Everspin Technologies, Inc. — Q3 2016 Form 10-Q
Business context and period. The unaudited report covers the quarter and nine months ended September 30, 2016. Everspin develops and sells MRAM products, embedded technology, licenses and royalties for industrial, automotive, transportation and enterprise-storage markets. It reported 90 employees at quarter-end and had effected a 1-for-26 reverse stock split in September; share and per-share data reflect the split.
Financial results
| Metric | Three months ended Sep. 30, 2016 | Nine months ended Sep. 30, 2016 |
|---|---|---|
| Revenue | $7.2 million | $20.0 million |
| Gross profit / margin | $4.3 million / 60.1% | $11.5 million / 57.2% |
| Operating expenses | $5.5 million | $21.7 million |
| Operating loss | $1.2 million | $10.2 million |
| Net loss | $1.4 million | $11.4 million |
| Adjusted EBITDA (non-GAAP) | $(0.8) million | $(7.5) million |
| Operating cash used | — | $7.3 million |
At September 30, cash and cash equivalents were $2.0 million; current assets were $10.7 million and current liabilities $26.1 million. Total liabilities were $31.5 million, including $8.5 million of related-party convertible notes and approximately $8.8 million of net carrying value on the 2015 credit facility. Accumulated deficit was $91.1 million. The filing reports no dividends.
Changes versus prior comparable periods
- Q3 revenue rose 1% year over year; product sales rose 5%, while licensing and royalty revenue fell 63% to $0.2 million. For nine months, revenue rose 1%; product sales increased 3% and licensing/royalty revenue declined from $0.6 million to $0.3 million.
- Gross margin improved to 60% from 51% in Q3 and to 57% from 56% for the nine-month period. Management attributed the improvement to yields, product mix and lower raw-material costs.
- Q3 operating expenses fell 31%, primarily reflecting lower R&D expense, including reduced GLOBALFOUNDRIES (GF) share-based compensation and joint-development costs. Nine-month operating expenses declined 4%.
- Net loss narrowed to $1.4 million from $4.5 million in Q3 and to $11.4 million from $11.9 million for nine months. Higher interest expense partly offset operating improvement: it was $2.0 million for nine months versus $0.4 million in 2015.
- Operating cash use improved to $7.3 million from $8.7 million for nine months. Financing provided $7.6 million, including $8.5 million in related-party notes and a $1.5 million revolving-loan draw; cash declined $0.3 million over the period.
Outlook, material events and risks
- IPO and liquidity: After quarter-end, the October 2016 IPO sold 5.0 million shares at $8.00 per share. The filing describes $37.2 million of proceeds net of underwriting discounts but before offering costs; elsewhere it reports approximately $34.0 million net after underwriting discounts and estimated offering expenses. A concurrent private placement generated $4.7 million net. Preferred stock converted to common stock, and the related-party notes converted into 1,361,023 common shares. Management said cash at quarter-end, IPO proceeds and available credit were expected to fund at least 12 months of anticipated requirements.
- Development and spending: Management expects R&D expenses to increase as it develops next-generation Spin-Torque MRAM (ST-MRAM), including under the GF joint-development agreement. It also expects additional public-company, hiring and sales-and-marketing costs. No specific revenue or earnings guidance is provided.
- GF obligations: The company owed GF $6.2 million at September 30 for joint-development costs; GF could terminate the agreement if amounts were not paid by the specified December 2016 deadline. Everspin reported repaying $4.7 million in November 2016. The agreement is strategically important to advanced MRAM development.
- Manufacturing and concentration: The filing identifies reliance on third-party foundries and suppliers, including a single foundry for higher-density advanced-node products. NXP had exercised an option to terminate the Chandler facility lease effective April 2017; renewal negotiations were underway. Five large end customers together represented 36% of nine-month revenue, though none individually exceeded 10%.
- Other risks and unusual items: Distributor shipments carry price-protection rights and revenue is deferred until resale and final pricing are established; deferred distributor income was $1.6 million at quarter-end. The company had a $1.4 million quarterly net loss, continuing accumulated losses, variable-rate debt and a material weakness in internal control over financial reporting identified for 2014 and 2015. Management described remediation efforts but could not assure they would be sufficient. Disclosure controls were deemed effective at a reasonable-assurance level. No material legal proceedings were reported.
Important facts for investors to verify
- Reconcile IPO proceeds across the filing’s different presentations: $37.2 million before offering costs versus approximately $34.0 million after estimated offering expenses, and confirm actual cash received and use of proceeds.
- Confirm post-IPO cash, debt balances and liquidity, including remaining Ares facility availability and the effect of the $4.7 million GF payment.
- Track GF agreement status, any remaining project-cost obligations, and milestones or delays in ST-MRAM development and commercialization.
- Monitor renewal or replacement of the Chandler manufacturing lease before its stated April 2017 termination date, and continuity of third-party foundry and assembly capacity.
- Assess whether gross-margin improvement persists amid product-price declines, distributor concessions, yield changes and variable licensing revenue.
- Review progress in remediating the material weakness and the potential effects of customer concentration, supplier dependence and ongoing operating losses.