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 March 31, 2019

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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   ☐

 

 

 

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 April 30, 2019

 

Common Stock, $0.0001 par value per share

 

29,720,036 shares

 

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock

IOTS

The NASDAQ Stock Market

 

 

 

 


 

Table of Contents

ADESTO TECHNOLOGIES CORPORATION

QUARTERLY REPORT ON FORM 10‑Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

INDEX

 

PART I FINANCIAL INFORMATION

 

Item 1. 

Condensed Consolidated Financial Statements (unaudited)

3

 

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

3

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018

4

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2019 and 2018

5

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018

6

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

7

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

Item 2. 

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

34

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4. 

Controls and Procedures

43

 

PART II OTHER INFORMATION

 

Item 1. 

Legal Proceedings

43

Item 1A. 

Risk Factors

44

Item 1B. 

Unresolved Staff Comments

64

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

64

Item 3. 

Defaults Upon Senior Securities

65

Item 4. 

Mine Safety Disclosures

65

Item 5. 

Other Information

65

Item 6. 

Exhibits

65

Signatures 

 

66

 

 

 

 


 

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)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31,

 

 

 

2019

 

2018

 

Assets

 

 

  

 

 

  

 

Current assets:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

7,645

 

$

8,630

 

Restricted cash

 

 

459

 

 

458

 

Accounts receivable, net

 

 

23,220

 

 

23,211

 

Inventories

 

 

16,643

 

 

18,635

 

Prepaid expenses

 

 

1,952

 

 

1,668

 

Other current assets

 

 

888

 

 

871

 

Total current assets

 

 

50,807

 

 

53,473

 

Property and equipment, net

 

 

6,873

 

 

7,085

 

Intangible assets, net

 

 

34,473

 

 

36,261

 

Operating lease right-of-use assets

 

 

4,730

 

 

 —

 

Other non-current assets

 

 

1,704

 

 

1,729

 

Goodwill

 

 

38,640

 

 

38,640

 

Total assets

 

$

137,227

 

$

137,188

 

Liabilities and Stockholders' Equity

 

 

  

 

 

  

 

Current liabilities:

 

 

  

 

 

  

 

Accounts payable

 

$

16,856

 

$

16,146

 

Accrued compensation and benefits

 

 

4,095

 

 

4,038

 

Accrued expenses and other current liabilities

 

 

5,471

 

 

5,172

 

Price adjustments and other revenue reserves

 

 

4,820

 

 

4,819

 

Earn-out liability, current

 

 

10,130

 

 

10,450

 

Operating lease liabilities, current

 

 

1,099

 

 

 —

 

Term loan, current

 

 

161

 

 

141

 

Total current liabilities

 

 

42,632

 

 

40,766

 

Term loan, non-current

 

 

29,362

 

 

29,418

 

Operating lease liabilities, non-current

 

 

5,620

 

 

 —

 

Deferred rent, non-current

 

 

 —

 

 

1,947

 

Deferred tax liability, non-current

 

 

1,660

 

 

1,735

 

Other non-current liabilities

 

 

591

 

 

580

 

Total liabilities

 

 

79,865

 

 

74,446

 

Commitments and contingencies (See Note 9)

 

 

  

 

 

  

 

Stockholders' equity:

 

 

  

 

 

  

 

Preferred stock, $0.0001 par value, 5,000,000 shares authorized as of March 31, 2019 and December 31, 2018; no shares issued and outstanding as of March 31, 2019 and December 31, 2018

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value, 100,000,000 shares authorized; 29,648,587 and 29,442,065 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

 

 

 3

 

 

 3

 

Additional paid-in capital

 

 

185,718

 

 

184,158

 

Accumulated other comprehensive loss

 

 

(263)

 

 

(135)

 

Accumulated deficit

 

 

(128,096)

 

 

(121,284)

 

Total stockholders' equity

 

 

57,362

 

 

62,742

 

Total liabilities and stockholders’ equity

 

$

137,227

 

$

137,188

 


(1)

The condensed consolidated balance sheet as of December 31, 2018 was derived from the audited consolidated financial statements as of that date.

