Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 1 of 30
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE SOUTHERN DISTRICT OF NEW YORK
`
`PETER STEIN, Individually and on Behalf
`of All Others Similarly Situated,
`
`Plaintiff,
`
`v.
`
`ADESTO TECHNOLOGIES
`CORPORATION, NELSON CHAN,
`NARBEH DERHACOBIAN, HERVÉ
`FAGES, FRANCIS LEE, KEVIN
`PALATNIK, and SUSAN
`UTHAYAKUMAR,
`
`Defendants.
`
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`Case No.
`
`1:20-cv-2900
`
`CLASS ACTION COMPLAINT FOR
`VIOLATIONS OF SECTIONS 14(a) AND
`20(a) OF THE SECURITIES
`EXCHANGE ACT OF 1934
`
`JURY TRIAL DEMANDED
`
`Plaintiff Peter Stein (“Plaintiff”), by his undersigned attorneys, alleges upon personal
`
`knowledge with respect to himself, and information and belief based upon, inter alia, the
`
`investigation of counsel as to all other allegations herein, as follows:
`
`NATURE OF THE ACTION
`
`1.
`
`This action is brought as a class action by Plaintiff on behalf of himself and the
`
`other public holders of the common stock of Adesto Technologies Corporation (“Adesto” or the
`
`“Company”) against the Company and the members of the Company’s board of directors
`
`(collectively, the “Board” or “Individual Defendants” and, together with Adesto, the
`
`“Defendants”) for their violations of Sections 14(a) and 20(a) of the Securities Exchange Act of
`
`1934 (the “Exchange Act”), 15 U.S.C. §§ 78n(a), 78t(a), SEC Rule 14a-9, 17 C.F.R. § 240.14a-9,
`
`and Regulation G, 17 C.F.R. § 244.100, in connection with the proposed merger (the “Proposed
`
`Transaction”) between Adesto and Dialog Semiconductor plc (“Dialog”).
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 2 of 30
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`
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`2.
`
`On February 20, 2020, the Board caused the Company to enter into an agreement
`
`and plan of merger (“Merger Agreement”), pursuant to which the Company’s shareholders stand
`
`to receive $12.55 in cash for each share of Adesto stock they own (the “Merger Consideration”).
`
`3.
`
`On March 16, 2020, in order to convince Adesto shareholders to vote in favor of
`
`the Proposed Transaction, the Board authorized the filing of a materially incomplete and
`
`misleading Form PREM14A Preliminary Proxy Statement (the “Preliminary Proxy”) with the
`
`Securities and Exchange Commission (“SEC”), in violation of Sections 14(a) and 20(a) of the
`
`Exchange Act. The materially incomplete and misleading preliminary proxy violates both
`
`Regulation G (17 C.F.R. § 244.100) and SEC Rule 14a-9 (17 C.F.R. § 240.14a-9), each of which
`
`constitutes a violation of Sections 14(a) and 20(a) of the Exchange Act. On March 27, 2020, the
`
`Board authorized the filing of a Form DEFM14A Definitive Proxy (the “Proxy”) that did not
`
`correct the materially misleading nature of the Preliminary Proxy. The Board has scheduled a
`
`special meeting of the Company’s shareholders on May 5, 2020 to vote on the Proposed
`
`Transaction.
`
`4.
`
`While touting the fairness of the Merger Consideration to the Company’s
`
`shareholders in the Proxy, Defendants have failed to disclose certain material information that is
`
`necessary for shareholders to properly assess the fairness of the Proposed Transaction, thereby
`
`violating SEC rules and regulations and rendering certain statements in the Proxy materially
`
`incomplete and misleading.
`
`5.
`
`In particular, the Proxy contains materially incomplete and misleading information
`
`concerning: (i) the financial projections for the Company that were prepared by the Company and
`
`relied on by Defendants in recommending that Adesto shareholders vote in favor of the Proposed
`
`Transaction; and (ii) the summary of certain valuation analyses conducted by Adesto’s financial
`
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 3 of 30
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`
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`advisor, Cowen and Company, LLC. (“Cowen”) in support of its opinion that the Merger
`
`Consideration is fair to shareholders, on which the Board relied.
