Everspin Technologies, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; filed August 8, 2018. Everspin develops and sells MRAM products, licenses and royalties, and related services for industrial, automotive, transportation and enterprise storage markets. Financial amounts below are in U.S. dollars; “six months” means the six months ended June 30.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $10.8m | $8.9m | $25.6m | $16.8m |
| Gross profit | $5.3m | $5.8m | $15.3m | $10.0m |
| Gross margin | 49.3% | 64.9% | 59.6% | 59.6% |
| Operating expenses | $11.8m | $10.6m | $22.9m | $20.7m |
| Net loss | $6.6m | $5.2m | $7.9m | $11.3m |
| Net loss per share, diluted | $0.40 | $0.42 | $0.50 | $0.91 |
| Adjusted EBITDA, non-GAAP | $(5.1)m | $(3.9)m | $(4.9)m | $(8.8)m |
Q2 product sales were $9.4m, up 31%; licensing, royalty and other revenue was $1.3m, down 24%. For the six months, product sales rose 36% to $18.8m and licensing, royalty and other revenue rose to $6.8m, including a $5.0m non-refundable license fee recognized in Q1. The company attributed Q2’s lower gross margin primarily to product mix and lower yields on Toggle and MRAM products; six-month margin was flat as the license event offset lower MRAM yields.
Research and development spending was $6.8m in Q2 and $13.3m for six months. Management expects R&D expense to increase as it develops MRAM technology, including through its GLOBALFOUNDRIES joint development agreement. Sales and marketing and general and administrative expenses also increased year over year.
Cash, debt and liquidity
- Cash and cash equivalents were $32.7m at June 30, versus $13.0m at December 31, 2017. Current assets were $48.7m and current liabilities $15.2m.
- Operating cash use was $4.5m for the six months, compared with $11.3m a year earlier. Investing cash use was $0.3m, primarily equipment purchases. Financing provided $24.6m, principally net proceeds from the February follow-on offering; the company sold 3.77m shares at $7.00 per share.
- Balance-sheet long-term debt, including current and noncurrent portions, was approximately $11.4m. The SVB term loan was secured by company assets other than intellectual property; the company reported covenant compliance at June 30.
- In July, the credit facility was amended to extend interest-only payments through December 31, 2018, with principal and interest payments to follow. The amendment provides for return of prior principal payments and raises the end-of-term fee to 7%; the filing does not clearly quantify the cash returned. SVB’s existing warrants were cancelled and a new warrant for 9,375 shares at $8.91 was issued.
- Management stated that available cash and anticipated sales should fund expected cash requirements for at least 12 months from the financial statement issuance date. It also cautioned that future financing may be needed and may not be available on acceptable terms.
Material changes, outlook and risks
- Q2 revenue growth did not translate into higher gross profit: cost of sales rose 74%, substantially faster than revenue, and net loss widened year over year. For the six-month period, revenue growth and the one-time license fee accompanied a narrower net loss.
- Revenue recognition standard Topic 606 was adopted January 1, 2018 using the modified retrospective method. Prior periods were not restated. Distributor revenue is now generally recognized upon delivery to distributors with estimated concessions recorded at that time. The filing’s adoption-impact tables indicate reported six-month 2018 revenue was $1.5m higher and net loss $1.3m lower than under the prior standard; Q2 revenue was $0.7m higher and net loss $0.8m lower. This affects year-over-year comparability.
- Management identified product design wins, customer adoption and successful production ramp as important to growth. The company was ramping 40nm 256Mb STT-MRAM production; it reported no sales of its 1Gb MRAM product to date. It cited delays in developing the 1Gb product as a risk.
- Customer and channel concentration are notable: distributors represented 78% of Q2 revenue and 65% for the six months. Six customers collectively accounted for about 47% of Q2 and 60% of six-month revenue. A small number of license transactions can also cause substantial revenue and margin variability.
- Manufacturing risks include dependence on third parties and a single foundry, GLOBALFOUNDRIES, for advanced-node high-density products; production yields were a specific pressure in the quarter. Other cited risks include semiconductor price erosion, customer order changes, lengthy qualification cycles, competition, and the possibility of continued losses or additional capital needs.
- Management stated that it expects gross margins to fluctuate and that R&D, G&A and sales and marketing expenses may rise as the company develops products and expands operations. The filing provides no quantitative revenue or earnings guidance.
- The company adopted Topic 606 and other accounting updates; adoption of the stock-compensation and cash-flow standards was not material. A CEO option repricing produced $0.6m of incremental compensation value. No material legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether MRAM production yields and Q2 gross margin recover, and whether product sales growth persists without relying on the one-time license fee.
- Progress on 256Mb customer adoption and the development, qualification and commercialization timing of 1Gb MRAM.
- Customer concentration, distributor price concessions and returns, and the durability of orders from major customers.
- The amended SVB loan’s repayment schedule, cash returned, covenants, revenue milestones and end-of-term fee.
- Cash burn relative to the stated 12-month liquidity outlook, and whether further financing will be required.
- The impact of Topic 606 on comparability; the filing’s reported and “without adoption” figures should be distinguished when assessing trends.