10-Q 1 iots-20180930x10q.htm 10-Q iots_Current_Folio_10Q

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549


FORM 10‑Q


(Mark One)

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

For the quarterly period ended September 30, 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 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 October 26, 2018

 

Common Stock, $0.0001 par value per share

 

29,434,142 shares

 

 

 

 


 

 

 

 


 

ADESTO TECHNOLOGIES CORPORATION

QUARTERLY REPORT ON FORM 10‑Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

INDEX

 

PART I FINANCIAL INFORMATION

 

Item 1. 

Condensed Consolidated Financial Statements (unaudited)

4

 

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

4

 

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

5

 

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

6

 

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

7

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

Item 2. 

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

33

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4. 

Controls and Procedures

43

 

PART II OTHER INFORMATION

 

Item 1. 

Legal Proceedings

44

Item 1A. 

Risk Factors

44

Item 1B. 

Unresolved Staff Comments

63

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

63

Item 3. 

Defaults Upon Senior Securities

64

Item 4. 

Mine Safety Disclosures

64

Item 5. 

Other Information

64

Item 6. 

Exhibits

64

Signatures 

 

65

 

 

 

 


 

PART I: FINANCIAL INFORMATION

Item 1.Financial Statements

ADESTO TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31,

 

 

 

2018

 

2017

 

 

 

(unaudited)

 

(1)

 

Assets

 

 

  

 

 

  

 

Current assets:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

13,273

 

$

30,078

 

Short-term investments

 

 

1,275

 

 

 —

 

Accounts receivable, net

 

 

24,706

 

 

8,668

 

Inventories

 

 

17,541

 

 

5,814

 

Prepaid expenses

 

 

1,853

 

 

993

 

Other current assets

 

 

1,971

 

 

52

 

Total current assets

 

 

60,619

 

 

45,605

 

Property and equipment, net

 

 

8,729

 

 

7,183

 

Intangible assets, net

 

 

38,013

 

 

7,102

 

Other non-current assets

 

 

1,594

 

 

900

 

Goodwill

 

 

38,640

 

 

22

 

Total assets

 

$

147,595

 

$

60,812

 

Liabilities and Stockholders' Equity

 

 

  

 

 

  

 

Current liabilities:

 

 

  

 

 

  

 

Accounts payable

 

$

16,316

 

$

7,075

 

Accrued compensation and benefits

 

 

3,701

 

 

2,614

 

Accrued expenses and other current liabilities

 

 

6,969

 

 

2,359

 

Price adjustments and other revenue reserves

 

 

5,202

 

 

 —

 

Earn-out liability, current

 

 

9,997

 

 

 —

 

Line of credit, current

 

 

 —

 

 

1,500

 

Term loan, current

 

 

 —

 

 

926

 

Total current liabilities

 

 

42,185

 

 

14,474

 

Term loan, non-current

 

 

29,433

 

 

10,908

 

Other non-current liabilities

 

 

3,788

 

 

75

 

Deferred rent, non-current

 

 

2,063

 

 

2,404

 

Deferred tax liability, non-current

 

 

1,797

 

 

 1

 

Total liabilities

 

 

79,266

 

 

27,862

 

Commitments and contingencies (See Note 9)

 

 

  

 

 

  

 

Stockholders' equity:

 

 

  

 

 

  

 

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

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value, 100,000,000 shares authorized; 29,367,787 and 21,291,833 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

 3

 

 

 2

 

Additional paid-in capital

 

 

183,087

 

 

133,087

 

Accumulated other comprehensive loss

 

 

(360)

 

 

(295)

 

Accumulated deficit

 

 

(114,401)

 

 

(99,844)

 

Total stockholders' equity

 

 

68,329

 

 

32,950

 

Total liabilities and stockholders’ equity

 

$

147,595

 

$

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.

