EVERSPIN TECHNOLOGIES INC - Quarter Report: 2017 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

OR

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number 001-37900

Everspin Technologies, Inc.

(Exact name of Registrant as specified in its Charter)

 

 

1347 N. Alma School Road, Suite 220

Chandler, Arizona 85224

(Address of principal executive offices including zip code)

 

Registrant’s telephone number, including area code: (480) 347-1111

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    YES  ☒    NO  ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

 

The number of shares of Registrant’s Common Stock outstanding as of November 6, 2017 was 12,766,546. 

 

 

Table of Contents

 

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Everspin Technologies,” and “the Company” refer to Everspin Technologies, Inc. The Everspin logo and other trade names, trademarks or service marks of Everspin Technologies are the property of Everspin Technologies, Inc. This report contains references to our trademarks and to trademarks belonging to other entities. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

 

EVERSPIN TECHNOLOGIES, INC.

Condensed Balance Sheets

(In thousands, except share and per share amounts)

 

 

The accompanying notes are an integral part of these condensed financial statements.

EVERSPIN TECHNOLOGIES, INC.

Condensed Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

 

 

The accompanying notes are an integral part of these condensed financial statements.

EVERSPIN TECHNOLOGIES, INC.

Condensed Statement of Cash Flows

(In thousands)

(Unaudited)

 

 

The accompanying notes are an integral part of these condensed financial statements.

EVERSPIN TECHNOLOGIES, INC.

 

Notes to Condensed Financial Statements

 

1. Organization and Nature of Business

 

Everspin Technologies, Inc. (the “Company”) was incorporated in Delaware on May 16, 2008. The Company’s MRAM solutions offer the persistence of non-volatile memory with the speed and endurance of random access memory (“RAM”) and enable the protection of mission critical data particularly in the event of power interruption or failure. The Company’s MRAM solutions allow its customers in the industrial, automotive and transportation, and enterprise storage markets to design high performance, power efficient and reliable systems without the need for bulky batteries or capacitors.

 

Ability to continue as a going concern 

The Company believes that its existing cash and cash equivalents as of September 30, 2017, coupled with its anticipated growth and sales levels will be sufficient to meet its anticipated cash requirements through November 30, 2018. The Company’s future capital requirements beyond November 30, 2018 will depend on many factors, including its growth rate, the timing and extent of its spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, and the introduction of new products. The Company may be required to seek additional equity or debt financing, and such additional financing may not be available on acceptable terms or at all. If the Company is unable to raise additional capital or generate sufficient cash from operations to adequately fund its operations, it will need to curtail planned activities to reduce costs. Doing so will likely harm its ability to execute on its business plan.

If the Company raises additional funds through issuances of equity, convertible debt securities or other securities convertible into equity, its existing stockholders could suffer significant dilution in their percentage ownership of the Company, and any new equity securities issued could have rights, preferences and privileges senior to those of holders of common stock. If the Company is unable to obtain adequate financing or financing on satisfactory terms, when required, its ability to continue to grow or support its business and to respond to business challenges could be significantly limited.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information required by GAAP for complete financial statements. These unaudited interim condensed financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the Company’s financial information. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other interim period or for any other future year.

 

The accompanying condensed financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2016, included in the Company’s Annual Report on Form 10-K filed with the SEC.

 

Use of Estimates

 

The preparation of the condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed financial statements and the reported amounts of revenues and expenses

during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, fair value of assets and liabilities, inventory, income taxes, common stock, and stock-based compensation. Actual results could differ from those estimates and assumptions.

 

Concentration of Credit Risk

 

Financial instruments that potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents that are held by a financial institution in the United States and accounts receivable. Amounts on deposit with a financial institution may at times exceed federally insured limits. The Company maintains its cash accounts with high credit quality financial institutions and, accordingly, minimal credit risk exists with respect to the financial institutions.

 

Significant customers are those which represent more than 10% of the Company’s total revenue or gross accounts receivable balance at each respective balance sheet date. For the purposes of this disclosure, the Company defines “customer” as the entity that is purchasing the products directly from the Company, which includes the distributors of the Company’s products in addition to end customers that the Company sells to directly. For each significant customer, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable, net are as follows:

 

*Less than 10%

 

 

Fair Value of Financial Instruments

 

The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:

 

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2—Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

 

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

The carrying value of accounts receivable, accounts payable, and other accruals approximate fair value because of the short-term nature of the instruments. The carrying value of the Company’s variable interest rate debt, excluding unamortized debt issuance costs, approximates fair value. The Company’s financial instruments consist of Level 1 assets. Where quoted prices are available in an active market, securities are classified as Level 1. Level 1 assets consist of highly liquid money market funds that are included in cash equivalents.

