ADESTO TECHNOLOGIES CORPORATION 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 10K. 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 10K.
Overview
We are a leading provider of innovative, application-specific semiconductors and embedded systems that provide the key building blocks of Internet of Things (IoT) edge devices operating on networks worldwide. Our broad portfolio of semiconductor and embedded technologies are optimized for connected IoT devices used in industrial, consumer, communications and medical applications. Through expert design, systems expertise and proprietary intellectual property, we enable our customers to differentiate their systems where it matters most for IoT: longer battery life, greater reliability, integrated intelligence and lower cost. Through our solutions, we enable seamless access to data and control of 'things' in the connected world. Our revenue is primarily derived from the sale of our NVM products, specifically our serial flash memory products, which represented a majority of our revenue for the year endedDecember 31, 2019 . 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$73.8 million and$64.1 million for the years endedDecember 31, 2019 and 2018, respectively. With the acquisition of S3 Semiconductors, inMay 2018 , we expanded our product offering and began selling analog, mixed-signal and radio frequency ASICs and IP blocks, and managing the supply of high-quality devices to our customers. We acquired 100% of the issued capital ofEchelon Corporation onSeptember 14, 2018 . During the years endedDecember 31, 2019 and 2018, S3 Semiconductors and Echelon revenues were approximately$44.3 and$19.3 million , respectively, following their respective acquisitions. For the year endedDecember 31, 2019 , our products were sold to more than 5,000 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 62%, 45
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65% and 74% of our revenue from distributors during the years endedDecember 31, 2019 , 2018 and 2017, respectively. Sales to three distributors generated approximately 38%, 31% and 38% of our revenue during the years endedDecember 31, 2018 , 2017 and 2016, respectively. Additionally, we derived approximately 73%, 72% and 79% of our revenue internationally during the years endedDecember 31, 2019 , 2018 and 2017, respectively, the majority of which was recognized in theAsia 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. OnFebruary 20, 2020 , we entered into the Merger Agreement with Dialog and Merger Sub, pursuant to which Merger Sub will, pursuant to the terms of and subject to the conditions specified in the Merger Agreement, merge with and into us, and we will be the surviving corporation of the Merger and become a wholly owned direct or indirect subsidiary of Dialog . Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each share of our common stock (subject to certain exceptions) issued and outstanding immediately prior to the effective time of the Merger will be canceled and automatically converted into the right to receive$12.55 in cash, without interest and subject to any required tax withholding. Our Board of Directors has unanimously determined that the Merger is advisable and fair to, and in the best interests of, us and our stockholders, and unanimously recommended the adoption of the Merger Agreement by the holders of our common stock. The Merger is expected to close in the third quarter of 2020, subject to customary regulatory approvals and customary closing conditions. For more information see Note 17, "Subsequent Event," in the notes to our consolidated financial statements.
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 2019, our
products were sold to more than 5,000 end customers, of which approximately 25
generated more than half our revenue. One end customer accounted for 10% or more
of our revenue in 2019. No end customer accounted for 10% or more of our revenue
in 2018 and 2017. While we expect the composition of our customers to change
over time, especially given our recent acquisitions, our business and operating
results will depend on our ability to continually target new and retain existing
customers that place 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 417 in 2018 to
570 in 2018. We had 459 additional design wins in 2019. 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
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introductions, changes in product mixes, changes in our purchase price of fabricated wafers and assembly and test service costs, the cost of raw materials for our embedded systems products, 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 endedDecember 31, 2019 . 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 outsidethe United States .
Components of Our Results of Operations
Revenue
For the year endedDecember 31, 2019 we derived approximately 62% of our revenue through the sale of our NVM products to OEMs and ODMs, primarily through distributors. We generated 62%, 65%, and 74% of our revenue from distributors for the years endedDecember 31, 2019 , 2018, and 2017, respectively. We derived approximately 38% and 23% of our revenue from the operations of S3 Semiconductors and Echelon during the years endedDecember 31, 2019 and 2018, respectively. Revenue is recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We sell the majority of our NVM 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 end 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,
raw material purchases for embedded products, and write-downs of NVM and
embedded inventory for excess and obsolete inventories. To a lesser extent, cost
of revenue also includes depreciation of test equipment and expenses relating to
manufacturing support activities, including personnel-related costs for both NVM
and embedded products, logistics and quality assurance and shipping. Cost of
revenue for ASIC and IP products is driven primarily by personnel-related costs
including outside consultants along with facilities costs.
