Form 10-Q AQUANTIA CORP For: Sep 30

December 6, 2017 4:52 PM

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017

OR

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

For the transition period from ____  to ____

Commission File Number: 001-38270

 

AQUANTIA CORP.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

20-1199709

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

105 E. Tasman Drive

San Jose, CA 95134

(Address of principal executive offices)

Registrant’s telephone number, including area code: (408) 228-8300

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small 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  

As of November 30, 2017, the registrant had 33,488,654 shares of common stock, $0.00001 par value per share, outstanding.

 

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

 

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

3

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016

4

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

27

Item 4.

Controls and Procedures

28

 

 

 

PART II.

OTHER INFORMATION

30

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 6.

Exhibits

49

Exhibit Index

 

Signatures

50

 

2


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

 

AQUANTIA CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value and share amounts)

(unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,529

 

 

$

28,893

 

Short-term investments

 

 

1,850

 

 

 

 

Accounts receivable

 

 

12,389

 

 

 

11,495

 

Inventories

 

 

15,673

 

 

 

7,017

 

Prepaid expenses and other current assets

 

 

3,745

 

 

 

1,609

 

Total current assets

 

 

47,186

 

 

 

49,014

 

Property and equipment, net

 

 

8,521

 

 

 

8,122

 

Intangible assets, net

 

 

4,757

 

 

 

5,363

 

Other assets

 

 

4,742

 

 

 

3,210

 

Total assets

 

$

65,206

 

 

$

65,709

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,357

 

 

$

4,757

 

Accrued liabilities

 

 

9,513

 

 

 

6,751

 

Long-term debt, current portion

 

 

10,784

 

 

 

11,238

 

Bank borrowings—line of credit

 

 

5,000

 

 

 

 

Total current liabilities

 

 

30,654

 

 

 

22,746

 

Long-term debt, net

 

 

 

 

 

6,991

 

Convertible preferred stock warrant liability

 

 

3,530

 

 

 

12,885

 

Other long-term liabilities

 

 

3,118

 

 

 

3,460

 

Total liabilities

 

 

37,302

 

 

 

46,082

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Convertible preferred stock:

 

 

 

 

 

 

 

 

Convertible preferred stock, par value of $0.00001 per share; 213,351,797 shares

   authorized as of September 30, 2017 and December 31, 2016, respectively;

   208,004,878 and 198,248,718 shares issued and outstanding with aggregate

   liquidation preference of $203,761 as of September 30, 2017 and $189,796 as of

   December 31, 2016 , respectively

 

 

210,269

 

 

 

199,434

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.00001 par value, 316,000,000 and 307,000,000 shares authorized

   as of September 30, 2017 and December 31, 2016, respectively; 4,739,936 and

   4,443,698 shares outstanding at September 30, 2017 and December 31, 2016,

   respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

14,289

 

 

 

12,419

 

Accumulated other comprehensive loss

 

 

 

 

 

 

Accumulated deficit

 

 

(196,654

)

 

 

(192,226

)

Total stockholders’ equity (deficit)

 

 

(182,365

)

 

 

(179,807

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

$

65,206

 

 

$

65,709

 

 

See accompanying notes to condensed consolidated financial statements.   

 

3


 

AQUANTIA CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

$

26,718

 

 

$

22,534

 

 

$

75,525

 

 

$

63,908

 

Cost of revenue

 

 

11,616

 

 

 

9,127

 

 

 

32,575

 

 

 

25,310

 

Gross profit

 

 

15,102

 

 

 

13,407

 

 

 

42,950

 

 

 

38,598

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

11,512

 

 

 

9,321

 

 

 

32,456

 

 

 

26,622

 

Sales and marketing

 

 

1,927

 

 

 

1,344

 

 

 

5,383

 

 

 

4,217

 

General and administrative

 

 

2,572

 

 

 

1,891

 

 

 

7,047

 

 

 

5,687

 

Total operating expenses

 

 

16,011

 

 

 

12,556

 

 

 

44,886

 

 

 

36,526

 

Income (loss) from operations

 

 

(909

)

 

 

851

 

 

 

(1,936

)

 

 

2,072

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(382

)

 