`
`6.
`
`It is imperative that the material information that has been omitted from the Proxy
`
`is disclosed prior to the forthcoming vote to allow the Company’s shareholders to make an
`
`informed decision regarding the Proposed Transaction.
`
`7.
`
`For these reasons, and as set forth in detail herein, Plaintiff asserts claims against
`
`Defendants for violations of Sections 14(a) and 20(a) of the Exchange Act, based on Defendants’
`
`violation of: (i) Regulation G (17 C.F.R. § 244.100); and (ii) Rule 14a-9 (17 C.F.R. § 240.14a-9).
`
`Plaintiff seeks to enjoin Defendants from holding the shareholder vote on the Proposed Transaction
`
`and taking any steps to consummate the Proposed Transaction unless, and until, the material
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`information discussed below is disclosed to Adesto shareholders sufficiently in advance of the vote
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`on the Proposed Transaction or, in the event the Proposed Transaction is consummated, to recover
`
`damages resulting from Defendants’ violations of the Exchange Act.
`
`JURISDICTION AND VENUE
`
`8.
`
`This Court has subject matter jurisdiction pursuant to Section 27 of the Exchange
`
`Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1331 (federal question jurisdiction) as Plaintiff alleges
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`violations of Sections 14(a) and 20(a) of the Exchange Act.
`
`9.
`
`Personal jurisdiction exists over each Defendant either because the Defendant
`
`conducts business in or maintains operations in this District, or is an individual who is either
`
`present in this District for jurisdictional purposes or has sufficient minimum contacts with this
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`District as to render the exercise of jurisdiction over Defendant by this Court permissible under
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`traditional notions of fair play and substantial justice.
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 4 of 30
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`
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`10.
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`Venue is proper in this District under Section 27 of the Exchange Act, 15 U.S.C. §
`
`78aa, as well as under 28 U.S.C. § 1391, because a substantial portion of the alleged wrongs took
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`place in this District and the Company’s common stock trades on the NASDAQ, which is
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`headquartered in this District.
`
`PARTIES
`
`11.
`
`12.
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`Plaintiff is, and at all relevant times has been, a holder of Adesto common stock.
`
`Defendant Adesto is incorporated in Delaware and maintains its principal executive
`
`offices at 3600 Peterson Way, Santa Clara, California 95054. The Company’s common stock
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`trades on the NASDAQ under the ticker symbol “IOTS.”
`
`13.
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`Individual Defendant Nelson Chan is Adesto’s Chairman and has been a director
`
`of Adesto at all relevant times.
`
`14.
`
`Individual Defendant Narbeh Derhacobian is Adesto’s co-founder, President and
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`Chief Executive Officer and has been a director of Adesto at all relevant times.
`
`Individual Defendant Hervé Fages has been a director of Adesto since August 2019.
`
`Individual Defendant Francis Lee has been a director of Adesto since July 2015.
`
`Individual Defendant Kevin Palatnik has been a director of Adesto since September
`
`15.
`
`16.
`
`17.
`
`2015.
`
`18.
`
`Individual Defendant Susan Uthayakumar has been a director of Adesto since
`
`August 2019.
`
`19.
`
`The Individual Defendants referred to in paragraphs 13-18 are collectively referred
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`to herein as the “Individual Defendants” and/or the “Board.”
`
`
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 5 of 30
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`
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`CLASS ACTION ALLEGATIONS
`
`20.
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`Plaintiff brings this class action pursuant to Fed. R. Civ. P. 23 on behalf of himself
`
`and the other public shareholders of Adesto (the “Class”). Excluded from the Class are Defendants
`
`herein and any person, firm, trust, corporation, or other entity related to or affiliated with any
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`Defendant.
