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.
Pending Acquisition
On May 6, 2019, the Company and Marvell Technology Group Ltd., a Bermuda exempted company (“Marvell”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Marvell and Aquantia Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Marvell (“Merger Sub”) providing for the merger of Merger Sub with and into the Company (the “Merger”) with the Company surviving the Merger as a wholly owned subsidiary of Marvell. At a special meeting of the Company’s stockholders held on July 10, 2019, the stockholders adopted the Merger Agreement.
Under the terms of the Merger Agreement, Marvell will acquire all outstanding shares of the Company’s common stock in exchange for consideration of $13.25 per share in cash. The Merger Agreement contains representations and warranties customary for transactions of this type. The Merger is expected to close before the end of the calendar year 2019, subject to the satisfaction or waiver of a number of closing conditions. The Merger Agreement provides Marvell and the Company with certain termination rights and, under certain circumstances, may require Marvell or the Company to pay a termination fee.
The Company recorded acquisition-related costs of approximately $1.9 million for each of the three and six months ended June 30, 2019 primarily for outside legal and external financial advisory fees associated with the pending acquisition by Marvell. These costs were recorded in general and administrative expense in the Company’s condensed consolidated statements of operations and comprehensive loss in the respective reporting periods. Additional acquisition-related costs are expected to be incurred through the closing of the Merger.
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 (“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, 2018 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 6, 2019 (the “2018 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, 2018 and the related notes thereto included in the 2018 Annual Report on Form 10-K.
2. Summary of Significant Accounting Policies
During the three and six months ended June 30, 2019, there have been no changes in our significant accounting policies as described in the Company’s 2018 Annual Report on Form 10-K, except as discussed below:
Recent Accounting Pronouncements
—
Adopted
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
(herein referred to as “ASC 842”). The new guidance requires entities to recognize assets and liabilities for leases and additional disclosures to better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance was effective for financial statements issued for fiscal years beginning after December 15, 2018. Early adoption was permitted. The Company adopted this guidance in the first quarter of 2019 using the modified retrospective approach, electing the package of practical expedients, which allows for the carryforward of the Company’s historical lease classification and assessment on whether a contract is or contains a lease, and the practical expedient to not separate lease and non-lease components. The Company has elected not to record on the balance sheet leases with an initial term of twelve months or less and that do not have a purchase option that the Company is reasonably certain to exercise. The Company also elected the optional transition method that permits adoption of the new standard as of the effective date without adjusting comparative periods presented. Adoption of the
7
standard resulted in the recognition of $5.9 million of right-of-use assets and $7.3 million of lease liabilities on our
condensed
consolidated balance sheet at adoption related to our
leases
. The difference of $1.4 million represented
lease incentives
and deferred rent
for leases that existed as of the date of adoption, which
reduced the
right-of-use asset
recorded at
the
date of
adoption
. The adoption of the standard on January 1, 2019 did not have a material impact on
the Company’s
consolidated statements of operations, stockholders’ equity
or
cash flows. See Note 3 for additional information.
3. Balance Sheet Components
Inventories consisted of the following (in thousands):
|
|
As of June 30,
|
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Processed wafers
|
|
$
|
1,847
|
|
|
$
|
1,233
|
|
Work in process
|
|
|
7,979
|
|
|
|
5,990
|
|
Finished goods
|
|
|
10,491
|
|
|
|
7,251
|
|
Total inventories
|
|
$
|
20,317
|
|
|
$
|
14,474
|
|
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
As of June 30,
|
|
|
As of December 31,
|
|
|
|
Estimated Useful Lives
|
|
2019
|
|
|
2018
|
|
Machinery and equipment
|
|
2-3 years
|
|
$
|
16,530
|
|
|
$
|
15,237
|
|
Production masks
|
|
4 years
|
|
|
8,101
|
|
|
|
5,401
|
|
Software and computer equipment
|
|
3 years
|
|
|
4,617
|
|
|
|
4,492
|
|
Leasehold improvements
|
|
Shorter of estimated life of asset or remaining lease term
|
|
|
1,414
|
|
|
|
1,414
|
|
Office furniture and fixtures
|
|
3 years
|
|
|
163
|
|
|
|
117
|
|
Total property and equipment
|
|
|
|
|
30,825
|
|
|
|
26,661
|
|
Less: accumulated depreciation and
amortization
|
|
|
|
|
(20,104
|
)
|
|
|
(17,436
|
)
|
Property and equipment, net
|
|
|
|
$
|
10,721
|
|
|
$
|
9,225
|
|
Depreciation and amortization of property and equipment totaled $1.4 million and $1.2 million for the three months ended June 30, 2019 and 2018, respectively. Depreciation and amortization of property and equipment totaled $2.8 million and $2.4 million for the six months ended June 30, 2019 and 2018, respectively.
