ADESTO TECHNOLOGIES CORPORATION Forward-looking statements and factors that may affect future results
The discussion below contains forward-looking statements, which are subject to safe harbors under the Securities Act of 1933, as amended (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements generally relate to future events or to our future financial or operating performance. You can generally identify forward-looking statements because they contain words such as "may," "might," "will," "should," "expects," "plans," "anticipates," "could," "intend," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions. We have based these forward-looking statements primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. Except as required by law, we do not undertake any obligation to update these forward-looking statements to reflect events occurring or circumstances arising after the date of this report. You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those projected in the forward-looking statements. These forward-looking statements involve risks and uncertainties, and our actual results, performance, or achievements could differ materially from those expressed or implied by the forward-looking statements on the basis of several factors, including those that we discuss in Risk Factors, set forth in Part II, Item 1A, of this Quarterly Report on Form 10-Q. We encourage you to read that section carefully. The following is a discussion and analysis of our financial condition and results of operations and should be read together with our condensed consolidated financial statements and related notes to condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes to audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . In this Quarterly Report, unless otherwise specified or the context otherwise requires, "Adesto ," "we," "us," and "our" refer toAdesto Technologies Corporation and its consolidated subsidiaries.
Impact of COVID-19
The global COVID-19 pandemic has impacted the operations and purchasing decisions of companies worldwide. It also has created and may continue to create significant uncertainty in the global economy. We have undertaken measures to protect our employees, partners, customers, and vendors. In addition, our personnel worldwide are subject to various travel restrictions and, which limit our ability of to provide services to customers and affiliates. This impacts our normal operations. To date, We have been able to provide uninterrupted access to our products and services due to our globally distributed workforce, many of whom are working remotely, and our pre-existing infrastructure that supports secure access to our internal systems. If, however, the COVID-19 pandemic has a substantial impact on the productivity of our employees or our partners' or customers' decision to use our products and services, the results of our operations and overall financial performance may be adversely impacted. The extent of the impact from the COVID-19 pandemic on our business will depend largely on future developments that are highly uncertain and cannot be predicted. For a discussion of risks of COVID-19 relating to our business, see "Part II: Other Information-Item 1A.- Risk Factors- Risks Related to Our Business and Our Industry- The recent coronavirus outbreak could have an adverse effect on our business."
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 product portfolio includes analog, digital
and non-volatile memory
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("NVM") technologies delivered in the form of standard products, application-specific integrated circuits ("ASICs") and intellectual property ("IP") cores.
Our revenue is primarily derived from the sale of our NVM products, specifically our serial flash memory products, which represented substantially all of our revenue for the three months endedMarch 31, 2020 . In recent years, we have invested in developing new flash memory products that are well suited for low-power, high-growth applications. Revenue from our next-generation NVM products were$13.7 million and$17.2 million for the three months endedMarch 31, 2020 andMarch 31, 2019 , 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 , aDelaware corporation ("Echelon"), onSeptember 14, 2018 . During the three months endedMarch 31, 2020 andMarch 31, 2019 S3 Semiconductors and Echelon revenues were approximately$6.3 million and$10.9 million , respectively. For the three months endedMarch 31, 2020 , 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 55% and 61% of our revenue from distributors in each of the three months endedMarch 31, 2020 andMarch 31, 2019 , respectively. Sales to three distributors generated approximately 31% and 40% of our revenue during the three months endedMarch 31, 2020 andMarch 31, 2019 , respectively. Additionally, we derived approximately 85% and 73% of our revenue internationally during the three months endedMarch 31, 2020 andMarch 31, 2019 , respectively, the majority of which was recognized in theAsia Pacific ("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 Company has filed the definitive proxy statement with theSecurities and Exchange Commission onMarch 27, 2020 . The Merger was approved by the stockholders of the Company onMay 5, 2020 . Subject to satisfaction of the closing conditions, we currently expect the merger to close in the second calendar quarter of 2020. For more information see Note 17, "Merger with Dialog Semiconductor plc," in the notes to our condensed 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 of our revenue. One end customer accounted for 10% or
more of our revenue in the first three months of 2020. One end customer
accounted for 10% or more of our revenue in 2019. While we expect the
composition of our customers to change over time, especially given our recent
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acquisitions, our business and operating results will depend on our ability to continually target new customers 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 2017 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. We had 159 new design wins during the first three months of 2020. 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, 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 such increase did not have a material impact on our results of operations for the three months endedMarch 31, 2020 . 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 three months endedMarch 31, 2020 we derived approximately 68% of our revenue through the sale of our NVM products to original equipment manufacturers ("OEMs") and original design manufacturers ("ODMs"), primarily through distributors. We generated 55%, and 61% of our revenue from distributors for the three months endedMarch 31, 2020 andMarch 31, 2019 , respectively. We derived approximately 32% and 39% of our revenue from the operations of S3 Semiconductors and Echelon for the three months endedMarch 31, 2020 andMarch 31, 2019 . 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 40
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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. 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 the acquisitions with respect to S3 Semiconductors,Echelon andAtmel Corporation . 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 acquisitions and the proposed merger with Dialog Semiconductor plc and include banking
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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 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.
