Everspin Technologies, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter filing; Q4 figures are included below where available. Filed March 29, 2017.
Business context
Everspin develops and sells magnetoresistive random access memory (MRAM), discrete and embedded memory technology, sensors, and related licenses and royalties. It serves industrial, automotive and transportation, and enterprise-storage markets. The company reported more than 600 end customers and over 60 million MRAM units shipped. It relies on its Chandler, Arizona fabrication facility and third parties, including GLOBALFOUNDRIES, for manufacturing and development.
Financial performance
| Metric (USD millions, except margin and per-share data) | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $27.094 | $26.546 | +2.1% |
| Product sales | $26.611 | $25.875 | +2.8% |
| Licensing and royalty revenue | $0.483 | $0.671 | -28.0% |
| Gross profit / gross margin | $14.699 / 54.3% | $13.978 / 52.7% | Margin +1.6 points |
| Operating expenses | $30.220 | $31.514 | -4.1% |
| Operating loss | $(15.521) | $(17.536) | Loss narrowed |
| Net loss | $(16.708) | $(18.183) | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $(11.429) | $(14.013) | Loss narrowed |
| Operating cash flow | $(18.539) | $(10.670) | Cash use increased |
FY2016 product-sales growth reflected higher Gen 1 MRAM volume, partly offset by declining legacy sales. Gross margin improved on Gen 1 volume and favorable raw-material pricing. Licensing revenue fell as 2015 included lump-sum IP-transfer payments, while 2016 revenue was primarily subscription licensing and royalties. Research and development expense was $19.233 million, down 9.0%; management expects R&D spending to increase as product development continues. Interest expense rose to $2.347 million from $0.653 million, mainly due to higher debt and debt-discount amortization.
Q4 FY2016: Revenue was $7.064 million, gross profit $3.232 million, and net loss $5.308 million. Reported quarterly gross margin was 45.8%, revised from 50.7% after additional cost of goods sold was recognized in Q4 that had previously been expected in Q1 2017.
Cash, debt and liquidity
- Cash and cash equivalents at year-end were $29.727 million, versus $2.307 million in 2015; working capital was $29.119 million, versus a $0.198 million deficit.
- Operating cash use was $18.539 million; investing cash use was $1.040 million; financing provided $46.999 million.
- October 2016 IPO and concurrent private placement generated net proceeds of approximately $38.5 million. The IPO issued 5.0 million shares at $8.00 each; a further 625,000 shares were sold in the private placement.
- Year-end long-term debt, current and non-current, was $8.102 million. Debt is secured by substantially all assets; the term loan bears a floating rate with an 8.75% floor and matures in June 2019. The $4 million revolving facility matures in June 2017, with availability limited by receivables. The company reported covenant compliance at year-end.
- Management stated cash and available credit were expected to fund anticipated requirements through March 31, 2018. The revolving facility may not be fully available, and additional financing may be needed thereafter.
Changes, outlook and material risks
- Revenue growth remained modest while losses continued. The 2016 net loss improved from 2015, but operating cash use increased materially.
- The October IPO converted preferred stock and convertible notes into common stock, substantially strengthening reported equity and liquidity. The company had an accumulated deficit of $96.4 million and a history of losses.
- Management’s growth strategy depends in part on design wins and adoption of higher-density 256Mb and 1Gb MRAM products; ST-MRAM revenue had not been material to date. No specific revenue or earnings guidance is provided.
- Backlog was $7.4 million at December 31, 2016, but orders can be changed or cancelled without significant penalty and may not predict future sales.
- Key risks include continuing losses and financing needs; reliance on GLOBALFOUNDRIES for advanced-node production and joint development; manufacturing capacity, yields and supply-chain exposure; customer concentration and short-term purchase orders; competition and semiconductor price erosion; and uncertain customer adoption and qualification of new products.
- GLOBALFOUNDRIES is a related party and has specified manufacturing exclusivity for jointly developed ST-MRAM devices. The company amended the development agreement in 2016 to clarify and reschedule project-cost payments; it reported paying past project costs in December 2016.
- Management disclosed material weaknesses in financial-reporting controls: prior weaknesses in closing and reporting processes and an additional 2016 weakness in ERP-related IT general and application controls. Remediation was underway, including staff additions and planned system integration.
- No legal proceeding was identified as likely to have a material adverse effect. The filing identifies no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether advanced-density MRAM products achieve qualification, design wins and commercial volume, and on what timeline.
- Whether cash burn, credit availability and financing plans support operations beyond management’s stated March 31, 2018 runway.
- Whether the reported Q4 gross-margin revision and related cost recognition are fully reflected in subsequent reporting.
- Whether GLOBALFOUNDRIES development, manufacturing capacity, payment terms and royalty arrangements remain on track.
- Progress in remediating the disclosed internal-control weaknesses and integrating the ERP system.
- Customer concentration, distributor sell-through, cancellable backlog, and the timing and variability of licensing revenue.