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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10‑K


(Mark One)

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

For the fiscal year ended December 31, 2017

OR

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

For the transition period from                      to                     

001‑    37582

(Commission File No.)


ADESTO TECHNOLOGIES CORPORATION

(Exact name of Registrant as specified in its charter)


Delaware

16‑1755067

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

3600 Peterson Way
Santa Clara, California

95054

(Address of principal executive offices)

(Zip Code)

 

(408) 400‑0578

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

  

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:

None


Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  ☐    No  ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  ☐    No  ☒

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 (Exchange Act) 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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See 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 smaller reporting Company)

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).   Yes  ☐    No  ☒

The aggregate market value of voting stock held by non-affiliates of the Registrant on June 30, 2017, based on the closing price of $4.55 for shares of the Registrant’s common stock as reported by The Nasdaq Capital Market, was approximately $80.0 million. Shares of common stock held by each executive officer, director and their affiliated holders have been excluded on the grounds that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The registrant has no non-voting common equity.

As of February 20, 2018, there were 21,393,777 shares of the Registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

 


 

TABLE OF CONTENTS

 

 

Page

 

Part I

 

Item 1. 

Business

2

Item 1A. 

Risk Factors

8

Item 1B. 

Unresolved Staff Comments

27

Item 2. 

Properties

28

Item 3. 

Legal Proceedings

28

Item 4. 

Mine Safety Disclosures

28

 

 

 

 

Part II

 

Item 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

29

Item 6. 

Selected Financial Data

31

Item 7. 

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

33

Item 7A. 

Quantitative and Qualitative Disclosures about Market Risk

44

Item 8. 

Financial Statements and Supplementary Data

49

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

81

Item 9A. 

Controls and Procedures

81

Item 9B. 

Other Information

82

 

 

 

 

Part III

 

Item 10. 

Directors, Executive Officers and Corporate Governance

83

Item 11. 

Executive Compensation

87

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

94

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

97

Item 14. 

Principal Accounting Fees and Services

98

 

 

 

 

Part IV

 

Item 15. 

Exhibits and Financial Statement Schedules

99

Item 16. 

Form 10-K Summary

102

 

 

 

 


 

PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” “seek” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.

As used in this report, the terms “Adesto,” “we,” “us,” and “our” mean Adesto Technologies Corporation and its subsidiaries unless the context indicates otherwise.

1


 

ITEM 1.       BUSINESS

Overview

We are a leading provider of application-specific, ultra-low power non-volatile memory, or NVM, products. We optimize our NVM products for Internet of Things, or IoT, applications including current and next-generation Internet-connected devices in the consumer, industrial, medical and wearables markets. We combine our NVM design capabilities with proprietary intellectual property and differentiated technology platforms to deliver high-performance products that dramatically reduce the overall energy consumption of our customers’ systems and extend battery life. Our products feature embedded intelligence in a small form factor and high reliability.

We sell our products directly to leading original equipment manufacturers and original design manufacturers, or OEMs and ODMs, respectively, that manufacture products for our end customers. In general, we work directly with our customers to have our NVM devices designed into and qualified for their products, which we refer to as design wins. Although we maintain direct sales, support and development relationships with our end customers, most of our products are sold to those end customers through distributors.

We were originally incorporated in California in January 2006, and reincorporated in Delaware in October 2015. We completed our initial public offering, or IPO, of common stock in October 2015.Our principal executive offices are located at 3600 Peterson Way, Santa Clara, California 95054 and our telephone number is (408) 400‑0578. Our website is www.adestotech.com. The contents of our website are not incorporated into, or otherwise to be regarded as part of, this Annual Report on Form 10‑K.

Our Products

We offer six product families, DataFlash, Fusion Serial Flash, Standard Serial Flash, EcoXiP, Mavriq and Moneta, which are manufactured using two technology platforms: industry-standard “floating gate” technology and our proprietary Conductive Bridging Random Access Memory, or CBRAM, technology. We optimize our products to operate at a wide voltage range, allowing continued operation even as the battery discharges and reaches very low power levels, where commodity NVM devices typically fail. Operating intelligence, such as low power mode, is designed into our products to help systems save energy. Our products allow for greater storage efficiency than competing commodity NVM products in logging small packets of data for the IoT. This reduces microcontroller unit burden on system resources and allows for less frequent re-write cycles, enabling dramatic increases in battery life and enhancing the reliability of the flash memory components. By incorporating power management features in our NVM products, we enable our customers to reduce the number of included components and the overall footprint of their systems, thereby lowering the total cost of their systems. Some of our new products can significantly improve system performance and power consumption by enabling the use of intelligent design to accelerate data handling capability between microprocessor and memory components.

Product Families

DataFlash. Our DataFlash family of NVM products contains smart features that reduce power requirements and improve system efficiencies, and is especially well suited for data-logging applications, such as industrial automation, home automation sensing and health and fitness tracking.

Fusion Serial Flash. Our Fusion Serial Flash product family combines industry-standard sector sizes and read/write commands with new features, such as wide voltage, ultra-deep power down mode and flexible erase capability. The Fusion Serial Flash family of memory products is designed for use in a wide variety of high-volume consumer applications, such as wearables, mobile and other applications requiring energy conservation and in which program code is copied from flash into embedded RAM for execution. Its features can extend the life of battery-operated devices, such as Bluetooth 4.0 products, DECT ULE (Ultra Low Energy) products, ZigBee RF4CE, Z-Wave and other Wi-Fi and Wi-Fi-direct applications.

Key features provided by our DataFlash and Fusion Serial Flash product families include ultra-deep power down, which assists in system-level energy savings, and wide supply voltage range operation, which can maximize battery life. Our DataFlash product family also has byte-write capability, which enables management of the NVM system resources with a much simpler stack and allows for a smaller software footprint in the controller’s Static Random Access Memory, or SRAM, making more resources available for higher priority operations and lowering energy consumption.

EcoXiP. Our EcoXiP product family is a new generation of non-volatile memory products ideal for execute-in-place applications in embedded IoT systems. EcoXiP enables improved processor performance, and reduced system power consumption. Features such as a high-speed octal double data rate, or DDR, interface and a proprietary pre-fetching scheme optimize both throughput and latency and allow the microprocessor to operate more efficiently with our EcoXiP memory. Our EcoXiP also features the ability to perform concurrent read and write functions, further improving system performance. EcoXiP products also offer designers flexibility for future growth, by providing a roadmap for higher density memory to store additional code and have best-in-class power management features to improve device and system power consumption.

Standard Serial Flash. The Standard Serial Flash is a high quality non-volatile memory product family with industry standard features to store boot or program code with a low pin count industry standard serial interface.  A wide range of densities from 4Mb to 128Mb devices operating at either 3V or 1.8V is available for this product family.  Adesto’s Standard Serial Flash products are used in a variety of applications ranging from smart home applications to industrial applications demanding reliability, quality and performance.

Mavriq. Our Mavriq family of memory products provides robust, embedded or stand-alone storage technology. These products are built on our CBRAM architecture and feature wide voltage range operation, low energy write and ultra-fast write speeds, enabling extended battery life in connected devices and other energy-conscious applications. Our specialty Mavriq medical products are specifically designed to survive the extreme conditions of sterilization. They have passed both gamma and e-beam sterilization testing and are compatible across the sterilization conditions of heat, pressure and irradiation. With functional and electrical compatibility with competing serial memory products, our low-energy Mavriq memory solutions are well matched to the new design requirements of IoT and other applications such as camera sensors, Bluetooth low energy devices, wearables, gaming components, printer cartridges, medical equipment and other devices that leverage its unique capabilities.

Moneta. With the ability to read and write at 50‑100x lower power than comparable memory products, the Moneta family of memory products meets the requirements of new, ultra-low energy IoT electronics and enables applications in innovative energy harvesting and other low energy system designs. By consuming less energy during standard operation, these products can extend battery life and/or allow customers flexibility to use smaller batteries to power their systems. In addition to their inherent low power technology capability, Moneta products are built on our CBRAM architecture and employ innovative features to save energy, automatically switching to deep power down between transactions, and providing an ultra-deep power down mode. Our Moneta products make energy efficient battery-operated and battery-free designs possible, by enabling the lowest power read, write and standby NVM operations. Applications for these products include retail beacons, wearable medical and fitness devices, industrial and environmental sensors, agricultural monitors and other extreme low energy/long battery life, or energy harvesting systems.

Our Technology

Our product families are based on multiple layers of innovation and differentiation arising from feature sets and architectures that are built on two fundamental silicon technology platforms: industry-standard floating gate and our proprietary CBRAM. We believe these areas of differentiation enable us to address the specific needs of the IoT market.

We offer more than 100 products across our product families. Each product family utilizes technologies that differentiate it from competing commodity products and provides value to our customers.

Key components of our DataFlash and Fusion Serial Flash architectures include small page write operation, auto-erase and ultra-deep power down modes to reduce standby energy consumption. Both families also include wide voltage input-output interface, which helps extend battery life. In addition, our DataFlash family incorporates dual SRAM, buffers that enable utilization of a single, very low pin-count memory device for all NVM needs related to data and code storage, reducing the overall required footprint of the system.

Key components of our EcoXiP architecture include a high-speed octal DDR interface and a proprietary pre-fetching scheme to optimize both throughput and latency and allow the microprocessor to operate more efficiently. EcoXiP also features the ability to perform concurrent read and write functions to improve system performance. EcoXiP also includes configurable strength input/output pins and a range of power management features to enable reduced device and system power consumption.

Key components of our Mavriq and Moneta architectures include low-energy read and ultra-fast direct write capability and the ability to switch to deep power down between transactions to extend battery life. In addition, the Moneta memory products’ low power capability is ideal for energy harvesting applications.

Customers

Our end customers include leading tier‑1 OEMs and ODMs that use our products across multiple industries and applications, including next-generation Internet-connected appliances, wearables, smart meters, sensors and medical devices. We have also secured a number of reference design wins for Bluetooth 4.0 and Z-Wave products for Home Automation applications. During the year ended December 31, 2017, more than 2,000 end customers purchased our products. We generate most of our revenue from sales of our products to two independent, non-exclusive distributors, which many of our end customers use as an alternative means of fulfillment to direct purchases from us. For the year ended December 31, 2017, sales of our products to Arrow Electronics and SAS Electronic Company accounted for approximately 18% and 10%, respectively, of our revenue. For the year ended December 31, 2016, sales of our products to Arrow Electronics and SAS Electronic Company accounted for approximately 14% and 11%, respectively, of our revenue. For the year ended December 31, 2015, sales of our products to Arrow Electronics, SAS Electronic Company, and Avnet Inc. accounted for approximately 17%, 12% and 11%, respectively, of our revenue. While no end customers accounted for 10% or more of our revenue in 2017 through direct sales, one end customer accounted for 10% or more of our revenue in 2016 and 2015 through sales to distributors. A majority of our revenue for the year ended December 31, 2017 was generated by approximately 45 end customers.

Sales

We sell our products through our worldwide sales organization and through our channel of representatives and distributors to OEMs and ODMs. End customers primarily fulfill and procure product orders through our distribution partners. We have sales personnel covering three primary regions, the Americas, Asia Pacific and Europe, Middle East and Africa.

Manufacturing

We employ a fabless manufacturing business model and rely on third-party suppliers for all phases of the manufacturing process, including fabrication, assembly and testing. Our fabless business model allows us to leverage the expertise of industry-leading suppliers in such areas as fabrication, assembly, quality control and assurance, reliability and testing, and avoid the significant costs and risks associated with owning and operating such manufacturing operations. These suppliers also are responsible for procurement of raw materials used in the production of our products. As a result, we are able to focus our resources on product design, additional quality assurance, marketing and customer support.

We do not have a guaranteed level of production capacity from any of our suppliers’ facilities for the production of our products. We carefully qualify each of our suppliers and their subcontractors and processes to ensure they meet our standards for quality and reliability.

Wafer Fabrication

We currently manufacture the majority of our floating gate solutions in 110nm silicon wafer production process geometries utilizing the services of United Microelectronics Corporation in Taiwan. In early 2015, we commenced developing our first floating gate technology-based flash products in a 65nm process node at XMC, a foundry in Wuhan, China. Our CBRAM-based products are manufactured in 130nm silicon wafer production process geometries by Altis Semiconductor S.N.C., or Altis, in Corbeil-Essonnes, France (acquired by X-FAB Silicon Foundries in 2016). In February 2016, we entered into an agreement with TowerJazz Panasonic Semiconductor Company, or (TPSCo), to manufacture our 45 nm CBRAM products at TPSCo’s 300 nm fabrication facility in Hokuriku, Japan which was subsequently amended in November 2016, February 2017 and December 2017.