 

The following table sets forth the fair value of the Company’s financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):

 

 

 

Revenue Recognition

 

The Company recognizes revenue when the following criteria are met: persuasive evidence of an arrangement exists; the price is fixed or determinable; delivery has occurred and title passed; and collectability is reasonably assured. For sales to original equipment manufacturers (“OEMs”) and contract manufacturers, this occurs generally upon shipment. Provisions for product returns and allowances are recorded in the same period as related revenues. The Company analyzes historical returns, current economic trends and changes in customer demand and acceptance of product when evaluating the adequacy of sales returns and other allowances, which are netted against accounts receivable, as these are processed as credits against future purchases or balances outstanding.

 

The Company sells the majority of its products to its distributors at a uniform list price. However, distributors resell the Company’s products to end customers at a very broad range of individually negotiated price points. Distributors are provided with price concessions subsequent to delivery of product to them depending on their end customer and sales price. These concessions are based on a variety of factors, including customer, product, quantity, geography and competitive differentiation. Price protection rights grant distributors the right to a credit in the event of declines in the price of the Company’s products. Under these circumstances, the Company remits back to the distributor a portion of their original purchase price after the resale transaction is completed in the form of a credit against the distributors’ outstanding accounts receivable balance. The credits are on a per unit basis and are not given to the distributor until the distributor provides information regarding the sale to their end customer. Revenue on shipments to distributors is deferred as the price is not fixed or determinable until delivery has been made by the distributor to its customer and the final sales price has been established.

 

At the time of shipment to distributors, the Company records a trade receivable for the selling price as there is a legally enforceable obligation of the distributor to pay for the product delivered, inventory is reduced by the carrying value of goods shipped, and the net of these amounts, the gross profit, is recorded as deferred income on shipments to distributors on the balance sheet. The amount of gross profit that will be ultimately recognized in the statements of operations on such sales could be lower than the deferred income recorded on the balance sheets as a result of credits granted to distributors from the price protection rights. The Company is unable to estimate the credits to the distributors due to the wide variability of negotiated price concessions granted to them.

 

Thus, a portion of the “deferred income on shipments to distributors” balance represents the amount of distributors’ original purchase price that will be credited back to the distributor in the future. The wide range and variability of negotiated price concessions granted to distributors does not allow the Company to accurately estimate the portion of the balance in the deferred income on shipments to distributor accounts that will be credited back to the distributor. Therefore, the Company does not reduce deferred income on shipments to distributors or accounts receivable by anticipated future price concessions rather, price concessions are recorded against deferred income on shipments to distributors when incurred, which is generally at the time the distributor sells the product.

 

At September 30, 2017, the Company had $3.3 million of deferred revenue and $1.1 million of deferred cost of sales, resulting in the recognition of $2.2 million of deferred income on shipments to distributors. At December 31, 2016, the Company had $2.9 million of deferred revenue and $1.1 million of deferred cost of sales, resulting in the recognition of $1.8 million of deferred income on shipments to distributors.

 

Products returned by distributors and subsequently scrapped have historically been immaterial to the Company’s results of operations. The Company routinely evaluates the risk of impairment of the deferred cost of sales component of the deferred income on shipments to distributors account. Because of the historically immaterial amounts of inventory that have been scrapped, and historically rare instances where discounts given to a distributor result in a price less than our cost, the Company believes the deferred costs are recorded at their approximate carrying values.

 

For licenses of technology, recognition of revenue is dependent upon whether the Company delivered rights to the technology, and whether there are future performance obligations. In some instances, the license agreements call for future milestones to be met for amounts to be due from the customer. In such scenarios, revenue is recognized using the milestone method, whereby revenue is recognized upon the completion of substantive milestones once the customers acknowledge the milestones have been met and the collection of the amounts are reasonably assured. Royalties received are recognized when reported to the Company, which generally coincides with the receipt of payment.