 

(779

)

 

 

(1,398

)

 

 

(2,650

)

Change in fair value of convertible preferred stock warrant

   liability

 

 

317

 

 

 

 

 

 

(1,383

)

 

 

78

 

Other income, net

 

 

(4

)

 

 

(6

)

 

 

24

 

 

 

(3

)

Total other income (expense)

 

 

(69

)

 

 

(785

)

 

 

(2,757

)

 

 

(2,575

)

Income (loss) before income tax expense

 

 

(978

)

 

 

66

 

 

 

(4,693

)

 

 

(503

)

Provision for (benefit from) income taxes

 

 

27

 

 

 

(22

)

 

 

(331

)

 

 

84

 

Net income (loss) attributable to common stockholders

 

$

(1,005

)

 

$

88

 

 

$

(4,362

)

 

$

(587

)

Net income (loss) per share attributable to common stockholders,

   basic

 

$

(0.21

)

 

$

0.02

 

 

$

(0.95

)

 

$

(0.14

)

Net income (loss) per share attributable to common stockholders,

   diluted

 

$

(0.21

)

 

$

0.00

 

 

$

(0.95

)

 

$

(0.14

)

Weighted-average shares used to compute net loss per share, basic

 

 

4,710

 

 

 

4,405

 

 

 

4,603

 

 

 

4,173

 

Weighted-average shares used to compute net loss per share,

   diluted

 

 

4,710

 

 

 

28,368

 

 

 

4,603

 

 

 

4,173

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

(1,005

)

 

$

88

 

 

$

(4,362

)

 

$

(587

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains and losses - short-term investments

 

 

2

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to common stockholders

 

$

(1,003

)

 

$

88

 

 

$

(4,362

)

 

$

(587

)

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

AQUANTIA CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited) 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(4,362

)

 

$

(587

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,422

 

 

 

1,892

 

Stock-based compensation expense

 

 

957

 

 

 

706

 

Change in fair value of convertible preferred stock warrant liability

 

 

1,383

 

 

 

(78

)

Amortization of debt discount

 

 

286

 

 

 

490

 

Non-cash interest expense related to debt costs

 

 

139

 

 

 

435

 

Gain/loss on disposal of property and equipment

 

 

 

 

 

33

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(894

)

 

 

(3,675

)

Inventories

 

 

(8,656

)

 

 

9,283

 

Prepaid expenses and other assets

 

 

(2,367

)

 

 

1,810

 

Accounts payable

 

 

356

 

 

 

245

 

Accrued and other liabilities

 

 

2,328

 

 

 

706

 

Deferred revenue

 

 

 

 

 

(2,059

)

Net cash provided by (used in) operating activities

 

 

(7,408

)

 

 

9,201

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,952

)

 

 

(2,345

)

Purchases of IP licenses

 

 

 

 

 

(2,065

)

Disposal of property and equipment

 

 

 

 

 

6

 

Purchases of short-term investments

 

 

(1,850

)

 

 

 

Net cash used in investing activities

 

 

(4,802

)

 

 

(4,404

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repayments on short and long-term borrowings

 

 

(7,846

)

 

 

(4,053

)

Repayments on line of credit

 

 

(5,000

)

 

 

(5,001

)

Proceeds from line of credit

 

 

10,000

 

 

 

 

Proceeds from exercise of stock options and preferred stock warrants

 

 

944

 

 

 

4,763

 

Purchases of IP licenses

 

 

(195

)

 

 

 

Payment of costs related to initial public offering

 

 

(1,057

)

 

 

(2,174

)

Net cash used in financing activities

 

 

(3,154

)

 

 

(6,465

)

Net decrease in cash and cash equivalents

 

 

(15,364

)

 

 

(1,668

)

Cash and cash equivalents at beginning of period

 

 

28,893

 

 

 

34,290

 

Cash and cash equivalents at end of period

 

$

13,529

 

 

$

32,622

 

Non-cash financing and investing transactions

 

 

 

 

 

 

 

 

Transfer of fair value of warrants to equity from liabilities upon warrant exercise

 

$

10,738

 

 

$

 

Unpaid costs related to initial public offering

 

$

608

 

 

$

305

 

Property and equipment received and accrued

 

$

503

 

 

$

1,318

 

IP licenses accrued

 

 

 

 

 

3,351

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

AQUANTIA CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization, Description of Business and Basis for Presentation

Organization—Aquantia Corp. (together with its subsidiaries, the “Company”) was incorporated in Delaware on January 27, 2004. The Company is a leader in the design, development and marketing of advanced high-speed communications integrated circuits, or ICs, for Ethernet connectivity in the data center, enterprise infrastructure, access and automotive markets.