`
`21.
`
`This action is properly maintainable as a class action because:
`
`a.
`
`The Class is so numerous that joinder of all members is impracticable. As
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`of February 28, 2020, there were approximately 31,000,000 shares of Adesto common
`
`stock outstanding, held by hundreds of individuals and entities scattered throughout the
`
`country. The actual number of public shareholders of Adesto will be ascertained through
`
`discovery;
`
`b.
`
`There are questions of law and fact that are common to the Class that
`
`predominate over any questions affecting only individual members, including the
`
`following:
`
`i)
`
`whether Defendants disclosed material information that includes
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`non-GAAP financial measures without providing a reconciliation of
`
`the same non-GAAP financial measures to their most directly
`
`comparable GAAP equivalent in violation of Section 14(a) of the
`
`Exchange Act;
`
`ii)
`
`whether Defendants have misrepresented or omitted material
`
`information concerning the Proposed Transaction in the Proxy in
`
`violation of Section 14(a) of the Exchange Act;
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 6 of 30
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`iii)
`
`whether the Individual Defendants have violated Section 20(a) of
`
`the Exchange Act; and
`
`iv)
`
`whether Plaintiff and other members of the Class will suffer
`
`irreparable harm if compelled to vote their shares regarding the
`
`Proposed Transaction based on the materially incomplete and
`
`misleading Proxy.
`
`c.
`
`Plaintiff is an adequate representative of the Class, has retained competent
`
`counsel experienced in litigation of this nature, and will fairly and adequately protect the
`
`interests of the Class;
`
`d.
`
`Plaintiff’s claims are typical of the claims of the other members of the Class
`
`and Plaintiff does not have any interests adverse to the Class;
`
`e.
`
`The prosecution of separate actions by individual members of the Class
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`would create a risk of inconsistent or varying adjudications with respect to individual
`
`members of the Class, which would establish incompatible standards of conduct for the
`
`party opposing the Class;
`
`f.
`
`Defendants have acted on grounds generally applicable to the Class with
`
`respect to the matters complained of herein, thereby making appropriate the relief sought
`
`herein with respect to the Class as a whole; and
`
`g.
`
`A class action is superior to other available methods for fairly and
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`efficiently adjudicating the controversy.
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 7 of 30
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`
`
`SUBSTANTIVE ALLEGATIONS
`
`I.
`
`The Proposed Transaction
`
`22.
`
`Adesto provides application specific semiconductors and embedded systems that
`
`provide key building blocks of Internet of Things edge devices operating on networks worldwide.
`
`The Company’s broad portfolio of semiconductor and embedded technologies are optimized for
`
`connected Internet of Things devices used in industrial, consumer, communications and medical
`
`applications.
`
`23.
`
`On February 20, 2020, Adesto and Dialog issued a joint press release announcing
`
`the Proposed Transaction, which states in pertinent part:
`
`LONDON, Feb. 20, 2020 (GLOBE NEWSWIRE) -- Dialog Semiconductor plc
`(XETRA:DLG), a leading provider of power management, charging, AC/DC
`power conversion, Wi-Fi and Bluetooth® low energy technology, and Adesto
`Technologies Corporation (“Adesto”) (NASDAQ:IOTS), a leading provider of
`innovative custom integrated circuits (ICs) and embedded systems for the Industrial
`Internet of Things (IIoT) market, today announced they have signed a definitive
`agreement for Dialog to acquire all outstanding shares of Adesto.
`
`Adesto accelerates Dialog’s expansion into the growing IIoT market that enables
`smart buildings and industrial automation (Industry 4.0), seamlessly driving cloud
`connectivity. Headquartered in Santa Clara, California, Adesto has approximately
`270 employees and an established portfolio of industrial solutions for smart
`building automation that fully complements Dialog’s manufacturing automation
`products. Adesto’s solutions are sold across the industrial, consumer, medical, and
`communications markets.