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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, selling, general and administrative expense, amortization of intangible assets, acquisition related expenses and impairment and other charges. 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. 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 costs 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. Selling, general and administrative. Selling, general, and administrative 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. 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 sales, general and administrative expenses to increase in absolute dollars for the foreseeable future as we hire additional personnel, increase our marketing activities, and make improvements to our infrastructure and incur additional costs for legal, insurance and accounting expenses associated with our recent acquisitions. Amortization of intangible assets. Amortization of intangible assets is the periodic expense related to the use of intangible assets created as a result of theAtmel , S3 Semiconductors and Echelon acquisitions. The periodic expense is based on useful lives determined as part of the initial valuation of the assets acquired.
Acquisition related expenses. Acquisition related expenses are those costs incurred as a result of the S3 Semiconductors and Echelon acquisition and include banking fees, legal, accounting, and tax fees, and certain professional fees including costs related to the valuation of each acquisition.
Impairment and other charges. Impairment and other charges are costs incurred
related to write-downs of certain equipment and assets, terminated projects and
excess facilities.
Other Income (Expense), Net
Other income (expense), net is comprised of interest income (expense) and other
income (expense). Interest expense consists of cash interest on our outstanding
debt and the amortization of debt discount. Other expense, net consists of
foreign exchange gains and losses and the change in the fair value of the
earn-out liability which was part of the S3 Semiconductors share purchase
agreement. The earn-out liability is tied to certain financial performance
criteria defined in the S3 Semiconductors share purchase agreement. Our foreign
currency exchange gains and losses relate to
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transactions and asset and liability balances denominated in currencies other than theU.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.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists primarily ofU.S. federal and state income taxes inthe 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,
2019 2018 2017
(in thousands, except share and per share data)
Revenue, net $ 118,166 $ 83,490 $ 56,112
Cost of revenue 61,461 47,429 28,637
Gross profit 56,705 36,061 27,475
Operating expenses:
Research and development 30,942 20,273 13,623
Selling, general and administrative 32,307 22,592 17,461
Amortization of intangible assets 7,153 3,871 1,222
Acquisition related expenses 227 7,029 -
Impairment and other charges 1,694 2,680 -
Total operating expenses 72,323 56,445 32,306
Loss from operations (15,618) (20,384) (4,831)
Other income (expense):
Interest expense, net (10,964) (3,791) (753)
Other income (expense), net (90) 2,656 (3)
Total other income (expense), net (11,054) (1,135) (756)
Loss before provision for (benefit from) for income taxes (26,672) (21,519) (5,587)
Provision for (benefit from) income taxes 184 (79) 101
Net loss attributable to common stockholders $ (26,856) $ (21,440) $ (5,688)
Net loss per share:
Basic and diluted $ (0.90) $ (0.85) $ (0.31)
Weighted average number of shares used in computing net
loss per share:
Basic and diluted 29,902,351 25,144,562 18,591,308
Comparison of Years Ended
Revenue, net
Year ended December 31, Change 2019 - 2018 Change 2018 - 2017
2019 2018 2017 Amount % Amount %
Revenue, net $ 118,166 $ 83,490 $ 56,112 $ 34,676 42 % $ 27,378 49 %
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Year ended December 31,
2019 2018 2017
(in thousands)
United States $ 31,887 $ 23,188 $ 11,667
Rest of Americas 5,217 2,790 245
Europe 20,942 17,514 9,546
Asia Pacific 59,167 39,463 34,263
Rest of world 953 535 391
Total $ 118,166 $ 83,490 $ 56,112
Revenue increased by $34.7 million , or 42%, for 2019 as compared to 2018. This
increase was due primarily to increased shipments of Standard Flash products to
Tier 1 OEM customers along with full year of revenue contribution from the S3
Semiconductors and Echelon acquisitions of $44.3 million .