 

Net Loss per Common Share

 

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration of potentially dilutive securities. Diluted net loss per common share is the same as basic net loss per common share since the effect of potentially dilutive securities is anti-dilutive.

 

Recently Issued Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014‑09, Revenue from Contracts with Customers. Areas of revenue recognition that will be affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The new standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. As described in the Company's significant accounting policies, the Company currently defers the revenue and cost of sales on shipments to distributors until the distributor sells the product to their end customer. Upon adoption of ASU 2014-09, and subsequent improvements including ASU 2015-14, Deferral of Effective Date, ASU 2016-08, Principal versus Agent Considerations, ASU 2016-10, Identifying Performance Obligations and Licensing, and ASU 2016-12, Narrow Scope Improvements and Practical Expedients, the Company will no longer defer revenue until sale by the distributor to the end customer, but rather, will be required to estimate the effects of returns and allowances provided to distributors and record revenue at the time of sale to the distributor. The Company plans on adopting this standard on January 1, 2018 retrospectively, applying the guidance to each prior period presented. The Company has determined that the most significant change will be related to the accounting for distributor arrangements whereby revenue will be recognized at the time of sale to the distributor at amounts equal to the estimate of the final selling price.  

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting, which is intended to amend the scope of modification accounting for share-based payment arrangements. The amendments in the update provide guidance on types of changes to the terms or conditions of share-based payment awards that would require the Company to apply modification accounting under ASC 718, Compensation-Stock Compensation. This ASU is effective for annual reporting periods beginning after December 15, 2017, and early adoption is permitted. The Company plans on adopting this standard on January 1, 2018 and is currently evaluating the impact that the adoption of the standard will have on its financial statements.

Recently Adopted Pronouncements

 

In July 2015, the FASB issued ASU No. 2015‑11, Simplifying the Measurement of Inventory, which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. The Company adopted this standard as of January 1, 2017 and the impact of its adoption on the Company’s financial statements was not material.

 

In November 2015, FASB issued ASU No. 2015‑17, Balance Sheet Classification of Deferred Taxes, which is intended to simplify and improve how deferred taxes are classified on the balance sheet. The guidance in this ASU eliminates the current requirement to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet and now requires entities to classify all deferred tax assets and liabilities as noncurrent. The guidance is effective for annual periods beginning after December 15, 2016, and for interim periods within those annual periods. Early adoption is permitted. The Company adopted this standard as of January 1, 2017 and the impact of its adoption on the Company’s financial statements was not material.

 

In March 2016, the FASB issued ASU No. 2016‑09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, the determination of forfeiture rates, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016, and early adoption is permitted. The Company adopted this standard as of January 1, 2017 and the impact of its adoption on the Company’s financial statements was not material.

 

 

 

 

3. Balance Sheet Components

 

Inventory

 

Inventory consisted of the following (in thousands):

 

 

Accrued Liabilities

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

4. Commitments and Contingencies

 

Operating Leases

 

The Company leases office space for its corporate headquarters located in Chandler, Arizona and for its design facility located in Austin, Texas. The leases expire in October 2018 and January 2022, respectively. Rent expense is recognized on a straight-line basis over the term of the leases and accordingly, the Company records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability.

 

In January 2017, the Company entered into a five-year sublease agreement with Freescale, a related party, to rent 6,560 square feet of office and laboratory space in Chandler, Arizona, and in March 2017, the Company amended the sublease to increase the space to 10,023 square feet.

 

The Company has an operating lease for its Arizona manufacturing facility, as amended, for certain of the fabrication, laboratory and office premises of Freescale. In March 2017, the Company extended the lease through January 28, 2019 and amended the premises covered to remove laboratory space, decrease fabrication space and expand office space.

 

 

5. Debt

 

Prior Facilities

 

In April 2017, the Company repaid the outstanding balance of $1.1 million on the revolving loan at which time the unamortized balance of the debt discount of $10,000 was recognized as a loss on extinguishment of debt. In May 2017, the Company repaid the outstanding principal balance of $6.2 million on the term loan at which time the unamortized balance of the debt discount was $175,000, and paid a prepayment penalty of $61,000. The unamortized debt discount balance and the prepayment penalty were recognized as a loss on extinguishment of debt in the condensed statements of operations and comprehensive loss.

