UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2019

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

For the transition period from ____ to ____

Commission File Number: 001-38270

AQUANTIA CORP.

(Exact Name of Registrant as Specified in its Charter)

Delaware

20-1199709

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

91 E. Tasman Drive, Suite 100

San Jose, CA 95134

(Address of principal executive offices)

Registrant’s telephone number, including area code: (408) 228-8300

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.00001 par value

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☑
Non-accelerated filer	☐	Small reporting company	☐
Emerging growth company	☑

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

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

As of August 2, 2019, the registrant had 36,085,333 shares of common stock, $0.00001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (Unaudited)	3
	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	3
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and 2018	4
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months ended June 30, 2019 and 2018	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2019 and 2018	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	25
Item 4.	Controls and Procedures	26

PART II.	OTHER INFORMATION	28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.	Exhibits	30

Signatures		31

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

AQUANTIA CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value and share amounts)

(unaudited)

	June 30,			December 31,
	2019			2018
Assets
Current assets:
Cash and cash equivalents	$	4,297		$	6,684
Short-term investments		45,914			60,730
Accounts receivable		7,526			16,927
Inventories		20,317			14,474
Prepaid expenses and other current assets		1,427			2,018
Total current assets		79,481			100,833
Property and equipment, net		10,721			9,225
Operating lease assets, net		5,386			—
Intangible assets, net		3,345			3,748
Other assets		618			617
Total assets	$	99,551		$	114,423
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	6,851		$	5,495
Accrued liabilities		14,486			13,907
Operating lease liabilities - short term		840			—
Total current liabilities		22,177			19,402
Operating lease liabilities - long term		6,048			—
Other long-term liabilities		413			1,799
Total liabilities		28,638			21,201
Commitments and contingencies (Note 3 and Note 6)
Stockholders’ equity:
Common stock, $0.00001 par value, 95,000,000 shares authorized as of each of June 30, 2019 and December 31, 2018; 36,078,275 and 35,050,425 shares outstanding at June 30, 2019 and December 31, 2018, respectively		—			—
Additional paid-in capital		309,269			300,791
Accumulated other comprehensive income (loss)		38			(123	)
Accumulated deficit		(238,394	)		(207,446	)
Total stockholders’ equity		70,913			93,222
Total liabilities and stockholders’ equity	$	99,551		$	114,423

See accompanying notes to condensed consolidated financial statements.

AQUANTIA CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Revenue	$	9,231		$	30,432		$	26,253		$	58,790
Cost of revenue		4,846			12,914			12,902			25,155
Gross profit		4,385			17,518			13,351			33,635
Operating expenses:
Research and development		15,004			12,772			31,074			25,346
Sales and marketing		2,652			2,614			5,371			4,901
General and administrative		4,932			3,324			8,354			6,321
Total operating expenses		22,588			18,710			44,799			36,568
Loss from operations		(18,203	)		(1,192	)		(31,448	)		(2,933	)
Other income (expense):
Other income, net		344			291			712			539
Total other income (expense)		344			291			712			539
Loss before income tax expense		(17,859	)		(901	)		(30,736	)		(2,394	)
Provision for (benefit from) income taxes		22			(68	)		212			(193	)
Net loss	$	(17,881	)	$	(833	)	$	(30,948	)	$	(2,201	)
Net loss per share, basic and diluted	$	(0.50	)	$	(0.02	)	$	(0.87	)	$	(0.07	)
Weighted-average shares used to compute net loss per share, basic and diluted		35,775			33,836			35,468			33,666
Comprehensive loss:
Net loss	$	(17,881	)	$	(833	)	$	(30,948	)	$	(2,201	)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) - short-term investments		42			52			161			(79	)
Comprehensive loss	$	(17,839	)	$	(781	)	$	(30,787	)	$	(2,280	)

See accompanying notes to condensed consolidated financial statements.