Assembly, Testing and Wafer Probe

We maintain multiple sources for assembly and final testing of our products. Amkor Technology, Inc. in Taiwan, Korea and the Philippines as well as Greatek Electronics Inc. in Taiwan currently provide substantially all of our assembly and final test services. Our wafer probing is performed by King Yuan Electronics Co., Ltd. in Taiwan. We continually monitor the manufacturing and testing of our products at all of our contractors to ensure that our manufacturing and testing procedures are properly implemented. As part of our total quality assurance program, our quality management system has been certified to ISO 9001:2008 standards. Our foundry, assembly and test vendors are also ISO 9001 certified.

Research and Development

We believe that our continued success depends on our ability to both introduce improved versions of our existing solutions and to develop new solutions for the markets that we serve. Through our research and development efforts, we intend to continually expand our portfolio of patents to enhance our intellectual property position. As of December 31, 2017, we had a core team of 49 engineers involved in research and development primarily located in our research and development design center at our headquarters in Santa Clara, California. For the years ended December 31, 2017, 2016 and 2015, our research and development expense was $14.1 million, $15.9 million and $12.8 million, respectively.

Competition

We operate in the highly competitive global semiconductor market in general and the semiconductor memory market in particular. We expect competition to increase and intensify as more and larger semiconductor companies enter our markets. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could materially and adversely affect our business, revenue and operating results.

Currently, our competitors range from large, international companies offering a wide range of commodity NVM products to companies specializing in other alternative, specialized emerging memory technologies. Our primary competitors in the NVM market include Macronix International Co. Ltd., Micron Technology, Inc., Cypress Semiconductor Corporation, Winbond Electronics Corp., and several China based suppliers who primarily cater to the local markets. Among these large memory suppliers, we compete primarily on an overall value proposition and not on a product or technology basis. We expect competition in our current markets to increase in the future as existing competitors improve or expand their product offerings and as new companies enter these markets.

Our ability to compete successfully depends on elements both within and outside of our control, including industry and general economic trends. Many of our competitors are substantially larger, have greater financial, technical, marketing, distribution, customer support and other resources, are more established than we are, and have significantly better brand recognition and broader product offerings which may enable them to better withstand adverse economic or market conditions in the future.

Our ability to compete successfully in the rapidly evolving memory market depends on several factors, including:

·

performance of our products, as measured by speed;

·

energy consumption of our products;

·

the ease of implementation of our products by customers;

·

the strength of customer relationships;

·

reputation and reliability;

·

customer support;

·

our products’ cost effectiveness for the total solution relative to that of our competitors;

·

our success in designing and manufacturing new products that anticipate the memory and integration needs of our customers’ current and future products and applications; and

·

the design, manufacture, commercialization and market adoption of our CBRAM technology that anticipate the power, performance, reliability and integration needs of our customers’ next-generation and application-specific products and applications.

We believe we compete favorably with respect to each of these factors.

Intellectual Property

Our success depends in part on our ability to protect our products and technologies from unauthorized third-party copying and use. To accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary contractual protections. As of December 31, 2017, we held 121 patents that expire at various times between June 2020 and March 2036 and had 18 U.S. patent applications pending. We also held 26 foreign patents that expire at various times between May 2021 and July 2032 and had 32 foreign patent applications pending.

We seek to file for patents that have broad application in the semiconductor industry and that would provide a competitive advantage. However, there can be no assurance that our pending patent application or any future applications will be approved, that any issued patents will provide us with competitive advantages or will not be challenged by third parties, or that the patents of others will not have an adverse effect on our ability to do business. In addition, there can be no assurance that others will not independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that we can effectively protect our intellectual property.

In addition to the intellectual property that we developed, we have acquired and licensed technology from third parties for incorporation in our products. In January 2007, we entered into a license agreement with Axon Technologies Corp. Pursuant to this license agreement, we have rights in Axon’s patents and trade secrets covering, among other things, Axon’s programmable metallization cell, or PMC, technology, which is a component of our CBRAM technology. This license provides us with broad rights to use and sub-license this technology, and we have the exclusive right to make, have made by authorized foundries or integrated device manufacturers, use, sell, lease, offer for sale, and import products covered by Axon’s licensed patents and trade secrets in certain fields of use. The license will last for the lifetime of the licensed patents, which currently ends in September 2026. We pay a royalty for use of the licensed intellectual property in our products. In July 2012, we purchased certain flash memory product assets from Atmel Corporation. As part of the asset purchase, Atmel granted us non-exclusive, perpetual and irrevocable licenses to its patent portfolio for development of flash memory products. In December 2017, we entered into a license agreement with TowerJazz Panasonic Semiconductor Company. The license is for two years and is a non-exclusive, non-transferable, non-assignable license to use and evaluate certain TowerJazz technologies.

Employees

As of December 31, 2017, we had 102 employees. Of these full-time employees, 49 were engaged in research and development, 34 in sales and marketing, nine in operations and support and 10 in general and administrative capacities. The substantial majority of our employees are based in the United States, although we have small numbers of personnel in Europe and Asia. None of our employees are represented by a labor union. We have not experienced any work stoppages. We consider our relations with our employees to be good.

Financial Information about Segments and Geographic Areas

We manage our operations and allocate resources as a single reporting segment. Financial information about our segment and geographic areas is incorporated herein by reference to Note 7 of Notes to Consolidated Financial Statements under Part II, Item 8. In addition, financial information regarding our operations, assets and liabilities, including our revenue and net loss for the years ended December 31, 2017, 2016, and 2015 and our total assets as of December 31, 2017 and 2016, is included in our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10‑K.

Available Information

We make available our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, free of charge on our website at www.adestotech.com, as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission or SEC. Additionally, copies of materials filed by us with the SEC may be accessed at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or at www.sec.gov. For information about the SEC’s Public Reference Room, contact 1‑800‑SEC‑0330.

The contents of the websites referred to above are not incorporated into this report. Further, our references to the URLs for these websites are intended to be inactive textual references only.

ITEM 1A.    RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10‑K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our common stock. Our business, operating results, financial condition, or prospects could be materially and adversely affected by any of these risks and uncertainties. If any of these risks actually occurs, the trading price of our common stock could decline and you might lose all or part of your investment. Our business, operating results, financial performance, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.

Risks Related to Our Business and Our Industry

We have a history of losses which may continue in the future, and we cannot be certain that we will achieve or sustain profitability.

We have incurred net losses since our inception. We incurred net losses of $5.7 million, $11.6 million, and $8.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, we had an accumulated deficit of $99.8 million. We expect to incur significant expenses related to the continued development and expansion of our business, including in connection with our efforts to pursue opportunities in emerging IoT markets, develop and improve upon our products and technology, maintain and enhance our research and development and sales and marketing activities and hire additional personnel. Further, revenue may not grow or revenue may decline for a number of possible reasons, many of which are outside our control, including a decline in demand for our products, increased competition, business conditions that adversely affect the semiconductor memory industry, including reduced demand for products in the end markets that we serve, or our failure to capitalize on growth opportunities. If we fail to generate sufficient revenue to support our operations, we may not be able to achieve or sustain profitability.

We rely on third parties to manufacture, package, assemble and test the semiconductor components comprising our products, which exposes us to a number of risks, including reduced control over manufacturing and delivery timing and potential exposure to price fluctuations, which could result in a loss of revenue or reduced profitability.

As a fabless semiconductor company, we outsource the manufacturing, packaging, assembly and testing of our semiconductor components to third-party foundries and assembly and testing service providers. We use two foundries, United Microelectronics Corporation in Taiwan and XMC in Wuhan, China, for the production of our flash memory products and a single foundry, Altis Semiconductor S.N.C. in France (acquired by X-FAB Silicon Foundries in 2016), for our Mavriq and Moneta products. Our primary assembly and testing contractor in 2017 was Amkor Technology, Inc. in Taiwan, Korea and the Philippines. Our wafer probing is performed by King Yuan Electronics Co., Ltd. in Taiwan.

Relying on third-party manufacturing, assembly and testing presents a number of risks, including but not limited to:

·

capacity and materials shortages during periods of high demand;

·

reduced control over delivery schedules, inventories and quality;

·

the unavailability of, or potential delays in obtaining access to, key process technologies;

·

the inability to achieve required production or test capacity and acceptable yields on a timely basis;

·

misappropriation of our intellectual property;

·

the third parties’ ability to perform its obligations due to bankruptcy or other financial constraints;

·

limited warranties on wafers or products supplied to us; and

·

potential increases in prices.

Any of the foregoing risks may affect our ability to meet customer demand. For example, a former silicon wafer supplier suddenly declared bankruptcy in December 2013 and abruptly shut down its foundry. As a result, we were unable to fulfill a portion of our customers’ orders in 2014 while we transitioned wafer production to a new foundry. Based on the average selling prices then in effect for those wafers, we estimate that the potential loss of revenue exceeded $10.0 million.

We currently do not have long-term supply contracts with our third-party contract manufacturers for the manufacture, package, assembly and test of our products. Therefore, they are not obligated to perform services or supply components to us for any specific period, in any specific quantities, or at any specific price, except as may be provided in a particular purchase order. During periods of high demand and tight inventories, our third-party foundries and assembly and testing contractors may allocate capacity to the production of other companies’ components while reducing deliveries to us, or significantly raise their prices. In particular, they may allocate capacity to other customers that are larger and better financed than us or that have long-term agreements, decreasing the capacity available to us. Shortages of capacity available to us may be caused by the actions of their other, large customers that may be difficult to predict, such as major product launches. If we need other foundries or assembly and test contractors because of increased demand, or if we are unable to obtain timely and adequate deliveries from our providers, we might not be able to cost-effectively and quickly retain other vendors to satisfy our requirements. Because the lead-time needed to establish a relationship with a new third-party supplier could be several quarters, there is no readily available alternative source of supply for any specific component. In addition, the time and expense to qualify a new foundry could result in additional expense, diversion of resources or lost sales, any of which would negatively impact our financial results.

In the event that we expand production of a component to include a new contract manufacturer, it may take approximately 18 to 24 months to allow a transition from our current foundry or assembly services provider to the new provider. We may experience difficulty migrating production to a new contract manufacturer and, consequently, may experience reduced yields, delays in component deliveries and increased research and development expense. The inability by us or our third-party manufacturers to effectively and efficiently transition our technology to their infrastructure may adversely affect our operating results and our gross margin. There can be no assurance that we will be able to find suitable replacements for our third-party contract manufacturers.

If any of our current or future foundry partners or assembly and test subcontractors significantly increases the costs of wafers or other materials, interrupts or reduces our supply, including for reasons outside of their control, or if any of our relationships with our suppliers is terminated, our operating results could be adversely affected. During 2017, one of our foundry partners increased the costs of wafers to us. Although such increase did not have a material impact on our results of operations for the year ended December 31, 2017 and is not expected to have a material impact in the near term, there can be no assurances that additional increases will not have a material adverse impact on our future operating results. Such increases could also damage our customer relationships, result in lost revenue, cause a loss in market share or damage our reputation.

We may be unable to match production with customer demand for a variety of reasons including our inability to accurately forecast customer demand or the capacity constraints of contract manufacturers, which could adversely affect our operating results.

We make planning and spending decisions, including determining production levels, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of product demand and customer requirements. Our products are typically purchased pursuant to individual purchase orders. While our customers may provide us with their demand forecasts, they are not contractually committed to buy any quantity of products beyond purchase orders. Furthermore, many of our customers may increase, decrease, cancel or delay purchase orders already in place without significant penalty. The short-term nature of commitments by our customers and the possibility of unexpected changes in demand for their products reduce our ability to accurately estimate future customer requirements. On occasion, customers may require rapid increases in production, which can strain our resources, necessitate more onerous procurement commitments and reduce our gross margin. If we overestimate customer demand, we may purchase products that we may not be able to sell, which could result in decreases in our prices or write-downs of unsold inventory. Conversely, if we underestimate customer demand or if sufficient manufacturing capacity was unavailable, we would lose sales opportunities and could lose market share or damage our customer relationships. The rapid pace of innovation in our industry could also render significant portions of our inventory obsolete. Excess or obsolete inventory levels could result in unexpected expenses or write-downs of inventory values that could adversely affect our business, operating results and financial condition.

Our quarterly operating results or other operating metrics may fluctuate significantly, which could cause the trading price of our common stock to decline.