 

2017 Credit Facility

 

On May 4, 2017, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (“2017 Credit Facility”) for a $12.0 million term loan. The term loan provides for interest at a floating rate equal to the prime rate minus 0.75%. As of September 30, 2017, the interest rate was 3.50%. The term loan provides for a period of interest-only payments through April 30, 2018, followed by fixed principal and interest payments based on either a 24-month amortization schedule or a 36-month amortization schedule if the Company meets certain sales milestones. The Company is required to comply with certain covenants under the 2017 Credit Facility, including requirements to maintain a minimum liquidity ratio, meet certain revenue targets, and restrictions on certain actions without the consent of the lender, such as the disposal and acquisition of its business or property, changes in business, and mergers or acquisitions. An end of term fee of 6% of the amount borrowed must be made when the loan is prepaid or repaid, whether at maturity or as a result of a prepayment or acceleration or otherwise. The additional payment is being accreted using the effective interest method.

 

Security for the 2017 Credit Facility includes all of the Company’s assets except for intellectual property. The 2017 Credit Facility contains customary covenants restricting the Company’s activities, including limitations on its ability to sell assets, engage in mergers and acquisitions, enter into transactions involving related parties, incur indebtedness or grant liens or negative pledges on its assets, make loans or make other investments. Under these covenants, the Company is prohibited from paying dividends with respect to its capital stock. The Company was in compliance with all covenants at September 30, 2017. The 2017 Credit Facility contains a material adverse effect clause which provides that an event of default will occur if, among other triggers, an event occurs that could reasonably be expected to result in a material adverse effect on the Company’s business, operations or condition, or on the Company’s ability to perform its obligations under the term loan. As of September 30, 2017, management does not believe that it is probable that the clause will be triggered within the next twelve months, and therefore the term loan is classified as long-term.

 

 

The carrying value of the Company’s 2017 Credit Facility at September 30, 2017 was as follows (in thousands):

 

 

The carrying value of the Company’s Prior Facilities at December 31, 2016 was as follows (in thousands):

 

 

 

 

 

 

6. Stock-Based Compensation

 

The following table summarizes the stock option activity for the nine months ended September 30, 2017:

 

 

The total grant date fair value of options vested was $236,000 and $129,000 during the three months ended September 30, 2017 and 2016, respectively, and $1.1 million and $415,000 for the nine months ended September 30, 2017 and 2016, respectively.

 

The weighted-average grant date fair value of employee options granted during the three months ended September 30, 2017 and 2016 was $9.22 and $3.86 per share, respectively, and during the nine months ended September 30, 2017 and 2016 was $7.80 and $3.86 per share, respectively.

 

2016 Employee Incentive Plan

 

The Company’s board of directors adopted the 2016 Equity Incentive Plan (the “2016 Plan”) on April 25, 2016, which was subsequently approved on September 20, 2016 by the Company’s stockholders. The 2016 Plan became effective on October 7, 2016, the date the Company’s registration statement was declared effective by the SEC. No further grants will be made under the Company’s 2008 Equity Incentive Plan (the “2008 Plan”). However, any outstanding stock awards granted under the 2008 Plan will remain outstanding, subject to the terms of the Company’s 

2008 Plan and the applicable stock award agreements, until such outstanding stock awards that are stock options are exercised or until they terminate or expire by their terms, or until such stock awards are fully settled, terminated or forfeited.

 

The Company’s 2016 Plan provides for the grant of incentive stock options (“ISOs”), non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensation to employees, directors and consultants. In addition, the Company’s 2016 Plan provides for the grant of performance cash awards to employees, directors and consultants.

 

The maximum number of shares of common stock that may be issued under the Company’s 2016 Plan is 500,000. The number of shares of common stock reserved for issuance under the Company’s 2016 Plan will automatically increase on January 1 of each year, beginning on January 1, 2017, and continuing through and including January 1, 2024, by 3% of the total number of shares of capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Company’s board of directors.

 

2016 Employee Stock Purchase Plan

 

The Company’s board of directors adopted the 2016 Employee Stock Purchase Plan (the “ESPP”) on April 25, 2016, which was subsequently approved on September 20, 2016 by the Company’s stockholders. The purpose of the ESPP is to secure the services of new employees, to retain the services of existing employees and to provide incentives for such individuals to exert maximum efforts toward the Company’s success and that of the Company’s affiliates. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. The board of directors, or a duly authorized committee thereof, will administer the Company’s ESPP.

