Everspin Technologies, Inc. — Q2 2017 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2017. Everspin develops and sells magnetoresistive random-access memory (MRAM) products, embedded technology, licenses and royalties for industrial, automotive, transportation and enterprise-storage applications. The company reports that it had shipped more than 60 million MRAM units since 2008.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $8.925 | $6.659 | $16.805 | $12.866 |
| Gross profit / margin | $5.792 / 64.9% | $3.500 / 52.6% | $10.009 / 59.6% | $7.162 / 55.7% |
| Operating loss | $(4.789) | $(5.035) | $(10.664) | $(9.052) |
| Net loss | $(5.187) | $(5.416) | $(11.273) | $(9.956) |
| Net loss per share, basic and diluted | $(0.42) | $(2.12) | $(0.91) | $(3.90) |
| Adjusted EBITDA, non-GAAP | $(3.864) | $(3.492) | $(8.802) | $(6.739) |
- Q2 revenue rose 34%; product sales increased 22%, primarily on higher volume and mix of first-generation MRAM products. Six-month revenue rose 31%, with product sales up 20%.
- Licensing and royalty revenue was $0.863 million in Q2 and $1.523 million for the half, largely reflecting GLOBALFOUNDRIES (GF) development milestones. This revenue is variable and tied to a small number of transactions.
- Operating expenses increased 24% in Q2 and 28% for the half. Higher public-company professional costs, staffing, sales and marketing, and GF development spending contributed. Management expects R&D spending to increase as it develops MRAM products and technology.
- Q2 gross margin improved substantially, reflecting product mix, higher Gen 1 yields and licensing revenue. A test-program correction also recovered previously rejected units, providing a one-time benefit of about two margin points. Management expects future margins to improve versus historical levels, but not to match Q2’s one-time uplift.
- At June 30, cash and equivalents were $21.176 million, versus $29.727 million at year-end 2016. Current assets were $33.011 million and current liabilities $7.394 million. The accumulated deficit was $107.712 million.
- For the six months, operating cash use was $11.290 million, investing cash use $1.704 million, and financing cash provided $4.443 million. Cash decreased $8.551 million. Inventory rose $1.584 million, primarily to support anticipated demand and backlog.
- Net debt carrying value was $11.994 million at June 30. In May, Everspin borrowed $12 million under a new Silicon Valley Bank term facility and used proceeds in part to repay prior debt. The facility bears interest at prime minus 0.75% (3.50% at June 30), has interest-only payments through April 2018, and then amortizes over 24 or 36 months depending on sales milestones. It is secured by substantially all assets except intellectual property, includes a 6% end-of-term fee and financial covenants, and prohibits dividends. The company reported compliance with covenants.
Changes, outlook and risks
- Management believes cash on hand, together with anticipated growth and sales, will fund expected cash requirements through August 31, 2018. Funding needs beyond that depend on growth, R&D, sales and marketing investment, and new-product introductions; additional financing may not be available on acceptable terms.
- Five end customers collectively represented approximately 35% of first-half revenue; one exceeded 10%. The company warns that loss, reduced orders or pricing pressure from major customers could materially affect results. Distributor sales represented 68% of Q2 revenue and 73% of first-half revenue.
- Related-party activity is significant: Q2 sales to Freescale were $0.627 million, while GF milestone revenue was $0.650 million. The filing reports $1.2 million of GF revenue for the first half. Verify the nature, timing and repeatability of related-party sales and milestone income.
- Manufacturing depends on third parties, including a single foundry, GF Singapore, for higher-density products on advanced nodes. Capacity, yield, supplier pricing, qualification delays and supply interruptions are identified risks.
- The company has incurred recurring losses and cautions that it may need additional capital. ST-MRAM revenue had not been material to date; future growth depends partly on product development, customer design wins and adoption.
- The company plans to adopt the new revenue standard on January 1, 2018. It expects distributor revenue accounting to change from recognition upon distributor resale to recognition at sale to the distributor, with estimates for returns and allowances; the financial impact was still being evaluated.
- Management said disclosure controls were effective at a reasonable-assurance level, while also disclosing previously identified material weaknesses in financial-reporting processes and ERP controls. Remediation was ongoing; the external auditor had not attested to internal-control effectiveness.
- No material legal proceedings were reported. The filing identifies no off-balance-sheet arrangements and states there were no material changes in contractual obligations other than debt refinancing.
Important facts for investors to verify
- Whether the stated cash runway through August 2018 is supported by actual sales, cash burn and financing availability.
- How much of revenue and margin improvement is sustainable versus variable GF milestone income and the one-time Q2 yield recovery.
- Progress in ST-MRAM product qualification, design wins and commercialization, including reliance on GF and other suppliers.
- Customer and distributor concentration, and the potential effect of pricing concessions, product returns and the upcoming revenue-recognition change.
- Compliance with loan covenants, repayment terms and the 6% end-of-term fee, alongside progress remediating material weaknesses in internal controls.