Our quarterly operating results and other operating metrics have fluctuated in the past and may continue to fluctuate from quarter to quarter. We expect that this trend will continue as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including:

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the receipt, reduction, delay or cancellation of orders by large customers;

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the gain or loss of significant customers and distributors;

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the timing and success of our launch of new or enhanced products and those of our competitors;

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market acceptance of our products and our customers’ products;

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the level of growth or decline in the IoT market;

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the timing and extent of research and development and sales and marketing expenditures;

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the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;

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changes in our product mix;

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our ability to reduce the manufacturing costs of our products;

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competitive pressures resulting in lower than expected average selling prices;

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fluctuations in sales by and inventory levels of OEMs and ODMs who incorporate our memory products in their products;

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cyclical and seasonal fluctuations in our markets;

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fluctuations in the manufacturing yields of our third-party contract manufacturers;

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events that impact the availability of production capacity at our third-party subcontractors and other interruptions in the supply chain including due to geopolitical events, natural disasters, materials shortages, bankruptcy or other causes;

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supply constraints for and changes in the cost of the other components incorporated into our customers’ products;

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the timing of expenses related to the acquisition of technologies or businesses;

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product rates of return or price concessions in excess of those expected or forecasted;

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costs associated with the repair and replacement of defective products;

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unexpected inventory write-downs or write-offs;

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costs associated with litigation over intellectual property rights and other litigation;

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the length and unpredictability of the purchasing and budgeting cycles of our customers;

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loss of key personnel or the inability to attract qualified engineers; and

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geopolitical events, such as war, threat of war or terrorist actions, or the occurrence of natural disasters.

Any one of the factors above or the cumulative effect of some of the factors above may result in significant fluctuations in our operating results.

The semiconductor memory industry is highly cyclical and our markets may experience significant cyclical fluctuations in demand as a result of changing economic conditions, budgeting and buying patterns of customers and others factors. As a result of these and other factors affecting demand for our products and our results of operations in any given period, the results of any prior quarterly or annual periods should not be relied upon as indicative of our future revenue or operating performance. Fluctuations in our revenue and operating results could also cause our stock price to decline.

The market for semiconductor memory products is characterized by declines in average selling prices, which we expect to continue, and which could negatively affect our revenue and margins.

Our customers expect the average selling price of our products to decrease year-over-year and we expect this trend to continue. When such pricing declines occur, we may not be able to mitigate the effects by selling more or higher margin units, or by reducing our manufacturing costs. In such circumstances, our operating results could be materially and adversely affected. Our products have experienced declining average selling prices over their life cycle. The rate of decline may be affected by a number of factors, including relative supply and demand, the level of competition, production costs and technological changes. As a result of the decreasing average selling prices of our products following their launch, our ability to increase or maintain our margins depends on our ability to introduce new or enhanced products with higher average selling prices and to reduce our per-unit cost of sales and our operating costs. We may not be able to reduce our costs as rapidly as companies that operate their own manufacturing, assembly and testing facilities, and our costs may even increase because we do not operate our own manufacturing, assembly or testing facilities, which could also reduce our gross margins. In addition, our new or enhanced products may not be as successful or enjoy as high margins as we expect. If we are unable to offset any reductions in average selling prices by introducing new products with higher average selling prices or reducing our costs, our revenue and margins will be negatively affected and may decrease.

The semiconductor memory market is highly cyclical and has experienced severe downturns in the past, generally as a result of wide fluctuations in supply and demand, constant and rapid technological change, continuous new product introductions and price erosion. During downturns, periods of intense competition, or the presence of oversupply in the industry, the selling prices for our products may decline at a high rate over relatively short time periods as compared to historical rates of decline. We are unable to predict selling prices for any future periods and may experience unanticipated, sharp declines in selling prices for our products.

Our prospects for growth depend on the growth and development of the emerging IoT industry, and if the market does not develop as we expect, our business prospects may be harmed.

Our products are increasingly being utilized in IoT edge devices. The IoT industry is nascent and is characterized by rapidly changing technologies, devices and connectivity requirements, evolving industry standards and changing customer demands. The continued development of IoT depends in part on significant growth in the number of connected devices. Such growth is affected by various factors, including the continued growth in the use of mobile operator networks and the Internet to connect an increasing number and variety of devices, price reductions for key hardware and software components, innovation of other components of the IoT nodes toward low-power formats, and the continued development of IoT standards and protocols. Without these continued developments, IoT might not gain widespread market acceptance and our business could suffer. Security and privacy concerns, evolving business practices and consumer preferences may also slow the growth and development of IoT. Because our revenue growth ultimately depends upon the success of IoT, our business may suffer as a result of slowing or declining growth in IoT adoption. Even if the IoT industry does develop, we may not be well positioned or able to penetrate and capitalize on this new market. As a result of these factors, the future revenue and income potential of our business is uncertain.

The markets for our products are evolving, and changing market conditions, such as the introduction of new technologies or changes in customer preferences, may negatively affect demand for our products. If we fail to properly anticipate or respond to changing market conditions, our business prospects and results of operations will suffer.

The NVM industry is subject to constant and rapid changes in technology, frequent new product introductions, short product life cycles, rapid product obsolescence and evolving technical standards. New technologies may be introduced that make the current technologies on which our products are based less competitive or obsolete or require us to make changes to our technology that could be expensive and time consuming to implement. Due to the evolving nature of our markets, our future success depends on our ability to accurately anticipate and respond to changes in industry standards, technological requirements, customer and consumer preferences and other market conditions. Our technologies could become obsolete sooner than we expect because of faster than anticipated, or unanticipated, changes in one or more of the industry standards and technological requirements. We may be unable to develop and introduce new or enhanced technologies that satisfy customer requirements and achieve market acceptance in a timely manner or at all, succeed in commercializing the technologies on which we have focused our research and development expenditures to develop, and anticipate new industry standards and technological changes. If we fail to adapt successfully to technological changes or fail to obtain access to important new technologies, we may be unable to retain customers or attract new customers. Any decrease in demand for our products, or the need for low-power products in general, due to the emergence of competing technologies, changes in customer preferences and requirements or other factors, could adversely affect our business, results of operations and prospects.

We must continuously develop new and enhanced products, and if we are unable to successfully market our new and enhanced products for which we incur significant expenses to develop, our results of operations and financial condition will be materially adversely affected.

In order to compete effectively in our markets, we must continually design, develop and introduce new and improved products with improved features in a cost-effective manner in response to changing technologies and market demand. This requires us to devote substantial financial and other resources to research and development. We have developed and are continuing to develop next-generation products, such as our Mavriq and EcoXiP products, which we expect to be one of the drivers of our future revenue growth. However, we may not succeed in developing and marketing these new and enhanced products. We also face the risk that customers may not value or be willing to bear the cost of incorporating our new and enhanced products into their products, particularly if they believe their customers are satisfied with current solutions. Regardless of the improved features or superior performance of our new and enhanced products, customers may be unwilling to adopt our solutions due to design or pricing constraints, or because they do not want to rely on a single or limited supply source. Because of the extensive time and resources that we invest in developing new and enhanced products, if we are unable to sell customers new generations of our products, our revenue could decline and our business, financial condition, results of operations and cash flows would be negatively affected. For example, we generated limited revenue from sales of our Mavriq products to date. While we expect revenue from our Mavriq products to grow, we may not be able to materially increase our revenue from this product family. Similarly, any of our other next generation products or product families may not achieve market acceptance and contribute significantly to our revenue. If we are unable to successfully develop and market our new and enhanced products that we have incurred significant expenses developing, our results of operations and financial condition will be materially and adversely affected.

Our success and future revenue depend on our ability to secure design wins and on our customers’ ability to successfully sell the products that incorporate our solutions. Securing design wins is a lengthy, expensive and competitive process, and may not result in actual orders and sales, which could cause our revenue to decline.

We sell to customers that incorporate our NVM into their products. A design win occurs after a customer has tested our product, verified that it meets the customer’s requirements, qualified our solutions for their products and placed an order for the purchase of our products. Our customers may need several months to years to test, evaluate and adopt our product and additional time to begin volume production of the product that incorporates our solution. Due to this generally lengthy design cycle, we may experience significant delays from the time we increase our operating expenses and make investments in our products to the time that we generate revenue from sales of these products. Moreover, even if a customer selects our solution, we cannot guarantee that this will result in any sales of our products, as the customer may ultimately change or cancel its product plans, or efforts by our customer to market and sell its product may not be successful. We may not generate any revenue from design wins after incurring the associated costs, which would cause our business and operating results to suffer.

If a current or prospective customer designs a competitor’s solution into its product, it becomes significantly more difficult for us to sell our solutions to that customer because changing suppliers involves significant time, cost, effort and risk for the customer even if our solutions remain compatible with their product design. If current or prospective customers do not include our solutions in their products and we fail to achieve a sufficient number of design wins, our results of operations and business may be harmed.

We rely on our relationships with OEMs and ODMs to enhance our solutions and market position, and our failure to continue to develop or maintain such relationships in the future would harm our ability to remain competitive.

We develop our products for leading OEMs and ODMs that serve a variety of end markets and are developing devices for wearables, sensors, Bluetooth 4.0 and other IoT applications. For each application, manufacturers create products that incorporate specialized semiconductor technology, which makers of memory products use as the basis for their products. These manufacturers set the specifications for many of the key components to be used on each generation of their products and, in the case of memory components, generally qualify only a few vendors to provide memory components for their products. As each new generation of their products is released, vendors are validated in a similar fashion. We must work closely with semiconductor manufacturers to ensure our products become qualified for use in their products. As a result, maintaining close relationships with leading product manufacturers that are developing devices for wearables, Bluetooth 4.0 and other IoT applications is crucial to the long-term success of our business. We could lose these relationships for a variety of reasons, including our failure to qualify as a vendor, our failure to demonstrate the value of our new solutions, declines in product quality, or if OEMs or ODMs seek to work with vendors with broader product suites, greater production capacity or greater financial resources. If our relationships with key industry participants were to deteriorate or if our solutions were not qualified by our customers, our market position and revenue could be materially and adversely affected.

Our business is dependent on selling through distributors.

Sales through distributors accounted for approximately 74% of our revenues in 2017. We do not have long-term agreements with our distributors, and we and our distributors may each terminate our relationship with little or no advance notice.

Any future adverse conditions in the U.S. or global economies or in the U.S. or global credit markets could materially impact the operations of our distributors. Any deterioration in the financial condition of our distributors or any disruption in the operations of our distributors could adversely impact the flow of our products to our end customers and adversely impact our results of operation. In addition, during an industry or economic downturn, it is possible there will be an oversupply of products and a decrease in demand for our products from our distributors, which could reduce our revenues in a given period. Violations of the Foreign Corrupt Practices Act and similar regulations, or similar laws, by our distributors could have a material adverse impact on our business.

Changes to industry standards and technical requirements relevant to our products and markets could adversely affect our business, results of operations and prospects.

Our products are only a part of larger electronic systems. All products incorporated into these systems must comply with various industry standards and technical requirements created by regulatory bodies or industry participants in order to operate efficiently together. Industry standards and technical requirements in our markets are evolving and may change significantly over time. For our products, the industry standards are developed by the Joint Electron Device Engineering Council, an industry trade organization. In addition, large industry-leading semiconductor and electronics companies play a significant role in developing standards and technical requirements for the product ecosystems within which our products can be used. Our customers also may design certain specifications and other technical requirements specific to their products and solutions. These technical requirements may change as the customer introduces new or enhanced products and solutions.

Our ability to compete in the future will depend on our ability to identify and comply with evolving industry standards and technical requirements. The emergence of new industry standards and technical requirements could render our products incompatible with products developed by other suppliers or make it difficult for our products to meet the requirements of certain of our customers in consumer, industrial, IoT and other markets. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards and requirements. If our products are not in compliance with prevailing industry standards and technical requirements for a significant period of time, we could miss opportunities to achieve crucial design wins, our revenue may decline and we may incur significant expenses to redesign our products to meet the relevant standards, which could adversely affect our business, results of operations and prospects.

If sales of our customers’ products decline or if their products do not achieve market acceptance, our business and operating results could be adversely affected.

Our revenue depends on our customers’ ability to commercialize their products successfully. The markets for our customers’ products are extremely competitive and are characterized by rapid technological change. Competition in our customers’ markets is based on a variety of factors including price, performance, product quality, marketing and distribution capability, customer support, name recognition and financial strength. As a result of rapid technological change, the markets for our customers’ products are characterized by frequent product introductions, short product life cycles, fluctuating demand and increasing product capabilities. As a result, our customers’ products may not achieve market success or may become obsolete. We cannot assure you that our customers will dedicate the resources necessary to promote and commercialize their products, successfully execute their business strategies for such products, or be able to manufacture such products in quantities sufficient to meet demand or cost-effectively manufacture products at a high volume. Our customers do not have contracts with us that require them to manufacture, distribute or sell any products. Moreover, our customers may develop internally, or in collaboration with our competitors, technology that they may utilize instead of the technology available to them through us. Our customers’ failure to achieve market success for their products, including as a result of general declines in our customers’ markets or industries, could negatively affect their willingness to utilize our products, which may result in a decrease in our revenue and negatively affect our business and operating results.