`
`“This acquisition substantially enhances our position in the Industrial IoT market,”
`said Jalal Bagherli, CEO of Dialog. “Adesto’s established strength in connectivity
`solutions and highly optimized products for building and industrial automation
`perfectly complements and adds scale to our Industrial IoT portfolio from the
`recently acquired Creative Chips. Adesto’s deep customer relationships,
`comprehensive system expertise, and proprietary technology will deliver enhanced
`value for Dialog customers.”
`
`“Together with Dialog, we are positioned to create unique Industrial IoT solutions
`through the integration of our best-in-class technologies for today’s increasingly
`connected world,” added Adesto’s CEO, Narbeh Derhacobian. “We are extremely
`pleased to join Dialog to bring more value to our combined customer base.”
`
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 8 of 30
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`
`Benefits of Transaction
`
`Bringing Dialog and Adesto together creates a complementary product portfolio for
`servicing a broad customer base in growth segments of the industrial market and
`enables cross-selling.
`
`The combination:
`
`
`• Scales Dialog’s IIoT sector capabilities by combining
`industrial
`connectivity, smart metering and building automation solutions, and access
`to more than 5,000 customers, the majority of which are new for Dialog
`
`• Complements Adesto’s industrial wired connectivity portfolio with
`Dialog’s wireless portfolio (BLE, Wi-Fi) for smart building and industrial
`applications. Cloud-connectivity adds further differentiation to Dialog’s
`existing Industrial solutions
`
`• Enables full system solutions for wearables, hearables, and other IoT
`applications by combining Adesto’s low-power specialty memory products
`with Dialog’s BLE & Wi-Fi connectivity and True Wireless Stereo (TWS)
`Audio ICs
`
`• Unlocks future growth in the Automotive market by qualifying Adesto’s
`specialty memory products by leveraging Dialog’s established Automotive
`production and test flow. Additionally, these products address the emerging,
`fast-growing Artificial Intelligence (AI) segment
`
`
`
`
`
`
`
`• Adds engineering and design scale to expand Dialog’s existing custom IC
`business making Dialog one of the largest custom analog mixed-signal
`semiconductor providers
`
`
`Transaction Structure and Terms
`
`Dialog will acquire Adesto for $12.55 per share in cash, or for approximately $500
`million enterprise value. The deal will be funded from Dialog’s balance sheet.
`
`The transaction is expected to be EPS accretive1 for Dialog within the first calendar
`year following close. Dialog expects annual cost synergies of approximately $20
`million within the first calendar year of close across the combined company. Dialog
`also anticipates considerable additional
`revenue
`synergies given
`the
`complementary nature of the product portfolios and technology. Adesto expects to
`report FY 2019 revenue of approximately $118 million and continued revenue
`growth is anticipated over the next few years.
`
`The transaction is subject to certain regulatory approvals and customary closing
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 9 of 30
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`conditions and is expected to close in the third quarter of 2020.
`
`The Board of Directors of Adesto has unanimously approved the transaction and
`recommends that Adesto stockholders vote in favor of the transaction, and directors
`and executive officers of Adesto have agreed to vote their shares in favor of the
`transaction.
`
`Hogan Lovells is serving as Dialog’s legal counsel, while BMO Capital Markets is
`serving as financial advisor. Fenwick & West LLP is serving as legal counsel for
`Adesto, with Cowen & Company, LLC serving as financial advisor.
`
`Conference Call Information:
`
`Dialog will host a conference call on Thursday, February 20 at 10:00 a.m. CET /
`9:00
`a.m. UK. A
`link
`to
`the webcast
`is
`available
`at
`https://webcast.openbriefing.com/dialog-feb2020/.
`
`at
`pre-register
`can
`Participants
`www.incommuk.com/customers/dialogsemiconductorcall to receive access details
`via email. Additionally, conference call information is below.