Intangible assets, net were carried at cost, less accumulated amortization. Intangible assets were as follows (in thousands):
|
|
|
|
As of June 30,
|
|
|
As of December 31,
|
|
|
|
Estimated Useful Lives
|
|
2019
|
|
|
2018
|
|
IP license
|
|
7 years
|
|
$
|
5,416
|
|
|
$
|
5,416
|
|
Patents
|
|
10-12 years
|
|
|
348
|
|
|
|
348
|
|
Total intangible assets
|
|
|
|
|
5,764
|
|
|
|
5,764
|
|
Less: accumulated amortization
|
|
|
|
|
(2,419
|
)
|
|
|
(2,016
|
)
|
Intangible assets, net
|
|
|
|
$
|
3,345
|
|
|
$
|
3,748
|
|
Amortization of intangible assets totaled $0.2 million and $0.2 million for the three months ended June 30, 2019 and 2018, respectively.
Amortization of intangible assets totaled $0.4 million and $0.4 million for the six months ended June 30, 2019 and 2018, respectively.
Amortization expense related to amortizable intangibles in future periods as of June 30, 2019 is expected to be as follows (in thousands):
2019 (remaining)
|
|
$
|
405
|
|
2020
|
|
|
808
|
|
2021
|
|
|
808
|
|
2022
|
|
|
800
|
|
2023 and thereafter
|
|
|
524
|
|
Total
|
|
$
|
3,345
|
|
8
Operating lease asset and liabilities
The Company has entered into operating leases primarily for real estate. As of adoption these leases have terms which range from 1 year to 6 years, and often include one or more options to renew. These renewal terms can extend the lease term from 1 to 9 years, and are included in the lease term when it is reasonably certain that the Company will exercise the option. After the adoption of ASC 842 on January 1, 2019, an asset has been included on the Company’s condensed consolidated balance sheet as “operating lease assets, net” which represents the Company’s right to use the underlying asset for the lease term. Similarly, the Company has recorded its obligation to make lease payments within its condensed consolidated balance sheet as “operating lease liabilities” and classified these liabilities as short-term (“operating lease liabilities – short term”) and long-term (“operating lease liabilities – long term”) based on the timing and amounts of payment. The Company determines whether an arrangement is a lease at inception. Some lease agreements contain the lease and non-lease components, which are accounted for a single lease component. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
As of June 30, 2019, total right-of-use assets and operating lease liabilities were approximately $5.4 million and $6.9 million, respectively and presented within the condensed consolidated balance sheet as noted above. The Company has entered into various short-term operating leases, primarily for office equipment, automotive, and other facilities, with an initial term of twelve months or less. Leases with a lease term of twelve months or less have not been recorded on the Company’s condensed consolidated balance sheet. No new leases were entered into during the six months ended June 30, 2019.
All operating lease expense is recognized on a straight-line basis over the lease term. In the three and six months ended June 30, 2019, the Company recognized approximately $0.5 million and $1.0 million in total lease costs, respectively.
Because the rate implicit in each lease is not readily determinable, the Company used the estimated interest rate for collateralized loan over a similar term to determine the present value of the lease payments. The weighted-average remaining lease term was 3.3 years and the weighted-average discount rate used was 8.5%.