 

4


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Revenue, net

 

$

21,927

 

$

15,239

 

$

55,412

 

$

39,958

 

Cost of revenue

 

 

12,344

 

 

7,773

 

 

30,885

 

 

20,215

 

Gross profit

 

 

9,583

 

 

7,466

 

 

24,527

 

 

19,743

 

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

Research and development

 

 

5,620

 

 

3,606

 

 

13,706

 

 

10,653

 

Sales and marketing

 

 

4,256

 

 

2,897

 

 

10,623

 

 

8,408

 

General and administrative

 

 

7,130

 

 

1,761

 

 

12,484

 

 

5,569

 

Total operating expenses

 

 

17,006

 

 

8,264

 

 

36,813

 

 

24,630

 

Loss from operations

 

 

(7,423)

 

 

(798)

 

 

(12,286)

 

 

(4,887)

 

Other income (expense):

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest expense, net

 

 

(1,046)

 

 

(170)

 

 

(2,368)

 

 

(581)

 

Other income (expense), net

 

 

 8

 

 

(12)

 

 

17

 

 

 2

 

Total other income (expense), net

 

 

(1,038)

 

 

(182)

 

 

(2,351)

 

 

(579)

 

Loss before provision for (benefit from) income taxes

 

 

(8,461)

 

 

(980)

 

 

(14,637)

 

 

(5,466)

 

Provision for (benefit from) income taxes

 

 

(64)

 

 

17

 

 

(80)

 

 

57

 

Net loss

 

$

(8,397)

 

$

(997)

 

$

(14,557)

 

$

(5,523)

 

Net loss per share:

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic and diluted

 

$

(0.29)

 

$

(0.05)

 

$

(0.61)

 

$

(0.31)

 

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

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic and diluted

 

 

28,171,952

 

 

21,058,635

 

 

23,717,727

 

 

17,701,230

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


 

 

 

ADESTO TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Net loss

 

$

(8,397)

 

$

(997)

 

$

(14,557)

 

$

(5,523)

 

Other comprehensive loss, net of tax:

 

 

 

 

 

  

 

 

 

 

 

  

 

Foreign currency translation adjustment

 

 

(148)

 

 

(20)

 

 

(65)

 

 

(71)

 

Comprehensive loss

 

$

(8,545)

 

$

(1,017)

 

$

(14,622)

 

$

(5,594)

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

6


 

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

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

    

2018

    

2017

    

Cash flows from operating activities:

 

 

  

 

 

  

 

Net loss

 

$

(14,557)

 

$

(5,523)

 

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

 

 

 

 

 

  

 

Stock-based compensation expense

 

 

2,103

 

 

2,873

 

Depreciation and amortization

 

 

1,687

 

 

1,004

 

Amortization of intangible assets

 

 

2,119

 

 

927

 

Amortization of debt discount

 

 

707

 

 

64

 

Deferred income taxes

 

 

(463)

 

 

 —

 

Gain on investment

 

 

(1)

 

 

 —

 

Gain on sale of equipment

 

 

(18)

 

 

 —

 

Changes in assets and liabilities:

 

 

 

 

 

  

 

Accounts receivable

 

 

(12,826)

 

 

(2,699)

 

Inventories

 

 

(6,017)

 

 

919

 

Prepaid expenses and other current assets

 

 

949

 

 

116

 

Other non-current assets

 

 

(8)

 

 

(311)

 

Accounts payable

 

 

5,834

 

 

1,426

 

Accrued compensation and benefits

 

 

1,087

 

 

533

 

Accrued expenses and other current liabilities

 

 

1,178

 

 

(230)

 

Price adjustments and other revenue reserves

 

 

5,202

 

 

 —

 

Other non-current liabilities

 

 

283

 

 

 —

 

Deferred rent

 

 

(341)

 

 

(315)

 

Net cash used in operating activities

 

 

(13,082)

 

 

(1,216)

 

Cash flows from investing activities:

 

 

  

 

 

  

 

Acquisition of property and equipment

 

 

(2,631)

 

 

(2,054)

 

Acquisition of Echelon, net of cash acquired

 

 

(28,836)

 

 

 —

 

Acquisition of S3, net of cash acquired

 

 

(34,616)

 

 

 —

 

Investment in unconsolidated affiliate

 

 

(434)

 

 

 —

 

Net cash used in investing activities

 

 

(66,517)

 

 

(2,054)

 

Cash flows from financing activities:

 

 

  

 

 

  

 

Proceeds from public offering, net of underwriting discounts and commissions

 

 

42,658

 

 

18,363

 

Proceeds from exercise of stock options and employee stock purchase plan

 

 

813

 

 

639

 