Initial Public OfferingOn November 7, 2017, the Company completed its initial public offering (“IPO”) of 7,840,700 shares of its common stock at the offering price of $9.00 per share, including 1,022,700 shares pursuant to the underwriters’ option to purchase additional shares of the Company’s common stock, resulting in net proceeds to the Company of $65.6 million after deducting underwriters' discounts and commissions of $4.9 million, but before deducting total offering expenses of approximately $5.4 million. Certain IPO- related costs as of September 30, 2017 of $4.3 million were recorded as other assets and were subsequently reclassified to additional paid-in capital upon completion of the IPO. Immediately prior to the closing of the IPO, all outstanding shares of the Company’s convertible preferred stock automatically converted into shares of its common stock and the Company’s convertible preferred stock warrants automatically converted into warrants to purchase common stock.  The Company used $9.2 million of the IPO proceeds to repay the outstanding indebtedness under the Company’s loan from Pinnacle Ventures, L.L.C. on November 8, 2017.

Basis of Presentation and Principles of Consolidation - The accompanying unaudited condensed consolidated financial statements included herein have been prepared by us in accordance with U.S. generally accepted accounting principles (“GAAP”), for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, normal recurring adjustments considered necessary for a fair presentation have been reflected in these condensed consolidated financial statements.  Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

The consolidated balance sheet as of December 31, 2016 has been derived from the audited financial statements for the fiscal year then ended included in our final prospectus dated November 2, 2017 and filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on November 3, 2017 (the “Prospectus”), but does not include all of the information and notes required by GAAP for complete financial statements. The financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements as of and for the fiscal year ended December 31, 2016 and the related notes thereto included in the Prospectus.

2. Summary of Significant Accounting Policies

There have been no significant changes in the Company’s accounting policies from those disclosed in the Prospectus.

Reverse Stock Split—In September 2017, the Company’s board of directors and stockholders approved a 1-for-10 reverse split of the Company’s common stock (the “Reverse Stock Split”), which was effected on October 5, 2017. The Company’s board of directors and stockholders also approved proportionate adjustments to the conversion prices of each series of convertible preferred stock and convertible preferred stock warrants. The number of options to purchase common stock was also proportionately adjusted to reflect the Reverse Stock Split. The par value of the common and convertible preferred stock was not adjusted as a result of the Reverse Stock Split. All share and per share information included in the accompanying condensed consolidated financial statements and notes thereto have been adjusted to reflect the Reverse Stock Split.

Recent Accounting Pronouncements—In May 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. It provides clarity and reduces both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years and early adoption is permitted. The Company is currently evaluating the impact of adoption of this new standard on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new guidance requires entities to recognize assets and liabilities for leases with terms of more than 12 months and additional disclosures to better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018. Early adoption is permitted. Management has concluded that it will not early adopt this standard and is currently evaluating the impact of this new standard on the Company’s consolidated financial statements.

6


 

In August 2015, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, an update that deferred the effective date of the new guidance they previously issued in May 2014 related to the recognition and reporting of revenue that establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The guidance allows for the use of either the full or modified retrospective transition method. This new standard will be effective for us on January 1, 2018, although adoption as of the original effective date of January 1, 2017 is permitted. Management intends to use the modified retrospective method and is evaluating the impact of this new standard on the Company’s consolidated financial statements and disclosure.