Revenue increased by $27.4 million , or 49%, for 2018 as compared to 2017. This
increase was due primarily to increased shipments of Standard Flash products to
Tier 1 OEM customers along with contributions from the S3 Semiconductors and
Echelon acquisitions of $19.3 million .
Cost of Revenue and Gross Margin
Year ended December 31, Change 2019 - 2018 Change 2018 - 2017
2019 2018 2017 Amount % Amount %
Cost of revenue $ 61,461 $ 47,429 $ 28,637 $ 14,032 30 % $ 18,792 66 %
Gross profit 56,705 36,061 27,475 20,644 57 % 8,586 31 %
Gross margin 48 % 43 % 49 %
Cost of revenue increased by $14.0 million , or 30%, for 2019 as compared to
2018. This increase was due primarily to increased shipments of our NVM products
together with a full year of costs associated with revenues from our ASIC and
Embedded products.
Our gross margin percentage increased from 43% to 48%, or 5 percentage points, for 2019 as compared to 2018. This increase was due primarily to a higher percentage of our overall revenue being derived from our ASIC and Embedded products, which generally carry higher gross margins than our memory products.
Cost of revenue increased by$18.8 million , or 66%, for 2018 as compared to 2017. This increase was due primarily to increased shipments of Standard Flash product to Tier 1 OEM customers which carry a higher average unit cost, increased expenses related to our operations organization, and costs associated with our revenues from ASIC and Embedded products. Our gross margin percentage decreased from 49% to 43%, or 6 percentage points, for 2018 as compared to 2017. This decrease was due primarily to product mix impacts as we generated a higher proportion of our revenues from sales to Tier 1 OEM customer of Standard Flash memory products which generally carry lower gross margins than our other memory products along with increased expenses within our operations organization. Operating Expenses Year ended December 31, Change 2019 - 2018 Change 2018 - 2017 2019 2018 2017 Amount % Amount % Operating expenses: 50 Table of Contents Research and development$ 30,942 $ 20,273 $ 13,623 $ 10,669 53 %$ 6,650 49 % Selling, general and administrative 32,307 22,592 17,461 9,715 43 5,131 29 Amortization of intangible assets 7,153 3,871 1,222 3,282 85 2,649 217 Acquisition related expenses 227 7,029 - (6,802) (97) 7,029 100 Impairment and other charges 1,694 2,680 - (986) (37) 2,680 100 Total operating expenses$ 72,323 $ 56,445 $ 32,306 $ 15,878 28 %$ 24,139 75 % Research and Development. Research and development expense increased by$10.7 million , or 53%, in 2019 as compared to 2018. This increase was due primarily to an increase in personnel related costs of$6.8 million and an increase in outside services of$3.8 million . Both of these increases resulted from our acquisitions of S3 Semiconductor and Echelon. Research and development expense increased by$6.7 million , or 49%, in 2018 as compared to 2017. This increase was due primarily to an increase in outside consulting costs of$2.7 million , an increase in personnel related costs of$2.0 million , an increase in facilities costs related primarily to our S3 Semiconductors and Echelon acquisitions of$0.6 million , an increase in depreciation and amortization of$0.5 million , an increase in materials costs of$0.4 million , and an increase in travel and other outside services of$0.4 million .
Selling, General and Administrative.