AQUANTIA CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share amounts)

									Accumulated
						Additional			Other						Total
	Common Stock					Paid-In			Comprehensive			Accumulated			Stockholders'
	Shares			Amount		Capital			loss			Deficit			Equity
BALANCE—December 31, 2018		35,050,425			—		300,791			(123	)		(207,446	)		93,222
Other comprehensive loss (gain) - unrealized loss (gain) on short-term investments		—			—		—			119			—			119
Exercise of stock options		132,692			—		392			—			—			392
Issuance of restricted stock units		325,436			—		—			—			—			—
Stock-based compensation expense		—			—		2,290			—			—			2,290
Net loss		—			—		—			—			(13,067	)		(13,067	)
BALANCE—March 31, 2019		35,508,553		$	—	$	303,473		$	(4	)	$	(220,513	)	$	82,956
Other comprehensive loss (gain) - unrealized loss (gain) on short-term investments		—			—		—			42			—			42
Exercise of stock options		320,601			—		1,334			—			—			1,334
ESPP Purchase		186,120			—		1,573			—			—			1,573
Issuance of restricted stock units		63,001			—		—			—			—			—
Stock-based compensation expense		—			—		2,889			—			—			2,889
Net loss		—			—		—			—			(17,881	)		(17,881	)
BALANCE—June 30, 2019		36,078,275		$	—	$	309,269		$	38		$	(238,394	)	$	70,913

									Accumulated
						Additional			Other						Total
	Common Stock					Paid-In			Comprehensive			Accumulated			Stockholders'
	Shares			Amount		Capital			loss			Deficit			Equity
BALANCE—December 31, 2017		33,523,683			—		288,719			(96	)		(197,709	)		90,914
Cumulative effect upon adoption of ASC 606		—			—		—			—			35			35
Other comprehensive loss (gain) - unrealized loss (gain) on short-term investments		—			—		—			(131	)		—			(131	)
Exercise of stock options		3,466			—		—			—			—			—
Issuance of restricted stock units		102,500			—		—			—			—			—
Issuance of restricted stock units (reversed, not yet issued)		(137,529	)		—		—			—			—			—
Issuance of common stock, net upon exercise of warrants		48,305			—		—			—			—			—
Repurchase of stock options		(3,626	)		—		—			—			—			—
IPO Costs		—			—		(22	)		—			—			(22	)
Stock-based compensation expense		—			—		978			—			—			978
Net loss		—			—		—			—			(1,368	)		(1,368	)
BALANCE—March 31, 2018		33,536,799		$	—	$	289,675		$	(227	)	$	(199,042	)	$	90,406
Other comprehensive loss (gain) - unrealized loss (gain) on short-term investments		—			—		—			52			—			52
Exercise of stock options		520,400			—		1,673			—			—			1,673
ESPP Purchase		207,935					1,591									1,591
Repurchase of stock options		(4,929	)		—		(16	)		—			—			(16	)
Stock-based compensation expense		—			—		1,162			—			—			1,162
Net loss		—			—		—			—			(833	)		(833	)
BALANCE—June 30, 2018		34,260,205		$	—	$	294,085		$	(175	)	$	(199,875	)	$	94,035

See accompanying notes to condensed consolidated financial statements.

AQUANTIA CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended
	June 30,
	2019			2018
Cash flows from operating activities
Net loss	$	(30,948	)	$	(2,201	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		3,179			2,755
Stock-based compensation expense		5,179			2,140
Accretion of investment premium, net of amortization of discount		(222	)		—
Loss (Gain) on disposal of fixed assets and lease impairment		—			(70	)
Changes in operating assets and liabilities:
Accounts receivable		9,401			(988	)
Inventories		(5,843	)		2,071
Operating lease assets, net		512			—
Prepaid expenses and other assets		590			2,570
Accounts payable		1,124			(2,527	)
Accrued and other liabilities		609			633
Operating lease liabilities		(426	)		—
Net cash provided by (used in) operating activities		(16,845	)		4,383
Cash flows from investing activities
Purchases of property and equipment		(4,040	)		(1,981	)
Proceeds from sales of PP&E		—			70
Proceeds from sales of short-term investments		1,000			—
Proceeds from maturities of short-term investments		26,085			20,553
Purchases of short-term investments		(11,886	)		(21,137	)
Net cash provided by (used in) investing activities		11,159			(2,495	)
Cash flows from financing activities
Proceeds from exercise of stock options and preferred stock warrants		1,726			1,657
Proceeds from employee stock purchase plan		1,573			1,591
Purchases of IP licenses		—			(26	)
Payment of costs related to initial public offering		—			(276	)
Net cash provided by financing activities		3,299			2,946
Net decrease in cash and cash equivalents		(2,387	)		4,834
Cash and cash equivalents at beginning of period		6,684			8,040
Cash and cash equivalents at end of period	$	4,297		$	12,874
Supplemental disclosures of cash flow information
Cash paid for interest	$	17		$	—
Cash paid for income taxes	$	207		$	80
Cash paid for amounts included in the lease liabilities	$	770		$	—
Cashless exercises of warrants, net of assumed proceeds from shares	$	—		$	550
Property and equipment received and accrued	$	318		$	1,002

See accompanying notes to condensed consolidated financial statements.