 

The maximum aggregate number of shares of common stock that may be issued pursuant to the exercise of purchase rights under the Company’s ESPP that are granted to employees or to employees of any of the Company’s designated affiliates is 96,153 shares. Additionally, the number of shares of common stock reserved for issuance under the Company’s ESPP will increase automatically each year, beginning on January 1, 2017, and continuing through and including January 1, 2026, by 1% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or a lesser number as determined by the board of directors. Shares subject to purchase rights granted under the Company’s ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under the Company’s ESPP. The first purchase period under the 2016 ESPP commenced on October 12, 2016 and ended on April 12, 2017. The second purchase period began on April 13, 2017 and ended on October 12, 2017. The Company had 203,210 shares available for future issuance under the Company’s ESPP as of September 30, 2017. Employees purchased 17,924 shares for $122,000 during the nine months ended September 30, 2017.

 

Modification of Stock Awards

 

During the three months ended September 30, 2017, the Company entered into a Separation Agreement with its former Chief Executive Officer which resulted in the acceleration in the vesting of certain unvested stock options as well as the extension of the exercise period for all vested options. As a result of the modification, the Company recorded stock-based compensation expense of $310,000 during the three months ended September 30, 2017 to reflect the revised service period for the stock options and related vesting of shares that would otherwise not have vested.

 

Restricted Stock Units

 

In September 2017, the Company’s board of directors authorized the issuance of Restricted Stock Units (“RSUs”), under the 2016 Plan and adopted a form of Restricted Stock Unit Award Agreement, which is intended to serve as a standard form agreement for RSU grants issued to employees, executive officers, directors and consultants. 

 

The following table summarizes RSU activity for the nine months ended September 30, 2017:

 

 

The fair value of RSUs is determined on the date of grant based on the market price of the Company’s common stock on that date. As of September 30, 2017, there was $149,000 of unrecognized stock-based compensation expense related to RSUs to be recognized over a weighted-average period of 0.9 years.

 

Stock-based Compensation Expense

 

The Company recognized stock-based compensation expense from awards granted to employees and non-employees under its equity incentive plans and from its ESPP as follows, excluding amounts related to GLOBALFOUNDRIES, Inc. (“GF”) (in thousands):

 

 

As of September 30, 2017, there was $6.2 million of total unrecognized compensation expense related to unvested options which is expected to be recognized over a weighted-average period of 3.3 years.

 

Employee Stock-based Compensation

 

Stock-based compensation expense for employees was $685,000 and $279,000 for the three months ended September 30, 2017 and 2016, respectively, and $1.4 million and $480,000 for the nine months ended September 30, 2017 and 2016, respectively.  

 

The Company estimated the fair value of each option using the Black-Scholes option-pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the assumptions below. Each of these inputs is subjective and its determination generally requires significant judgment.

 

 

Non-employee Stock-based Compensation

 

Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options vest. During the three and nine months ended September 30, 2017, the Company granted 12,800 stock options to non-employees. During the three and nine months ended September 30, 2016, the Company granted 21,633 stock

options to non-employees. As of September 30, 2017, options to purchase 24,453 shares of common stock were outstanding with a weighted-average exercise price of $5.57 per share. Stock-based compensation expense for non-employees was $(13,000) and $30,000 for the three months ended September 30, 2017 and 2016, respectively, and $86,000 and $40,000 for the nine months ended September 30, 2017 and 2016, respectively.

 

 

7. Related Party Transactions

 

Joint Development Agreement—GLOBALFOUNDRIES

 

On October 17, 2014, the Company entered into a Joint Development Agreement (“JDA”) with GF, a related party due to its equity ownership in the Company, for the joint development of the Company’s Spin Torque MRAM (“ST-MRAM”) technology. The term of the agreement is the later of four years from the effective date or until the completion, termination or expiration of the last statement of work entered into pursuant to the JDA. The JDA also states that the specific terms and conditions for the production and supply of the developed ST-MRAM technology would be pursuant to a separate manufacturing agreement entered into between the parties.