Selling, general and administrative expense increased by$9.7 million , or 43%, in 2019 as compared to 2018. This increase was primarily due to an increase in personnel related expenses of$7.0 million , an increase in outside services of$2.4 million , and an increase in travel expense of$0.4 all driven by our S3 Semiconductor and Echelon acquisitions. Selling, general and administrative expense increased by$5.1 million , or 29%, in 2018 as compared to 2017. This increase was primarily due to an increase in personnel related expenses of$2.4 million , an increase in facilities related costs of$0.9 million , an increase in consulting expense of$0.7 million , and increase in travel and tradeshows of$0.6 million , an increase in accounting and tax services of$0.4 million , and an increase in third party rep commissions of$0.1 million . Amortization of Intangible Assets. Amortization of intangible assets increased by$3.3 million , or 85%, for 2019 as compared to 2018. This increase was primarily due to a full year of amortization of intangible assets related to the acquisitions of S3 Semiconductors and Echelon in 2018. Amortization of intangible assets increased by$2.6 million , or 217%, for 2018 as compared to 2017. This increase was due primarily to additional amortization related to the S3 Semiconductors acquisition of$1.6 million and to the Echelon acquisition of$1.1 million . Acquisition Related Expenses. Acquisition related expenses decreased by$6.8 million for 2019 as compared to 2018. The decrease was due primarily to significantly less acquisition related activity in 2019 compared to 2018 during which we completed two acquisitions. Acquisition related expenses increased by$7.0 million for 2018 as compared to 2017. The increase was due primarily to banking fees incurred of$2.7 million , severance payments related to the Echelon acquisition of$1.9 million , legal fees of$1.8 million , professional services including valuation services of$0.3 million and accounting and tax fees of$0.3 million . There were no acquisition related expenses incurred in 2017. Impairment and Other Charges. Impairment and other charges decreased by$1.0 million for 2019 as compared to 2018. This decrease was due to expenses and costs related to exiting the lighting business which was part of the Echelon acquisition. Impairment and other charges increased by$2.7 million for 2018 as compared to 2017. The increase was due primarily to write-downs of certain fixed and intangible assets of$1.5 million , costs related to excess facilities of$0.6 million , the cost of exiting a development agreement associated with certain memory products of$0.4 51
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million, and costs associated with exiting the lighting business acquired from
Echelon of
Other Income (Expense), Net
Year ended December 31, Change 2019 - 2018 Change 2018 - 2017
2019 2018 2017 Amount % Amount %
Interest expense, net $ (10,964) (3,791)
(753)
(90) 2,656 (3) (2,746) (103) 2,659 NM
Total other income (expense), net
Interest expense, net increased by$7.2 million or 189% in 2019 as compared to 2018 primarily due to additional cash interest of$1.0 million and amortization of debt discount of$6.2 million as we paid off the Tennenbaum loan and issued$80.5 million of senior convertible notes. Interest expense, net increased by$3.0 million or 403% in 2018 as compared to 2017 primarily due to additional cash interest of$2.1 million and amortization of debt discount of$1.0 million as we increased our level of indebtedness during the year in connection with the S3 Semiconductors acquisition. Other income (expense), net decreased by$2.7 million in 2019 as compared to 2018 due primarily to a decrease in the fair value of an earn-out liability incurred in connection with the S3 Semiconductors acquisition that occurred in 2018 but not in 2019.
Other income (expense), net increased by
Provision for (Benefit from) Income Taxes
Year ended December 31, Change 2019 - 2018 Change 2018 - 2017
2019 2018 2017 Amount % Amount %
Provision for (benefit from) income taxes
Our provision for income taxes increased by
Our benefit from income taxes increased by
Liquidity and Capital Resources
Our principal source of liquidity as of
We believe our existing cash and cash equivalents will be sufficient to meet our
anticipated cash needs over the next 12 months, if we remain independent. 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
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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,
2019 2018 2017
Cash flows used in operating activities
Cash flows used in investing activities (4,974) (65,952)
(3,552)
Cash flows provided by financing activities 29,120 62,864
14,165