Our revenue also depends on the timely introduction, quality and market acceptance of our customers’ products that incorporate our solutions. Our customers’ products are often very complex and subject to design complexities that may result in design flaws, as well as potential defects, errors and bugs. We have in the past been subject to delays and project cancellations as a result of design flaws in the products developed by our customers. For example, in 2014, flaws in one of our customer’s products that were unrelated to our memory solutions generated negative publicity for our customer and delayed the product’s release until it could be redesigned. In the past, we have also been subject to delays and project cancellations as a result of changing market requirements, such as the customer adding a new feature, or because a customer’s product fails their end customer’s evaluation or field trial. Customer products may also be delayed due to issues with other vendors of theirs. We incur significant design and development costs in connection with designing our solutions for customers’ products. If our customers discover design flaws, defects, errors or bugs in their products, or if they experience changing market requirements, failed evaluations or field trials, or issues with other vendors, they may delay, change or cancel a project. If we have already incurred significant development costs, we may not be able to recoup those costs, which in turn would adversely affect our business and financial results.

We face competition and expect competition to increase in the future. If we fail to compete effectively, our revenue growth and results of operations will be materially and adversely affected.

The global semiconductor market in general, and the semiconductor memory market in particular, are highly competitive. We expect competition to increase and intensify as other semiconductor companies enter our markets, many of which have greater financial and other resources with which to pursue technology development, product design, manufacturing, marketing and sales and distribution of their products. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could materially and adversely affect our business, revenue and operating results. Currently, our competitors range from large, international companies offering a wide range of semiconductor products to companies specializing in other alternative, specialized emerging memory technologies. Our primary competitors include Macronix International Co. Ltd., Micron Technology, Inc., Cypress Semiconductor Corporation, and Winbond Electronics Corp. In addition, as the IoT market opportunity grows, we expect new entrants will enter these markets and existing competitors, including leading semiconductor companies, may make significant investments to compete more effectively against our products. These competitors could develop technologies or architectures that make our products or technologies obsolete.

Our ability to compete successfully depends on factors both within and outside of our control, including:

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the functionality and performance of our products and those of our competitors;

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our relationships with our customers and other industry participants;

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prices of our products and prices of our competitors’ products;

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our ability to develop innovative products;

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our ability to retain high-level talent, including our management team and engineers; and

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the actions of our competitors, including merger and acquisition activity, launches of new products and other actions that could change the competitive landscape.

Competition could result in pricing pressure, reduced revenue and profitability and loss of market share, any of which could materially and adversely affect our business, results of operations and prospects. In the event of a market downturn, competition in the markets in which we operate may intensify as our customers reduce their purchase orders. Our competitors that are significantly larger and have greater financial, technical, marketing, distribution, customer support and other resources or more established market recognition than us may be better positioned to accept lower prices and withstand adverse economic or market conditions.

Our customers require our products and our third-party contractors to undergo a lengthy and expensive qualification process. If we are unsuccessful or delayed in qualifying any of our products with a customer, our business and operating results would suffer.

Prior to selecting and purchasing our products, our customers typically require that our products undergo extensive qualification processes, which involve testing of our products in the customers’ systems, as well as testing for reliability. This qualification process may continue for several months or years. However, obtaining the requisite qualifications for a memory product does not assure any sales of the product. Even after successful qualification and sales of a product to a customer, a subsequent revision in our third-party contractors’ manufacturing process or our selection of a new contract manufacturer may require a new qualification process, which may result in delays and excess or obsolete inventory. After our products are qualified and selected, it can and often does take several months or more before the customer commences volume production of systems that incorporate our products. Despite these uncertainties, we devote substantial resources, including design, engineering, sales, marketing and management efforts, to qualify our products with customers in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, sales of those products may be precluded or delayed, which may impede our growth and harm our business.

Our costs may increase substantially if our third-party manufacturing contractors do not achieve satisfactory product yields or quality.

The fabrication process is extremely complicated and small changes in design, specifications or materials can result in material decreases in product yields or even the suspension of production. From time to time, the third-party foundries that we contract to manufacture our products may experience manufacturing defects and reduced manufacturing yields related to errors or problems in their manufacturing processes or the interrelationship of their processes with our designs. In some cases, our third-party foundries may not be able to detect these defects early in the fabrication process or determine the cause of such defects in a timely manner.

Generally, in pricing our products, we assume that manufacturing yields will continue to improve, even as the complexity of our products increases. Once our products are initially qualified with our third-party foundries, minimum acceptable yields are established. We are responsible for the costs of the units if the actual yield is above the minimum. If actual yields are below the minimum we are not required to purchase the units. Typically, minimum acceptable yields for our new products are generally lower at first and gradually improve as we achieve full production. Unacceptably low product yields or other product manufacturing problems could substantially increase overall production time and costs and adversely impact our operating results. Product yield losses will increase our costs and reduce our gross margin. In addition to significantly harming our results of operations and cash flow, poor yields may delay shipment of our products and harm our relationships with existing and potential customers.

The complexity of our products may lead to errors, defects and bugs, which could negatively impact our reputation with customers and result in liability.

Products as complex as ours may contain errors, defects and bugs when first introduced to customers or as new versions are released. Our products have in the past experienced such errors, defects and bugs. Delivery of products with production defects or reliability, quality or compatibility problems could significantly delay or hinder market acceptance of the products or result in a costly recall and could damage our reputation and adversely affect our ability to retain existing customers and attract new customers. Errors, defects or bugs could cause problems with the functionality of our products, resulting in interruptions, delays or cessation of sales of these products to our customers. We may also be required to make significant expenditures of capital and resources to resolve such problems. We cannot assure you that problems will not be found in new products, both before and after commencement of commercial production, despite testing by us, our suppliers or our customers. Any such problems could result in:

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delays in development, manufacture and roll-out of new products;

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additional development costs;

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loss of, or delays in, market acceptance;

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diversion of technical and other resources from our other development efforts;

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claims for damages by our customers or others against us; and

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loss of credibility with our current and prospective customers.

Any such event could have a material adverse effect on our business, financial condition and results of operations.

We may experience difficulties in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.

We aim to use the most advanced manufacturing process technology appropriate for our solutions that is available from our third-party foundries. As a result, we periodically evaluate the benefits of migrating our solutions to other technologies in order to improve performance and reduce costs. These ongoing efforts require us from time to time to modify the manufacturing processes for our products and to redesign some products, which in turn may result in delays in product deliveries. We may face difficulties, delays and increased expense as we transition our products to new processes, and potentially to new foundries. We will depend on our third-party foundries as we transition to new processes. We cannot assure you that our third-party foundries will be able to effectively manage such transitions or that we will be able to maintain our relationship with our third-party foundries or develop relationships with new third-party foundries. If we or any of our third-party foundries experience significant delays in transitioning to new processes or fail to efficiently implement transitions, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, any of which could harm our relationships with our customers and our operating results.

As smaller line width geometry manufacturing processes become more prevalent, we intend to move our future products to increasingly smaller geometries in order to reduce costs while integrating greater levels of functionality into our products. This transition will require us and our third-party foundries to migrate to new designs and manufacturing processes for smaller geometry products. We may not be able to achieve smaller geometries with higher levels of design integration or to deliver new integrated products on a timely basis. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs and increase performance. We are dependent on our relationships with our third-party foundries to transition to smaller geometry processes successfully. We cannot assure you that our third-party foundries will be able to effectively manage any such transition. If we or our third-party foundries experience significant delays in any such transition or fail to implement a transition, our business, financial condition and results of operations could be materially harmed.

If we fail to retain qualified finance personnel and strengthen our financial reporting systems and infrastructure, we may not be able to timely and accurately report our financial results or comply with the requirements of being a public company, including compliance with the Sarbanes-Oxley Act and SEC reporting requirements.

Our ability to timely and accurately report our financial results or comply with the requirements of being a public company depends on our maintaining adequate numbers of accounting and finance staff with technical accounting, SEC reporting and Sarbanes-Oxley Act compliance expertise. Any inability to recruit or retain qualified accounting and finance staff would have an adverse impact on our ability to accurately and timely prepare our consolidated financial statements. We may be unable to hire qualified professionals with requisite technical and public company experience when and as needed. In addition, new employees will require time and training to learn our business and operating processes and procedures. If our finance and accounting organization is unable for any reason to respond adequately to the increased demands from being a public company, the quality and timeliness of our financial reporting may suffer, which could result in the identification of material weaknesses in our internal controls. Any consequences resulting from inaccuracies or delays in our reported financial statements could cause the trading price of our common stock to decline and could harm our business, operating results and financial condition.

If we fail to strengthen our financial reporting systems, infrastructure and internal control over financial reporting to meet the demands placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to report our financial results timely and accurately and prevent fraud. We expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404.

A breach of our security systems may damage our reputation and adversely affect our business.

Our security systems are designed to protect our customers’, suppliers’ and employees’ confidential information, as well as maintain the physical security of our facilities. We also rely on a number of third-party “cloud-based” service providers of corporate infrastructure services relating to, among other things, human resources, electronic communication services and some finance functions, and we are, of necessity, dependent on the security systems of these providers. Any security breaches or other unauthorized access by third parties to the systems of our cloud-based service providers or the existence of computer viruses in their data or software could expose us to a risk of information loss and misappropriation of confidential information. Accidental or willful security breaches or other unauthorized access by third parties to our information systems or facilities, or the existence of computer viruses in our data or software, could expose us to a risk of information loss and misappropriation of proprietary and confidential information belonging to us, our customers or our suppliers. Any theft or misuse of this information could result in, among other things, unfavorable publicity, damage to our reputation, difficulty in marketing our products, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for liabilities and damages related to the theft or misuse of this information, any of which could have a material adverse effect on our business, financial condition, our reputation, and our relationships with our customers and partners. Since the techniques used to obtain unauthorized access or to sabotage systems change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

Failure to protect our intellectual property could substantially harm our business.

Our success and ability to compete depend in part upon our ability to protect our intellectual property. We rely on a combination of intellectual property rights, including patents, mask work protection, copyrights, trademarks, trade secrets and know-how, in the United States and other jurisdictions. The steps we take to protect our intellectual property rights may not be adequate, particularly in foreign jurisdictions such as China. Any patents we hold may not adequately protect our intellectual property rights or our products against competitors, and third parties may challenge the scope, validity or enforceability of our issued patents. In addition, other parties may independently develop similar or competing technologies designed around any patents or patent applications that we hold. Some of our products and technologies are not covered by any patent or patent application, as we do not believe patent protection of these products and technologies is critical to our business strategy at this time. A failure to timely seek patent protection on products or technologies generally precludes us from seeking future patent protection on these products or technologies.

In addition to patents, we also rely on contractual protections with our customers, suppliers, distributors, employees and consultants, and we implement security measures designed to protect our trade secrets and know-how. However, we cannot assure you that these contractual protections and security measures will not be breached, that we will have adequate remedies for any such breach or that our customers, suppliers, distributors, employees or consultants will not assert rights to intellectual property or damages arising out of such contracts.

We may initiate claims against third parties to protect our intellectual property rights if we are unable to resolve matters satisfactorily through negotiation. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management. It could also result in the impairment or loss of portions of our intellectual property, as an adverse decision could limit our ability to assert our intellectual property rights, limit the value of our technology or otherwise negatively impact our business, financial condition and results of operations. Additionally, any enforcement of our patents or other intellectual property may provoke third parties to assert counterclaims against us. Our failure to secure, protect and enforce our intellectual property rights could materially harm our business.

We may face claims of intellectual property infringement, which could be time-consuming, costly to defend or settle, result in the loss of significant rights, harm our relationships with our customers and distributors, or otherwise materially adversely affect our business, financial condition and results of operations.

The semiconductor memory industry is characterized by companies that hold patents and other intellectual property rights and that vigorously pursue, protect and enforce intellectual property rights. These companies include patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may provide little or no deterrence. From time to time, third parties may assert against us and our customers’ patent and other intellectual property rights to technologies that are important to our business.

Claims that our products, processes or technology infringe third-party intellectual property rights, regardless of their merit or resolution, could be costly to defend or settle and could divert the efforts and attention of our management and technical personnel. We may also be obligated to indemnify our customers or business partners in connection with any such litigation, which could result in increased costs. Infringement claims also could harm our relationships with our customers or distributors and might deter future customers from doing business with us. If any such proceedings result in an adverse outcome, we could be required to:

·

cease the manufacture, use or sale of the infringing products, processes or technology;

·

pay substantial damages for infringement;

·

expend significant resources to develop non-infringing products, processes or technology, which may not be successful;

·

license technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms, or at all;

·

cross-license our technology to a competitor to resolve an infringement claim, which could weaken our ability to compete with that competitor; or

·

pay substantial damages to our customers to discontinue their use of or to replace infringing technology sold to them with non-infringing technology, if available.

Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations. Furthermore, our exposure to the foregoing risks may also be increased as a result of acquisitions of other companies or technologies. For example, we may have a lower level of visibility into the development process with respect to intellectual property or the care taken to safeguard against infringement risks with respect to the acquired company or technology. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to the acquisition.

