Everspin Technologies, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Financial amounts below are in U.S. dollars; unless noted, figures are in millions. Everspin develops and sells magnetoresistive random-access memory (MRAM) products and licenses MRAM technology for industrial, automotive, transportation, and enterprise-storage markets.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $7.88 | $6.21 | +27% |
| Gross profit / margin | $4.22 / 53.5% | $3.66 / 59.0% | Margin down 5.5 percentage points |
| Operating expenses | $10.09 | $7.68 | +31% |
| Operating loss | $(5.88) | $(4.02) | Loss widened |
| Net loss | $(6.09) | $(4.54) | Loss widened |
| Adjusted EBITDA, non-GAAP | $(4.94) | $(3.25) | Loss widened |
| Cash used in operating activities | $(4.04) | $(2.64) | Cash use increased |
Product sales increased 18% to $7.22 million, attributed to higher sales volume and mix in first-generation MRAM and increased legacy-product sales. Licensing and royalty revenue rose to $0.66 million from $0.08 million, primarily due to a $0.6 million GLOBALFOUNDRIES milestone. Licensing revenue is variable and depends on a small number of transactions. Gross margin fell mainly because of product mix and low yields on Gen 1 MRAM products.
Research and development expense increased 24% to $6.39 million, including higher GLOBALFOUNDRIES joint-development costs. General and administrative expense rose 66% to $2.85 million, largely reflecting public-company professional fees. Management expects R&D, hiring, sales and marketing, and public-company costs to increase as the business develops.
Basic and diluted loss per share was $(0.49), versus $(1.78) a year earlier. The weighted-average share count rose substantially following the October 2016 IPO, so per-share figures are not directly comparable without considering the change in shares.
Liquidity, debt, and balance sheet
Cash and cash equivalents were $24.49 million at March 31, 2017, down from $29.73 million at year-end. Current assets were $34.34 million and current liabilities $12.52 million. Inventory was $5.82 million, up from $5.07 million; accounts receivable was $2.66 million. Accumulated deficit was $102.53 million.
Debt’s net carrying value at March 31 was $7.43 million ($3.91 million current and $3.52 million long-term); the stated debt balance including end-of-term fee was $7.63 million. The company used $0.73 million for debt payments during the quarter. Management said cash and available credit were expected to fund anticipated needs through May 31, 2018, while noting revolving-credit availability depended on receivables.
Subsequent financing: In April 2017, Everspin repaid the $1.5 million revolving-loan balance. In May, it entered a $12.0 million, three-year Silicon Valley Bank term loan at prime less 0.75%, secured by company assets other than intellectual property; scheduled monthly principal repayment begins May 1, 2018. A portion of proceeds repaid the 2015 Credit Facility. The term may extend by one year if the company meets a $4.0 million Spin-Torque product revenue target.
Material changes, outlook, and risks
- Revenue mix shifted toward distributor sales: 78% of revenue came through distributors in Q1 2017, compared with 22% in Q1 2016.
- Five largest end customers together represented approximately 35.9% of Q1 2017 revenue; one customer exceeded 10%. Customer concentration and purchase-order variability pose revenue risks.
- Management continued investment in second-generation and Spin-Torque MRAM and expects R&D spending to increase. ST-MRAM revenue had not been material to date, and future growth depends in part on product development, qualification, yields, and customer adoption.
- The company relies on third-party manufacturers, including GLOBALFOUNDRIES for higher-density products, and identified supply, capacity, yield, and pricing risks. Low Gen 1 yields already reduced gross margin.
- Management reported disclosure controls were effective at a reasonable-assurance level, but also disclosed material weaknesses in internal control over financial reporting: financial-reporting process resources and, at year-end 2016, ERP information-technology controls. Remediation was ongoing; management had not concluded those weaknesses were fully remediated.
- No material legal proceedings were reported. The filing states there were no off-balance-sheet arrangements. The company adopted certain accounting updates in 2017 without material impact and planned to adopt the new revenue standard on January 1, 2018; the impact was still under evaluation.
Important facts for investors to verify
- Whether Gen 1 yields improve and gross margin recovers, and how product mix affects margins.
- Whether R&D investment and GLOBALFOUNDRIES collaboration produce qualified, scalable Spin-Torque products and meaningful revenue.
- Customer concentration, distributor sell-through, deferred income on distributor shipments, and the impact of price concessions.
- Cash burn, actual credit availability, compliance with debt covenants, and the terms and repayment burden of the new $12.0 million loan.
- Progress in remediating the disclosed financial-reporting and ERP control weaknesses, including the status of Section 404 readiness.
- Future effects of adopting the revenue-recognition standard, which changes recognition for distributor shipments; the filing did not provide a clear quantified estimate of that impact.