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

Revenue, net

 

$

28,113

 

$

15,302

 

Cost of revenue

 

 

14,893

 

 

8,122

 

Gross profit

 

 

13,220

 

 

7,180

 

Operating expenses:

 

 

  

 

 

  

 

Research and development

 

 

7,522

 

 

3,559

 

Selling, general and administrative

 

 

7,935

 

 

4,277

 

Amortization of intangible assets

 

 

1,788

 

 

294

 

Acquisition related expenses

 

 

222

 

 

 —

 

Restructuring and other charges

 

 

1,694

 

 

 —

 

Total operating expenses

 

 

19,161

 

 

8,130

 

Loss from operations

 

 

(5,941)

 

 

(950)

 

Other income (expense):

 

 

  

 

 

  

 

Interest expense, net

 

 

(1,370)

 

 

(141)

 

Other income (expense), net

 

 

220

 

 

10

 

Total other income (expense), net

 

 

(1,150)

 

 

(131)

 

Loss before provision for (benefit from) income taxes

 

 

(7,091)

 

 

(1,081)

 

Provision for (benefit from) income taxes

 

 

(31)

 

 

21

 

Net loss

 

$

(7,060)

 

$

(1,102)

 

Net loss per share:

 

 

  

 

 

  

 

Basic and diluted

 

$

(0.24)

 

$

(0.05)

 

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

 

 

  

 

 

  

 

Basic and diluted

 

 

29,592,247

 

 

21,370,927

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4


 

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ADESTO TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

Net loss

 

$

(7,060)

 

$

(1,102)

 

Other comprehensive loss, net of tax:

 

 

 

 

 

  

 

Foreign currency translation adjustment

 

 

(128)

 

 

(17)

 

Comprehensive loss

 

$

(7,188)

 

$

(1,119)

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

5


 

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ADESTO TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Accumulated

 

Stockholders’

 

  

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Equity

Balances as of January 1, 2019

 

29,442,065

 

$

 3

 

$

184,158

 

$

(135)

 

$

(121,284)

 

$

62,742

ASC 842 adoption adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

248

 

 

248

Options exercised

 

9,712

 

 

 —

 

 

26

 

 

 —

 

 

 —

 

 

26

Employee stock purchase plan

 

129,815

 

 

 —

 

 

544

 

 

 —

 

 

 —

 

 

544

Restricted stock units, net of taxes paid related to net settlement of equity awards

 

66,995

 

 

 —

 

 

(85)

 

 

 —

 

 

 —

 

 

(85)

Stock-based compensation

 

 —

 

 

 —

 

 

1,075

 

 

 —

 

 

 —

 

 

1,075

Foreign currency translation adjustments

 

 —

 

 

 —

 

 

 —

 

 

(128)

 

 

 —

 

 

(128)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7,060)

 

 

(7,060)

Balances as of  March 31, 2019

 

29,648,587

 

$

 3

 

$

185,718

 

$

(263)

 

$

(128,096)

 

$

57,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Accumulated

 

Stockholders’

 

  

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Equity

Balances as of January 1, 2018

 

21,291,833

 

$

 2

 

$

133,087

 

$

(295)

 

$

(99,844)

 

$

32,950

Options exercised

 

47,405

 

 

 —

 

 

106

 

 

 —

 

 

 —

 

 

106

Employee stock purchase plan

 

55,806

 

 

 —

 

 

223

 

 

 —

 

 

 —

 

 

223

Restricted stock units, net of taxes paid related to net settlement of equity awards

 

14,248

 

 

 —

 

 

(55)

 

 

 —

 

 

 —

 

 

(55)

Stock-based compensation

 

 —

 

 

 —

 

 

443

 

 

 —

 

 

 —

 

 

443

Foreign currency translation adjustments

 

 —

 

 

 —

 

 

 —

 

 

(17)

 

 

 —

 

 

(17)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,102)

 

 

(1,102)

Balances as of  March 31, 2018

 

21,409,292

 

$

 2

 

$

133,804

 

$

(312)

 