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, investments in research and development and sales and marketing, and procurement of inventory. 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 endedDecember 31, 2019 , cash used in operating activities was$11.9 million and was due primarily to a net loss of$26.9 million , a decrease from the revaluation of the earn-out liability of$0.3 million , a decrease in deferred taxes of$0.4 million and an increase in net assets and liabilities of$9.3 million offset by non-cash charges of 5.7 million for stock-based compensation,$3.2 million for depreciation and amortization,$7.2 million for amortization of intangible assets,$6.4 million for the amortization of debt discount,$1.7 million for impairment and other charges and$0.8 million for a prepayment premium and other costs related to early debt extinguishment. The increase in net assets and liabilities is due primarily to an increase in accounts receivable of$17.3 million , an increase in inventories of$1.4 million , and a reduction in price reserves and other liabilities of$2.4 million partially offset by a decrease in prepaid expenses and other non-current assets of$0.5 million and an increase in accounts payable, accrued expenses and other liabilities of$11.3 million . During the year endedDecember 31, 2018 , cash used in operating activities was$17.7 million and was due primarily to a net loss of$21.4 million , the revaluation of the earn-out liability of$2.6 million , change in deferred taxes of$0.2 million and an increase in net assets and liabilities of$6.7 million partially offset by non-cash charges of$3.2 million for stock-based compensation expense,$2.4 million for depreciation and amortization,$3.9 million for amortization of intangible assets,$1.1 for the amortization of debt discount, and impairment and other losses of$2.7 million . The increase in net assets and liabilities is due primarily to an increase in accounts receivable of$11.3 million , an increase in inventories of$7.1 million partially offset by a decrease in prepaid expenses and other current assets of$1.5 million and an increase in accounts payable, accrued expenses and other liabilities of$10.2 million . 53 Table of Contents During the year endedDecember 31, 2017 , cash used in operating activities was$0.2 million and was due primarily to a net loss of$5.7 million and an increase in net assets and liabilities of$0.7 million partially 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, and$82,000 for the amortization of debt discount. 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 .
Cash Flows from Investing Activities
During the year endedDecember 31, 2019 , cash used in investing activities was$5.0 million and was due primarily to the purchase of property and equipment for$4.5 million and an investment in an unconsolidated subsidiary of$0.5 million . During the year endedDecember 31, 2018 , cash used in investing activities was$66.0 million and was due primarily to the S3 Semiconductors acquisition for$34.6 million , net of cash, the Echelon acquisition for$28.8 million , net of cash, purchases of property and equipment for$3.2 million and an additional investment in an unconsolidated affiliate for$0.6 million partially offset by maturities of short-term investments of$1.3 million . During the year endedDecember 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.
Cash Flows from Financing Activities
During the year endedDecember 31, 2019 cash provided by financing activities was$29.1 million and was due primarily to proceeds from the issuance of convertible senior notes net of issuance costs of$77.0 million and the proceeds from the exercise of stock options and RSU's net of taxes of$1.0 million offset by the repayment of the Tennenbaum loan of$35.5 million , a payment against the earn-out liability of$7.2 million , and the purchase of capped calls associated with the issuance of the convertible senior notes of$6.2 million . During the year endedDecember 31, 2018 , cash provided by financing activities was$62.9 million and was due primarily to$42.7 million received from the proceeds of a follow-on offering to fund our Echelon acquisition, net proceeds of$33.6 million from a new term loan with Tennenbaum to fund our S3 Semiconductors acquisition, net proceeds of$0.4 million from the exercise of employee stock options and our employee stock purchase plan partially offset by the repayment of ourBridge Bank term loan for$12.0 million , the repayment of ourBridge Bank line of credit for$1.5 million , and a repayment of$0.3 million on our Tennenbaum term loan. During the year endedDecember 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.
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.
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Credit Facility
Western Alliance Bank Term Loan.
The Company was a party to that certain Business Financing Agreement datedJuly 7, 2016 and that certain Second Business Financing Modification Agreement, datedSeptember 29, 2017 , by and betweenWestern Alliance Bank and the Company ("Credit Facility"). The Credit Facility 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)$5.0 million and (y) 80% of certain of the Company's receivables. The Term Loan bore interest at a rate per annum equal to the greater of the prime rate or 3.5%, plus 0.75% and was scheduled to mature inJune 2019 . 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%, and was scheduled to mature inJuly 2018 . We made interest-only payments on the Term Loan fromJuly 2016 throughSeptember 2016 and began making interest payments and principal payments in 33 equal monthly installments startingOctober 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 onJuly 7, 2017 . Additional fees of$25,000 were incurred in connection with the amendment. These fees were recorded as a debt discount and were amortized over the life of the agreement. Borrowings of$12.0 million under this facility were repaid in full inMay 2018 . In connection with the repayment of this facility, the remaining unamortized debt discount of$66,000 was recorded as interest expense in the consolidated statements of operations.