3. Balance Sheet Components

Inventories consisted of the following (in thousands):

 

 

 

As of September 30,

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Processed wafers

 

$

4,321

 

 

$

1,474

 

Work in process

 

 

9,298

 

 

 

3,310

 

Finished goods

 

 

2,054

 

 

 

2,233

 

Total inventories

 

$

15,673

 

 

$

7,017

 

 

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

As of September 30,

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Processed wafer prepayments

 

$

1,702

 

 

$

653

 

Electronic design automation tools

 

 

495

 

 

 

330

 

Other prepaid and other current assets

 

 

1,548

 

 

 

626

 

Total other prepaid and other current assets

 

$

3,745

 

 

$

1,609

 

 

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

 

 

 

 

 

As of September 30,

 

 

As of December 31,

 

 

 

Estimated Useful Lives

 

2017

 

 

2016

 

Machinery and equipment

 

2-3 years

 

$

12,201

 

 

$

10,189

 

Production masks

 

4 years

 

 

4,301

 

 

 

4,301

 

Software and computer equipment

 

3 years

 

 

3,470

 

 

 

2,724

 

Leasehold improvements

 

Shorter of estimated life of asset or remaining lease term

 

 

523

 

 

 

271

 

Office furniture and fixtures

 

3 years

 

 

114

 

 

 

99

 

Total property and equipment

 

 

 

 

20,609

 

 

 

17,584

 

Less: accumulated depreciation and

   amortization

 

 

 

 

(12,088

)

 

 

(9,462

)

Property and equipment, net

 

 

 

$

8,521

 

 

$

8,122

 

 

Depreciation and amortization of property and equipment totaled $1.0 million and $0.6 million for the three months ended September 30, 2017 and 2016, respectively, and $2.8 million and $1.8 million for the nine months ended September 30, 2017 and 2016, respectively.

Intangible assets, net were carried at cost, less accumulated amortization. Intangible assets were as follows (in thousands):

 

 

 

 

 

As of September 30,

 

 

As of December 31,

 

 

 

Estimated Useful Lives

 

2017

 

 

2016

 

IP license

 

7 years

 

$

5,416

 

 

$

5,416

 

Patents

 

10-12 years

 

 

348

 

 

 

348

 

Total intangible assets

 

 

 

 

5,764

 

 

 

5,764

 

Less: accumulated amortization

 

 

 

 

(1,007

)

 

 

(401

)

Intangible assets, net

 

 

 

$

4,757

 

 

$

5,363

 

 

7


 

Amortization of intangible assets totaled $202,000 and $72,000 for the three months ended September 30, 2017 and 2016, respectively, and $606,000 and $89,000 for the nine months ended September 30, 2017 and 2016, respectively.

Amortization expense related to amortizable intangibles in future periods as of September 30, 2017 is expected to be as follows (in thousands):

 

2017 (remaining)

 

$

202

 

2018

 

 

808

 

2019

 

 

808

 

2020

 

 

808

 

2021 and thereafter

 

 

2,131

 

Total

 

$

4,757

 

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

As of September 30,

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Accrued compensation and related benefits

 

$

4,404

 

 

$

3,585

 

Accrued IP license fees

 

 

320

 

 

 

389

 

Accrued technical consulting and professional services

 

 

1,363

 

 

 

617

 

Accrued royalty, rebates, and commission

 

 

428

 

 

 

610

 

Deferred income

 

 

1,303

 

 

 

 

Other accrued liabilities

 

 

1,695

 

 

 

1,550

 

Total accrued liabilities

 

$

9,513

 

 

$

6,751

 

 

4. Financial Instruments

The following is a summary of financial instruments (in thousands):

 

 

 

As of September 30, 2017

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

Unrealized

 

 

Estimated Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Values

 

Available-for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

1,699

 

 

$

 

 

$

 

 

$

1,699

 

Money market funds

 

 

7,500

 

 

 

 

 

 

 

 

 

7,500

 

Corporate bonds

 

 

2,665

 

 

 

 

 

 

 

 

 

2,665

 

U.S. government securities

 

 

1,199

 

 

 

 

 

 

 

 

 

1,199

 

Total available-for-sale securities

 

$

13,063

 

 

$

 

 

$

 

 

$

13,063

 

Reported in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

11,213

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,850

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,063

 

 

Prior to June 2017, the Company’s financial instruments comprised solely of money market funds which were classified as cash equivalents. As of September 30, 2017, the Company had $13.5 million in cash, cash equivalents and $1.9 million in short-term investments. There was no sale of available-for-sale investments and therefore no significant realized gain or loss for the three and nine months ended September 30, 2017. The amounts of financial instruments in the table above will mature within the next 12 months after September 30, 2017.