AQUANTIA CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization, Description of Business and Basis for Presentation

Organization—Aquantia Corp. (together with its subsidiaries, the “Company”) was incorporated in Delaware on January 27, 2004. The Company is a leader in the design, development and marketing of advanced high-speed communications integrated circuits, or ICs, for Ethernet connectivity in the data center, enterprise infrastructure, access and automotive markets.

Pending Acquisition

On May 6, 2019, the Company and Marvell Technology Group Ltd., a Bermuda exempted company (“Marvell”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Marvell and Aquantia Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Marvell (“Merger Sub”) providing for the merger of Merger Sub with and into the Company (the “Merger”) with the Company surviving the Merger as a wholly owned subsidiary of Marvell. At a special meeting of the Company’s stockholders held on July 10, 2019, the stockholders adopted the Merger Agreement.

Under the terms of the Merger Agreement, Marvell will acquire all outstanding shares of the Company’s common stock in exchange for consideration of $13.25 per share in cash. The Merger Agreement contains representations and warranties customary for transactions of this type. The Merger is expected to close before the end of the calendar year 2019, subject to the satisfaction or waiver of a number of closing conditions. The Merger Agreement provides Marvell and the Company with certain termination rights and, under certain circumstances, may require Marvell or the Company to pay a termination fee.

The Company recorded acquisition-related costs of approximately $1.9 million for each of the three and six months ended June 30, 2019 primarily for outside legal and external financial advisory fees associated with the pending acquisition by Marvell. These costs were recorded in general and administrative expense in the Company’s condensed consolidated statements of operations and comprehensive loss in the respective reporting periods. Additional acquisition-related costs are expected to be incurred through the closing of the Merger.

Basis of Presentation and Principles of Consolidation—The accompanying unaudited condensed consolidated financial statements included herein have been prepared by us in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, normal recurring adjustments considered necessary for a fair presentation have been reflected in these condensed consolidated financial statements. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.

The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited financial statements for the fiscal year then ended included in the Company’s Annual Report on Form 10-K filed with the SEC on March 6, 2019 (the “2018 Annual Report on Form 10-K”), but does not include all of the information and notes required by U.S. GAAP for complete consolidated financial statements. The financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements as of and for the fiscal year ended December 31, 2018 and the related notes thereto included in the 2018 Annual Report on Form 10-K.

2. Summary of Significant Accounting Policies

During the three and six months ended June 30, 2019, there have been no changes in our significant accounting policies as described in the Company’s 2018 Annual Report on Form 10-K, except as discussed below:

Recent Accounting Pronouncements—

Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (herein referred to as “ASC 842”). The new guidance requires entities to recognize assets and liabilities for leases and additional disclosures to better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance was effective for financial statements issued for fiscal years beginning after December 15, 2018. Early adoption was permitted. The Company adopted this guidance in the first quarter of 2019 using the modified retrospective approach, electing the package of practical expedients, which allows for the carryforward of the Company’s historical lease classification and assessment on whether a contract is or contains a lease, and the practical expedient to not separate lease and non-lease components. The Company has elected not to record on the balance sheet leases with an initial term of twelve months or less and that do not have a purchase option that the Company is reasonably certain to exercise. The Company also elected the optional transition method that permits adoption of the new standard as of the effective date without adjusting comparative periods presented. Adoption of the

standard resulted in the recognition of $5.9 million of right-of-use assets and $7.3 million of lease liabilities on our condensed consolidated balance sheet at adoption related to our leases. The difference of $1.4 million represented lease incentives and deferred rent for leases that existed as of the date of adoption, which reduced the right-of-use asset recorded at the date of adoption. The adoption of the standard on January 1, 2019 did not have a material impact on the Company’s consolidated statements of operations, stockholders’ equity or cash flows. See Note 3 for additional information.

