Form 10-Q AQUANTIA CORP For: Sep 30

November 7, 2018 4:34 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, 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: 001-38270

 

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.)

 

91 E. Tasman Drive Suite 100

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 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, 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

 

  

  

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 October 31, 2018, the registrant had 34,854,563 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, 2018 and December 31, 2017

3

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017

4

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

26

Item 4.

Controls and Procedures

27

 

 

 

PART II.

OTHER INFORMATION

28

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 6.

Exhibits

47

 

 

Signatures

48

 

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,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,842

 

 

$

8,040

 

Short-term investments

 

 

58,507

 

 

 

48,362

 

Accounts receivable

 

 

15,781

 

 

 

15,012

 

Inventories

 

 

15,005

 

 

 

18,469

 

Prepaid expenses and other current assets

 

 

2,413

 

 

 

5,623

 

Total current assets

 

 

100,548

 

 

 

95,506

 

Property and equipment, net

 

 

10,423

 

 

 

9,973

 

Intangible assets, net

 

 

3,950

 

 

 

4,556

 

Other assets

 

 

679

 

 

 

331

 

Total assets

 

$

115,600

 

 

$

110,366

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,644

 

 

$

7,059

 

Accrued liabilities

 

 

10,718

 

 

 

9,217

 

Total current liabilities

 

 

16,362

 

 

 

16,276

 

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

4,274

 

 

 

3,176

 

Total liabilities

 

 

20,636

 

 

 

19,452

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.00001 par value, 95,000,000 and 400,000,000 shares authorized

   as of September 30, 2018 and December 31, 2017, respectively; 34,821,975 and 33,523,683 shares outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

297,024

 

 

 

288,719

 

Accumulated other comprehensive loss

 

 

(120

)

 

 

(96

)

Accumulated deficit

 

 

(201,940

)

 

 

(197,709

)

Total stockholders’ equity

 

 

94,964

 

 

 

90,914

 

Total liabilities and stockholders’ equity

 

$

115,600

 

 

$

110,366

 

 

See accompanying notes to condensed consolidated financial statements.   

 

3


 

AQUANTIA CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

32,902

 

 

$

26,718

 

 

$

91,692

 

 

$

75,525

 

Cost of revenue

 

 

13,866

 

 

 

11,616

 

 

 

39,021

 

 

 

32,575

 

Gross profit

 

 

19,036

 

 

 

15,102

 

 

 

52,671

 

 

 

42,950

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

15,701

 

 

 

11,512

 

 

 

41,047

 

 

 

32,456

 

Sales and marketing

 

 

2,354

 

 

 

1,927

 

 

 

7,255

 

 

 

5,383

 

General and administrative

 

 

3,214

 

 

 

2,572

 

 

 

9,535

 

 

 

7,047

 

Total operating expenses

 

 

21,269

 

 

 

16,011

 

 

 

57,837

 

 

 

44,886

 

Loss from operations

 

 

(2,233

)

 

 

(909

)

 

 

(5,166

)

 

 

(1,936

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

(382

)

 

 

 

 

 

(1,398

)

Change in fair value of convertible preferred stock warrant liability

 

 

 

 

 

317

 

 

 

 

 

 

(1,383

)

Other income (expense), net

 

 

311

 

 

 

(4

)

 

 

850

 

 

 

24

 

Total other income (expense)

 

 

311

 

 

 

(69

)

 

 

850

 

 

 

(2,757

)

Loss before income tax expense

 

 

(1,922

)

 

 

(978

)

 

 

(4,316

)

 

 

(4,693

)

Provision for (benefit from) income taxes

 

 

143

 

 

 

27

 

 

 

(50

)

 

 

(331

)

Net loss

 

$

(2,065

)

 

$

(1,005

)

 

$

(4,266

)

 

$

(4,362

)

Net loss per share, basic and diluted

 

$

(0.06

)

 

$

(0.21

)

 

$

(0.13

)

 

$

(0.95

)