`
`Germany (Local): 0322 2109 8334
`United Kingdom: 0800 640 6441
`United Kingdom (Local): 020 3936 2999
`United States: 1 855 979 6654
`United States (Local): 1 646 664 1960
`All other locations: +44 20 3936 2999
`Access code: 863503 (Participants will be greeted by an operator who will register
`their details.)
`
`NOTES
`
`For further information, please contact the following representatives.
`
`
`Dialog Investor Relations Contacts:
`
`
`Jose Cano
`Head of Investor Relations
`Dialog Semiconductor
`Phone: +44 (0)1793 756 961
`jose.cano@diasemi.com
`
`
`
`
`Dialog Media Contact:
`
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 10 of 30
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`
`
`
`
`
`UK – Matt Dixon
`FTI Consulting London
`Phone: +44 (0)2037 271 137
`matt.dixon@fticonsulting.com
`
`
`
`Germany – Anja Meusel
`FTI Consulting Frankfurt
`Phone: +49 (0)69 9203 7120
`anja.meusel@fticonsulting.com
`
`
`
`US – Antonia Gray
`FTI Consulting New York
`Phone: +1 (212) 850-5663
`antonia.gray@fticonsulting.com
`
`Mark Tyndall
`SVP Corporate Development & Strategy
`Dialog Semiconductor
`Phone: +1 (408) 845-8520
`mark.tyndall@diasemi.com
`
`
`
`Web: www.dialog-semiconductor.com
`Twitter: @DialogSemi
`
`
`
`
`Adesto Investor Relations Contact:
`
`
`Joel W. Achramowicz
`Managing Director
`Shelton Group
`Phone: +1 (415) 845-9964
`sheltonir@sheltongroup.com
`
`
`
`Adesto Media Contact:
`
`Jen Bernier-Santarini
`
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 11 of 30
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`VP, Corporate Communications
`Adesto Technologies
`Phone: +1 (650) 336-4222
`jen.bernier@adestotech.com
`
`About Dialog Semiconductor
`Dialog Semiconductor is a leading provider of integrated circuits (ICs) that powers
`the Internet of Things and Industry 4.0 applications. Dialog solutions are integral
`to some of today’s leading smartphones and the enabling element for increasing
`performance and productivity on the go. From making smartphones more power
`efficient and shortening charging times, enabling home appliances to be controlled
`from anywhere, to connecting the next generation of wearable devices, Dialog’s
`decades of experience and world-class innovation help manufacturers get to what’s
`next.
`
`Dialog operates a fabless business model and is a socially responsible employer
`pursuing many programs to benefit the employees, community, other stakeholders
`and the environment it operates in. Dialog is headquartered near London with a
`global sales, R&D and marketing organization. In 2019, it had approximately $1.4
`billion in revenue and is consistently one of the fastest growing European public
`semiconductor companies. It currently has approximately 2,000 employees
`worldwide. The company is listed on the Frankfurt (FWB: DLG) stock exchange
`(Regulated Market, Prime Standard, ISIN GB0059822006) and is a member of the
`German MDAX and TecDax indices.
`
`For more information, visit www.dialog-semiconductor.com.
`
`About Adesto Technologies Corporation
`Adesto Technologies Corporation (NASDAQ:IOTS) is a leading provider of
`innovative application-specific semiconductors and embedded systems for the
`Industrial IoT. The company’s technology is used by a broad industrial customer
`base worldwide. With its growing portfolio of high-value technologies, Adesto is
`helping its customers usher in the era of the Internet of Things.
`
`For more information, visit www.adestotech.com or follow Adesto on Twitter.
`
`
`
`
`
`24.
`
`Adesto is well-positioned for financial growth and the Merger Consideration fails
`
`to adequately compensate the Company’s shareholders. It is imperative that Defendants disclose
`
`the material information they have omitted from the Proxy, discussed in detail below, so that the
`
`Company’s shareholders can properly assess the fairness of the Merger Consideration for
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 12 of 30
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`
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`themselves and make an informed decision concerning whether or not to vote in favor of the
`
`Proposed Transaction.