3. Balance Sheet Components

Inventories consisted of the following (in thousands):

	As of June 30,		As of December 31,
	2019		2018
Processed wafers	$	1,847	$	1,233
Work in process		7,979		5,990
Finished goods		10,491		7,251
Total inventories	$	20,317	$	14,474

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

		As of June 30,			As of December 31,
	Estimated Useful Lives	2019			2018
Machinery and equipment	2-3 years	$	16,530		$	15,237
Production masks	4 years		8,101			5,401
Software and computer equipment	3 years		4,617			4,492
Leasehold improvements	Shorter of estimated life of asset or remaining lease term		1,414			1,414
Office furniture and fixtures	3 years		163			117
Total property and equipment			30,825			26,661
Less: accumulated depreciation and amortization			(20,104	)		(17,436	)
Property and equipment, net		$	10,721		$	9,225

Depreciation and amortization of property and equipment totaled $1.4 million and $1.2 million for the three months ended June 30, 2019 and 2018, respectively. Depreciation and amortization of property and equipment totaled $2.8 million and $2.4 million for the six months ended June 30, 2019 and 2018, respectively.

Intangible assets, net were carried at cost, less accumulated amortization. Intangible assets were as follows (in thousands):

		As of June 30,			As of December 31,
	Estimated Useful Lives	2019			2018
IP license	7 years	$	5,416		$	5,416
Patents	10-12 years		348			348
Total intangible assets			5,764			5,764
Less: accumulated amortization			(2,419	)		(2,016	)
Intangible assets, net		$	3,345		$	3,748

Amortization of intangible assets totaled $0.2 million and $0.2 million for the three months ended June 30, 2019 and 2018, respectively. Amortization of intangible assets totaled $0.4 million and $0.4 million for the six months ended June 30, 2019 and 2018, respectively.

Amortization expense related to amortizable intangibles in future periods as of June 30, 2019 is expected to be as follows (in thousands):

2019 (remaining)	$	405
2020		808
2021		808
2022		800
2023 and thereafter		524
Total	$	3,345

Operating lease asset and liabilities

The Company has entered into operating leases primarily for real estate. As of adoption these leases have terms which range from 1 year to 6 years, and often include one or more options to renew. These renewal terms can extend the lease term from 1 to 9 years, and are included in the lease term when it is reasonably certain that the Company will exercise the option. After the adoption of ASC 842 on January 1, 2019, an asset has been included on the Company’s condensed consolidated balance sheet as “operating lease assets, net” which represents the Company’s right to use the underlying asset for the lease term. Similarly, the Company has recorded its obligation to make lease payments within its condensed consolidated balance sheet as “operating lease liabilities” and classified these liabilities as short-term (“operating lease liabilities – short term”) and long-term (“operating lease liabilities – long term”) based on the timing and amounts of payment. The Company determines whether an arrangement is a lease at inception. Some lease agreements contain the lease and non-lease components, which are accounted for a single lease component. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

As of June 30, 2019, total right-of-use assets and operating lease liabilities were approximately $5.4 million and $6.9 million, respectively and presented within the condensed consolidated balance sheet as noted above. The Company has entered into various short-term operating leases, primarily for office equipment, automotive, and other facilities, with an initial term of twelve months or less. Leases with a lease term of twelve months or less have not been recorded on the Company’s condensed consolidated balance sheet. No new leases were entered into during the six months ended June 30, 2019.

All operating lease expense is recognized on a straight-line basis over the lease term. In the three and six months ended June 30, 2019, the Company recognized approximately $0.5 million and $1.0 million in total lease costs, respectively.

Because the rate implicit in each lease is not readily determinable, the Company used the estimated interest rate for collateralized loan over a similar term to determine the present value of the lease payments. The weighted-average remaining lease term was 3.3 years and the weighted-average discount rate used was 8.5%.

Maturities of lease liabilities as of June 30, 2019 were as follows (in thousands):

2019 (remaining)	$	668
2020		1,513
2021		2,018
2022		2,059
2023		1,793
2024 and thereafter		431
Total		8,482
Less imputed interest		(1,594	)
Total lease liabilities	$	6,888

Refer to Note 6 for the future minimum operating lease payments under ASC 840.

