 31, 2017.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

June 30, 

 

 

June 30, 

 

 

 

    

2018

    

2017

    

 

2018

    

2017

 

    

Customer A

 

26

%  

18

%  

 

22

%  

18

%  

 

Customer B

 

*

 

10

%  

 

*

 

10

%  

 


*less than 10%

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

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

    

 

 

2018

 

2017

 

 

Customer A

 

29

%  

31

%  

 


*less than 10%

 

Note 2. Acquisition.

On May 9, 2018, we acquired 100% of the issued capital of S3 Asic Semiconductors Limited, a private company limited by shares and incorporated in Ireland (“S3”), pursuant to the Share Purchase Agreement dated May 9, 2018 (the “Agreement”). S3 is headquartered in Ireland and its subsidiaries are in the United States, Portugal and the Czech Republic. S3 and its subsidiaries are engaged in the business of providing advanced mixed signal semiconductor devices and intellectual property to customers in the industrial and communications markets. The aggregate consideration was approximately $35.0 million in cash and contingent consideration in the form of a $15.0 million earn-out. The earn-out is based on achievement of certain milestones through 2019, including minimum total revenue targets, revenue derived from sales of semiconductor devices and new customer engagements with minimum value thresholds. 

 

The assets and liabilities of S3 were recorded in our condensed consolidated balance sheet as of the acquisition date, at their respective fair values. Fair value is estimated based on one or a combination of income, cost and/or market approaches, as determined based on the nature of the asset or liability, and the level of inputs available. With respect to assets and liabilities, the determination of fair value requires management to make subjective judgments as to projections of future operating performance, the appropriate discount rate to apply, long-term growth rates, etc., which affect the amounts recorded in the purchase price allocation. The excess of the consideration transferred over the fair value of the identifiable assets, net of liabilities, is recorded as goodwill, which is indicative of the expected continued growth and development of S3. The purchase price allocation that follows is based on these estimated fair values of assets acquired and liabilities assumed. We will continue to evaluate certain assets, liabilities and tax estimates that are subject to change within the measurement period (up to one year from the acquisition date).

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ADESTO TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

The following table summarizes the fair values of assets acquired and liabilities assumed (in thousands):

 

 

 

 

Cash

 

$

267

Accounts receivable

 

 

192

Other current assets

 

 

883

Property and equipment, net

 

 

191

Intangible assets

 

 

15,340

Goodwill

 

 

34,352

Accounts payable

 

 

(37)

Deferred revenue

 

 

(129)

Earn-out liability, current

 

 

(10,218)

Other current liabilities

 

 

(761)

Deferred tax liability

 

 

(1,918)

Earn-out liability, non-current

 

 

(3,279)

Fair value of net assets acquired

 

$

34,883

 

Intangible assets reflect the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

Fair Value

    

Useful
Life (in Years)

Customer relationships

 

$

12,880

 

7

Contract backlog

 

 

210

 

0.5

Developed technology

 

 

1,080

 

5

Non-compete agreements

 

 

380

 

2

Trademarks

 

 

790

 

12

Total

 

$

15,340

 

 

 

 

 

Note 3. Balance Sheet Components.

Accounts Receivable, Net.

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

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2018

 

2017

Accounts receivable

 

$

17,172

 

$

12,500

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

 

 

 —

 

 

(3,832)

Total accounts receivable, net

 

$

17,172

 

$

8,668

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ADESTO TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

As of June 30, 2018 we have no allowance for doubtful accounts on any of our accounts receivable.

 

Inventories.

Inventories consisted of the following (in thousands):

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2018

 

2017

Raw materials

 

$

1,383

 

$

2,213

Work-in-process

 

 

7,063

 

 

2,408

Finished goods

 

 

3,002

 

 

1,193

Total inventories

 

$

11,448

 

$

5,814

 

For the three months ended June 30, 2018 and 2017, we realized a benefit of $0.4 million and $0.2 million, respectively, from the sales of previously reserved products.

For the six months ended June 30, 2018 and 2017, we realized a benefit of $0.8 million and $0.6 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 Conductive Bridging Random Access Memory (“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, 

 

 

2018

 

2017

Machinery and equipment

 

$

10,900

 

$

9,457

Leasehold improvements

 

 

4,252

 

 

4,252

Computer software

 

 

675

 

 

675

TowerJazz license

 

 

350

 

 

350

Furniture and fixtures

 

 

192

 

 

83

Construction in progress

 

 

1,301

 

 

1,301

Property and equipment, at cost

 

 

17,670

 

 

16,118

Accumulated depreciation and amortization

 

 

(9,434)

 

 

(8,935)

Property and equipment, net

 

$

8,236

 

$

7,183

 

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, 2018 was $0.6 million and $1.1 million, respectively.

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ADESTO TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

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

Accrued Expenses and Other Current Liabilities.

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

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2018

 

2017

Accrued sales commission payable

 

$

291

 

$

310

Accrued manufacturing expenses

 

 

956

 

 

265

Deferred rent, current portion

 

 

439

 

 

422

Liabilities to certain customers

 

 

818

 

 

468

Accrued professional services

 

 

1,029

 

 

94

Other accrued liabilities

 

 

2,004

 

 

800

Total accrued expenses and other current liabilities

 

$

5,537

 

$

2,359

 

 

Note 4. 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.