Benefit from Income Taxes
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.
Comparison of the three months ended
Revenue
Three Months Ended
March 31, Change
2020 2019 $ %
Revenue, net $ 20,021 $ 28,113 (8,092) -29 %
Three Months Ended
March 31,
2020 2019
Revenue by geography:
United States 15 % 27 %
Europe 17 % 17 %
Asia Pacific 65 % 49 %
Rest of world 2 % 7 %
Revenue decreased by $8.1 million , or 29%, during the three months ended March
31, 2020 as compared to the three months ended March 31, 2019 . This decrease was
due primarily to decreased unit shipments of NVM products to Tier 1 customers
along with a decrease in revenues from the S3 Semiconductors and Echelon
businesses of $4.6 million .
Cost of Revenue and Gross Margin
Three Months Ended
March 31, Change
2020 2019 $ %
Cost of revenue $ 11,384 $ 14,893 $ (3,509) -24 %
Gross profit 8,637 13,220 (4,583) -35 %
Gross margin 43 % 47 %
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Cost of revenue decreased by$3.5 million , or 24%, during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . This decrease was due primarily to a decrease in unit shipments of NVM products to Tier 1 customers offset by relatively stable expenses resulting from our S3 Semiconductors and Echelon businesses. Gross profit decreased by$4.6 million , or 35%, during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 due primarily to a decrease in unit shipments of NVM products along with decreased revenues and gross profits from S3 Semiconductors and Echelon. Operating Expenses Three Months Ended March 31, Change 2020 2019 $ % Operating expenses: Research and development$ 7,664 $ 7,522 $ 142 2 % Selling, general and administrative 8,823 7,935 888
11
Amortization of intangible assets 1,788 1,788 - - Acquisition related expenses 1,901 222 1,679 756 Impairment and other charges - 1,694 (1,694) (100) Total operating expenses$ 20,176 $ 19,161 $ 1,015 5 % Research and Development. Research and development expense decreased by$0.1 million , or 2%, during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . This decrease was due primarily to a reduction in outside services. Selling, General and Administrative. Selling, general and administrative expense increased by$0.9 million , or 11%, for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . This increase was due primarily to a$0.4 million increase in personnel-related costs, a$0.2 million increase in legal and accounting costs, a$0.2 million increase in facilities costs, and a$0.1 million increase in travel costs. Amortization of Intangible Assets. There was no change in the amortization of intangible assets for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . Acquisition expenses. Acquisition related expenses increased by$1.7 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 and were primarily due to increased legal and accounting costs related to the announced acquisition of the Company by Dialog Semiconductor plc. Impairment and Other Charges. There was no impairment and other charges for the three months endedMarch 31, 2020 . During the three months endedMarch 31, 2019 we recorded$1.7 million of impairment and other charges for inventory write-downs and additional warranty and other liabilities related to exiting the Echelon lighting business. Other Income (Expense), Net Three months ended March 31, Change 2020 2019 $ % Interest expense, net$ (1,515) (1,370)$ (145) (11) % Other income (expense), net 1,936 220 1,716 780
Total other income (expense), net
Interest expense, net increased by approximately$0.1 million during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 , as a result of our increased indebtedness related to the issuance of our convertible notes. 43
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Other income (expense), net increased by approximately$1.7 million during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 due primarily to a change in the fair value of an earn-out liability incurred in connection with the S3 Semiconductors acquisition and certain other credits recognized at S3 Semiconductors. Benefit from Income Taxes Three Months Ended March 31, Change 2020 2019 $ % Benefit from income taxes$ (103) $ (31) $ 72 232 % Benefit from income taxes increased by$72,000 during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . The increase was due primarily to a reduction in tax expense related to our foreign subsidiaries as well as an increase in the benefit related to deferred taxes inthe United States .