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

 

 

34,435

 

 

 

4,710

 

 

 

33,925

 

 

 

4,603

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,065

)

 

$

(1,005

)

 

$

(4,266

)

 

$

(4,362

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (loss) - short-term investments

 

 

55

 

 

 

2

 

 

 

(24

)

 

 

 

Comprehensive loss

 

$

(2,010

)

 

$

(1,003

)

 

$

(4,290

)

 

$

(4,362

)

 

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,

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(4,266

)

 

$

(4,362

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

4,271

 

 

 

3,422

 

Stock-based compensation expense

 

4,263

 

 

 

957

 

Change in fair value of convertible preferred stock warrant liability

 

 

 

 

1,383

 

Loss (gain) on disposal of fixed assets and lease impairment

 

(70

)

 

 

 

Amortization of debt discount

 

 

 

 

286

 

Non-cash interest expense related to debt costs

 

 

 

 

139

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(769

)

 

 

(894

)

Inventories

 

3,464

 

 

 

(8,656

)

Prepaid expenses and other assets

 

2,862

 

 

 

(2,367

)

Accounts payable

 

(1,096

)

 

 

356

 

Accrued and other liabilities

 

2,914

 

 

 

2,328

 

Net cash provided by (used in) operating activities

 

11,573

 

 

 

(7,408

)

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(4,434

)

 

 

(2,952

)

Proceeds from sales of Property and equipment

 

70

 

 

 

 

Proceeds from sales and maturities of short-term investments

 

32,488

 

 

 

 

Purchases of short-term investments

 

(42,657

)

 

 

(1,850

)

Net cash used in investing activities

 

(14,533

)

 

 

(4,802

)

Cash flows from financing activities

 

 

 

 

 

 

 

Repayments on short and long-term borrowings

 

 

 

 

(7,846

)

Repayments on line of credit

 

 

 

 

 

(5,000

)

Proceeds from line of credit

 

 

 

 

10,000

 

Proceeds from exercise of stock options, purchase rights, and preferred stock warrants

 

4,064

 

 

 

944

 

Purchases of IP licenses

 

(26

)

 

 

(195

)

Payment of costs related to initial public offering

 

(276

)

 

 

(1,057

)

Net cash provided by (used in) financing activities

 

3,762

 

 

 

(3,154

)

Net increase (decrease) in cash and cash equivalents

 

802

 

 

 

(15,364

)

Cash and cash equivalents at beginning of period

 

8,040

 

 

 

28,893

 

Cash and cash equivalents at end of period

$

8,842

 

 

$

13,529

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

$

17

 

 

$

707

 

Cash paid for income taxes

$

193

 

 

$

41

 

Non-cash financing and investing transactions

 

 

 

 

 

 

 

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

$

 

 

$

10,738

 

Cashless exercises of warrants, net of assumed proceeds from shares

$

1,175

 

 

$

 

Unpaid costs related to initial public offering

$

 

 

$

608

 

Property and equipment received and accrued

$

100

 

 

$

503

 

 

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 (“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 $5.7 million which were 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 and $0.3 million of the IPO proceeds, respectively, to repay the outstanding indebtedness under the Company’s loan from Pinnacle Ventures, L.L.C. and the termination fee for the line of credit from Hercules in 2017, respectively.

Basis of Presentation and Principles of ConsolidationThe accompanying unaudited condensed consolidated financial statements included herein have been prepared by us in accordance with U.S. generally accepted accounting principles (“U.S. 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 U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.

The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited financial statements for the fiscal year then ended included in the Company’s Annual Report on Form 10-K filed with the SEC on March 7, 2018 (the “2017 Annual Report on Form 10-K”), but does not include all of the information and notes required by U.S. GAAP for complete consolidated 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, 2017 and the related notes thereto included in the 2017 Annual Report on Form 10-K.

