Everspin Technologies, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; balance sheet compared with December 31, 2016. Unaudited results. Everspin develops and sells MRAM products, embedded technology, and licenses and royalties for industrial, automotive, transportation, and enterprise-storage applications.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $9.0 | $7.2 | $25.8 | $20.0 |
| Gross profit | $5.3 | $4.3 | $15.3 | $11.5 |
| Gross margin | 58.3% | 60.1% | 59.1% | 57.2% |
| Operating expenses | $10.6 | $5.5 | $31.2 | $21.7 |
| Operating loss | $(5.3) | $(1.2) | $(16.0) | $(10.2) |
| Net loss | $(5.4) | $(1.4) | $(16.7) | $(11.4) |
| Adjusted EBITDA, non-GAAP | $(3.8) | $(0.8) | $(12.6) | $(7.5) |
| Basic and diluted loss per share | $(0.43) | $(0.54) | $(1.35) | $(4.40) |
- Revenue mix and growth: Product sales were $8.9 million in Q3, up 27%, and $24.2 million for nine months, up 23%. Licensing and royalty revenue was $0.1 million in Q3 versus $0.2 million, but $1.6 million for nine months versus $0.3 million, including $1.2 million of GLOBALFOUNDRIES (GF) milestone revenue.
- Cash flow: For nine months, operating cash used was $14.5 million (versus $7.3 million), investing cash used was $2.2 million (versus $0.6 million), and financing provided $4.8 million (versus $7.6 million). Cash declined $11.9 million to $17.8 million from year-end 2016.
- Liquidity and balance sheet: Current assets were $30.5 million and current liabilities $10.0 million. Inventory increased to $7.7 million from $5.1 million. Accumulated deficit was $113.2 million; stockholders’ equity was $14.1 million.
- Debt: Net carrying value of debt was $12.1 million at September 30. The May 2017 Silicon Valley Bank facility provided a $12.0 million term loan; interest was 3.50% at quarter-end, with interest-only payments through April 30, 2018. Repayment thereafter follows a 24-month schedule, or 36 months if specified sales milestones are met. A 6% end-of-term fee applies. The company reported covenant compliance.
Changes versus prior comparable periods
- Q3 revenue growth was driven by higher sales volume and mix in first-generation MRAM products; gross margin fell 1.8 percentage points, primarily due to product mix. Nine-month gross margin rose 1.9 points, attributed to mix and improved yields.
- Operating expenses rose 93% in Q3 and 44% for nine months. Increases reflected research and development investment, higher headcount and compensation, public-company costs, and GF development work. The company expects R&D spending to increase further.
- Net losses widened despite higher revenue. Nine-month interest expense fell to $0.6 million from $2.0 million, while a $0.2 million debt-extinguishment loss arose from repayment of the prior facility.
- Cash used in operations nearly doubled year over year, with inventory build and higher losses among the factors cited. Q3 and nine-month EPS comparisons are affected by the much larger weighted-average share count following the 2016 IPO.
Outlook, risks, and unusual items
- Runway and funding: Management believes cash, together with anticipated growth and sales, will fund expected cash requirements through November 30, 2018. This is not a guarantee; future requirements depend on growth and investment needs. Additional financing may be unavailable or may dilute shareholders; cost reductions could impair execution.
- Strategy and risks: The company is investing in second-generation Spin-Torque MRAM (ST-MRAM), but ST-MRAM revenue had not been material. Key risks include customer qualification and design-win timing, customer concentration, declining selling prices, manufacturing yields and inventory, and reliance on third parties—including a single foundry for higher-density advanced-node production.
- Distributor accounting: At September 30, deferred income on distributor shipments was $2.2 million, reflecting $3.3 million deferred revenue less $1.1 million deferred cost of sales. The company planned to adopt the new revenue standard on January 1, 2018 retrospectively; distributor revenue would generally be recognized on sale to distributors using estimated final selling prices and estimated returns and allowances.
- Debt and operating constraints: The credit facility is secured by substantially all assets other than intellectual property and includes liquidity and revenue covenants and restrictions on specified actions, including acquisitions, additional debt, liens, and dividends. Contractual obligations totaled $17.2 million, including debt and operating leases.
- Leadership and related parties: Former CEO Phillip LoPresti resigned effective August 31, 2017, with transition consulting through February 2018 and separation benefits, including accelerated option vesting. The company recorded $0.3 million of Q3 stock-compensation expense related to award modifications. GF and Freescale are related parties; GF development costs and Freescale manufacturing, lease, and customer transactions are material areas to monitor.
- Controls and contingencies: Management deemed disclosure controls effective at a reasonable-assurance level, but disclosed prior material weaknesses in financial reporting processes and IT controls and continued remediation efforts. No material legal proceedings were reported. An October 2017 lease amendment added 17,951 square feet, with $1.1 million of additional payments over the term and 11 months of free rent.
Important facts for investors to verify
- Whether revenue growth, customer demand, and gross margins can persist as product mix and selling prices change.
- Whether the cash runway assumption is borne out given the $14.5 million operating cash outflow for nine months and the planned R&D investment.
- How the 2018 distributor revenue-standard adoption affects reported revenue, margins, and comparability across periods.
- Progress on ST-MRAM qualification, GF milestones, manufacturing yields, and availability of advanced-node foundry capacity.
- Ongoing compliance with credit-facility covenants and repayment terms, and progress in remediating disclosed internal-control weaknesses.
- Exposure to customer and related-party concentration, including distributor arrangements and transactions with GF and Freescale.