5. Fair Value Measurements

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which to transact and the market-based risk. The Company applies fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Level 1 liabilities consist of accounts payable, accrued expense

8


 

and long-term debt. The carrying amounts of accounts receivable, prepaid expenses, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items. Based on the borrowing rates currently available to the Company for debt with similar terms, the carrying value of the term debt approximates fair value as well. The Company categorizes assets and liabilities recorded at fair value based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:

Level 1—Observable inputs, such as quoted prices in active markets for identical, unrestricted assets, or liabilities.

Level 2—Quoted prices for similar assets or liabilities, or inputs other than quoted prices in active markets that are observable either directly or indirectly.

Level 3—Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions about the assumptions market participants would use in pricing the asset or liability. Valuation techniques include use of option-pricing models, discounted cash flows models, and similar techniques.

The hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The following tables represent the Company’s financial assets and financial liabilities measured at fair value on a recurring basis categorized by the fair value hierarchy as of September 30, 2017 and December 31, 2016 (in thousands):

 

 

 

As of September 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial asset— available-for-sales securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

7,500

 

 

$

 

 

$

 

 

$

7,500

 

Commercial Paper

 

 

 

 

 

1,699

 

 

 

 

 

 

1,699

 

Corporate bonds

 

 

 

 

 

2,665

 

 

 

 

 

 

2,665

 

U.S. government securities

 

 

 

 

 

1,199

 

 

 

 

 

 

1,199

 

Total financial asset—available-for-sales securities

 

$

7,500

 

 

$

5,563

 

 

$

 

 

$

13,063

 

Financial liability—convertible preferred stock warrant

   liability

 

$

 

 

$

 

 

$

3,530

 

 

$

3,530

 

 

 

 

As of December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial asset—money market funds

 

$

15,316

 

 

$

 

 

$

 

 

$

15,316

 

Financial liability—convertible preferred stock warrant

   liability

 

$

 

 

$

 

 

$

12,885

 

 

$

12,885

 

 

The summary of changes in the fair value of the Company’s Level 3 financial liabilities was as follows (in thousands):

 

Balance as of January 1, 2017

 

$

12,885

 

Change in fair value of convertible preferred stock warrant

   liability

 

 

1,383

 

Exercise of Series H convertible preferred stock warrants

 

 

(10,738

)

Balance as of September 30, 2017

 

$

3,530

 

 

See Note 8 for discussion of valuation methods and inputs for such financial liabilities.

The Company has not changed the manner in which it values liabilities that are measured at estimated fair value using Level 3 inputs. There were no transfers within the hierarchy during the nine months ended September 30, 2017 or the year ended December 31, 2016.

6. Commitments and Contingencies

Lease and purchase obligations—The Company leases office and research facilities under operating leases for its U.S. headquarters and international locations that expire at various dates through March 2020. Under any lease agreement that contains escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term. Rent expense for the three months ended September 30, 2017 and 2016 was $0.3 million and $0.2 million, respectively. Rent expense for the nine months ended September 30, 2017 and 2016 was $0.8 million and $0.7 million, respectively. In addition, the Company has purchase obligations which included agreements and issued purchase orders containing non-cancelable payment terms to purchase goods and services.

9


 

As of September 30, 2017, future minimum operating lease payments and purchase obligations are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Operating

 

 

Purchase

 

 

Lease and Purchase

 

 

 

Leases

 

 

Obligations

 

 

Obligations

 

2017 (remaining)

 

$

290

 

 

$

13,850

 

 

$

14,140

 

2018

 

 

662

 

 

 

4,943

 

 

 

5,605

 

2019

 

 

234

 

 

 

1,974

 

 

 

2,208

 

2020

 

 

128

 

 

 

198

 

 

 

326

 

2021 and thereafter

 

 

169

 

 

 

 

 

 

169

 

Total

 

$

1,483

 

 

$

20,965

 

 

$

22,448

 

 

Litigation—The Company accrues for contingencies when it believes that a loss is probable and that it can reasonably estimate the amount of any such loss and the Company has made an assessment of the probability of incurring any such losses and whether or not those losses are estimable.