2. Summary of Significant Accounting Policies

During the three and nine months ended September 30, 2018, there have been no changes in our significant accounting policies as described in the Company’s 2017Annual Report on Form 10-K, except as discussed below:

Recent Accounting Pronouncements

In February 2018, the FASB released ASU 2018-2, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This standard update addresses a specific consequence of the Tax Cuts and Jobs Act (“U.S tax reform”) and allows a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from U.S. tax reform. Consequently, the update eliminates the stranded tax effects that were created as a result of the historical U.S. federal corporate income tax rate to the newly enacted U.S. federal corporate income tax rate. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the adoption date and the impact of this new standard on the Company’s condensed 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 condensed consolidated financial statements. The Company expects that most of operating lease commitments will be subject to the new standard and recognized as lease liabilities and right-of-use assets upon adoption, which will increase total assets and total liabilities.

6


 

Adopted

Revenue Recognition In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” 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 was effective on January 1, 2018.

Under the new standard, the Company used the modified retrospective method and recognizes all revenue on sales to distributors upon shipment and transfer of control (known as “sell-in” revenue recognition), rather than deferring recognition until distributor report that they have sold the product to their customers (known as “sell-through” revenue recognition).  This change in methodology will cause a shift in the timing of when revenue is recognized for this class of customers comparing to prior periods.  The Company provides some of its distributors rights that would result in a deferral of revenue under the revenue standards before the adoption. Accordingly, the Company recorded $0.1 million of deferred revenue balance to retained earnings upon adoption of this new standard on the Company’s condensed consolidated financial statements. As a result of the adoption, the Company revised its accounting policy for revenue recognition as detailed below:

Revenue Recognition:

Product revenues consist of sales to customers which are mainly comprised of end customers, their manufacturing subcontractors, and distributors. Revenue is recognized after the Company (a) identifies the contract with a customer, (b) identifies the performance obligations in the contract, (c) determines the transaction price, (d) allocates the transaction price to the performance obligations in the contract, and (e) satisfies the performance obligation when the control of products is transferred to the customer.

The Company considers the purchase orders, which in some cases are governed by master sales agreements, to be the contract with its customers.  In evaluating the existence of the contract, the Company considers various factors relative to the contract including the customer’s ability to pay amounts due under the contract.  The Company is obligated to deliver a fixed number of products to its customers, each of which is distinct, and have been separately identified to be the performance obligations. The Company generally provides an assurance warranty that its products will substantially conform to the published specifications for twelve months from the date of shipment. The Company has not provided services in addition to the standard warranty. As such, the Company does not consider activities related to such warranty, if any, to be a separate performance obligation.

In determining the transaction price, the Company considers the variability of the amount due under the contract including amounts subject to refund or adjustment when determining the net consideration to which the Company expects to be entitled within the contract.  As the Company’s standard payment terms are less than one year, the Company has elected the practical expedient under the accounting guidance and does not assess whether the contract has a significant financing component.  The Company allocates revenue to each product based on their relative standalone selling price.  Frequently, the Company receives orders for products to be delivered over multiple dates that may extend across several reporting periods. The Company invoices for each delivery upon shipment and recognizes revenues for each distinct product delivered, assuming transfer of control has occurred. As scheduled delivery dates are within one year, under the optional exemption revenues allocated to future shipments of partially completed contracts are not disclosed.

Sales to certain of end customers include limited rebates.  The Company estimates these rebates, using historical volumes of such rebates, at the time revenue is recognized. Such rebates were not significant in any of the periods presented, and the differences between the actual amount of such rebates and our estimates also were not significant.

Sales to most of our distributors are made under contracts that allow for pricing credits upon shipment to the end customer and rights of return for on hand inventory at the distributor.  Under the accounting guidance, revenue is recognized at the point of transfer of control to the distributor, which typically occurs at the point of shipment.  The Company adjusts the transaction price for any unprocessed claims and for future estimated pricing credits which is recorded in accrued liabilities on our condensed consolidated balance sheets.  The adjustments for these estimates are recorded as a reduction to revenue in the same period when the related revenue is recorded and is calculated based on an analysis of the historical actual claims received, both in aggregate and at a distributor level to the extent that it is probable that a significant future reversal of revenue will not occur.  Historically, adjustments for actual pricing credits and product returns have not been significantly differed from the amounts estimated by the Company. As of September 30, 2018, the Company has recorded an accrued liability of $0.6 million related to the above adjustments to transaction price.