 

Under the JDA, each party licenses its relevant intellectual property to the other party. For certain jointly developed works, the parties have agreed to follow an invention allocation procedure to determine ownership. In addition, GF possesses the exclusive right to manufacture the Company’s discrete and embedded ST-MRAM devices developed pursuant to the agreement until the earlier of three years after the qualification of the MRAM device for a particular technology node or four years after the completion of the relevant statement of work under which the device was developed. For the same exclusivity period associated with the relevant device, GF agreed not to license intellectual property developed in connection with the JDA to named competitors of the Company.

 

Generally, unless otherwise specified in the agreement or a statement of work, the Company and GF share project costs, which do not include personnel or production qualification costs, equally under the JDA. If GF manufactures, sells or transfers to customers wafers containing production quantified ST-MRAM devices that utilize certain design information, GF will be required to pay the Company a royalty. The term of the agreement is four years and is extended until the completion of any development work, if later.

 

As of September 30, 2017, $25,000 was receivable from GF. There were no amounts receivable from GF as of December 31, 2016. As of September 30, 2017 and December 31, 2016, $1.6 million and $979,000, respectively, were payable to GF for the Company’s share of the project costs under the JDA. During the three and nine months ended September 30, 2017, the Company purchased research and development equipment from GF for $485,000 and $747,000, respectively, which were included in Property and equipment, net as of September 30, 2017. There were no such purchases from GF as of December 31, 2016. The Company incurred project costs, recognized as research and development expense, of $850,000 and $480,000 for the three months ended September 30, 2017 and 2016 respectively, and $4.1 million and $2.4 million for the nine months ended September 30, 2017 and 2016, respectively. The Company entered into a Statement of Work #4B (the “SOW 4B”) under the JDA with GF effective August 31, 2016. Under SOW 4B, the Company will collaborate with GF in planning, designing and supporting evaluation of 22nm embedded MRAM arrays. The Company is eligible to receive three substantive milestone payments from this collaboration: (a) $569,000 was due upon the delivery of the Company’s database of bias system schematics; (b) $650,000 was due upon the delivery of a Graphic Design Database System package; and (c) $406,000 is due upon demonstration that the embedded MRAM array meets the specifications agreed upon by the two parties. Two of the milestones were achieved during the nine months ended September 30, 2017. There was no revenue recognized from GF for the three months ended September 30, 2017. The Company recognized revenue of $1.2  million from GF in the nine months ended September 30, 2017. There was no revenue from GF for the three and nine months ended September 30, 2016.

 

On October 21, 2014, GF participated, along with other investors, in the Company’s Series B redeemable convertible preferred stock financing and purchased 192,307 shares at $26.00 per share. Contemporaneously, the Company sold 461,538 shares of its common stock to GF at a discounted price of $0.00026 per share. The common shares vest upon the achievement of a goal as set forth in the Statement of Work #1 (the “SOW”) under the JDA. The unvested common shares are subject to repurchase by the Company, if the JDA is terminated for any reason, for a one-year period after such termination, at a price that is the lower of the original price paid by GF or the fair value of the Company’s common stock as of the date of repurchase. The Company has determined that the issuance of these shares of common stock to GF represents compensation for services to be provided under the JDA. Accordingly, the shares are

accounted for similar to a stock award granted to a non-employee of the Company and are remeasured to their fair value as they vest. Although the shares issued do not commence vesting until the achievement of the product qualification (the “Initial Measurement Date”), the Company has deemed it probable that the qualification requirement will be met and compensation expense related to the shares issued is being recognized prior to the Initial Measurement Date. Due to the vesting conditions, there will be multiple measurement dates, occurring on the Initial Measurement Date and at the end of each month thereafter. The fair value of vesting shares is effectively fixed at each measurement date while the fair value of the remaining unvested shares will be remeasured each subsequent measurement date until the shares are fully vested. During the year ended December 31, 2016, GF achieved the product qualification as set forth under the SOW. As such, a total of 211,538 shares of common stock became vested on August 21, 2016, the designated Initial Measurement Date. Subsequent to the Initial Measurement Date through September 30, 2017, an additional 125,000 shares of common stock became vested. As of September 30, 2017, there were 125,000 shares unvested that were subject to repurchase.