Accrued liabilities consisted of the following (in thousands):

	As of June 30,		As of December 31,
	2019		2018
Accrued compensation and related benefits	$	3,889	$	5,301
Accrued IP License		5,651		4,829
Accrued technical consulting and professional services		1,490		412
Accrued royalty, rebates and commission		646		443
Other accrued liabilities		2,810		2,922
Total accrued liabilities	$	14,486	$	13,907

4. Financial Instruments

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

	As of June 30, 2019
			Gross		Gross
			Unrealized		Unrealized			Estimated Fair
	Cost		Gains		Losses			Values
Available-for sale securities
Commercial paper	$	8,943	$	4	$	—		$	8,947
Money market funds		751		—		—			751
Corporate bonds		34,945		32		(2	)		34,975
U.S. government securities		1,988		4		—			1,992
Total available-for-sale securities	$	46,627	$	40	$	(2	)	$	46,665
Reported in:
Cash and cash equivalents								$	751
Short-term investments									45,914
Total available-for-sale securities								$	46,665

	As of December 31, 2018
			Gross		Gross
			Unrealized		Unrealized			Estimated Fair
	Cost		Gains		Losses			Values
Available-for sale securities
Commercial paper	$	10,173	$	—	$	(9	)	$	10,164
Money market funds		403		—		—			403
Corporate bonds		52,448		—		(114	)		52,334
U.S. government securities		1,972		—		-			1,972
Total available-for-sale securities	$	64,996	$	—	$	(123	)	$	64,873
Reported in:
Cash and cash equivalents								$	4,143
Short-term investments									60,730
Total available-for-sale securities								$	64,873

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

	As of June 30, 2019
	Amortized Cost Basis		Estimated Fair Value
Due in one year or less	$	46,627	$	46,665
Due between one and five years		—		—
	$	46,627	$	46,665

Gross realized gains and gross realized losses on sales of available-for-sale securities for the three and six months ended June 30, 2019 were not significant. As of June 30, 2019 and December 31, 2018, there were $5.1 million and $19.2 million, respectively, of securities that had been in a continuous loss position for 12 months or longer.

5. Fair Value Measurements

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which to transact and the market-based risk. The Company applies fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company categorizes assets and liabilities recorded at fair value based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:

Level 1—Observable inputs, such as quoted prices in active markets for identical, unrestricted assets, or liabilities.

Level 2—Quoted prices for similar assets or liabilities, or inputs other than quoted prices in active markets that are observable either directly or indirectly.

Level 3—Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions about the assumptions market participants would use in pricing the asset or liability. Valuation techniques include use of option-pricing models, discounted cash flows models, and similar techniques.

The hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The following tables represent the Company’s financial assets measured at fair value on a recurring basis categorized by the fair value hierarchy as of June 30, 2019 and December 31, 2018 (in thousands):

	As of June 30, 2019
	Level 1		Level 2		Level 3		Total
Financial asset— available-for-sales securities
Money market funds	$	751	$	—	$	—	$	751
Commercial paper		—		8,947		—		8,947
Corporate bonds		—		34,975		—		34,975
U.S. government securities		—		1,992		—		1,992
Total financial asset—available-for-sales securities	$	751	$	45,914	$	—	$	46,665

	As of December 31, 2018
	Level 1		Level 2		Level 3		Total
Financial asset— available-for-sales securities
Money market funds	$	403	$	—	$	—	$	403
Commercial paper		—		10,164		—		10,164
Corporate bonds		—		52,334		—		52,334
U.S. government securities		—		1,972		—		1,972
Total financial asset—available-for-sales securities	$	403	$	64,470	$	—	$	64,873

There were no transfers within the hierarchy during the six months ended June 30, 2019 and 2018.

6. Commitments and Contingencies

Lease and purchase obligations—The Company leases office and research facilities under operating leases for its U.S. headquarters and international locations that expire at various dates through March 2024. Under any lease agreement that contains escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term. In addition, the Company has purchase obligations which included agreements and issued purchase orders containing non-cancelable payment terms to purchase goods and services.

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 and under the previous lease accounting standard ASC 840, the aggregate future non-cancelable minimum rental payments on our operating leases, as of December 31, 2018, were as follows (in thousands):

					Total
	Operating		Purchase		Lease and Purchase
	Leases		Obligations		Obligations
2019	$	1,482	$	15,674	$	17,156
2020		1,516		4,247		5,763
2021		1,993		1,008		3,001
2022		2,033		—		2,033
2023 and thereafter		2,217		—		2,217
Total	$	9,241	$	20,929	$	30,170

Litigation—The Company accrues for contingencies when it believes that a loss is probable and that it can reasonably estimate the amount of any such loss and the Company has made an assessment of the probability of incurring any such losses and whether or not those losses are estimable.