 

7


 

3. Balance Sheet Components

Inventories consisted of the following (in thousands):

 

 

 

As of September 30,

 

 

As of December 31,

 

  

 

2018

 

 

2017

 

Processed wafers

 

$

1,536

 

 

$

3,523

 

Work in process

 

 

6,733

 

 

 

10,118

 

Finished goods

 

 

6,736

 

 

 

4,828

 

Total inventories

 

$

15,005

 

 

$

18,469

 

 

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

 

 

 

As of September 30,

 

 

As of December 31,

 

 

 

2018

 

 

2017

 

Processed wafer prepayments

 

$

521

 

 

$

3,443

 

Electronic design automation tools

 

 

307

 

 

 

519

 

Other prepaid and other current assets

 

 

1,585

 

 

 

1,661

 

Total other prepaid and other current assets

 

$

2,413

 

 

$

5,623

 

 

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

 

 

 

 

 

As of September 30,

 

 

As of December 31,

 

 

 

Estimated Useful Lives

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

Machinery and equipment

 

2-3 years

 

$

15,244

 

 

$

13,268

 

Production masks

 

4 years

 

 

5,401

 

 

 

5,401

 

Software and computer equipment

 

3 years

 

 

4,223

 

 

 

3,820

 

Leasehold improvements

 

Shorter of estimated life

of asset or remaining lease term

 

 

1,546

 

 

 

539

 

Office furniture and fixtures

 

3 years

 

 

168

 

 

 

114

 

Total property and equipment

 

 

 

 

26,582

 

 

 

23,142

 

Less: accumulated depreciation and

   amortization

 

 

 

 

(16,159

)

 

 

(13,169

)

Property and equipment, net

 

 

 

$

10,423

 

 

$

9,973

 

 

Depreciation and amortization of property and equipment totaled $1.3 million and $1.0 million for the three months ended September 30, 2018 and 2017, respectively. Depreciation and amortization of property and equipment totaled $3.7 million and $2.8 million for the nine months ended September 30, 2018 and 2017, 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

 

2018

 

 

2017

 

IP license

 

7 years

 

$

5,416

 

 

$

5,416

 

Patents

 

10-12 years

 

 

348

 

 

 

348

 

Total intangible assets

 

 

 

 

5,764

 

 

 

5,764

 

Less: accumulated amortization

 

 

 

 

(1,814

)

 

 

(1,208

)

Intangible assets, net

 

 

 

$

3,950

 

 

$

4,556

 

 

Amortization of intangible assets totaled $0.2 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively. Amortization of intangible assets totaled $0.6 million and $0.6 million for the nine months ended September 30, 2018 and 2017, respectively.

 

8


 

Amortization expense related to amortizable intangibles in future periods as of September 30, 2018 is expected to be as follows (in thousands):

 

2018 (remaining)

 

$

202

 

2019

 

 

808

 

2020

 

 

808

 

2021

 

 

808

 

2022 and thereafter

 

 

1,324

 

Total

 

$

3,950

 

 

 

 

 

 

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

As of September 30,

 

 

As of December 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Accrued compensation and related benefits

 

$

5,206

 

 

$

5,242

 

Customer Deposit

 

 

-

 

 

 

1,154

 

Accrued IP License

 

 

1,339

 

 

 

343

 

Accrued technical consulting and professional services

 

 

200

 

 

 

259

 

Accrued royalty, rebates and commission

 

 

278

 

 

 

287

 

Other accrued liabilities

 

 

3,695

 

 

 

1,932

 

Total accrued liabilities

 