`
`25.
`
`If the false and/or misleading Proxy is not remedied and the Proposed Transaction
`
`is consummated, Defendants will directly and proximately have caused damages and actual
`
`economic loss (i.e. the difference between the value to be received as a result of the Proposed
`
`Transaction and the true value of their shares prior to the merger), in an amount to be determined
`
`at trial, to Plaintiff and the Class.
`
`II.
`
`The Materially Incomplete and Misleading Proxy
`
`26.
`
`On March 16, 2020, Defendants caused the Preliminary Proxy to be filed with the
`
`SEC in connection with the Proposed Transaction. The Preliminary Proxy solicits the Company’s
`
`shareholders to vote in favor of the Proposed Transaction. Defendants were obligated to carefully
`
`review the Preliminary Proxy before it was filed with the SEC and disseminated to the Company’s
`
`shareholders to ensure that it did not contain any material misrepresentations or omissions.
`
`However, the Preliminary Proxy misrepresents and/or omits material information that is necessary
`
`for the Company’s shareholders to make an informed decision concerning whether to vote in favor
`
`of the Proposed Transaction, in violation of Sections 14(a) and 20(a) of the Exchange Act. On
`
`March 27, 2020, the Board authorized the filing of the Proxy, which did not correct the materially
`
`misleading nature of the Preliminary Proxy.
`
`The Materiality of Financial Projections
`
`27.
`
`A company’s financial forecasts are material information a board relies on to
`
`determine whether to approve a merger transaction and recommend that shareholders vote to
`
`approve the transaction. Here, the Proxy discloses that “in connection with its evaluation of the
`
`Merger, Adesto’s management prepared projections through the year ending December 31, 2025.”
`
`Proxy 54-55. These projections were provided to the Board, Dialog and Cowen. Id.
`
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 13 of 30
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`
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`28. When soliciting proxies from shareholders, a company must furnish the
`
`information found in Schedule 14A (codified as 17 C.F.R. § 240.14a-101). Item 14 of Schedule
`
`14A sets forth the information a company must disclose when soliciting proxies regarding mergers
`
`and acquisitions. In regard to financial information, companies are required to disclose “financial
`
`information required by Article 11 of Regulation S-X[,]” which includes Item 10 of Regulation S-
`
`K. See Item 14(7)(b)(11) of 17 C.F.R. § 240.14a-101.
`
`29.
`
`Under Item 10 of Regulation S-K, companies are encouraged to disclose
`
`“management’s projections of future economic performance that have a reasonable basis and are
`
`presented in an appropriate format.” 17 C.F.R. § 229.10(b). Although the SEC recognizes the
`
`usefulness of disclosing projected financial metrics, the SEC cautions companies to “take care to
`
`assure that the choice of items projected is not susceptible of misleading inferences through
`
`selective projection of only favorable items.” 17 C.F.R. § 229.10(b)(2).
`
`30.
`
`In order to facilitate investor understanding of the Company’s financial projections,
`
`the SEC provides companies with certain factors “to be considered in formulating and disclosing
`
`such projections[,]” including:
`
`(i) When management chooses to include its projections in a Commission filing,
`the disclosures accompanying
`the projections should
`facilitate
`investor
`understanding of the basis for and limitations of projections. In this regard investors
`should be cautioned against attributing undue certainty to management’s
`assessment, and the Commission believes that investors would be aided by a
`statement indicating management’s intention regarding the furnishing of updated
`projections. The Commission also believes that investor understanding would be
`enhanced by disclosure of the assumptions which in management’s opinion are
`most significant to the projections or are the key factors upon which the financial
`results of the enterprise depend and encourages disclosure of assumptions in a
`manner that will provide a framework for analysis of the projection.