Tax withholdings related to net share settlement of restricted stock units

 

 

(372)

 

 

(157)

 

Proceeds from revolving line of credit

 

 

 —

 

 

27,427

 

Payments on revolving line of credit

 

 

(1,500)

 

 

(27,234)

 

Proceeds from term loan, net of fees

 

 

33,591

 

 

 —

 

Payments on term loan

 

 

(12,000)

 

 

(4,909)

 

Net cash provided by financing activities

 

 

63,190

 

 

14,129

 

Effect of exchange rates on cash and equivalents

 

 

(396)

 

 

(70)

 

Net increase (decrease) in cash and cash equivalents

 

 

(16,805)

 

 

10,789

 

Cash and cash equivalents - beginning of period

 

 

30,078

 

 

19,719

 

Cash and cash equivalents - end of period

 

$

13,273

 

$

30,508

 

Supplemental disclosures of other cash flow information:

 

 

  

 

 

  

 

Cash paid for interest expense

 

$

1,777

 

$

560

 

Supplemental disclosures of non-cash investing and financing information:

 

 

  

 

 

  

 

Purchase of property and equipment included in accounts payable

 

$

159

 

$

347

 

Fair value of warrants issued in connection with term loan

 

$

4,799

 

$

 —

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

7


 

Table of Contents

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 nine months ended September 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 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

8


 

Table of Contents

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

 

annual and interim periods beginning after December 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 June 2018, FASB issued 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 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

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Table of Contents

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

 

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”.

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 a 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 September 30, 2018

 

 

 

As

 

 

Balances without

 

 

Effect of

 

 

Reported

 

ASC 606

 

Change

Accounts receivable, net

 

$

24,706

 

$

19,504

 

$

(5,202)

Price adjustments and other revenue reserves

 

$

5,202

 

$

 —

 

$

5,202

 

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.

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

 

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.

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.

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

 

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 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 September 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 losses from foreign currency translation of assets and liabilities were $148,000 and $20,000 for the three months ended September 30, 2018 and 2017, respectively, and $65,000 and $71,000 for the nine months ended September 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 a gain of $9,000 and a loss of $7,000 for the three months ended September 30, 2018 and 2017, respectively, and a loss of $1,000 and a gain of $1,000 for the nine months ended September 30, 2018 and 2017, respectively, and are included in other income (expense), net in the condensed consolidated statements of operations.

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

 

Concentration of Risk.

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

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, 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 to pay. The allowance for doubtful accounts as of September 30, 2018 and December 31, 2017 was $30,000 and zero, respectively.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30, 

 

 

September 30, 

 

 

 

    

2018

    

2017

    

 

2018

    

2017

 

    

Customer A

 

20

%  

13

%  

 

21

%  

16

%  

 

Customer B

 

*

 

12

%  

 

*

 

10

%  

 

Customer C

 

*

 

13

%  

 

*

 

12

%  

 


*less than 10%

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

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

    

 

 

2018

 

2017

 

 

Customer A

 

22

%  

31

%  

 

Customer B

 

13

%  

*

 

 


*less than 10%

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.

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

 

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).

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

 

 

(222)

Deferred tax liability

 

 

(341)

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

 

 

 

Pro forma financial information

 

The following table presents the unaudited pro forma financial information for the combined entity of Adesto and Echelon for the three and nine month periods ended September 30, 2018, as if the acquisition had occurred at the beginning of the periods presented after giving effect to certain purchase accounting adjustments. Echelon was acquired on September 14, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

 

2018

    

2017

 

 

 

(in thousands except per share amounts)

Net revenue

 

$

27,541

 

$

23,157

 

$

76,780

 

$

63,916

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Net loss

 

$

(8,124)

 

$

(1,842)

 

$

(17,087)

 

$

(8,737)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.29)

 

$

(0.06)

 

$

(0.72)

 

$

(0.34)

 

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).

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

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

 

Trademarks

 

 

790

 

12

Total

 

$

15,340

 

 

 

 

 

Note 3. Balance Sheet Components.

Accounts Receivable, Net.

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

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2018

 

2017

Accounts receivable

 

$

24,736

 

$

12,500

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

 

 

 —

 

 

(3,832)

Allowance for doubtful accounts

 

 

(30)

 

 

 —

Total accounts receivable, net

 

$

24,706

 

$

8,668

 

Inventories.