Maturities of lease liabilities as of June 30, 2019 were as follows (in thousands):
2019 (remaining)
|
$
|
668
|
|
2020
|
|
1,513
|
|
2021
|
|
2,018
|
|
2022
|
|
2,059
|
|
2023
|
|
1,793
|
|
2024 and thereafter
|
|
431
|
|
Total
|
|
8,482
|
|
Less imputed interest
|
|
(1,594
|
)
|
Total lease liabilities
|
$
|
6,888
|
|
Refer to Note 6 for the future minimum operating lease payments under ASC 840.
Accrued liabilities consisted of the following (in thousands):
|
|
As of June 30,
|
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued compensation and related benefits
|
|
$
|
3,889
|
|
|
$
|
5,301
|
|
Accrued IP License
|
|
|
5,651
|
|
|
|
4,829
|
|
Accrued technical consulting and professional services
|
|
|
1,490
|
|
|
|
412
|
|
Accrued royalty, rebates and commission
|
|
|
646
|
|
|
|
443
|
|
Other accrued liabilities
|
|
|
2,810
|
|
|
|
2,922
|
|
Total accrued liabilities
|
|
$
|
14,486
|
|
|
$
|
13,907
|
|
9
4. Financial Instruments
The following is a summary of financial instruments (in thousands):
|
|
As of June 30, 2019
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Values
|
|
Available-for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
8,943
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
8,947
|
|
Money market funds
|
|
|
751
|
|
|
|
—
|
|
|
|
—
|
|
|
|
751
|
|
Corporate bonds
|
|
|
34,945
|
|
|
|
32
|
|
|
|
(2
|
)
|
|
|
34,975
|
|
U.S. government securities
|
|
|
1,988
|
|
|
|
4
|
|
|
|
—
|
|
|
|
1,992
|
|
Total available-for-sale securities
|
|
$
|
46,627
|
|
|
$
|
40
|
|
|
$
|
(2
|
)
|
|
$
|
46,665
|
|
Reported in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
751
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,914
|
|
Total available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,665
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Values
|
|
Available-for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
10,173
|
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
|
$
|
10,164
|
|
Money market funds
|
|
|
403
|
|
|
|
—
|
|
|
|
—
|
|
|
|
403
|
|
Corporate bonds
|
|
|
52,448
|
|
|
|
—
|
|
|
|
(114
|
)
|
|
|
52,334
|
|
U.S. government securities
|
|
|
1,972
|
|
|
|
—
|
|
|
|
-
|
|
|
|
1,972
|
|
Total available-for-sale securities
|
|
$
|
64,996
|
|
|
$
|
—
|
|
|
$
|
(123
|
)
|
|
$
|
64,873
|
|
Reported in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,143
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,730
|
|
Total available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,873
|
|
The contractual maturities of available-for-sale securities are presented in the following table (in thousands):
|
|
As of June 30, 2019
|
|
|
|
Amortized
Cost Basis
|
|
|
Estimated
Fair Value
|
|
Due in one year or less
|
|
$
|
46,627
|
|
|
$
|
46,665
|
|
Due between one and five years
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
46,627
|
|
|
$
|
46,665
|
|
Gross realized gains and gross realized losses on sales of available-for-sale securities for the three and six months ended June 30, 2019 were not significant.
As of June 30, 2019 and December 31, 2018, there were $5.1 million and $19.2 million, respectively, of securities that had been in a continuous loss position for 12 months or longer.
10
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. 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 measured at fair value on a recurring basis categorized by the fair value hierarchy as of June 30, 2019 and December 31, 2018 (in thousands):
|
|
As of June 30, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial asset— available-for-sales securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
751
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
751
|
|
Commercial paper
|
|
|
—
|
|
|
|
8,947
|
|
|
|
—
|
|
|
|
8,947
|
|
Corporate bonds
|
|
|
—
|
|
|
|
34,975
|
|
|
|
—
|
|
|
|
34,975
|
|
U.S. government securities
|
|
|
—
|
|
|
|
1,992
|
|
|
|
—
|
|
|
|
1,992
|
|
Total financial asset—available-for-sales securities
|
|
$
|
751
|
|
|
$
|
45,914
|
|
|
$
|
—
|
|
|
$
|
46,665
|
|
|
|
As of December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial asset— available-for-sales securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
403
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
403
|
|
Commercial paper
|
|
|
—
|
|
|
|
10,164
|
|
|
|
—
|
|
|
|
10,164
|
|
Corporate bonds
|
|
|
—
|
|
|
|
52,334
|
|
|
|
—
|
|
|
|
52,334
|
|
U.S. government securities
|
|
|
—
|
|
|
|
1,972
|
|
|
|
—
|
|
|
|
1,972
|
|
Total financial asset—available-for-sales securities
|
|
$
|
403
|
|
|
$
|
64,470
|
|
|
$
|
—
|
|
|
$
|
64,873
|
|
There were no transfers within the hierarchy during the six months ended June 30, 2019 and 2018.