`
`(ii) Management also should consider whether disclosure of the accuracy or
`inaccuracy of previous projections would provide investors with important insights
`into the limitations of projections. In this regard, consideration should be given to
`presenting the projections in a format that will facilitate subsequent analysis of the
`reasons for differences between actual and forecast results. An important benefit
`may arise from the systematic analysis of variances between projected and actual
`
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 14 of 30
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`
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`results on a continuing basis, since such disclosure may highlight for investors the
`most significant risk and profit-sensitive areas in a business operation.
`
`17 C.F.R. § 229.10(b)(3) (emphasis added).
`
`31.
`
`Here, Adesto shareholders would clearly find complete and non-misleading
`
`financial projections material in deciding how to vote, considering that the Board specifically
`
`relied on the financial forecasts in reaching its decision to, among other things, approve the Merger
`
`Agreement and the transactions contemplated by it and determine that the Proposed Transaction
`
`is fair to, and in the best interests of, the Company and its shareholders. Proxy 41-42.
`
`32.
`
`As discussed further below, the non-GAAP financial projections used do not
`
`provide Adesto’s shareholders with a materially complete understanding of the assumptions and
`
`key factors considered in developing the financial projections, which assumptions, factors and
`
`other inputs the Board reviewed.
`
`The Financial Projections Relied on by the Board
`
`33.
`
`The Proxy discloses that “in connection with its evaluation of the Merger, Adesto’s
`
`management prepared projections through the year ending December 31, 2025.” Id. at 54-55.
`
`These projections were provided to the Board, Dialog and Cowen. Id. at 55.
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`34.
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`The Proxy goes on to disclose, inter alia, forecasted values for projected non-
`
`GAAP (Generally Accepted Accounting Principles) financial metrics for 2020 through 2025 for:
`
`(1) Non-GAAP Gross Profit, (2) Non-GAAP Operating Income, (3) Non-GAAP Net Income, (4)
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`Adjusted EBITDA and (5) Unlevered Free Cash Flow, but fails to provide (i) the line items used
`
`to calculate these non-GAAP metrics or (ii) a reconciliation of these non-GAAP projections to the
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`most comparable GAAP measures. Id. at 56.
`
`35.
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`The Proxy defines each of Non-GAAP Gross Profit, Non-GAAP Operating Income
`
`and Non-GAAP Net Income as a “[n]on-GAAP financial measure which excludes the effect of
`
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 15 of 30
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`stock-based compensation expense and non-recurring items.” Id. at 56 n.1. Nevertheless, the
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`Proxy fails to reconcile Non-GAAP Gross Profit, Non-GAAP Operating Income or Non-GAAP
`
`Net Income to their most comparable GAAP measures or disclose all of the line items used in their
`
`calculations, rendering the Proxy materially false and/or misleading. Id.
`
`36.
`
`The Proxy defines Adjusted EBITDA as “a non-GAAP financial measure
`
`calculated by adjusting non-GAAP net income (loss) to add back interest expense, levered income
`
`tax expense, and depreciation and amortization.” Id. at 56 n.2. Nevertheless, the Proxy fails to
`
`reconcile Adjusted EBITDA to its most comparable GAAP measure or disclose all of the line
`
`items used to calculate Adjusted EBITDA, rendering the Proxy materially false and/or misleading.
`
`Id.
`
`37.
`
`The Proxy defines Unlevered Free Cash Flow (“UFCF”) as “a non-GAAP financial
`
`measure calculated by subtracting stock-based compensation expense, capital expenditures,
`
`increase in net working capital and unlevered income tax expense from Adjusted EBITDA.” Id. at
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`56 n.5. Nevertheless, the Proxy fails to reconcile UFCF to its most comparable GAAP measure or
`
`disclose all of the line items used to calculate UFCF, rendering the Proxy materially false and/or
`
`misleading. Id.
`
`38.
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`Thus, the Proxy’s disclosure of these non-GAAP financial forecasts provides an
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`incomplete and materially misleading understanding of the Company’s future financial prospects
`
`and the inputs and assumptions for which those prospects are based upon. It is clear that those
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`inputs and assumptions were in fact forecasted and utilized in calculating the non-GAAP measures
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`disclosed and relied on by the Board to recommend the Proposed Transaction in violation of
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`Section 14(a) of the Exchange Act.