We rely upon third-party licensed technology to develop our products. If licenses of third-party technology are inadequate, our ability to develop and commercialize our products or product enhancements could be negatively impacted.

Our products incorporate technology licensed from third parties. In connection with our acquisition of certain flash memory assets from Atmel Corporation in 2012, we obtained a perpetual license to Atmel’s flash memory technology. In addition, a component of our CBRAM technology is licensed from Axon Technology Corp. In December 2017, we entered into a license agreement with TowerJazz Panasonic Semiconductor Company. While we believe these licenses enable us to develop our products and pursue our current product strategies, these licenses may not provide us with the benefits we expect from them. From time to time, we may be required to license additional technology from third parties to develop our products or product enhancements. However, these third-party licenses may not be available to us on commercially reasonable terms or at all. Our inability to obtain third-party licenses necessary to develop products and product enhancements could require us to obtain substitute technology at a greater cost or of lower quality or performance standards or delay product development. Any of these results may limit our ability to develop new products, which could harm our business, financial condition and results of operations.

Our success depends on our ability to attract and retain key employees, and our failure to do so could harm our ability to grow our business and execute our business strategies.

Our success depends on our ability to attract and retain our key employees, including our management team and experienced engineers. Competition for personnel in the semiconductor technology field is intense, and the availability of suitable and qualified candidates is limited. We compete to attract and retain qualified research and development personnel with other semiconductor companies, universities and research institutions, particularly those in the San Francisco Bay Area where our headquarters is located. The members of our management and key employees are at-will employees. If we lose the services of any key senior management member or employee, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely impact our business and prospects. The loss of the services of one or more of our key employees, especially our key engineers, or our inability to attract and retain qualified engineers, could harm our business, financial condition and results of operations.

We may not be able to effectively manage our growth, and we may need to incur significant expenditures to address the additional operational and control requirements of our growth, either of which could harm our business and operating results.

We expect to increase headcount and the overall size of our operations to support our growth. To effectively manage our growth, we must continue to expand our operational, engineering and financial systems, procedures and controls and to improve our accounting and other internal management systems. This may require substantial managerial and financial resources, and our efforts in this regard may not be successful. Our current systems, procedures and controls may not be adequate to support our future operations. If we fail to adequately manage our growth, or to improve our operational, financial and management information systems, or fail to effectively motivate or manage our new and future employees, the quality of our products and the management of our operations could suffer, which could adversely affect our operating results.

We have expanded in the past and expect to continue to expand in the future through acquisitions of, or investments in, other companies, each of which may divert our management’s attention, result in additional dilution to stockholders or use resources that are necessary to operate our business.

In the past, we have grown our business through acquisitions and we expect to continue to evaluate and enter into discussions regarding potential strategic transactions that we believe could complement or expand our business, enhance our technical capabilities or otherwise offer growth opportunities. These transactions could be material to our financial condition and results of operations. The process of integrating businesses and technology can create unforeseen operating difficulties and expenditures as could the integration of any future acquisitions. Such transactions could create risks for us, including:

·

difficulties in assimilating acquired personnel, operations and technologies or realizing synergies expected in connection with an acquisition, particularly with acquisitions of companies with large and widespread operations, complex products or that operate in markets in which we historically have had limited experience;

·

unanticipated costs or liabilities, including possible litigation, associated with the acquisition;

·

incurrence of acquisition-related costs;

·

diversion of management’s attention from other business concerns;

·

use of resources that are needed in other parts of our business; and

·

use of substantial portions of our available cash to consummate an acquisition.

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities and harm our business generally. Future acquisitions could also result in the use of substantial amounts of our cash and cash equivalents, dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses or the write-off of goodwill, any of which could harm our financial condition. Also, the anticipated benefits of any acquisitions may not materialize, may be less beneficial, or may develop more slowly, than we expect. If we do not receive the benefits anticipated from these acquisitions and investments, or if the achievement of these benefits is delayed, our operating results may be adversely affected and our stock price could decline.

We have operations outside of the United States and intend to expand our international operations, which exposes us to significant risks.

We have limited operations in Europe and Asia. We intend to expand our operations in Asia. The success of our business depends, in large part, on our ability to operate successfully from geographically disparate locations and to further expand our international operations and sales. Operating in international markets requires significant resources and management attention and subjects us to regulatory, economic and political risks that are different from those we face in the United States. We cannot be sure that further international expansion will be successful. In addition, we face risks in doing business internationally that could expose us to reduced demand for our products, lower prices for our products or other adverse effects on our operating results. Among the risks we believe are most likely to affect us are:

·

difficulties, inefficiencies and costs associated with staffing and managing foreign operations;

·

longer and more difficult customer qualification and credit checks;

·

greater difficulty collecting accounts receivable and longer payment cycles;

·

the need for various local approvals to operate in some countries;

·

difficulties in entering some foreign markets without larger-scale local operations;

·

compliance with local laws and regulations;

·

unexpected changes in regulatory requirements, including the elimination of tax holidays;

·

reduced protection for intellectual property rights in some countries;

·

adverse tax consequences as a result of repatriating cash generated from foreign operations to the United States;

·

adverse tax consequences, including potential additional tax exposure if we are deemed to have established a permanent establishment outside of the United States;

·

adverse tax consequences, including potential additional tax costs, resulting from the new tax legislation signed into law on December 22, 2017, that imposes a minimum domestic tax on the earnings of foreign subsidiaries;

·

the effectiveness of our policies and procedures designed to ensure compliance with the Foreign Corrupt Practices Act of 1977 and similar regulations;

·

fluctuations in currency exchange rates, which could increase the prices of our products to customers outside of the United States, increase the expenses of our international operations by reducing the purchasing power of the U.S. dollar and expose us to foreign currency exchange rate risk if, in the future, we denominate our international sales in currencies other than the U.S. dollar;

·

new and different sources of competition; and

·

political and economic instability, and terrorism.

Our failure to manage any of these risks successfully could harm our operations and reduce our revenue.

In order to comply with environmental laws and regulations, we may need to modify our activities or incur substantial costs, and if we fail to comply with environmental regulations we could be subject to substantial fines or be required to have our suppliers alter their processes.

The semiconductor memory industry is subject to a variety of international, federal, state and local governmental regulations directed at preventing or mitigating environmental harm, as well as to the storage, discharge, handling, generation, disposal and labeling of toxic or other hazardous substances. Failure to comply with environmental regulations could subject us to civil or criminal sanctions and property damage or personal injury claims. Compliance with current or future environmental laws and regulations could restrict our ability to expand our business or require us to modify processes or incur other substantial expenses which could harm our business. In response to environmental concerns, some customers and government agencies impose requirements for the elimination of hazardous substances, such as lead (which is widely used in soldering connections in the process of semiconductor packaging and assembly), from electronic equipment. For example, the European Union, or EU, adopted its Restriction on Hazardous Substance Directive which prohibits, with specified exceptions, the sale in the EU market of new electrical and electronic equipment containing more than agreed levels of lead or other hazardous materials and China has enacted similar regulations. Environmental laws and regulations such as these could become more stringent over time, causing a need to redesign technologies, imposing greater compliance costs and increasing risks and penalties associated with violations, which could seriously harm our business.

The issuance of new accounting standards or future interpretations of existing accounting standards could adversely affect our operating results.

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP. A change in those principles could have a significant effect on our reported results and might affect our reporting of transactions completed before a change is announced. GAAP is issued and subject to interpretation by the Financial Accounting Standards Board, the SEC and various other bodies formed to promulgate and interpret accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. The issuance of new accounting standards or future interpretations of existing accounting standards, or changes in our business practices or estimates, could result in future changes in our revenue recognition or other accounting policies that could have a material adverse effect on our results of operations.

Some of our facilities and the facilities of our suppliers are located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could damage our facilities, which could cause us to curtail our operations.

Our principal offices, and our contract manufacturers’ and suppliers’ facilities in Asia, are located near known earthquake fault zones and, therefore, are vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, such as power loss, fire, floods and similar events. If any such disaster were to occur, our ability to operate our business could be seriously impaired. In addition, we may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions. Any significant losses that are not recoverable under our insurance policies could seriously impair our business and financial condition.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

We have funded our operations since inception through equity financings, our borrowing arrangements, and our public offerings in October 2015 and June 2017. We have incurred net losses and negative cash flows from operating activities since our inception, and we expect we will continue to incur operating and net losses and negative cash flows from operations for the foreseeable future. We do not know when or if our operations will generate sufficient cash to fund our ongoing operations. In the future, we expect to require additional capital to fund our ongoing operations, respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings or enter into credit facilities, but we may not be able to timely secure additional debt or equity financing or raise additional capital in the public market on favorable terms or at all.

Our current term loan facility limits our ability to incur indebtedness, and these restrictions are subject to a number of qualifications and exceptions subject to the consent of our lender. Any additional debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.

If we raise additional funds through issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

Provisions of our debt agreements may restrict our ability to pursue our business strategies.

Borrowings under our $12 million term loan facility and $5 million line of credit are collateralized by substantially all of our assets. Our credit facility restricts our ability to, among other things:

·

dispose of or sell assets;

·

consolidate or merge with other entities;

·

incur additional indebtedness;

·

create liens on our assets;

·

pay dividends;

·

make investments;

·

enter into transactions with affiliates; and

·

redeem subordinated indebtedness.

These restrictions are subject to certain exceptions. In addition, our credit facility, as amended, requires us to comply with certain financial covenants. The operating and financial restrictions and covenants in the credit facility, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, and we may not be able to meet those covenants. A breach of any of these covenants could result in a default under the credit facility (as it did during the months of August, September, October and November 2016), which could cause, among other things (unless such default is waived by the lender), all or a portion of the outstanding indebtedness thereunder to become immediately due and payable and subject to an increase by 5% of the interest rate charged during the period of the unremedied breach. In addition, the lender would be able to sell or lease our assets in satisfaction of our outstanding indebtedness.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income, and tax credits to offset tax. In addition, although we do not expect to undergo an ownership change, we may experience an ownership change in the future, and our ability to utilize our NOLs and tax credits could be further limited by Section 382 of the Code. Future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Section 382 of the Code. Our net operating losses and tax credits could also be impaired under state laws. As a result, we might not be able to utilize a material portion of our state NOLs and tax credits.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. If and when we no longer meet the definition of an “emerging growth company” as defined by the JOBS Act, we would be required under Section 404 of the Sarbanes-Oxley Act to evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our annual report for the applicable fiscal year provide a management report on our internal control over financial reporting, which must be attested to by our independent registered public accounting firm. If we have one or more material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are in the process of designing and implementing our internal control over financial reporting required to comply with this obligation, which process will be time consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to determine that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be negatively affected, and we could become subject to investigations by the NASDAQ Stock Market, the SEC or other regulatory authorities, which could require additional financial and management resources.

Regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.

Pursuant to the Dodd-Frank Act, the SEC has adopted requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements will require companies to diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. The implementation of these requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of our products, and affect our costs and relationships with customers, distributors and suppliers as we must obtain additional information from them to ensure our compliance with the disclosure requirement. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free and these customers may discontinue, or materially reduce, purchases of our products, which could result in a material adverse effect on our results of operations and our financial condition may be adversely affected.

Risks Related to Ownership of Our Common Stock

The market price of our common stock has been and will likely continue to be volatile, and you could lose all or part of your investment.

The market price of our common stock has been, and will likely continue to be, volatile. Since shares of our common stock were sold in our initial public offering in October 2015 at a price of $5.00 per share, our stock price has fluctuated significantly. In addition to the factors discussed in this Annual Report on Form 10‑K, the market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

·

overall performance of the equity markets in general, in our industry or in the markets we address;

·

our operating performance and the performance of other similar companies;

·

changes in the estimates of our results of operations that we provide to the public, our failure to meet these projected results or changes in recommendations by securities analysts that elect to follow our common stock;

·

announcements of technological innovations, new products or enhancements to products, acquisitions, strategic alliances or significant agreements by us or by our competitors;

·

announcements of new business partners, on the termination of existing business partner arrangements or changes to our relationships with such business partners;

·

recruitment or departure of key personnel;

·

announcements of litigation or claims against us;

·

changes in legal requirements relating to our business;

·

the economy as a whole, market conditions in our industry, and the industries of our customers and end customers;

·

trading activity by our principal stockholders;

·

the expiration of contractual lock-up or market standoff agreements; and

·

sales of shares of our common stock by us or our stockholders.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

lf securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.

The trading market for our common stock rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. If few analysts cover our company, the price and trading volume of our stock could suffer. If one or more of the analysts who cover us downgrade our stock, or publish unfavorable research about our business, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of our company or fail to publish regularly, we could lose visibility in the market, which in turn could cause our stock price to decline.