$

(100,946)

 

$

32,548

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

Cash flows from operating activities:

 

 

  

 

 

  

 

Net loss

 

$

(7,060)

 

$

(1,102)

 

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

 

 

 

 

 

  

 

Stock-based compensation expense

 

 

1,075

 

 

443

 

Depreciation and amortization

 

 

646

 

 

488

 

Amortization of intangible assets

 

 

1,788

 

 

294

 

Amortization of debt discount

 

 

401

 

 

19

 

Deferred income taxes

 

 

(75)

 

 

 1

 

Gain on sale of equipment

 

 

 —

 

 

(18)

 

Decrease in fair value of earn-out liability

 

 

(320)

 

 

 —

 

Changes in assets and liabilities:

 

 

 

 

 

  

 

Accounts receivable

 

 

(9)

 

 

(3,520)

 

Inventories

 

 

1,992

 

 

(1,740)

 

Prepaid expenses and other current assets

 

 

(301)

 

 

(163)

 

Other non-current assets

 

 

176

 

 

(129)

 

Accounts payable

 

 

545

 

 

125

 

Accrued compensation and benefits

 

 

57

 

 

205

 

Accrued expenses and other current liabilities

 

 

756

 

 

147

 

Price adjustments and other revenue reserves

 

 

 1

 

 

4,545

 

Other non-current liabilities

 

 

(303)

 

 

 —

 

Deferred rent

 

 

 —

 

 

(110)

 

Net cash used in operating activities

 

 

(631)

 

 

(515)

 

Cash flows from investing activities:

 

 

  

 

 

  

 

Acquisition of property and equipment

 

 

(600)

 

 

(293)

 

Investment in unconsolidated affiliate

 

 

(4)

 

 

 —

 

Net cash used in investing activities

 

 

(604)

 

 

(293)

 

Cash flows from financing activities:

 

 

  

 

 

  

 

Proceeds from exercise of stock options and employee stock purchase plan

 

 

570

 

 

329

 

Tax withholdings related to net share settlement of restricted stock units

 

 

(85)

 

 

(55)

 

Proceeds from revolving line of credit

 

 

 —

 

 

1,500

 

Payments on revolving line of credit

 

 

 —

 

 

(1,500)

 

Payments on term loan

 

 

(437)

 

 

 —

 

Net cash provided by financing activities

 

 

48

 

 

274

 

Effect of exchange rates on cash, cash equivalents and restricted cash

 

 

203

 

 

 2

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(984)

 

 

(532)

 

Cash, cash equivalents and restricted cash - beginning of year

 

 

9,088

 

 

30,078

 

Cash, cash equivalents and restricted cash - end of year

 

$

8,104

 

$

29,546

 

Supplemental disclosures of other cash flow information:

 

 

  

 

 

  

 

Cash paid for interest expense

 

$

981

 

$

137

 

Supplemental disclosures of non-cash investing and financing information:

 

 

  

 

 

  

 

Purchase of property and equipment included in accounts payable

 

$

165

 

$

1,065

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

7


 

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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 innovative, application-specific semiconductor and systems for the Internet of Things era. Our corporate headquarters are located in Santa Clara, California.

On May 9, 2018 we acquired 100% of the issued capital of S3 Asic Semiconductors Limited and on September 14, 2018 we acquired 100% of the issued capital of Echelon Corporation. Our financial results include the operating results of those entities 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 three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, for any other interim period or for any other future year.

The condensed consolidated balance sheet as of December 31, 2018 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, 2018, filed with the Securities and Exchange Commission on March 18, 2019.

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, 2018 that have had a material impact on our condensed consolidated financial statements and related notes, except as described below.

Recent Accounting Pronouncements.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. As part of the FASB's disclosure framework project, it has eliminated, amended and added disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, the policy of timing of transfers between levels of the fair value hierarchy and the valuation processes for Level 3 fair value measurements. Public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU is effective for public entities for annual and interim periods beginning after December

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

 

15, 2019. Early adoption is permitted as of the beginning of any interim or annual reporting period. This ASU will have an impact on the Company's disclosures.

