Everspin Technologies, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Everspin develops and sells MRAM products, licenses and royalties, and related services for industrial, automotive, transportation and enterprise-storage applications. Financial figures below are in millions of dollars unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $14.9 | $7.9 |
| Gross profit / margin | $10.0 / 67.0% | $4.2 / 53.5% |
| Operating expenses | $11.1 | $10.1 |
| Operating loss | $(1.1) | $(5.9) |
| Net loss | $(1.3) | $(6.1) |
| Adjusted EBITDA (non-GAAP) | $0.2 | $(4.9) |
| Cash used in operations | $(3.7) | $(4.0) |
Revenue grew 88.5%. Product sales increased 40.9% to $9.4 million, reflecting higher MRAM volume and mix, partly offset by lower legacy-product sales. Licensing, royalty and other revenue rose to $5.5 million, primarily due to a non-refundable license fee from a March 2018 cross-license agreement. That fee was a significant contributor to the higher gross margin and is not evidence by itself of recurring product economics.
Cash and cash equivalents were $33.9 million at March 31, 2018, versus $13.0 million at year-end 2017. Financing provided $24.9 million, principally $24.6 million net proceeds from a February follow-on offering of 3.77 million shares at $7.00 per share. Operating cash use included a $5.8 million increase in accounts receivable, largely attributed to the timing of collections. Capital expenditures were $0.2 million.
Total debt carrying value was approximately $12.2 million, including the end-of-term fee and net of debt discounts and issuance costs; the balance-sheet presentation reports $5.5 million current and $6.8 million long-term. The $12.0 million Silicon Valley Bank term loan bears a floating rate, reported at 4.00% at quarter-end, and scheduled principal payments begin in May 2018. The company reported compliance with its loan covenants. Current assets were $53.3 million and current liabilities $13.7 million.
Material changes and accounting
- Revenue increased by $7.0 million year over year; the quarter’s $5.0 million license fee was a major, potentially nonrecurring contributor.
- Operating expenses increased 9.6% to $11.1 million. R&D was $6.5 million, G&A $3.2 million and sales and marketing $1.4 million. Management expects R&D, G&A and sales and marketing spending to increase as product development and commercial activities continue.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Distributor revenue is now generally recognized when control transfers to the distributor, with estimated concessions recorded at that time. Adoption reduced opening accumulated deficit by $1.3 million. For Q1, reported revenue was $0.8 million higher and net loss $0.5 million lower than under the previous accounting; the comparison with Q1 2017 is not restated.
- In February, Everspin repriced 400,000 vested and unvested CEO options from $16.25 to $7.64 per share. The modification generated $0.6 million of incremental compensation value, with $0.1 million recognized immediately and the remainder to be expensed over the vesting period.
Outlook, risks and contingencies
Management said existing cash, together with anticipated growth and sales, should fund expected cash requirements for at least 12 months from the May 9, 2018 issuance date. This is not a revenue or earnings forecast. Management cautioned that future capital needs depend on growth, R&D, sales investment and product introductions; additional financing may not be available on acceptable terms. The company has incurred losses since inception and had a $117.5 million accumulated deficit at quarter-end.
Key risks include reliance on successful customer design wins and adoption of 256Mb and 1Gb STT-MRAM products; the company had not yet sold 1Gb MRAM products. It also cited manufacturing-yield and capacity risk, including dependence on GLOBALFOUNDRIES for higher-density production, customer and distributor concentration, price erosion, competition, and the possibility that customers change or delay orders. Lower MRAM yields contributed to higher cost of sales. The loan is secured by substantially all assets other than intellectual property and restricts certain actions.
The filing reports no material legal proceedings, no material change in contractual obligations, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the $5.0 million cross-license fee is nonrecurring, and what ongoing royalties or future license revenue can reasonably be expected?
- Whether receivables are collected as expected: accounts receivable rose to $8.9 million from $3.4 million at year-end, and operating cash flow remained negative.
- The filing contains differing customer-concentration disclosures: the significant-customer table identifies Customer A at 34% of Q1 revenue, while other MD&A passages report four customers collectively at 18.8% or 52%, and state conflictingly whether any customer exceeded 10%. Reconcile the definitions and figures.
- Whether STT-MRAM yields, production ramp, customer qualifications and design wins improve sufficiently to support growth and margins without relying on occasional license transactions.
- The effect of scheduled loan amortization, minimum-liquidity and revenue covenants, and the company’s ongoing cash burn on financing needs and liquidity.