We do not intend to pay dividends for the foreseeable future.

We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. In addition, our ability to pay cash dividends on our capital stock is restricted by the terms of our current credit facility and is likely to be restricted by any future debt financing arrangement. Any return to stockholders will therefore be limited to increases in the price of our common stock, if any.

Provisions in our amended and restated certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management.

Delaware corporate law and our amended and restated certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our board of directors that the stockholders of our company may deem advantageous. Among other things, these provisions:

·

establish a classified board of directors so that not all members of our board are elected at one time;

·

provide that directors may be removed only “for cause” and only with the approval of stockholders representing 66 2/3 percent of our outstanding common stock;

·

require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and bylaws;

·

authorize the issuance of “blank check” preferred stock that our board could issue to increase the number of outstanding shares and to discourage a takeover attempt;

·

eliminate the ability of our stockholders to call special meetings of stockholders;

·

prohibit stockholder action by written consent, which means that all stockholder actions will be required to be taken at a meeting of our stockholders;

·

provide that our board of directors is expressly authorized to make, alter or repeal our bylaws; and

·

establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any delay or prevention of a change of control transaction or changes in our management could cause the market price of our common stock to decline.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.       PROPERTIES

We lease approximately 34,000 square feet in Santa Clara, California for our corporate headquarters, pursuant to a noncancelable lease, which expires in July 2023. We believe that our existing facilities are adequate to meet our current needs, and we intend to add or change facilities as needs require. We believe that, if required, suitable additional or substitute space would be available to accommodate expansion of our operations.

ITEM 3.       LEGAL PROCEEDINGS

We are not currently a party to any legal proceedings which, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our business, operating results, financial condition or cash flows. We may, from time to time, become involved in legal proceedings arising in the ordinary course of our business and as our business grows, we may become a party to an increasing number of legal proceedings.

ITEM 4.       MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.       MARKET FOR REGISTRANT’S COMMON EQUITY, RELIATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information for Common Stock

Our common stock has been listed on The Nasdaq Capital Market under the symbol “IOTS” since October 27, 2015, the date of our initial public offering. Prior to our initial public offering, there was no public market for our common stock.

The following table sets forth for the indicated periods the high and low closing sales prices of our common stock as reported by The Nasdaq Capital Market.

 

 

 

 

 

 

 

 

    

High

    

Low

Fiscal 2017 quarter ended:

 

 

 

 

 

 

March 31, 2017

 

$

4.40

 

$

1.90

June 30, 2017

 

$

5.60

 

$

3.85

September 30, 2017

 

$

8.15

 

$

4.25

December 31, 2017

 

$

8.50

 

$

6.15

Fiscal 2016 quarter ended:

 

 

  

 

 

  

March 31, 2016

 

$

7.59

 

$

5.11

June 30, 2016

 

$

5.76

 

$

3.02

September 30, 2016

 

$

3.81

 

$

2.02

December 31, 2016

 

$

2.59

 

$

1.60

 

As of February 20, 2018, there were 38 registered stockholders of record of our common stock. Because many of our shares of common stock are held by brokers or other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by the record holders.

Dividend Policy

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any cash dividends on our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. In addition, the terms of our $12.0 million term loan facility and our $5.0 million line of credit currently prohibit us from paying dividends.

Stock Performance Graph

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Adesto under the Securities Act or the Exchange Act.

The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the NASDAQ Composite Index and the PHLX Semiconductor Index for the period from October 27, 2015 (the date our common stock commenced trading on The Nasdaq Capital Market) to December 31, 2017, the end of our last fiscal year. The comparisons in the graph below are based on historical data and are not intended to forecast or be indicative of future stock price performance of our common stock.

Picture 2

Recent Sale of Unregistered Securities and Use of Proceeds

Use of Proceeds

On October 30, 2015, we completed our initial public offering in which we sold 5,000,000 shares of common stock at a price to the public of $5.00 per share. On November 4, 2015, we completed the sale of an additional 192,184 shares of common stock pursuant to the underwriters’ over-allotment option. The aggregate offering price for shares sold by us in the offering was approximately $26.0 million. The offer of up to 5,750,000 shares in the initial public offering, for a proposed maximum aggregate offering price of $28.75 million, were registered under the Securities Act pursuant to a registration statement on Form S‑1 (File No. 333‑206940) that was declared effective by the Securities and Exchange Commission on October 26, 2015.

Needham & Company, LLC, Oppenheimer & Co. Inc. and Roth Capital Partners, LLC were the underwriters for the offering. Following the sale of 5,192,184 shares in connection with the closing of the initial public offering and the sale of the shares subject to the over-allotment option, the offering terminated. We raised approximately $22.1 million in net proceeds after deducting underwriting discounts and commissions of approximately $1.8 million and other offering expenses of approximately $2.0 million. As of December 31, 2017, we had used substantially all of the aggregate net proceeds from our initial public offering to fund working capital and general corporate requirements in the ordinary course of business. No such payments were made, whether directly or indirectly to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or to our affiliates.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

ITEM 6.       SELECTED FINANCIAL DATA

We have derived the selected consolidated statements of operations data for the years ended December 31, 2017, 2016, and 2015, and the consolidated balance sheet data as of December 31, 2017 and 2016 from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the years ended December 31, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 have been derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K.You should read the following selected consolidated financial data below in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report on Form 10‑K. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes, and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

 

    

2017

    

2016

    

2015

    

2014

    

2013

 

 

(in thousands, except share and per share data)

Revenue, net

 

$

56,112

 

$

43,968

 

$

43,259

 

$

41,465

 

$

49,684

Cost of revenue

 

 

28,637

 

 

22,618

 

 

24,775

 

 

25,532

 

 

29,738

Gross profit

 

 

27,475

 

 

21,350

 

 

18,484

 

 

15,933

 

 

19,946

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Research and development

 

 

14,094

 

 

15,896

 

 

12,795

 

 

14,410

 

 

15,033

Sales and marketing

 

 

11,064

 

 

11,026

 

 

8,345

 

 

7,211

 

 

8,094

General and administrative

 

 

7,148

 

 

6,693

 

 

3,978

 

 

2,356

 

 

2,677

Gain from settlement with former foundry supplier

 

 

 —

 

 

(1,962)

 

 

 —

 

 

 —

 

 

 —

Total operating expenses

 

 

32,306

 

 

31,653

 

 

25,118

 

 

23,977

 

 

25,804

Loss from operations

 

 

(4,831)

 

 

(10,303)

 

 

(6,634)

 

 

(8,044)

 

 

(5,858)

Other income (expense):

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Interest expense, net

 

 

(753)

 

 

(1,275)

 

 

(1,115)

 

 

(864)

 

 

(2,731)

Other income (expense), net

 

 

(3)

 

 

(50)

 

 

(695)

 

 

114

 

 

508

Total other (expense), net

 

 

(756)

 

 

(1,325)

 

 

(1,810)

 

 

(750)

 

 

(2,223)

Loss before provision for (benefit from) for income taxes

 

 

(5,587)

 

 

(11,628)

 

 

(8,444)

 

 

(8,794)

 

 

(8,081)

Provision for (benefit from) income taxes

 

 

101

 

 

(16)

 

 

(61)

 

 

140

 

 

72

Net loss

 

$

(5,688)

 

$

(11,612)

 

$

(8,383)

 

$

(8,934)

 

$

(8,153)

Net loss per share:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Basic and diluted

 

$

(0.31)

 

$

(0.77)

 

$

(2.79)

 

$

(16.48)

 

$

(15.14)

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Basic and diluted

 

 

18,591,308

 

 

15,085,973

 

 

3,007,929

 

 

542,248

 

 

538,388

 

Consolidated Balance Sheets Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

Consolidated Balance Sheets Data:

    

2017

    

2016

    

2015

 

2014

 

2013

 

 

(in thousands)

Cash and cash equivalents

 

$

30,078

 

$

19,719

 

$

23,089

 

$

5,972

 

$

11,580

Total assets

 

 

60,812

 

 

46,183

 

 

49,938

 

 

31,447

 

 

43,589

Current liabilities

 

 

14,474

 

 

15,408

 

 

17,644

 

 

21,634

 

 

20,139

Debt

 

 

13,334

 

 

18,048

 

 

13,420

 

 

10,749

 

 

14,901

Preferred stock warrant liability

 

 

 —

 

 

 —

 

 

 —

 

 

122

 

 

262

Convertible preferred stock

 

 

 —

 

 

 —

 

 

 —

 

 

78,467

 

 

78,467

Total stockholders' equity (deficit)

 

 

32,950

 

 

16,365

 

 

24,479

 

 

(70,252)

 

 

(61,661)

 

In September 2017, we entered into a three-year $12.0 million term loan facility and a $5.0 million line of credit. As of December 31, 2017, we had net borrowings of $11.8 million outstanding under our term loan facility, of which $0.9 million is included in current liabilities. We also had borrowings of $1.5 million under our line of credit as of December 31, 2017.

ITEM 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10‑K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this Annual Report on Form 10‑K.

Overview

We are a leading provider of application-specific, ultra-low power non-volatile memory, or NVM, products. We optimize our NVM products for Internet of Things, or IoT, applications including current and next-generation Internet-connected devices in the consumer, industrial, medical and wearables markets. We combine our NVM design capabilities with proprietary intellectual property and differentiated technology platforms to deliver high-performance products that dramatically reduce the overall energy consumption of our customers’ systems and extend battery life. Our products feature embedded intelligence in a small form factor and high reliability.

Our revenue is derived from the sale of our NVM products, primarily our serial flash memory products, which represented substantially all of our revenue for the year ended December 31, 2017. In recent years, we have invested in developing and commercializing new flash memory products that are well suited for low-power, high-growth applications. In 2013, we introduced the first of our next-generation DataFlash and Fusion Serial Flash products. Revenue from our next-generation NVM products were $55.8 million, $43.5 million and $39.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. We had been exclusively developing products based on Conductive Bridging RAM, or CBRAM, technology prior to our 2012 acquisition of assets from Atmel, which brought us our first flash memory products. We believe products based on this technology have the potential to contribute to our long-term growth and thus we continue to invest our resources into developing and enhancing our families of CBRAM-based products, although revenue associated with these products has not been material to date.

For the year ended December 31, 2017, our products were sold to more than 2,000 end customers. In general, we work directly with our customers to have our NVM devices designed into and qualified for their products. Although we maintain direct sales, support and development relationships with our customers, once our products are designed into a customer’s product, we sell a majority of our products to those customers through distributors. We generated 74%, 71% and 73% of our revenue from distributors during the years ended December 31, 2017, 2016 and 2015, respectively. Sales to three distributors generated approximately 38%, 35% and 40% of our revenue during the years ended December 31, 2017, 2016 and 2015, respectively. Additionally, we derived approximately 79%, 85% and 80% of our revenue internationally during the years ended December 31, 2017, 2016 and 2015, respectively, the majority of which was recognized in the Asia Pacific, or APAC, region. Revenue by geography is recognized based on the region to which our products are sold, and not to where the end products are shipped.

We employ a fabless manufacturing strategy and use market-leading suppliers for all phases of the manufacturing process, including wafer fabrication, assembly, testing and packaging. This strategy significantly reduces the capital investment that would otherwise be required to operate manufacturing facilities of our own.

Factors Affecting Our Performance

Product adoption in new markets and applications. We optimize our products to meet the technical requirements of the emerging IoT market. The growth in the IoT market is dependent on many factors, most of which are outside of our control. Should the IoT market not develop or develop more slowly, our financial results could be adversely affected.

Ability to attract and retain customers that make large orders. In 2017, our products were sold to more than 2,000 end customers, of which approximately 45 generated more than half our revenue. No end customer accounted for 10% or more of our revenue in 2017. One end customer accounted for 10% or more of our revenue in 2016 and 2015. While we expect the composition of our customers to change over time, our business and operating results will depend on our ability to continually target new and retain existing customers that make large orders, particularly those in growth markets which are less dependent on macroeconomic conditions.

Design wins with new and existing customers. We believe our solutions significantly improve the performance and potentially lower the system cost of our customers’ designs, particularly if we are part of the early design phase. Accordingly, we work closely with our customers and targeted prospects to understand their product roadmaps and strategies. We consider design wins to be critical to our future success. We define a design win as the successful completion of the evaluation stage, where a customer has tested our product, verified that our product meets its requirements and qualified our NVM device for their products. The number of our design wins has grown from 135 in 2015 to 296 in 2016 and to 417 in 2017. The revenue that we generate, if any, from each design win can vary significantly. Our long-term sales expectations are based on forecasts from customers, internal estimates of customer demand factoring in expected time to market for end customer products incorporating our solutions and associated revenue potential and internal estimates of overall demand based on historical trends.