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.
In addition, the Company has purchase obligations which included agreements and issued purchase orders containing non-cancelable payment terms to purchase goods and services.
11
As
prev
iously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2018
and under the previous lease accounting standard ASC 840
,
the aggregate future non-cancelable minimum rental payments on our operating leases, as of December 31, 2018,
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Operating
|
|
|
Purchase
|
|
|
Lease and Purchase
|
|
|
|
Leases
|
|
|
Obligations
|
|
|
Obligations
|
|
2019
|
|
$
|
1,482
|
|
|
$
|
15,674
|
|
|
$
|
17,156
|
|
2020
|
|
|
1,516
|
|
|
|
4,247
|
|
|
|
5,763
|
|
2021
|
|
|
1,993
|
|
|
|
1,008
|
|
|
|
3,001
|
|
2022
|
|
|
2,033
|
|
|
|
—
|
|
|
|
2,033
|
|
2023 and thereafter
|
|
|
2,217
|
|
|
|
—
|
|
|
|
2,217
|
|
Total
|
|
$
|
9,241
|
|
|
$
|
20,929
|
|
|
$
|
30,170
|
|
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.
Between May 30, 2019 and June 14, 2019, thirteen stockholder actions were filed in federal court (captioned
Wang v. Aquantia Corp., et al.
, No. 19-cv-03000 (N.D. Cal. filed May 30, 2019);
Sabatini v. Aquantia Corp., et al.
, No. 19-cv-01020-UNA (D. Del. filed May 31, 2019) (filed on behalf of a putative class);
Carter v. Aquantia Corp., et al.
, No. 19-cv-03092 (N.D. Cal. filed June 4, 2019) (filed on behalf of a putative class);
Yu v. Aquantia Corp., et al.
, No. 19-cv-05293-PAE (S.D.N.Y. filed June 5, 2019);
Vakil v. Aquantia Corp., et al.
, No. 19-cv-05287-DLC (S.D.N.Y. filed June 5, 2019);
Engel v. Aquantia Corp., et al.
, No. 19-cv-05285-LLS (S.D.N.Y. filed June 5, 2019);
Ward v. Aquantia Corp., et al.
, No. 19-cv-05367 (S.D.N.Y. filed June 7, 2019) (filed on behalf of a putative class);
Drake v. Aquantia Corp.
, et al., No. 19-cv-03194-LB (N.D. Cal. filed June 10, 2019);
Childs v. Aquantia Corp., et al.
, No. 19-cv-01078-UNA (D. Del. filed June 10, 2019) (filed on behalf of a putative class);
Ergene v. Aquantia Corp., et al.
, No. 19-cv-03301 (N.D. Cal. filed June 11, 2019) (filed on behalf of a putative class);
Bushansky v. Aquantia Corp., et al.
, No. 19-cv-03302 (N.D. Cal. filed June 11, 2019) (filed on behalf of a putative class);
Stewart v. Aquantia Corp., et al.
, No. 19-cv-01087-UNA (D. Del. filed June 13, 2019) (filed on behalf of a putative class); and
Fahrbach v. Aquantia Corp., et al.