 

The Company recognized non-cash compensation expense of $508,000 and $(691,000) during the three months ended September 30, 2017 and 2016, respectively, and $1.2 million and $751,000 for the nine months ended September 30, 2017 and 2016, respectively, in research and development expense related to the vesting of the shares of common stock. The Company recognizes compensation expense based on the estimated fair value of the common stock at each reporting period, which was $17.09 and $8.29 per share as of September 30, 2017 and December 31, 2016, respectively.

 

Transactions with Freescale

 

The Company has entered into various transactions with Freescale (a wholly-owned subsidiary of NXP), a related party due to its equity ownership in the Company. The Company leases its manufacturing facility in Chandler, Arizona, from Freescale and total rent expense was $250,000 and $268,000 during the three months ended September 30, 2017 and 2016, respectively, and $718,000 and $803,000 for the nine months ended September 30, 2017 and 2016, respectively. Freescale also performs processing of the Company’s products in its facility which are capitalized as part of the cost of inventory. The total processing costs incurred by the Company were $786,000 and $702,000 for the three months ended September 30, 2017 and 2016, respectively, and $2.4 million and $2.0 million for the nine months ended September 30, 2017 and 2016, respectively. In addition, Freescale is one of the Company’s largest customers for the sale of embedded wafers, and total revenue from Freescale was $610,000 and $662,000 during the three months ended September 30, 2017 and 2016, respectively, and $1.8 million and $1.4 million for the nine months ended September 30, 2017 and 2016, respectively. In the three and nine months ended September 30, 2017, the Company purchased wafers for its Condor product from Freescale for $317,000 and $708,000, respectively, which are included in inventory as of September 30, 2017. Amounts due from Freescale were $458,000 and $486,000 at September 30, 2017 and December 31, 2016, respectively. Amounts due to Freescale were $469,000 and $380,000 at September 30, 2017 and December 31, 2016, respectively.

 

8. Net Loss Per Common Share

 

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share amounts):

 

 

The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per common share for the periods presented, because their inclusion would be anti-dilutive:

 

 

 

 

 

9. Subsequent Events

 

In October 2017, the Company entered into an amendment to its lease with Freescale in Chandler, Arizona to add 17,951 square feet of office space. The initial term of this amendment to the lease ends on January 31, 2022. The amendment provides the Company with 11 months free rent for the additional space, and total additional lease payments under the amendment will be $1.1 million over the initial lease term.

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed financial statements and related notes included in Part I, Item 1 of this report and with our audited financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Forward-Looking Statements

 

This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, strategies, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

 

Overview

 

We are the leading provider of MRAM solutions. Our MRAM solutions offer the persistence of non-volatile memory, a type of memory that retains information even in the absence of power, with the speed and endurance of random access memory (RAM), and enable the protection of mission critical data particularly in the event of power interruption or failure. Our MRAM solutions allow our customers in the industrial, automotive and transportation, and enterprise storage markets to design high performance, power efficient and reliable systems without the need for bulky batteries or capacitors. We are the only provider of commercially available MRAM solutions, and over the past eight years we have shipped over 60 million MRAM units.

 

We drive our revenue from the sale of our MRAM-based products in discrete unit form, as embedded technology, and through licensing and royalties of our MRAM technology.

 

We work directly with our customers to have our MRAM devices designed into and qualified for their products. Although we maintain direct sales, support, and development relationships with our customers, once our products are designed into a customer’s product, we sell a majority of our products to those customers through distributors. We generated 80% and 76% for the three months ended September 30, 2017 and 2016, respectively, and 75% and 79% for the nine months ended September 30, 2017 and 2016, respectively, of our revenue from products sold through distributors.

 

We maintain a direct selling relationship, for strategic purposes, with several key customer accounts. Our direct sales personnel and representatives are organized into three primary regions: North America; Europe, Middle East and Africa (EMEA); and Asia-Pacific (APAC). In North America, our revenue was $1.7 million and $2.1 million for the three months ended September 30, 2017 and 2016, and $4.5 million and $5.0 million for the nine months ended September 30, 2017 and 2016, respectively. In EMEA, our revenue was $2.0 million and $1.5  million for the three months ended September 30, 2017 and 2016, respectively, and $5.4 million and $4.1 million for the nine months ended September 30, 2017 and 2016, respectively. In APAC, our revenue was $5.3 million and $3.6 million for the three months ended September 30, 2017 and 2016, respectively, and $15.9 million and $10.9 million for the nine months ended September 30, 2017 and 2016, respectively. We recognize revenue by geography based on the region in which our products are sold, and not to where the end products are shipped.