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 16 of 30
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`39.
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`The non-GAAP financial projections disclosed on page 56 of the Proxy violate
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`Section 14(a) of the Exchange Act because: (i) the use of such forecasted non-GAAP financial
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`measures alone violates SEC Regulation G as a result of Defendants’ failure to reconcile those
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`non-GAAP measures to their closest GAAP equivalent or otherwise disclose the specific financial
`
`assumptions and inputs used to calculate the non-GAAP measures; and (ii) they violate SEC
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`Regulation 14a-9 because they are materially misleading as without any correlation with their
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`GAAP equivalent financial metrics, shareholders are unable to discern the veracity of the financial
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`projections.
`
`40.
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`As such, this information must be disclosed in order to cure the materially
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`misleading disclosures regarding both the financial projections developed by the Company as well
`
`as the projections relied upon by the Company’s financial advisor.
`
`The Financial Projections Violate Regulation G
`
`41.
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`The SEC has acknowledged that potential “misleading inferences” are exacerbated
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`when the disclosed information contains non-GAAP financial measures1 and adopted Regulation
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`G2 “to ensure that investors and others are not misled by the use of non-GAAP financial
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`measures.”3
`
`42.
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`Defendants must comply with Regulation G. More specifically, the company must
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`disclose the most directly comparable GAAP financial measure and a reconciliation (by schedule
`
`or other clearly understandable method) of the differences between the non-GAAP financial
`
`
`1
`Non-GAAP financial measures are numerical measures of future financial performance
`that exclude amounts or are adjusted to effectively exclude amounts that are included in the most
`directly comparable GAAP measure. 17 C.F.R. § 244.101(a)(1).
`2
`Item 10 of Regulations S-K and S-B were amended to reflect the requirements of
`Regulation G.
`3
`SEC, Final Rule: Conditions for Use of Non-GAAP Financial Measures (Jan. 22, 2003),
`available at https://www.sec.gov/rules/final/33-8176.htm (“SEC, Final Rule”).
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`Case 1:20-cv-02900-VEC Document 1 Filed 04/08/20 Page 17 of 30
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`measure disclosed or released with the most comparable financial measure or measures calculated
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`and presented in accordance with GAAP. 17 C.F.R. § 244.100. This is because the SEC believes
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`“this reconciliation will help investors . . . to better evaluate the non-GAAP financial measures
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`. . . . [and] more accurately evaluate companies’ securities and, in turn, result in a more accurate
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`pricing of securities.”4
`
`43. Moreover, the SEC has publicly stated that the use of non-GAAP financial
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`measures can be misleading.5 Former SEC Chairwoman Mary Jo White has stated that the
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`frequent use by publicly traded companies of unique company-specific non-GAAP financial
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`measures (as Adesto included in the Proxy here) implicates the centerpiece of the SEC’s
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`disclosures regime:
`
`In too many cases, the non-GAAP information, which is meant to supplement the
`GAAP information, has become the key message to investors, crowding out and
`effectively supplanting the GAAP presentation. Jim Schnurr, our Chief Accountant,
`Mark Kronforst, our Chief Accountant in the Division of Corporation Finance and
`I, along with other members of the staff, have spoken out frequently about our
`concerns to raise the awareness of boards, management and investors. And last
`month, the staff issued guidance addressing a number of troublesome practices
`which can make non-GAAP disclosures misleading: the lack of equal or greater
`prominence for GAAP measures; exclusion of normal, recurring cash operating
`expenses; individually tailored non-GAAP revenues; lack of consistency; cherry-
`picking; and the use of cash per share data. I strongly urge companies to carefully
`consider this guidance and revisit their approach to non-GAAP disclosures. I also
`urge again, as I did last December, that appr