Pricing, product cost and gross margins of our products. Our gross margin has been and will continue to be affected by a variety of factors, including the timing of changes in pricing, shipment volumes, new product introductions, changes in product mixes, changes in our purchase price of fabricated wafers and assembly and test service costs, manufacturing yields and inventory write downs, if any. In general, newly introduced products and products with higher performance and more features tend to be priced higher than older, more mature products. Average selling prices in the semiconductor industry typically decline as products mature. Consistent with this historical trend, we expect that the average selling prices of our products will decline as they mature. In the normal course of business, we will seek to offset the effect of declining average selling prices on existing products by reducing manufacturing costs and introducing new and higher value-added products. More recently, certain of our suppliers have increased costs although this increase did not have a material impact on our results of operations for the year ended December 31, 2017. If we are unable to maintain overall average selling prices or offset any declines in average selling prices with realized savings on product costs, our gross margin will decline.

Investment in growth.  We have invested, and intend to continue to invest, in expanding our operations, increasing our headcount, developing our products and differentiated technologies to support our growth and expanding our infrastructure. We expect our total operating expenses to increase in the foreseeable future to meet our growth objectives. We plan to continue to invest in our sales and support operations throughout the world, with a particular focus in adding additional sales and field applications personnel to further broaden our support and coverage of our existing customer base, in addition to developing new customer relationships and generating design wins. We also intend to continue to invest additional resources in research and development to support the development of our products and differentiated technologies. Any investments we make in our sales and marketing organization or research and development will occur in advance of experiencing any benefits from such investments, and the return on these investments may be lower than we expect. In addition, as we invest in expanding our operations internationally, our business and results will become further subject to the risks and challenges of international operations, including higher operating expenses and the impact of legal and regulatory developments outside the United States.

Components of Our Results of Operations

Revenue

We derive substantially all of our revenue through the sale of our NVM products to OEMs and ODMs, primarily through distributors. We generated 74%, 71%, and 73% of our revenue from distributors during the years ended December 31, 2017, 2016, and 2015, respectively. We recognize revenue from product sales when persuasive evidence of an arrangement exists and all other revenue recognition criteria are met. We sell the majority of our products to distributors and generally recognize revenue when we ship the product directly to the distributors since title and risk of loss transfers at that time.

Because our distributors market and sell their products worldwide, our revenue by geographic location is not necessarily indicative of where our customers’ product sales and design win activity occur, but rather of where their manufacturing operations occur.

Cost of Revenue and Gross Margin

Cost of revenue primarily consists of costs paid to our third-party manufacturers for wafer fabrication, assembly and testing of our NVM products, write-downs of inventory for excess and obsolete inventories including write-downs of inventory for products based on CBRAM technology and accruals for future losses on CBRAM wafer purchase commitments to the extent our costs exceed the market price for such products. To a lesser extent, cost of revenue also includes depreciation of test equipment and expenses relating to manufacturing support activities, including personnel-related costs, logistics and shipping.

 

Our gross margin has been and will continue to be affected by a variety of factors, including the timing of changes in pricing, shipment volumes, new product introductions, changes in product mix, changes in our purchase price of fabricated wafers and assembly and test service costs, manufacturing yields and inventory write downs, if any. We expect our gross margin to fluctuate over time depending on the factors described above.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing and general and administrative expense. Personnel-related costs, including salaries, benefits, bonuses and stock-based compensation, are the most significant component of each of our operating expense categories. In addition, in the near term we expect to hire additional personnel, primarily in our selling and marketing functions, and increase research and development expenditures, such as prototype wafers, associated with the implementation of our technology in a manufacturing facility in Asia. Accordingly, we expect our operating expenses to increase in absolute dollars as we invest in these initiatives.

Research and Development. Our research and development expenses consist primarily of personnel-related costs for the design and development of our products and technologies. Additional research and development expenses include product prototype costs, amortization of mask expenditures and other materials costs, external test and characterization expenses, depreciation, amortization of design tool software licenses, amortization of acquisition-related intangible assets and allocated overhead expenses. We also incur costs related to outsourced research and development activities and joint venture activities. We expect research and development expenses to increase in absolute dollars for the foreseeable future as we continue to improve our product features and increase our portfolio of solutions.

Sales and Marketing. Sales and marketing expenses consist primarily of personnel-related costs for our sales, business development, marketing, and applications engineering activities, third-party sales representative commissions, promotional and other marketing expenses, amortization of acquisition-related intangible assets and travel expenses. We expect sales and marketing expenses to increase in absolute dollars for the foreseeable future as we continue to expand our direct sales teams and increase our marketing activities.

General and Administrative. General and administrative expenses consist primarily of personnel-related costs, consulting expenses and professional fees. Professional fees principally consist of legal, audit, tax and accounting services. We expect general and administrative expenses to increase in absolute dollars for the foreseeable future as we hire additional personnel, make improvements to our infrastructure and incur significant additional costs for the compliance requirements of operating as a public company, including higher legal, insurance and accounting expenses.

Other Income (Expense), Net

Other income (expense), net is comprised of interest income (expense) and other income (expense). Interest expense consists of interest on our outstanding debt. Other expense, net consists primarily of the change in fair value of our preferred stock warrant liability and foreign exchange gains or losses. Our foreign currency exchange gains and losses relate to transactions and asset and liability balances denominated in currencies other than the U.S. dollar. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.

 

Prior to our IPO of common stock in October 2015, we classified our preferred stock warrants as a liability on our consolidated balance sheets and recorded changes in fair value at each balance sheet date with the corresponding change recorded as other income (expense). We recorded a final adjustment to the fair value of the warrants as of the closing of our initial public offering on October 30, 2015 and the warrants will no longer be subject to fair value accounting thereafter due to their conversion into warrants to purchase common stock.

Provision for (Benefit from) Income Taxes

Provision for income taxes consists primarily of U.S. federal and state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. We have a full valuation allowance for deferred tax assets, including net operating loss carryforwards, and tax credits related primarily to research and development. We expect to maintain this full valuation allowance for the foreseeable future.

Results of Operations

The following table sets forth our consolidated results of operations for the periods shown:

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

 

    

2017

    

2016

    

2015

 

 

(in thousands, except share and per share data)

Revenue, net

 

$

56,112

 

$

43,968

 

$

43,259

Cost of revenue

 

 

28,637

 

 

22,618

 

 

24,775

Gross profit

 

 

27,475

 

 

21,350

 

 

18,484

Operating expenses:

 

 

  

 

 

  

 

 

  

Research and development

 

 

14,094

 

 

15,896

 

 

12,795

Sales and marketing

 

 

11,064

 

 

11,026

 

 

8,345

General and administrative

 

 

7,148

 

 

6,693

 

 

3,978

Gain from settlement with former foundry supplier

 

 

 —

 

 

(1,962)

 

 

 —

Total operating expenses

 

 

32,306

 

 

31,653

 

 

25,118

Loss from operations

 

 

(4,831)

 

 

(10,303)

 

 

(6,634)

Other (expense):

 

 

  

 

 

  

 

 

  

Interest expense, net

 

 

(753)

 

 

(1,275)

 

 

(1,115)

Other (expense), net

 

 

(3)

 

 

(50)

 

 

(695)

Total other (expense), net

 

 

(756)

 

 

(1,325)

 

 

(1,810)

Loss before provision for (benefit from) for income taxes

 

 

(5,587)

 

 

(11,628)

 

 

(8,444)

Provision for (benefit from) income taxes

 

 

101

 

 

(16)

 

 

(61)

Net loss attributable to common stockholders

 

$

(5,688)

 

$

(11,612)

 

$

(8,383)

Net loss per share:

 

 

  

 

 

  

 

 

  

Basic and diluted

 

$

(0.31)

 

$

(0.77)

 

$

(2.79)

Weighted average number of shares used in computing net

 

 

  

 

 

  

 

 

  

  loss per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

18,591,308

 

 

15,085,973

 

 

3,007,929

 

Comparison of Years Ended December 31, 2017, 2016 and 2015

Revenue, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

Change 2017 - 2016

 

 

 

Change 2016 - 2015

 

 

 

 

2017

 

    

2016

 

 

2015

 

    

Amount

    

%

 

 

    

Amount

    

%

 

 

 

 

(dollars in thousands)

 

Revenue, net

 

$

56,112

 

$

43,968

 

$

43,259

 

$

12,144

 

28

%

 

$

709

 

2

%

Revenue by category of products:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legacy Products

 

 

301

 

 

427

 

 

3,385

 

 

(126)

 

(30)

%

 

 

(2,958)

 

(87)

%

New Products

 

 

55,811

 

 

43,541

 

 

39,874

 

 

12,270

 

28

%

 

 

3,667

 

9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

    

2017

    

2016

    

2015

 

 

(in thousands)

United States

 

$

11,667

 

$

6,301

 

$

8,831

Rest of Americas

 

 

245

 

 

483

 

 

602

Europe

 

 

9,546

 

 

5,809

 

 

4,817

Asia Pacific

 

 

34,263

 

 

31,051

 

 

28,711

Rest of world

 

 

391

 

 

324

 

 

298

Total

 

$

56,112

 

$

43,968

 

$

43,259

 

Revenue increased by $12.1 million, or 28%, for 2017 as compared to 2016.  This increase was due primarily to an increase in sales of our DataFlash and to a lesser extent, sales of our Standard Serial Flash products.

Revenue increased by $0.7 million, or 2%, for 2016 as compared to 2015. This increase was due primarily to an increase in sales of our next generation Fusion Serial Flash products, partially offset by a decrease in revenue from our Standard Serial Flash and DataFlash products.

Cost of Revenue and Gross Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

Change 2017 - 2016

 

Change 2016 - 2015

 

 

    

2017

 

2016

    

2015

 

    

Amount

    

 

Amount

    

 

 

 

(dollars in thousands)

 

Cost of revenue

 

$

28,637

 

$

22,618

 

$

24,775

 

 

$

6,019

 

27

%  

$

(2,157)

 

(9)

%  

Gross Profit

 

 

27,475

 

 

21,350

 

 

18,484

 

 

 

6,125

 

29

%  

 

2,866

 

16

%  

Gross Margin

 

 

49

% 

 

49

% 

 

43

%  

 

 

  

 

  

 

 

  

 

  

 

 

Cost of revenue increased by $6.0 million, or 27%, for 2017 as compared to 2016.  This increase was due primarily to increased unit volume associated with our increase in revenue during 2017.

There was no material change in gross margin in 2017 as compared to 2016.

Cost of revenue decreased by $2.2 million, or 9%, for 2016 as compared to 2015. This decrease was due primarily to reduced costs to third-party manufacturers for wafer fabrication, assembly and testing of our products of $1.4 million.

Gross margin increased by 6 percentage points in 2016 as compared to 2015 due to the same factors that caused our costs of revenue to decline over the same period which included reductions in unit costs from our manufacturing subcontractors, improved process yields, and a reduction in manufacturing support expense.

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

Change 2017 - 2016

 

 

Change 2016 - 2015

 

 

    

2017

    

2016

    

2015

    

Amount

    

 

    

Amount

    

 

 

 

(dollars in thousands)

 

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

 

  

 

  

 

Research and development

 

$

14,094

 

$

15,896

 

$

12,795

 

$

(1,802)

 

(11)

%

 

$

3,101

 

24

%

Sales and marketing

 

 

11,064

 

 

11,026

 

 

8,345

 

 

38

 

 0

 

 

 

2,681

 

32

 

General and administrative

 

 

7,148

 

 

6,693

 

 

3,978

 

 

455

 

 7

 

 

 

2,715

 

68

 

Gain from settlement with former foundry supplier

 

 

 —

 

 

(1,962)

 

 

 —

 

 

1,962

 

(100)

 

 

 

(1,962)

 

100

 

Total operating expenses

 

$

32,306

 

$

31,653

 

$

25,118

 

$

653

 

 2

%

 

$

6,535

 

26

%

 

Research and Development. Research and development (“R&D”) expense decreased by $1.8 million or 11%, in 2017 as compared to 2016.  The decrease was due primarily to a $1.2 million decrease in costs related to joint activities due to the renegotiation of our joint development agreement with TowerJazz Panasonic Semiconductor Company, a $0.4 million reduction in material costs, a $0.4 million reduction in facilities costs due to elimination of offsite lab rent expense and $0.2 million reduction in external test and characterization expenses, partially offset by a $0.4 million increase in personnel related costs. 

Research and development expense increased by $3.1 million, or 24%, in 2016 as compared to 2015. This increase was due primarily to a $1.2 million increase in personnel-related costs, $1.2 million in expenditures related to our joint venture development agreement with TowerJazz Panasonic Semiconductor Company, for which there were not corresponding expenditures in 2015, and a $0.7 million increase in allocated facilities costs due to our headquarters relocation in 2016 and an investment in a new research and development lab.

Sales and Marketing. There was no material change in sales and marketing expense in 2017 as compared to 2016 as a result of our expense management efforts in 2017.