, No. 19-cv-01100-UNA (D. Del. filed June 14, 2019) (collectively, the “Complaints”)) against Aquantia and our Board of Directors related to the Merger. The Complaints assert violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. Plaintiffs contend that Aquantia’s Preliminary Proxy Statement on Schedule 14A and Definitive Proxy Statement on Schedule 14A, filed on May 29, 2019 and June 10, 2019, respectively, omitted or misrepresented material information regarding the Merger. The complaints seek, among other things, injunctive relief, rescission or rescissory damages, and an award of plaintiffs’ respective costs, including attorneys’ fees and expenses. On June 28, 2019, the Company filed a Schedule 14A containing certain supplemental disclosures to moot the claims alleged in the Complaints.
The Company believes the litigations are without merit and has not recorded an expense related to the outcome of these litigations because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.
Such litigation, and any future litigation 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 June 30, 2019 and December 31, 2018, no liability associated with such indemnifications had been recorded.
12
7
.
Common Stock
and Share-based Com
pensation
The Company’s certificate of incorporation, as of June 30, 2019 and December 31, 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.
As of June 30, 2019, 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 5,047,440 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 until 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 June 30, 2019, 2,157,424 shares are available for grant.
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
|
|
|
Term (Years)
|
|
|
(in thousands)
|
|
Balance—December 31, 2018
|
|
|
2,297,403
|
|
|
$
|
4.49
|
|
|
|
6.9
|
|
|
$
|
9,858
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(453,293
|
)
|
|
$
|
3.81
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(33,206
|
)
|
|
$
|
6.30
|
|
|
|
|
|
|
|
|
|
Balance—June 30, 2019
|
|
|
1,810,904
|
|
|
$
|
4.63
|
|
|
|
6.5
|
|
|
$
|
15,206
|
|
Vested and exercisable—June 30, 2019
|
|
|
1,311,186
|
|
|
$
|
4.00
|
|
|
|
6.2
|
|
|
$
|
11,844
|
|
Vested and exercisable—December 31, 2018
|
|
|
1,547,754
|
|
|
$
|
3.74
|
|
|
|
6.5
|
|
|
$
|
7,803
|
|
As of June 30, 2019, approximately $1.4 million of unrecognized stock compensation costs related to awards were expected to be recognized over a weighted-average period of 2.8 years. As of December 31, 2018, approximately $2.0 million of unrecognized stock compensation costs related to awards were expected to be recognized over a weighted-average period of 2.8 years.
13
The aggregate intrinsic value of options exercised during the
six
months ended
June 30
, 2019 was $
3
.
5
million. The aggregate intrinsic value of options exercised during the year ended December 31, 2018 was $7.1 million.
There were no options granted during the three months ended June 30, 2019 and 2018. The weighted-average grant-date fair value of options granted during the year ended December 31, 2018 was $5.46 per share.
Restricted Stock Unit Awards
The Company grants restricted stock units (RSU) to employees under the 2017 Plan. RSUs granted typically vest ratably over a four-year period and are converted into shares of the Company’s common stock upon vesting on a one-for-one basis subject to the employee’s continued service to the Company over that period. The fair value of RSUs is determined using the fair value of the Company’s common stock on the date of the grant, reduced by the discounted present value of dividends expected to be declared before the awards vest. Compensation expense is recognized on a straight-line basis over the requisite service period of each grant. Each RSU award granted from the 2017 Plan will reduce the number of shares available for issuance under the 2017 Plan by one share.
As of June 30, 2019, unamortized compensation expense related to RSU was approximately $29.6 million, to be recognized over 3.3 years. For the year ended December 31, 2018, unamortized compensation expense related to RSU was approximately $15.8 million, to be recognized over 3.0 years.