Between May 30, 2019 and June 14, 2019, thirteen stockholder actions were filed in federal court (captioned Wang v. Aquantia Corp., et al., No. 19-cv-03000 (N.D. Cal. filed May 30, 2019); Sabatini v. Aquantia Corp., et al., No. 19-cv-01020-UNA (D. Del. filed May 31, 2019) (filed on behalf of a putative class); Carter v. Aquantia Corp., et al., No. 19-cv-03092 (N.D. Cal. filed June 4, 2019) (filed on behalf of a putative class); Yu v. Aquantia Corp., et al., No. 19-cv-05293-PAE (S.D.N.Y. filed June 5, 2019); Vakil v. Aquantia Corp., et al., No. 19-cv-05287-DLC (S.D.N.Y. filed June 5, 2019); Engel v. Aquantia Corp., et al., No. 19-cv-05285-LLS (S.D.N.Y. filed June 5, 2019); Ward v. Aquantia Corp., et al., No. 19-cv-05367 (S.D.N.Y. filed June 7, 2019) (filed on behalf of a putative class); Drake v. Aquantia Corp., et al., No. 19-cv-03194-LB (N.D. Cal. filed June 10, 2019); Childs v. Aquantia Corp., et al., No. 19-cv-01078-UNA (D. Del. filed June 10, 2019) (filed on behalf of a putative class); Ergene v. Aquantia Corp., et al., No. 19-cv-03301 (N.D. Cal. filed June 11, 2019) (filed on behalf of a putative class); Bushansky v. Aquantia Corp., et al., No. 19-cv-03302 (N.D. Cal. filed June 11, 2019) (filed on behalf of a putative class); Stewart v. Aquantia Corp., et al., No. 19-cv-01087-UNA (D. Del. filed June 13, 2019) (filed on behalf of a putative class); and Fahrbach v. Aquantia Corp., et al., No. 19-cv-01100-UNA (D. Del. filed June 14, 2019) (collectively, the “Complaints”)) against Aquantia and our Board of Directors related to the Merger. The Complaints assert violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. Plaintiffs contend that Aquantia’s Preliminary Proxy Statement on Schedule 14A and Definitive Proxy Statement on Schedule 14A, filed on May 29, 2019 and June 10, 2019, respectively, omitted or misrepresented material information regarding the Merger. The complaints seek, among other things, injunctive relief, rescission or rescissory damages, and an award of plaintiffs’ respective costs, including attorneys’ fees and expenses. On June 28, 2019, the Company filed a Schedule 14A containing certain supplemental disclosures to moot the claims alleged in the Complaints. The Company believes the litigations are without merit and has not recorded an expense related to the outcome of these litigations because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.

Such litigation, and any future litigation matters, are subject to many uncertainties and outcomes and are not predictable with assurance. The Company accrues amounts that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that it believes will result in a probable loss that is reasonably estimable.

To the extent there is a reasonable possibility that a loss exceeding amounts already recognized may be incurred and the amount of such additional loss would be material, the Company will either disclose the estimated additional loss or state that such an estimate cannot be made. The Company does not currently believe that it is reasonably possible that losses in connection with litigation arising in the ordinary course of business would be material.

Indemnification—Under the indemnification provisions of the Company’s standard sales-related contracts, the Company agrees to defend its customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. Certain agreements include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement. In addition, the Company indemnifies its directors and certain of its officers while they are serving in good faith in such capacities. To date, the Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As of June 30, 2019 and December 31, 2018, no liability associated with such indemnifications had been recorded.

7. Common Stock and Share-based Compensation

The Company’s certificate of incorporation, as of June 30, 2019 and December 31, 2018, authorized the Company to issue up to 95,000,000 shares of common stock and 5,000,000 shares of preferred stock, each at $0.00001 par value per share.

As of June 30, 2019, no preferred stock was outstanding. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends out of funds legally available. No dividends have been declared to date.