Liquidity and Capital Resources
Our principal source of liquidity as ofMarch 31, 2020 consisted of cash and cash equivalents and restricted cash of$10.5 million . Our outstanding borrowings as ofMarch 31, 2020 were$80.5 million . Substantially all of our cash and cash equivalents are held inthe United States . We believe our existing cash and cash equivalents and short-term investments 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.
The following table summarizes our cash flows for the periods indicated:
Three Months Ended
March 31,
2020 2019
Cash flows used in operating activities
(1,226) (604)
Cash flows provided by financing activities 1,703 48
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
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provides more cash as we do more business with our contract foundries and other third parties, depending on the timing of payments.
During the three months endedMarch 31, 2020 , cash used in operating activities was approximately$11.1 million and was due primarily to a net loss of$11.0 million , partially offset by non-cash charges of$1.9 million related to stock-based compensation expense,$1.0 million related to depreciation and amortization,$1.8 million related to the amortization of intangible assets,$0.7 million related to amortization of debt discount, offset by the change in fair value of our earn-out liability of$0.9 million , and an increase in our net assets and liabilities of$4.6 million . The increase in net assets and liabilities is due primarily to an decrease in accounts receivable of$2.4 , an increase in inventories of$2.2 million , an increase in prepaids and other current and non-current assets of$0.7 million , a decrease in accounts payable, accrued compensation and other accrued expenses of$3.5 million , and a decrease in price adjustments and other non-current liabilities of$0.6 million . During the three months endedMarch 31, 2019 , cash used in operating activities was approximately$0.6 million and was due primarily to a net loss of$7.1 million , partially offset by non-cash charges of$1.1 million related to stock-based compensation expense,$0.6 million related to depreciation and amortization,$1.8 million related to the amortization of intangible assets,$0.4 million related to amortization of debt discount, offset by the change in fair value of our earn-out liability of$0.3 million , and a decrease in our net assets and liabilities of$2.9 million . The decrease in net assets and liabilities is due primarily to an increase in accounts receivable of$9,000 , a decrease in inventories of$2.0 million , a decrease in deferred rent of$0.3 million , an increase in accounts payable, accrued compensation and other accrued expenses of$1.3 million , and an increase in prepaid expenses and other current assets of$0.1 million .
Cash Flows from Investing Activities
During the three months endedMarch 31, 2020 , cash used in investing activities was$1.2 million , primarily due to purchases of equipment for our operations and research and development functions along with investments in unconsolidated affiliates. During the three months endedMarch 31, 2019 , cash used in investing activities was$0.6 million , primarily due to purchases of equipment for our operations and research and development functions.
Cash Flows from Financing Activities
During the three months endedMarch 31, 2020 , cash provided by financing activities was$1.7 million and was due primarily to proceeds of$1.7 million from the exercise of stock options and purchases of stock associated with our employee stock purchase plan net of withholdings related to the net settlement of restricted stock units. During the three months endedMarch 31, 2019 , cash provided by financing activities was$48,000 and was due primarily to proceeds of$0.5 million from the exercise of stock options and purchases of stock associated with our employee stock purchase plan net of withholdings related to the net settlement of restricted units offset by a$0.4 million paydown of our term loan.
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
OnMay 8, 2018 , we entered into a credit agreement with Tennenbaum ("Credit Agreement"). The Credit Agreement provided for a first lien senior secured term loan of$35.0 million ("Term Loan"). The Term Loan bore interest at a rate per annum equal to the sum of the Libor Rate plus 8.75% and was payable in consecutive quarterly installments startingDecember 31, 2018 . The Term Loan was scheduled to mature onMay 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, as amended, contained 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 have been 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 could have accelerated our obligations under the agreement. 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 OnSeptember 23, 2019 , we completed offering of$80.5 million aggregate principal amount of the Notes. The Notes were sold pursuant to an indenture, datedSeptember 23, 2019 , between the Company andU.S. Bank National 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 continues to meet the conditions for equity classification. 46
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Contractual Obligations and Commitments
The following is a summary of our contractual obligations and commitments as ofMarch 31, 2020 : 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) $ 7,945 $ 1,512 $ 4,258 $ 2,175 $ -
Inventory-related commitments (2) 9,088 9,088 - - -
Financing arrangements (3) 80,500 - - 80,500 -
Interest obligation on convertible
senior notes 16,137 2,566 10,264 3,307
Total contractual cash obligations $ 113,670 $ 13,166 $ 14,522 $ 85,982 $ -
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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 senior convertible
notes.
As of
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