Activity under the Company’s RSU is set forth below
:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Market
|
|
|
|
Number of Shares
|
|
|
Value
|
|
Balance—December 31, 2018
|
|
|
1,554,089
|
|
|
$
|
12.73
|
|
Granted
|
|
|
2,070,526
|
|
|
$
|
9.30
|
|
Released
|
|
|
(388,437
|
)
|
|
$
|
12.66
|
|
Canceled
|
|
|
(101,261
|
)
|
|
$
|
11.04
|
|
Balance—June 30, 2019
|
|
|
3,134,917
|
|
|
$
|
10.42
|
|
Employee Stock Purchase Plan
Concurrent with the completion of the Company’s initial public offering (“IPO”) in November 2017, the Company adopted the 2017 Employee Stock Purchase Plan, or ESPP. The ESPP authorizes the issuance of 2,018,975 shares of common stock outstanding under purchase rights granted to its employees. In addition, the shares reserved under the ESPP Plan will automatically increase on the first day of each calendar year until January 1, 2027, by the lesser of (i) an amount equal to 2% 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, (ii) 1,000,000 shares of common stock, and (iii) a lesser number of shares determined by the board of directors prior to the date of such automatic increase. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP generally provides for offering periods and purchase periods every six months, and at the end of each purchase period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the purchase period or on the last trading day of the offering period. 366,369 shares and 552,489 shares were issued as of December 31, 2018 and June 30, 2019 under the ESPP, respectively. Shares expected to be issued under the ESPP were 140,820 for the offering period outstanding as of June 30, 2019. The calculated fair value of the shares under the ESPP for the period started on May 16, 2019 was estimated using the Black-Scholes model with the following assumptions: risk-free interest rate of 2.43%, expected term of 0.5 year, expected dividends of 0% and volatility of 22%. As of June 30, 2019, unamortized compensation expense related to ESPP was approximately $0.4 million, to be recognized over approximately five months. As of December 31, 2018, unamortized compensation expense related to ESPP was approximately $0.5 million, to be recognized over approximately five months.
14
The Company uses the straight-line vesting attribution method to record stock-based compensation expense. Stock-based compensation expense recognized in the consolidated statements of operations and comprehensive loss for opti
ons, restricted stock units and ESPP was as follows (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Cost of revenue
|
|
$
|
86
|
|
|
$
|
21
|
|
|
$
|
152
|
|
|
$
|
46
|
|
Research and development
|
|
|
1,821
|
|
|
521
|
|
|
|
3,053
|
|
|
|
1,094
|
|
Sales and marketing
|
|
398
|
|
|
162
|
|
|
748
|
|
|
273
|
|
General and administrative
|
|
584
|
|
|
458
|
|
|
|
1,226
|
|
|
727
|
|
Total
|
|
$
|
2,889
|
|
|
$
|
1,162
|
|
|
|
5,179
|
|
|
$
|
2,140
|
|
No income tax benefit associated with stock-based compensation expense was recognized in the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2019 and 2018.
8. Income Taxes
The Company recorded an income tax provision of $22,000 and benefit of $0.1 million for the three months ended June 30, 2019 and 2018, respectively. The Company recorded an income tax provision of $0.2 million and benefit of $0.2 million for the six months ended June 30, 2019 and 2018, respectively. The income tax benefit for the three and six months ended June 30, 2018 consisted primarily of a credit to foreign jurisdiction.
Although the Company files U.S. federal and various state tax returns, the Company’s only major tax jurisdictions are the United States and California. As a result of NOL carryforwards, all of the Company’s tax years are open to federal and state examination in the United States. All tax years are open to examination in various foreign countries.
9. Net Loss Per Share
The following table summarizes the computation of basic and diluted net loss per share (in thousands, except per share data):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(17,881
|
)
|
|
$
|
(833
|
)
|
|
$
|
(30,948
|
)
|
|
$
|
(2,201
|
)
|
Weighted-average common shares outstanding
|
|
|
35,774,633
|
|
|
|
33,835,889
|
|
|
|
35,468,254
|
|
|
|
33,666,290
|
|
Less: Shares subject to repurchase
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted-average shares outstanding
|
|
|
35,774,633
|
|
|
|
33,835,889
|
|
|
|
35,468,254
|
|
|
|
33,666,290
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.50
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.87
|
)
|
|
$
|
(0.07
|
)
|
Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period.