$

10,718

 

 

$

9,217

 

 

4. Financial Instruments

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

 

 

 

As of September 30, 2018

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

Unrealized

 

 

Estimated Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Values

 

Available-for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

9,883

 

 

$

 

 

$

(8

)

 

$

9,875

 

Money market funds

 

 

4,911

 

 

 

 

 

 

 

 

 

4,911

 

Corporate bonds

 

 

49,242

 

 

 

 

 

 

(112

)

 

 

49,130

 

U.S. government securities

 

 

1,500

 

 

 

 

 

 

 

 

 

1,500

 

Total available-for-sale securities

 

$

65,536

 

 

$

 

 

$

(120

)

 

$

65,416

 

Reported in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6,909

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

58,507

 

Total available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

65,416

 

9


 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

Unrealized

 

 

Estimated Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Values

 

Available-for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

13,927

 

 

$

 

 

$

(11

)

 

$

13,916

 

Money market funds

 

 

1,269

 

 

 

 

 

 

 

 

 

1,269

 

Corporate bonds

 

 

36,534

 

 

 

 

 

 

(81

)

 

 

36,453

 

U.S. government securities

 

 

2,489

 

 

 

 

 

 

(4

)

 

 

2,485

 

Total available-for-sale securities

 

$

54,219

 

 

$

 

 

$

(96

)

 

$

54,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,761

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48,362

 

Total available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

54,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The contractual maturities of available-for-sale securities are presented in the following table (in thousands):

 

 

 

As of September 30, 2018

 

 

 

Amortized

Cost Basis

 

 

Estimated

Fair Value

 

Due in one year or less

 

$

59,517

 

 

$

59,408

 

Due between one and five years

 

 

6,019

 

 

 

6,008

 

 

 

$

65,536

 

 

$

65,416

 

 

 

Gross realized gains and gross realized losses on sales of available-for-sale securities for the three and nine months ended September 30, 2018 were not significant. As of September 30, 2018 and December 31, 2017, there were no individual securities that had been in a continuous loss position for 12 months or longer.

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 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.

10


 

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, 2018 and December 31, 2017 (in thousands):

 

 

 

As of September 30, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial asset— available-for-sales securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

4,911

 

 

$

 

 

$

 

 

$

4,911

 

Commercial Paper

 

 

 

 

 

9,875

 

 

 

 

 

 

9,875

 

Corporate bonds

 

 

 

 

 

49,130

 

 

 

 

 

 

49,130

 

U.S. government securities

 

 

 

 

 

1,500

 

 

 

 

 

 

1,500

 

Total financial asset—available-for-sales securities

 

$

4,911

 

 

$

60,505

 

 

$

 

 

$

65,416

 

 

 

 

As of December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial asset— available-for-sales securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,269

 

 

$

 

 

$

 

 

$

1,269

 

Commercial paper

 

 

 

 

 

13,916

 

 

 

 

 

 

13,916

 

Corporate bonds

 

 

 

 

 

36,453

 

 

 

 

 

 

36,453

 

U.S. government securities

 

 

 

 

 

2,485

 

 

 

 

 

 

2,485

 

Total financial asset—available-for-sales securities

 

$

1,269

 

 

$

52,854

 

 

$

 

 

$

54,123

 

 

There were no transfers within the hierarchy during the nine months ended September 30, 2018 and the year ended December 31, 2017. 

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 2024. 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, 2018 and 2017 was $0.4 million and $0.3 million, respectively. Rent expense for the nine months ended September 30, 2018 and 2017 was $1.4 million and $0.8 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.