Inventories consisted of the following (in thousands):

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2018

 

2017

Raw materials

 

$

2,298

 

$

2,213

Work-in-process

 

 

8,430

 

 

2,408

Finished goods

 

 

6,813

 

 

1,193

Total inventories

 

$

17,541

 

$

5,814

 

For the three months ended September 30, 2018, we recorded a write-down of $16,000 related to excess inventory. For the three months ended September 30, 2017, we realized a benefit of $0.4 million from the sales of previously reserved products.

For the nine months ended September 30, 2018 and 2017, we realized a benefit of $0.9 million and $1.0 million, respectively, 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 and lower of cost or net realizable value write-downs associated with products for which costs exceeded net realizable value.

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

 

Property and Equipment, Net.

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

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2018

 

2017

Machinery and equipment

 

$

14,936

 

$

9,457

Leasehold improvements

 

 

4,463

 

 

4,252

Computer software

 

 

3,765

 

 

675

TowerJazz license

 

 

350

 

 

350

Furniture and fixtures

 

 

246

 

 

83

Construction in progress

 

 

1,301

 

 

1,301

Property and equipment, at cost

 

 

25,061

 

 

16,118

Accumulated depreciation and amortization

 

 

(16,332)

 

 

(8,935)

Property and equipment, net

 

$

8,729

 

$

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 nine months ended September 30, 2018 was $0.6 million and $1.7 million, respectively.

Depreciation and amortization expense of property and equipment for the three and nine months ended September 30, 2017 was $0.4 million and $1.0 million, respectively

Accrued Expenses and Other Current Liabilities.

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

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2018

 

2017

Accrued sales commission payable

 

$

318

 

$

310

Accrued manufacturing expenses

 

 

537

 

 

265

Deferred rent, current portion

 

 

527

 

 

422

Liabilities to certain customers

 

 

812

 

 

468

Deferred revenue, current portion

 

 

1,454

 

 

262

Accrued professional services

 

 

1,903

 

 

94

Other accrued liabilities

 

 

1,418

 

 

538

Total accrued expenses and other current liabilities

 

$

6,969

 

$

2,359

 

 

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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)

 

Total

 

 

(in thousands)

As of September 30, 2018

 

 

  

 

 

  

 

 

  

 

 

  

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

 6

 

$

 —

 

$

 —

 

$

 6

U.S. government securities

 

 

 —

 

 

1,275

 

 

 —

 

 

1,275

 

 

$

 6

 

$

1,275

 

$

 —

 

$

1,281

 

 

 

  

 

 

  

 

 

  

 

 

  

As of December 31, 2017

 

 

  

 

 

  

 

 

  

 

 

  

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

11,501

 

$

 —

 

$

 —

 

$

11,501

 

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

 

The Company’s available-for-sale securities consist of U.S. government securities with a minimum and weighted average credit rating of A-1+. The Company values these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, the Company classifies all of its fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of the Company’s financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques. The Company's procedures include controls to ensure that appropriate fair values are recorded by comparing prices obtained from a third party independent source.

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

 

The Company’s available-for-sale securities had contractual maturities of six months and an average remaining term to maturity of three months. The amortized cost basis, aggregate fair value, and gross unrealized holding gains and losses of the Company’s short-term investments by major security type were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate

 

Unrealized

 

Unrealized

 

 

Amortized Cost

 

Fair Value

 

Holding Gain

 

Holding Losses

As of September 30, 2018

 

 

  

 

 

  

 

 

  

 

 

  

U.S. government securities

 

$

1,275

 

$

1,275

 

$

 —

 

$

 —

 

Market values were determined for each individual security in the investment portfolio. The Company reviews its investments on a regular basis to evaluate whether or not any have experienced an other-than-temporary decline in fair value.

 

 

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.

In connection with the acquisition of Echelon (Note 2), we recorded $17.7 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

    

Estimated Useful
Life (in Years)

Gross Carrying
Amount

    

Accumulated
Amortization

    

Net Carrying
 Amount

Developed technology

 

10

 

$

4,282

 

$

2,570

 

$

1,712

Developed technology

 

5

 

 

1,080

 

 

85