The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted-average shares outstanding because such securities have an antidilutive impact due to losses reported (in common stock equivalent shares):
|
|
As of
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options to purchase common stock
|
|
|
1,810,904
|
|
|
|
2,297,403
|
|
Unvested restricted stock units
|
|
|
3,134,917
|
|
|
|
1,554,089
|
|
Common stock warrants
|
|
|
83,695
|
|
|
|
83,695
|
|
Total
|
|
|
5,029,516
|
|
|
|
3,935,187
|
|
10. Segment Reporting
The Company operates in one reportable segment related to the design, development and sale of network communication integrated circuits. The Company’s chief operating decision-maker (“CODM”) is its Chief Executive Officer, who reviews operating
15
results on an aggregate basis and mana
ges the Company’s operations as a whole for the purpose of evaluating financial performance and allocating resources. Substantially all of the Company’s long-lived assets were attributable to operations in the United States as of
June 30
, 2019
and
December
31, 2018
.
The following table summarizes revenue by market (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenue by market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Center
|
|
$
|
2,117
|
|
|
$
|
15,097
|
|
|
$
|
10,328
|
|
|
$
|
31,366
|
|
Enterprise Infrastructure
|
|
|
3,429
|
|
|
|
11,518
|
|
|
|
8,900
|
|
|
|
21,029
|
|
Access
|
|
|
3,586
|
|
|
|
3,576
|
|
|
|
6,792
|
|
|
|
6,107
|
|
Automotive
|
|
|
99
|
|
|
|
241
|
|
|
|
233
|
|
|
|
288
|
|
Total revenue
|
|
$
|
9,231
|
|
|
$
|
30,432
|
|
|
$
|
26,253
|
|
|
$
|
58,790
|
|
The Company sells its products worldwide and attributes revenue to the geography where the product is shipped. The geographical distribution of revenue as a percentage of total revenue for the periods indicated was as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Malaysia
|
|
|
22
|
|
%
|
|
55
|
|
%
|
|
35
|
|
%
|
|
58
|
|
%
|
China
|
|
|
39
|
|
|
|
24
|
|
|
|
34
|
|
|
|
24
|
|
|
United States
|
|
|
6
|
|
|
|
2
|
|
|
|
7
|
|
|
|
1
|
|
|
Other
|
|
|
33
|
|
|
|
19
|
|
|
|
24
|
|
|
|
17
|
|
|
Total
|
|
|
100
|
|
%
|
|
100
|
|
%
|
|
100
|
|
%
|
|
100
|
|
%
|
11. Concentrations
Credit
—Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company’s cash equivalents consist of cash and money market accounts with a financial institution that management believes to be of high-credit quality; however, at times, balances exceed federally insured limits. Amounts held on deposit at financial institutions in excess of Federal Deposit Insurance Corporation-insured amounts were $1.9 million and $1.1 million as of June 30, 2019 and December 31, 2018, respectively.
Significant Customers
—Credit risk with respect to accounts receivable is concentrated with two large customers that contribute a majority of the Company’s business and is mitigated by a relatively short collection period. Collateral is not required for accounts receivable. The fair value of accounts receivable approximates their carrying value.
Revenue and accounts receivable concentrated with significant customers and their manufacturing subcontractors as a percentage of accounts receivable and total revenue were as follows:
|
|
As of
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accounts Receivable:
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
24
|
%
|
|
|
42
|
%
|
Customer B
|
|
4
|
|
|
19
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
19
|
%
|
|
|
46
|
%
|
|
|
33
|
%
|
|
|
51
|
%
|
Customer B
|
|
14
|
|
|
31
|
|
|
15
|
|
|
30
|
|
Significant Suppliers
— The Company depends on a limited number of subcontractors and suppliers for its wafer and substrate supply and to fabricate, assemble, and test its semiconductor devices. The Company generally sources its production through standard purchase orders and has wafer supply and assembly and test agreements with certain outside contractors. While the Company seeks to maintain a sufficient level of supply and endeavors to maintain ongoing communications with suppliers to guard against interruptions or cessation of supply, business and results of operations could be adversely affected by a stoppage or delay of supply, substitution of more
16
expensive or less rel
iable products or services, receipt of defective semiconductor devices, an increase in the price of products, or an inability to obtain reduced pricing from suppliers in response to competitive pressures.
12. Employee Benefit Plan
The Company has established a 401(k) plan, which permits participants to make contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code. The Company may, at its discretion, make matching contributions to the 401(k) Plan. The Company has made no contributions to the 401(k) Plan since its inception.
17