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.

Recently Adopted Accounting Pronouncements.

Adoption of ASC 842:

 

We adopted ASU No. 2016-02, Leases (“Topic 842”), as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at the beginning of the period of adoption. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification and we elected the hindsight practical expedient to determine the lease term for existing leases. We determined that most renewal options would not be reasonably certain in determining the expected lease term. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Adoption of the new standard resulted in the recording of right of use assets of $4.9 million and lease liabilities of $7.0 million, as of January 1, 2019. The standard did not have an impact on our consolidated results of operations or cash flows.

The effect of the changes made to our consolidated January 1, 2019 balance sheet for the adoption of the new lease standard was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Balance as of

    

Adjustments

    

Balance as of

 

 

 

December 31, 

 

 

Due to

 

 

January 1,

 

 

2018

 

ASC 842

 

2019

Operating lease right-of-use assets

 

$

 —

 

$

4,877

 

$

4,877

Total assets

 

$

137,188

 

$

4,877

 

$

142,065

Operating lease liabilities, current

 

$

 —

 

$

1,116

 

$

1,116

Operating lease liabilities, non-current

 

$

 —

 

$

5,917

 

$

5,917

Deferred rent

 

$

2,404

 

 

(2,404)

 

 

 —

Total liabilities

 

$

74,446

 

$

4,629

 

$

79,075

Accumulated deficit

 

$

(121,284)

 

$

248

 

$

(121,036)

Total stockholders' equity

 

$

62,742

 

$

248

 

$

62,990

Total liabilities and stockholders' equity

 

$

137,188

 

$

4,877

 

$

142,065

9


 

Table of Contents

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

 

 

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.

 

 

(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.

Sales commissions are owed and are recorded at the time of sell through of our products to end customers. These costs are recorded within selling, general and administrative expenses.

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

 

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.

Timing of Revenue Recognition.

 

 

 

 

 

 

2018

 

 

(in thousands)

Products transferred at a point in time

 

$

24,135

Products and services transferred over time

 

 

3,978

 

 

$

28,113

 

The following table reflects the changes in our contract assets, which we classify as accounts receivable, unbilled and our contract liabilities which we classify as deferred revenue:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

 

    

2019

    

2018

 

Change

 

 

(in thousands)

Contract assets:

 

 

 

 

 

 

 

 

 

Accounts receivable, unbilled

 

$

889

 

$

751

 

$

138

Contract liabilities:

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

1,668

 

$

1,848

 

$

(180)

 

Accounts receivable, unbilled represents revenue recognized on certain development contracts for which invoicing has not yet occurred based on the terms of the development contract. As of March 31, 2019 and December 31, 2018, we had $0.9 million and $0.8 million, respectively, classified as unbilled accounts receivable.

Deferred revenue represents amounts invoiced to customers for certain development contracts for which revenue has yet to be recognized based on actual development hours performed. Typically the timing of invoicing is based on the terms of the contract. As of March 31, 2019 and December 31, 2018, we had $1.7 million and $1.8 million, respectively, of deferred revenue classified as accrued expenses and other liabilities.

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 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

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

 

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 non-volatile memory (“NVM”) 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 2018 and the three months ended March 31, 2019, we did not record any additional liability related to potential warranty claims. As of March 31, 2019 and December 31, 2018, the warranty accrual related to NVM products was $51,000 and is included in accrued expenses and other current liabilities on the condensed consolidated balance sheets.

At the time of the Echelon acquisition we recorded a warranty liability of $401,000 related to Echelon products. During 2018 and the three months ended March 31, 2019, we recorded additional warranty expense of $53,000 and $9,000, respectively. As of March 31, 2019 and December 31, 2018, the warranty accrual related to Echelon products was $463,000 and $454,000, 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 $128,000 and $17,000 for the three months ended March 31, 2019 and 2018, 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 a loss of $97,000 and $8,000 for the three months ended March 31, 2019 and 2018, respectively, and are included in other income (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, investments and accounts receivables. We place substantially all of our cash and cash equivalents and investments 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 and investments 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

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Table of Contents

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

 

to pay. The allowance for doubtful accounts as of March 31, 2019 and December 31, 2018 was $60,000 and $30,000, respectively.