Although the Company is not currently subject to any litigation, and the Company is not aware of any litigation currently threatened against it, the Company may be subject to legal proceedings, claims and litigation, including intellectual property litigation, arising in the ordinary course of business. Such matters are subject to many uncertainties and outcomes and are not predictable with assurance. The Company accrues amounts that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that it believes will result in a probable loss that is reasonably estimable.

To the extent there is a reasonable possibility that a loss exceeding amounts already recognized may be incurred and the amount of such additional loss would be material, the Company will either disclose the estimated additional loss or state that such an estimate cannot be made. The Company does not currently believe that it is reasonably possible that losses in connection with litigation arising in the ordinary course of business would be material.

Indemnification—Under the indemnification provisions of the Company’s standard sales-related contracts, the Company agrees to defend its customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. Certain agreements include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement. In addition, the Company indemnifies its directors and certain of its officers while they are serving in good faith in such capacities. To date, the Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As of September 30, 2017 and December 31, 2016, no liability associated with such indemnifications had been recorded.

7. Debt

In connection with each of the Loan and Security Agreements with Pinnacle Ventures L.L.C. (“Pinnacle Ventures”) and the Loan and Security Agreement with Hercules Technology Growth Capital, each as described below, the Company has granted in favor of the lenders thereunder a security interest in substantially all of the Company’s assets other than the Company’s intellectual property. The loan with Pinnacle Ventures is subordinated to the loan with Hercules Technology Growth Capital pursuant to a subordination agreement.

Loan and Security Agreement with Pinnacle Ventures—On April 5, 2013, the Company entered into a Loan and Security Agreement with Pinnacle Ventures (the “2013 Agreement”) to borrow an aggregate principal amount of $15 million. The interest rate on this loan was the greater of the prime rate plus 925 basis points or 12.5% per annum. As of December 31, 2014, immediately prior to the effective date of the 2013 Amended Agreement (as defined below), the interest rate was 12.5%. The Company was required to make interest-only payments for the first 24 months starting in April 2013 and thereafter make 18 equal installment payments of principal and interest through October 5, 2016, the original maturity date of the loan.

In connection with the 2013 Agreement, the Company issued 646,551 fully vested Series F convertible preferred stock warrants at an exercise price of $0.9280000 before the Reverse Stock Split. See Notes 1, 2 and 8 for additional information. The agreement also provided a conversion right (the “Conversion Right”), which expired unexercised on September 30, 2014 and was reclassified to convertible preferred stock. The Conversion Right was accounted for as a financial derivative and the estimated fair value was determined using the Monte Carlo Simulation with an initial aggregate fair value of $180,843. The estimated fair value was determined using the following assumptions: risk-free interest rate of 0.21%, contractual term of 0.46 years to 0.96 years, and volatility of 45%.

On December 16, 2014, the Company amended the 2013 Agreement with Pinnacle Ventures (the “2013 Amended Agreement”) to borrow an additional $8.8 million and modify the terms of the existing loan of $15 million, including extending the maturity date to

10


 

July 1, 2018. The interest rate on this loan, effective January 1, 2015, was the greater of the prime rate plus 550 basis points or 8.75% per annum. As of September 30, 2017 and December 31, 2016, the interest rate on this loan was 9.75% and 9.25%, respectively. Under the terms of the 2013 Amended Agreement, principal payments for the combined loan started in May 2016. An additional payment of $1.5 million was due upon the earliest to occur of the maturity date of July 1, 2018 or the prepayment of all outstanding principal and accrued and unpaid interest. The final payment is being amortized to interest expense over the original term of the loan. In connection with this 2013 Amended Agreement, the Company also issued 640,129 fully vested Series G convertible preferred stock warrants with an exercise price of $1.4314298 per share before the Reverse Stock Split. See Notes 1, 2 and 8 for additional information.