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ADESTO TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement at Reporting Date Using

 

    

 

 

    

Significant

    

 

 

    

 

 

 

 

Quoted Prices in

 

Other

 

Significant

 

 

 

 

 

Active Markets

 

Observable

 

Unobservable

 

 

 

 

 

for Identical

 

Inputs

 

Inputs

 

 

 

 

 

Assets (Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

 

(in thousands)

As of June 30, 2018

 

 

  

 

 

  

 

 

  

 

 

  

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

5,523

 

$

 —

 

$

 —

 

$

5,523

 

 

 

  

 

 

  

 

 

  

 

 

  

As of December 31, 2017

 

 

  

 

 

  

 

 

  

 

 

  

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

11,501

 

$

 —

 

$

 —

 

$

11,501

 

As of June 30, 2018 and December 31, 2017, we had no financial liabilities measured at fair value on a recurring basis.

 

Note 5. 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.

In connection with the acquisition of S3 (Note 2), we recorded $15.3 million of intangible assets.

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ADESTO TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

    

Estimated Useful
Life (in Years)

Gross Carrying
Amount

    

Accumulated
Amortization

    

Net Carrying
 Amount

Developed technology

 

10

 

$

4,282

 

$

2,463

 

$

1,819

Developed technology

 

5

 

 

1,080

 

 

31

 

 

1,049

Customer relationships

 

12

 

 

9,011

 

 

4,318

 

 

4,693

Customer relationships

 

7

 

 

12,880

 

 

264

 

 

12,616

Customer backlog

 

1

 

 

2,779

 

 

2,779

 

 

 —

Contract backlog

 

0.5

 

 

210

 

 

60

 

 

150

Non-compete agreement

 

5

 

 

282

 

 

282

 

 

 —

Non-compete agreement

 

2

 

 

380

 

 

27

 

 

353

Trademarks

 

12

 

 

790

 

 

 9

 

 

781

Total intangible assets subject to amortization

 

 

 

$

31,694

 

$

10,233

 

$

21,461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Estimated Useful
Life (in Years)

 

Gross Carrying
Amount

    

Accumulated
Amortization

    

Net Carrying
 Amount

Developed technology

 

10

 

$

4,282

 

$

2,249

 

$

2,033

Customer relationships

 

12

 

 

9,011

 

 

3,942

 

 

5,069

Customer backlog

 

1

 

 

2,779

 

 

2,779

 

 

 —

Non-compete agreement

 

5

 

 

282

 

 

282

 

 

 —

Total intangible assets subject to amortization

 

 

 

$

16,354

 

$

9,252

 

$

7,102

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Operating expense category:

 

 

  

 

 

  

 

 

  

 

 

  

 

Research and development

 

$

138

 

$

121

 

$

244

 

$

243

 

Sales and marketing

 

 

521

 

 

188

 

 

709

 

 

375

 

General and administrative

 

 

28

 

 

 —

 

 

28

 

 

 —

 

Total

 

$

687

 

$

309

 

$

981

 

$

618

 

 

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ADESTO TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

The estimated future amortization expense of acquisition-related intangible assets subject to amortization after June 30, 2018 is as follows (in thousands):

 

 

 

 

 

Year Ended December 31, 

    

  

 

 

2018 (remaining 6 months)

 

$

1,895

 

2019

 

 

3,491

 

2020

 

 

3,368

 

2021

 

 

3,301

 

2022

 

 

3,194

 

Thereafter

 

 

6,212

 

Total

 

$

21,461

 

 

 

 

Note 6. Investment in Unconsolidated Affiliates.

During 2017 and 2016, we made investments in Semitech Semiconductor Pty. Ltd., an Australian corporation (“Semitech”), as part of a license and development agreement dated April 16, 2016. Semitech has developed Narrowband-Power Line Communications (“N-PLC”) products and market knowledge in the N-PLC devices space and plans to sell its products into the smart grid, solar, smart lighting and industrial space. Investments during 2016 through June 14, 2017 were recorded as notes receivable. On June 15, 2017, $0.4 million of notes receivable and accrued interest were converted into 233,335 shares of preferred stock in Semitech. In June 2018, we converted $0.5 million of notes receivable and accrued interest into 312,076 shares of preferred stock in Semitech. This investment is recorded at cost in other non-current assets on the condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017. As of June 30, 2018, we no longer held any investments in notes receivable in Semitech. As of December 31, 2017, we held $0.2 million of notes receivable which were classified in other non-current assets on the condensed consolidated balance sheets.

Note 7. Borrowings.

Western Alliance Bank Term Loan.

The Company was a party to that certain Business Financing Agreement dated July 7, 2016 and that certain Second Business Financing Modification Agreement, dated September 29, 2017, by and between Western Alliance Bank and the Company (“Credit Facility”). The Credit Facility 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) $5.0 million and (y) 80% of certain of the Company’s receivables. The Term Loan bore interest at a rate per annum equal to the greater of the prime rate or 3.5%, plus 0.75% and was scheduled to mature in June 2019.  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%), and was scheduled to mature in July 2018. 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. Additional fees of $25,000 were incurred in connection with the amendment. These fees were recorded as a debt discount and were amortized over the life of the agreement.

Borrowings of $12.0 million under this facility were repaid in full in May 2018. In connection with the repayment of this facility, the remaining unamortized debt discount of $66,000 was recorded as interest expense in the condensed consolidated statements of operations.   

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