As of September 30, 2018, future minimum operating lease payments and purchase obligations are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Operating

 

 

Purchase

 

 

Lease and Purchase

 

 

 

Leases

 

 

Obligations

 

 

Obligations

 

2018 (remaining)

 

$

138

 

 

$

8,533

 

 

$

8,671

 

2019

 

 

1,446

 

 

 

5,361

 

 

 

6,807

 

2020

 

 

1,496

 

 

 

3,981

 

 

 

5,477

 

2021

 

 

1,995

 

 

 

399

 

 

 

2,394

 

2022 and thereafter

 

 

4,251

 

 

 

 

 

 

4,251

 

Total

 

$

9,326

 

 

$

18,274

 

 

$

27,600

 

 

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.

11


 

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, 2018 and December 31, 2017, no liability associated with such indemnifications had been recorded.

 

7. Shareholder’s Equity and Share-based Compensation

The Company’s certificate of incorporation as of September 30, 2018 authorized the Company to issue up to 95,000,000 shares of common stock and 5,000,000 shares of preferred stock, each at $0.00001 par value per share. The Company’s certificate of incorporation as of December 31, 2017 authorized the Company to issue up to 400,000,000 shares of common stock and 10,000,000 shares of preferred stock, each at $0.00001 par value per share.

As of September 30, 2018, no preferred stock was outstanding. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends out of funds legally available. No dividends have been declared to date.

2015 Equity Incentive Plan and 2004 Equity Incentive Plan

Under the Company’s 2015 Equity Incentive Plan and 2004 Equity Incentive Plan, shares of common stock were reserved for the issuance of incentive stock options (“ISO”); nonstatutory stock options (“NSO”); or the sales of restricted common stock to employees, officers, directors, and consultants of the Company. The exercise price of an option is determined by the board of directors when the option is granted and may not be less than 85% of the fair market value of the shares on the date of grant, provided that the exercise price of an ISO is not less than 100% of the fair market value of the shares on the date of grant and the exercise price of any option granted to a 10% stockholder is not less than 110% of the fair market value of the shares on the date of grant. ISOs granted under the Plan generally vest 25% after the completion of 12 months of service and the balance in equal monthly installments over the next 36 months of service and expire 10 years from the grant date. NSOs vest as per the specific agreement and expire 10 years from the date of grant. The Plan allows for early exercise of options prior to full vesting as determined by the board of directors and set forth in the stock option agreements governing such options. Exercises of unvested options are subject to repurchase by the Company at not less than the original exercise price upon termination of employment.

2017 Equity Incentive Plan

In November 2017, the Company adopted the 2017 Equity Incentive Plan, or 2017 Plan, and all shares reserved for grant under the 2015 Equity Incentive Plan and 2004 Equity Incentive Plan were cancelled. The 2017 Plan had 3,294,919 common shares reserved, plus any shares subject to outstanding stock options or other stock awards that were granted under the 2015 Equity Incentive Plan and 2004 Equity Incentive Plan that were forfeited, terminate, expire or are otherwise not issued. In addition, the shares reserved under the 2017 Plan will automatically increase on the first day of each calendar year, beginning on January 1, 2018 and ending on January 1, 2027, by an amount equal to 5% of the total number of shares of the Company’s capital stock outstanding on the last day of the calendar month before the date of the automatic increase, or a lesser number of shares determined by the board of directors prior to the date of such automatic increase. The 2017 Plan provides for the grant of common stock awards, including incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and restricted stock units, performance units and performance shares to employees, directors, and consultants of the Company. All granted shares that are canceled, forfeited or expired are returned to the 2017 Plan and are available for grant in conjunction with the issuance of new equity awards. Stock options may be granted at an exercise price per share not less than 100% of the fair market value at the date of grant. If a stock option is granted to a 10% stockholder, then the exercise price per share must not be less than 110% of the fair market value per share of common stock on the grant date. Options granted are exercisable over a maximum term of 10 years from the date of grant and generally vest over a period of four years. As of September 30, 2018, 2,512,698 shares are available for grant.

 

 

12


 

8. Common Stock

Stock Options

Activity under the Company’s stock option plan is set forth below:

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

 

 

 

 

 

Exercise

 

 

Contractual

 

 

Intrinsic Value

 

 

 

Number of Shares

 

 

Price