OnMay 8, 2018 , we entered into a credit agreement with Tennenbaum ("Credit Agreement"). The Credit Agreement provides for a first lien senior secured term loan of$35.0 million ("Term Loan"). The Term Loan bears interest at a rate per annum equal to the sum of the Libor Rate (2.8125% onDecember 31, 2018 ) plus 8.75% and is payable in consecutive quarterly installments startingDecember 31, 2018 . The Term Loan was scheduled to matureMay 8, 2022 . The Credit Agreement 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. The Credit Agreement contains customary representations and warranties and affirmative and negative covenants, including maximum consolidated leverage ratios and minimum liquidity. 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 2% above the otherwise applicable interest rate, and the lender may accelerate our obligations under the agreement. As ofDecember 31, 2018 , we were in compliance with all financial covenants and restrictions. In connection with the Credit Agreement, Tennenbaum received a warrant to purchase 850,000 shares of common stock at an exercise price of$8.62 and a term of six years. We paid financing costs of$1.4 million . The financing costs and the value of the warrant,$4.8 million , were recorded as a debt discount and were being amortized over the life of the agreement. Amortization of debt discount was$1.2 million prior to the loan payoff with the remaining$3.6 million of unamortized debt discount being recognized as interest expense for the year endedDecember 31, 2019 . Borrowings of$33.8 million under this term loan were repaid in full onSeptember 23, 2019 along with a contractual prepayment premium of$0.7 million which represented 2% of the outstanding loan balance. Senior Convertible Notes
On
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Association. The Notes are senior, unsecured obligations of the Company. The Notes pay interest at a rate equal to 4.25% per year. Interest on the Notes is payable semiannually in arrears onMarch 15 andSeptember 15 of each year, beginningMarch 15, 2020 . Interest accrues on the Notes from the last date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, fromSeptember 23, 2019 . Unless earlier converted, redeemed or repurchased, the Notes mature onSeptember 15, 2024 . In connection with the pricing of the Notes, we entered into privately negotiated capped call transactions with each ofCredit Suisse Capital LLC and Société Générale. In accounting for the issuance of the Notes, we separated the Notes into liability and equity components. The carrying amounts of the liability components of the Notes were calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The carrying amount of the equity component represents the conversion option and was determined by deducting the fair value of the liability component from the par value of the respective Notes. This difference represents the debt discount that is amortized to interest expense over the respective term of the Notes using the effective interest rate method. The carrying amount of the equity component that represents the conversion option was$22.6 million gross and$21.6 million net of issuance costs. The equity component is recorded in additional paid-in capital and is not remeasured as long as it continue to meet the conditions for equity classification.
Contractual Obligations and Commitments
The following is a summary of our contractual obligations and commitments as ofDecember 31, 2019 : Payments due by period Contractual Obligations Total 2020 2021 - 2022 2023 - 2024 After 2024 (in thousands) Operating leases (1)$ 8,452 $ 2,006 $ 3,246 $ 1,238 $ 1,962 Inventory-related commitments (2) 8,841 8,841 - - - Financing arrangements (3) 80,500 - - 80,500 - Interest obligation on financing arrangements 16,992 3,421 10,264 3,307 -
Total contractual cash obligations
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(1) Operating leases primarily relate to our leases of office space with terms
expiring through
(2) Represents outstanding purchase orders for wafer commitments that we have
placed with our suppliers as of
(3) Financing arrangements represent debt maturities under our convertible senior
notes.
As of
InMay 2018 , we entered into a new$35.0 million credit facility and terminated of our existing credit facility, which included paying off the outstanding term loan thereunder. InSeptember 2019 , we completed an offering of$80.5 million aggregate principal amount of the Notes and repaid in full the outstanding amounts under the$35.0 million credit facility.
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