Sales and marketing expense increased $2.7 million, or 32%, in 2016 as compared to 2015. This increase was due primarily to a $2.8 million increase in personnel-related costs, a $0.5 million increase in allocated facilities costs due to our headquarters relocation in 2016, partially offset by a $0.8 million decrease in outside services such as consulting expense.

General and Administrative. General and administrative expenses increased by $0.5 million or 7% in 2017 as compared to 2016.  The increase was due primarily to personnel-related costs.    

General and administrative expenses increased $2.7 million, or 68%, in 2016 as compared to 2015. This increase was due primarily to a $2.2 million increase in personnel-related costs, a $0.5 increase in directors’ and officers’ insurance premiums, a $0.2 million increase in costs related to being a public company, partially offset by a $0.2 million decrease in outside services such as consulting expenses, and a $0.1 million decrease in accounting, audit, and tax preparation fees.

Other (Expense), Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

Change 2017 - 2016

 

 

Change 2016 - 2015

 

 

    

2017

    

2016

    

2015

    

Amount

    

%

 

 

Amount

 

%

 

 

 

(dollars in thousands)

 

Interest expense, net

 

$

(753)

 

 

(1,275)

 

 

(1,115)

 

$

(522)

 

(41)

%  

 

$

160

 

14

%  

Other (expense), net

 

 

(3)

 

 

(50)

 

 

(695)

 

 

(47)

 

(94)

 

 

 

(645)

 

(93)

 

Total other (expense), net

 

$

(756)

 

$

(1,325)

 

$

(1,810)

 

$

(569)

 

(43)

%  

 

$

(485)

 

(27)

%  

 

Interest expense, net decreased by $0.5 million or 41% in 2017 as compared to 2016 primarily due to a reduction in net borrowings of $4.7 million.

 

Interest expense, net increased by $0.2 million, or 14%, in 2016 as compared to 2015 due to an increase in our net borrowings of $4.6 million.

Other (expense), net decreased by $47,000 in 2017 as compared to 2016 due primarily to reduced foreign currency transaction costs.

Other (expense), net decreased by $0.6 million, or 93%, in 2016 as compared to 2015 as we no longer had to record the change in fair value of preferred stock warrants. All preferred stock warrants were converted to common stock warrants on the date of our IPO in 2015.

Provision for (Benefit from) Income Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

Change 2017 - 2016

 

 

 

Change 2016 - 2015

 

 

    

2017

      

2016

    

2015

    

Amount

 

%

 

 

Amount

 

%

 

 

 

(dollars in thousands)

 

Provision for (benefit from) income taxes

 

$

101

 

$

(16)

 

$

(61)

 

$

117

 

731

%  

 

$

45

 

74

%  

 

Our provision for income taxes increased by $0.1 million in 2017 as compared to 2016 due primarily to provisions related to our foreign subsidiaries.

Our benefit from income taxes decreased by $45,000, or 74%, in 2016 as compared to 2015. The decrease was due primarily to a reduction in benefits related to our foreign subsidiaries as well as a reduction in benefits related to deferred taxes in the United States.

Liquidity and Capital Resources

Our principal source of liquidity as of December 31, 2017 consisted of cash and cash equivalents of $30.1 million. We had approximately $3.5 million of additional borrowing capacity under our line of credit as of December 31, 2017. Our outstanding borrowings under this credit facility as of December 31, 2017 were $13.5 million. Substantially all of our cash and cash equivalents are held in the United States.

We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs over the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the introduction of new and enhanced products and our costs to implement new manufacturing technologies. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. Any additional debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, if we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

Our cash flows for the periods indicated were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

    

2017

    

2016

    

2015

 

 

(in thousands)

Cash flows used in operating activities

 

$

(189)

 

$

(4,858)

 

$

(7,127)

Cash flows used in investing activities

 

 

(3,552)

 

 

(2,662)

 

 

(559)

Cash flows provided by financing activities

 

 

14,165

 

 

4,221

 

 

25,141

 

Cash Flows from Operating Activities

Our primary source of cash from operating activities has been from cash collections from our customers. We expect cash inflows from operating activities to be affected by increases in sales and timing of collections. Our primary uses of cash from operating activities have been for personnel costs and investments in research and development and sales and marketing. Net cash used in operating activities for the periods presented consisted of net losses adjusted for certain noncash items and changes in working capital. Within changes in working capital, changes in accounts receivable, inventory and accounts payable generally account for the largest adjustments, as we typically use more cash to fund accounts receivable and build inventory as our business grows. Increases in accounts payable typically provides more cash as we do more business with our contract foundries and other third parties, depending on the timing of payments.

During the year ended December 31, 2017, cash used in operating activities was $0.2 million and was due primarily to a net loss of $5.7 million offset by non-cash charges of $3.5 million for stock-based compensation expense, $1.4 million for depreciation and amortization, $1.2 million for the amortization of intangible assets, $82,000 for the amortization of debt discount and an increase in net assets and liabilities of $0.7 million.  The increase in net assets and liabilities is due primarily to an increase in accounts receivable of $2.6 million, an increase in inventory of $0.6 million, an increase in prepaids and other current assets of $0.5 million, an increase in other non-current assets of $0.3 million and a decrease in deferred rent of $0.4 million all partially offset by an increase in accounts payable and accrued compensation and other expenses of $3.7 million.

During the year ended December 31, 2016, cash used in operating activities was $4.9 million and was due primarily to a net loss of $11.6 million and the impact of a settlement with a former foundry supplier of $2.0 million, partially offset by non-cash charges of $3.3 million related to stock-based compensation expense, $1.0 million related to depreciation and amortization, $1.2 million related to amortization of intangible assets, $0.6 million related to amortization of debt discount, and a decrease in our net assets and liabilities of $2.5 million. The decrease in assets and liabilities is due primarily to a decrease in accounts receivable of $0.4 million, a decrease in net inventories of $2.2 million, a decrease in prepaid expenses and other current assets of $1.8 million partially offset by a decrease in accounts payable and other accrued expenses of $1.9 million.

During the year ended December 31, 2015, cash used in operating activities was $7.1 million, primarily due to a net loss of $8.4 million, partially offset by non-cash charges of $4.9 million, primarily depreciation and amortization and stock-based compensation, and a net change in our net operating assets and liabilities of $3.6 million. The change in our net operating assets and liabilities was primarily due to a $4.5 million increase in accounts receivable due to the timing of revenue during the fourth quarter of 2015 and a $1.0 million increase in prepaid expenses and other current assets partially offset by a $1.9 million increase in accounts payable.

Cash Flows from Investing Activities

Our investing activities consist primarily of purchases of property and equipment. We expect to continue to make significant capital expenditures to support continued growth of our business. During the year ended December 31, 2017, cash used in investing activities was $3.6 million, of which $2.9 million was related to the purchase of equipment, $0.4 million was related to the acquisition of a technology license, and $0.3 million was related to the issuance of a note receivable. During the year ended December 31, 2016, cash used in investing activities was $2.7 million, related primarily to the purchase of equipment, an increase in leasehold improvements related to our new headquarters in Santa Clara, California, and $0.2 million related to the issuance of a note receivable. During the year ended December 31, 2015, cash used in investing activities was $0.6 million, related primarily to the purchase of equipment.

Cash Flows from Financing Activities

During the year ended December 31, 2017, cash provided by financing activities was $14.2 million, due primarily to $18.4 million received from the net proceeds of our follow-on public offering of our common stock and $0.5 million from the exercise of stock options and purchases made through the employee stock purchase plan offset by tax settlements associated with the release of restricted stock units partially offset by net repayments of $4.4 million and $0.3 million, respectively, on our term loan and revolving line of credit.

During the year ended December 31, 2016, cash provided by financing activities was $4.2 million and was due primarily to net proceeds from our term loan of $17.8 million offset by repayments of borrowings under our prior term loan of $15.7 million, net proceeds from our line of credit of $1.8 million, and proceeds from the issuance of common stock of $0.2 million.

During the year ended December 31, 2015, cash provided by financing activities was $25.1 million, due primarily to $22.1 million received from the net proceeds from our IPO and $14.9 million from our prior term loan, partially offset by payments of $11.9 million on our loans with both Bridge Bank and Opus Bank.

Off Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purpose.

Credit Facility

The Company is a party to that certain Business Financing Agreement dated July 7, 2016, by and between Western Alliance Bank and the Company, as amended (“Credit Facility”). The Credit Facility originally provided for (i) a term loan of up to $18.0 million (the “Term Loan”) and (ii) a revolving credit line advance (the “Line of Credit”) in the aggregate amount of the lower of (x) $2.0 million and (y) 80% of certain of the Company’s receivables. Prior to the Amendment (as defined below), the Term Loan bore interest at a rate per annum equal to the greater of the prime rate or 3.5%, plus 0.75% (5.00% on September 30, 2017), and was scheduled to mature in June 2019.  Prior to the Amendment, the Line of Credit bore interest at a rate per annum equal to the greater of the prime rate or 3.5% plus 0.50% (4.75% on September 30, 2017), and was scheduled to mature in July 2018. Prior to the Amendment, we made interest-only payments on the Term Loan from July 2016 through September 2016 and began making interest payments and principal payments in 33 equal monthly installments starting October 2016. Prior to the Amendment, the Credit Facility provided that any indebtedness we incurred thereunder was collateralized by substantially all assets of the Company and any domestic subsidiaries, subject to certain customary exceptions. We paid a facility fee of $150,000 as well as a $25,000 diligence fee upon entry into the Credit Facility and an additional $10,000 on July 7, 2017. These fees have been recorded as a debt discount and are being amortized over the life of the agreement.

The Credit Facility contains customary representations and warranties and affirmative and negative covenants. Among other negative covenants, prior to the Amendment, the Credit Facility provided that we may not (i) permit the ratio of the balance of unrestricted cash deposited at the financial institution, plus eligible receivables, net of reserve to the total amounts owed with respect to advances under the revolving credit line to be less than 1.50 to 1.00 and (ii) permit cash held at the financial institution in a deposit account to be less than 100% of the term loan outstanding. Upon an occurrence of an event of default, under the Credit Facility we could be required to pay interest on all outstanding obligations under the agreement at a rate of 5% above the otherwise applicable interest rate, and the lender may accelerate our obligations under the agreement.  As of December 31, 2017, we were in compliance with all financial covenants and restrictions.

On September 29, 2017, we amended the Credit Facility by entering into that certain Second Business Financing Modification Agreement, dated September 29, 2017 (the “Amendment”) with Western Alliance Bank. The Amendment extended the maturity dates of the Line of Credit and the Term Loan to July 2019 and September 2021, respectively, from July 2018 and June 2019, respectively. In addition, the Amendment increased the amount available under the Line of Credit in the aggregate amount to $5.0 million.

As part of this amendment we incurred additional fees of $125,000. These fees have been recorded as a debt discount and are being amortized over the life of the agreement. During the year ended December 31, 2017, the amortization of the debt discount was $82,000 and the unamortized debt discount was $0.2 million as of December 31, 2017.

The Amendment also decreased the interest rates under the Term Loan and the Line of Credit and changed the payment schedule under the Term Loan. The Term Loan bears interest at a rate per annum equal to the greater of the prime rate or 3.5% (4.5% on December 31, 2017). The Line of Credit bears interest at a rate per annum equal to the greater of the prime rate or 3.5% plus 0.25% (4.75% on December 31, 2017). Under the Amendment, we will make interest-only payments on the Term Loan from October 10, 2017 and on the 10th calendar day of each month thereafter, and will make principal and interest payments in 36 equal installments beginning on October 10, 2018, and on the 10th calendar day of each month thereafter, until the maturity date of the Term Loan. Pursuant to the Amendment, our Intellectual Property (as defined in the Amendment) is excluded from the collateral used to secure the indebtedness we incurred under the Credit Facility.

Under the Amendment, we have agreed to modified and additional negative covenants, requiring us to maintain a ratio of at least 1.25 to 1.00 with respect to either of the following: (x) the sum of our cash and certain receivables to our indebtedness under the Credit Facility; or (y) our Adjusted EBITDA (as defined in the Amendment), less certain capital expenditures, to the sum of (a) all principal payments and interest expense that we would have owed to the Lender if the Term Loan’s amortization were to start on September 29, 2017, all measured on a trailing 4-quarter basis, plus (b) all principal payments and interest expense on any of our other debt.  The Amendment also subjects us to the requirement that our quarterly revenues shall not negatively deviate more than 25% from the projections provided to Western Alliance Bank in accordance with the Credit Facility.

Contractual Obligations and Commitments

The following is a summary of our contractual obligations and commitments as of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period

Contractual Obligations

    

Total

    

Less than 1 year

    

1 – 3 Years

    

4 – 5 Years

    

More than 5 Years

 

 

(in thousands)

Operating leases (1)

 

$

7,117

 

$

1,238