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31, 

 

 

 

    

 

2019

    

2018

 

    

Customer A

 

 

26

%  

18

%  

 


 

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

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

    

 

 

2019

 

2018

 

 

Customer A

 

32

%  

13

%  

 


 

Note 2. Acquisitions.

Echelon Corporation

On September 14, 2018, we acquired 100% of the issued capital of Echelon Corporation, a Delaware corporation (“Echelon”), pursuant to the terms of an Agreement and Plan of Merger (the “Merger Agreement”) dated as of June 28, 2018. The purchase price was approximately $44.1 million paid in cash.

The assets and liabilities of Echelon 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, and other factors, 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 Echelon. 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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Table of Contents

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

 

$

15,270

Short term investments

 

 

1,274

Accounts receivable

 

 

3,020

Inventories

 

 

5,710

Other current assets

 

 

2,845

Property and equipment, net

 

 

614

Intangible assets

 

 

17,690

Goodwill

 

 

4,266

Other non-current assets

 

 

252

Accounts payable

 

 

(3,630)

Other current liabilities

 

 

(2,642)

Other non-current liabilities

 

 

(563)

Fair value net assets acquired

 

$

44,106

 

Intangible assets reflect the following:

 

 

 

 

 

 

 

 

    

 

Fair Value

    

Useful
Life (in Years)

Customer relationships

 

$

6,520

 

7

Developed technology

 

 

10,670

 

4

Trademarks

 

 

500

 

8

Total acquired intangible assets

 

$

17,690

 

 

 

 

S3 Asic Semiconductors Limited

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, and other factors, 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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Table of Contents

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

 

 

 

 

 

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Table of Contents

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

 

Note 3. Balance Sheet Components.

Accounts Receivable, Net.

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

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2019

 

2018

Accounts receivable

 

$

22,391

 

$

22,490

Accounts receivable, unbilled

 

 

889

 

 

751

Allowance for doubtful accounts

 

 

(60)

 

 

(30)

Total accounts receivable, net

 

$

23,220

 

$

23,211

 

Inventories.

Inventories consisted of the following (in thousands):

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2019

 

2018

Raw materials

 

$

1,414

 

$

1,427

Work-in-process

 

 

9,518

 

 

11,451

Finished goods

 

 

5,711

 

 

5,757

Total inventories

 

$

16,643

 

$

18,635

 

For the three months ended March 31, 2019, we recorded a write-down of $0.3 million related to excess inventory. For the three months ended March 31, 2018, we realized a benefit of $0.4 million from the sales of previously reserved products.

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

Property and Equipment, Net.

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

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2019

 

2018

Machinery and equipment

 

$

15,537

 

$

15,537

Leasehold improvements

 

 

4,418

 

 

4,422

Computer software

 

 

3,799

 

 

3,760

Furniture and fixtures

 

 

362

 

 

372

Construction in progress

 

 

337

 

 

52

Property and equipment, at cost

 

 

24,453

 

 

24,143

Accumulated depreciation and amortization

 

 

(17,580)

 

 

(17,058)

Property and equipment, net

 

$

6,873

 

$

7,085

 

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

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Table of Contents

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

 

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 months ended March 31, 2019 and 2018 was $0.6 million and $0.5 million, respectively.

Accrued Expenses and Other Current Liabilities.

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

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2019

 

2018

Accrued sales commission payable

 

$

281

 

$

387

Accrued manufacturing expenses

 

 

428

 

 

692

Liabilities to certain customers

 

 

 —

 

 

366

Warranty reserve

 

 

514

 

 

505

Lighting disposal liabilities

 

 

1,392

 

 

 —

Deferred revenue, current portion

 

 

1,668

 

 

1,848

Other accrued liabilities

 

 

1,188

 

 

1,374

Total accrued expenses and other current liabilities

 

$

5,471

 

$

5,172

 

 

 

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Table of Contents

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

 

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.

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)