2015 Equity Incentive Plan and 2004 Equity Incentive Plan

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

2017 Equity Incentive Plan

In November 2017, the Company adopted the 2017 Equity Incentive Plan, or 2017 Plan, and all shares reserved for grant under the 2015 Equity Incentive Plan and 2004 Equity Incentive Plan were cancelled. The 2017 Plan had 5,047,440 common shares reserved, plus any shares subject to outstanding stock options or other stock awards that were granted under the 2015 Equity Incentive Plan and 2004 Equity Incentive Plan that were forfeited, terminate, expire or are otherwise not issued. In addition, the shares reserved under the 2017 Plan will automatically increase on the first day of each calendar year until January 1, 2027, by an amount equal to 5% of the total number of shares of the Company’s capital stock outstanding on the last day of the calendar month before the date of the automatic increase, or a lesser number of shares determined by the board of directors prior to the date of such automatic increase. The 2017 Plan provides for the grant of common stock awards, including incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and restricted stock units, performance units and performance shares to employees, directors, and consultants of the Company. All granted shares that are canceled, forfeited or expired are returned to the 2017 Plan and are available for grant in conjunction with the issuance of new equity awards. Stock options may be granted at an exercise price per share not less than 100% of the fair market value at the date of grant. If a stock option is granted to a 10% stockholder, then the exercise price per share must not be less than 110% of the fair market value per share of common stock on the grant date. Options granted are exercisable over a maximum term of 10 years from the date of grant and generally vest over a period of four years. As of June 30, 2019, 2,157,424 shares are available for grant.

Stock Options

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

						Weighted-
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic Value
	Number of Shares			Price		Term (Years)		(in thousands)
Balance—December 31, 2018		2,297,403		$	4.49		6.9	$	9,858
Granted		—		$	—
Exercised		(453,293	)	$	3.81
Canceled		(33,206	)	$	6.30
Balance—June 30, 2019		1,810,904		$	4.63		6.5	$	15,206
Vested and exercisable—June 30, 2019		1,311,186		$	4.00		6.2	$	11,844
Vested and exercisable—December 31, 2018		1,547,754		$	3.74		6.5	$	7,803

As of June 30, 2019, approximately $1.4 million of unrecognized stock compensation costs related to awards were expected to be recognized over a weighted-average period of 2.8 years. As of December 31, 2018, approximately $2.0 million of unrecognized stock compensation costs related to awards were expected to be recognized over a weighted-average period of 2.8 years.

The aggregate intrinsic value of options exercised during the six months ended June 30, 2019 was $3.5 million. The aggregate intrinsic value of options exercised during the year ended December 31, 2018 was $7.1 million.

There were no options granted during the three months ended June 30, 2019 and 2018. The weighted-average grant-date fair value of options granted during the year ended December 31, 2018 was $5.46 per share.

Restricted Stock Unit Awards

The Company grants restricted stock units (RSU) to employees under the 2017 Plan. RSUs granted typically vest ratably over a four-year period and are converted into shares of the Company’s common stock upon vesting on a one-for-one basis subject to the employee’s continued service to the Company over that period. The fair value of RSUs is determined using the fair value of the Company’s common stock on the date of the grant, reduced by the discounted present value of dividends expected to be declared before the awards vest. Compensation expense is recognized on a straight-line basis over the requisite service period of each grant. Each RSU award granted from the 2017 Plan will reduce the number of shares available for issuance under the 2017 Plan by one share.

As of June 30, 2019, unamortized compensation expense related to RSU was approximately $29.6 million, to be recognized over 3.3 years. For the year ended December 31, 2018, unamortized compensation expense related to RSU was approximately $15.8 million, to be recognized over 3.0 years.

Activity under the Company’s RSU is set forth below:

				Weighted
				Average
				Market
	Number of Shares			Value
Balance—December 31, 2018		1,554,089		$	12.73
Granted		2,070,526		$	9.30
Released		(388,437	)	$	12.66
Canceled		(101,261	)	$	11.04
Balance—June 30, 2019		3,134,917		$	10.42