The 2013 Amended Agreement contained customary financial reporting and insurance requirements, and negative covenants that limit the Company’s ability to, among other things, prepay or incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets, and merge or consolidate. As of September 30, 2017, the Company was in compliance with all covenants. This loan was repaid in full subsequent to the IPO in November 2017. See Note 1 for additional information.

Loan and Security Agreement with Hercules Technology Growth Capital—On January 30, 2015, the Company entered into a Loan and Security Agreement with Hercules Technology Growth Capital for an $11.5 million revolving line of credit. In connection with this agreement, the Company issued fully vested warrants to purchase 196,831 shares of convertible preferred stock at an exercise price of $1.4314298 per share before the Reverse Stock Split. See Notes 1, 2 and 8 for additional information. At the election of the holder, these warrants may be exercised for Series G or Series H convertible preferred stock.

The line of credit is based upon a percentage of eligible receivables and eligible customer purchase orders. The line of credit bears a variable rate of interest and is based upon the Federal Reserve’s prime rate and changes in the Company’s borrowing base eligibility and whether the borrowing base is based on eligible accounts receivables or eligible purchase orders or both. The line of credit matures on February 1, 2018. An additional final payment of $0.3 million is due upon the earliest to occur of the maturity date, the date of prepayment of the outstanding secured obligations, or the date that the secured obligations become due and payable. The final payment was recorded as a long-term liability and other asset on the Company’s consolidated balance sheet and the asset is amortized to interest expense over 24 months, the initial term of the agreement. As of September 30, 2017, the amount outstanding under the line of credit was $5.0 million with an average interest rate of 7.20% and the amount available for borrowing was $6.5 million.

The agreement contains customary financial reporting requirements and negative covenants that limit the Company’s ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, lend money or forgive indebtedness to employees, officers or directors, transfer assets, and merge or consolidate. As of September 30, 2017, the Company was in compliance with all covenants.

Debt obligations consisted of the following (in thousands):

 

 

 

As of September 30,

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Term loans

 

$

9,396

 

 

$

17,241

 

Final payment liability

 

 

1,443

 

 

 

1,192

 

Total term loans

 

 

10,839

 

 

 

18,433

 

Unamortized debt discount

 

 

(55

)

 

 

(204

)

Balance term loans

 

 

10,784

 

 

 

18,229

 

Bank borrowings—line of credit

 

 

5,000

 

 

 

 

Total debt

 

 

15,784

 

 

 

18,229

 

Less: long-term debt, current portion and

   bank borrowings—line of credit

 

 

(15,784

)

 

 

(11,238

)

Long-term debt

 

$

 

 

$

6,991

 

 

11


 

8. Convertible Preferred Stock Warrants

The following convertible preferred stock warrants, which will be subject to the Reverse Stock Split and converted into warrants to purchase the Company’s common stock immediately prior to the closing of the IPO, were outstanding (in thousands except share and per share amounts; see Notes 1 and 2 for additional information):

 

 

 

 

 

 

 

 

 

As of September 30, 2017

 

 

As of December 31, 2016

 

 

 

Exercise Price

 

 

 

 

Preferred Shares

 

 

Fair

 

 

Preferred Shares

 

 

Fair

 

Series

 

Per Share

 

 

Expiration Date

 

Underlying Warrants

 

 

Value

 

 

Underlying Warrants

 

 

Value

 

B

 

$

2.150275

 

 

3/9/2018

 

 

31,973

 

 

 

 

 

 

31,973

 

 

 

 

C-1(1)

 

$

0.010000

 

 

1/16/2019

 

 

2,472,088

 

 

 

2,793

 

 

 

2,472,088

 

 

 

1,760

 

D

 

$

0.666397

 

 

3/9/2018, 11/16/2019

 

 

825,332

 

 

 

262

 

 

 

825,332

 

 

 

272

 

F

 

$

0.928000

 

 

4/5/2023

 

 

646,551

 

 

 

237

 

 

 

646,551

 

 

 

154

 

G

 

$

1.431430

 

 

12/16/2024

 

 

640,129

 

 

 

182

 

 

 

640,129

 

 

 

93

 

G/H

 

$

1.431430

 

 

1/3/2025

 

 

196,831

 

 

 

56