Employee Stock Purchase Plan

Concurrent with the completion of the Company’s initial public offering (“IPO”) in November 2017, the Company adopted the 2017 Employee Stock Purchase Plan, or ESPP. The ESPP authorizes the issuance of 2,018,975 shares of common stock outstanding under purchase rights granted to its employees. In addition, the shares reserved under the ESPP Plan will automatically increase on the first day of each calendar year until January 1, 2027, by the lesser of (i) an amount equal to 2% of the total number of shares of the Company’s capital stock outstanding on the last day of the calendar month before the date of the automatic increase, (ii) 1,000,000 shares of common stock, and (iii) a lesser number of shares determined by the board of directors prior to the date of such automatic increase. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP generally provides for offering periods and purchase periods every six months, and at the end of each purchase period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the purchase period or on the last trading day of the offering period. 366,369 shares and 552,489 shares were issued as of December 31, 2018 and June 30, 2019 under the ESPP, respectively. Shares expected to be issued under the ESPP were 140,820 for the offering period outstanding as of June 30, 2019. The calculated fair value of the shares under the ESPP for the period started on May 16, 2019 was estimated using the Black-Scholes model with the following assumptions: risk-free interest rate of 2.43%, expected term of 0.5 year, expected dividends of 0% and volatility of 22%. As of June 30, 2019, unamortized compensation expense related to ESPP was approximately $0.4 million, to be recognized over approximately five months. As of December 31, 2018, unamortized compensation expense related to ESPP was approximately $0.5 million, to be recognized over approximately five months.

The Company uses the straight-line vesting attribution method to record stock-based compensation expense. Stock-based compensation expense recognized in the consolidated statements of operations and comprehensive loss for options, restricted stock units and ESPP was as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Cost of revenue	$	86	$	21	$	152	$	46
Research and development		1,821	521			3,053		1,094
Sales and marketing	398		162		748		273
General and administrative	584		458			1,226	727
Total	$	2,889	$	1,162		5,179	$	2,140

No income tax benefit associated with stock-based compensation expense was recognized in the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2019 and 2018.

8. Income Taxes

The Company recorded an income tax provision of $22,000 and benefit of $0.1 million for the three months ended June 30, 2019 and 2018, respectively. The Company recorded an income tax provision of $0.2 million and benefit of $0.2 million for the six months ended June 30, 2019 and 2018, respectively. The income tax benefit for the three and six months ended June 30, 2018 consisted primarily of a credit to foreign jurisdiction.

Although the Company files U.S. federal and various state tax returns, the Company’s only major tax jurisdictions are the United States and California. As a result of NOL carryforwards, all of the Company’s tax years are open to federal and state examination in the United States. All tax years are open to examination in various foreign countries.

9. Net Loss Per Share

The following table summarizes the computation of basic and diluted net loss per share (in thousands, except per share data):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Net loss	$	(17,881	)	$	(833	)	$	(30,948	)	$	(2,201	)
Weighted-average common shares outstanding		35,774,633			33,835,889			35,468,254			33,666,290
Less: Shares subject to repurchase		—			—			—			—
Weighted-average shares outstanding		35,774,633			33,835,889			35,468,254			33,666,290
Net loss per share, basic and diluted	$	(0.50	)	$	(0.02	)	$	(0.87	)	$	(0.07	)

Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period.

The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted-average shares outstanding because such securities have an antidilutive impact due to losses reported (in common stock equivalent shares):

	As of		As of
	June 30,		December 31,
	2019		2018
Stock options to purchase common stock		1,810,904		2,297,403
Unvested restricted stock units		3,134,917		1,554,089
Common stock warrants		83,695		83,695
Total		5,029,516		3,935,187

10. Segment Reporting

The Company operates in one reportable segment related to the design, development and sale of network communication integrated circuits. The Company’s chief operating decision-maker (“CODM”) is its Chief Executive Officer, who reviews operating

results on an aggregate basis and manages the Company’s operations as a whole for the purpose of evaluating financial performance and allocating resources. Substantially all of the Company’s long-lived assets were attributable to operations in the United States as of June 30, 2019 and December 31, 2018.

The following table summarizes revenue by market (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Revenue by market:
Data Center	$	2,117	$	15,097	$	10,328	$	31,366
Enterprise Infrastructure		3,429		11,518		8,900		21,029
Access		3,586		3,576		6,792		6,107
Automotive		99		241		233		288
Total revenue	$	9,231	$	30,432	$	26,253	$	58,790

The Company sells its products worldwide and attributes revenue to the geography where the product is shipped. The geographical distribution of revenue as a percentage of total revenue for the periods indicated was as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Malaysia		22	%		55	%		35	%		58	%
China		39			24			34			24
United States		6			2			7			1
Other		33

AQUANTIA CORP 10-Q