 

We leverage both internal and outsourced capabilities to manufacture our MRAM products. We purchase industry-standard complementary metal-oxide semiconductor (“CMOS”) wafers from semiconductor foundries and complete the fabrication by inserting our magnetic-bit technology at our 200mm fabrication facility in Chandler, Arizona. We believe this allows us to streamline research and development, rapidly prototype new products, and bring new products to market quickly and cost effectively. This strategy significantly reduces the capital investment that would otherwise be required to operate manufacturing facilities of our own. We intend to utilize leading semiconductor foundries, including GLOBALFOUNDRIES, to support high-volume production of our high density MRAM products on 300mm wafers at advanced process nodes.

 

During the three and nine months ended September 30, 2017, we continued to invest in research and development to support the development and production of our second generation of MRAM technology. We believe our continued investment will allow us to continue to develop and deploy products based on our Spin-Torque MRAM (“ST-MRAM”) technology. Our research and development expenses were $6.4 million and $3.1 million for the three months ended September 30, 2017 and 2016, respectively, and $19.2 million and $14.3 million for the nine months ended September 30, 2017 and 2016, respectively. We expect that our research and development expenses will increase in the future as we continue to develop our MRAM technology internally and through our joint development agreement with GLOBALFOUNDRIES.

 

Our principal executive offices are located in Chandler, Arizona. The facility accommodates our principal sales, marketing and research and development. Also in Chandler, we lease office space, clean room space, and laboratory space for our 200mm production and research and development functions. Our primary product design personnel are located in our office in Austin, Texas.

 

We recorded revenue of $9.0 million and $7.2 million for the three months ended September 30, 2017 and 2016, respectively, and $25.8 million and $20.0 million for the nine months ended September 30, 2017 and 2016, respectively; gross margin was 58.3% and 60.1% for the three months ended September 30, 2017 and 2016, respectively and 59.1%  and 57.2% for the nine months ended September 30, 2017 and 2016, respectively; and our net loss was  $5.4 million and $1.4 million for the three months ended September 30, 2017 and 2016, respectively, and $16.7 million and $11.4 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, we had 94 employees, approximately half of whom are engaged in research and development.

 

Key Metrics

 

We monitor a variety of key financial metrics to help us evaluate growth trends, establish budgets, measure the effectiveness of our business strategies and assess operational efficiencies. These financial metrics include revenue, gross margin, operating expenses and operating income determined in accordance with GAAP. Additionally, we monitor and project cash flow to determine our sources and uses for working capital to fund our operations. We also monitor Adjusted EBITDA, a non-GAAP financial measure.  We define Adjusted EBITDA as net income or loss adjusted for interest expense, tax, depreciation and amortization, stock-based compensation expense, and compensation expense related to the vesting of common stock held by GLOBALFOUNDRIES resulting from our joint development agreement.

 

Our management and board of directors use Adjusted EBITDA to understand and evaluate our operating performance and trends, to prepare and approve our annual budget and to develop short-term and long-term operating and financing plans. Accordingly, we believe that Adjusted EBITDA provides useful information for investors in understanding and evaluating our operating results in the same manner as our management and our board of directors.

 

The following table presents a reconciliation of net loss, the most directly comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated:

 

 

 

Factors Affecting Our Results of Operations

 

Design wins. In order to continue to grow our revenue, we must continue to achieve design wins for our MRAM products. We consider a design win to occur when an original equipment manufacturer (“OEM”) or contract manufacturer notifies us that it has selected one of our products to be incorporated into a product or system under development. Because the life cycles for our customers’ products can last for several years, if these products have successful commercial introductions, we expect to continue to generate revenues over an extended period of time for each successful design win.

 

Customer acceptance of our technology and customer product success. In order for our customers to use our products, they may have to redesign certain components of their existing designs. We have established relationships with several controller companies, including Broadcom (formerly LSI and Avago) and Microsemi (formerly PMC-Sierra), and IP core companies, including Cadence, Northwest Logic and Altera (now part of Intel), to accelerate the implementation of our MRAM solutions into our customers end products. Delays in our customers’ design cycles may have adverse effects on the demand, and therefore sales, of our products.

 

Customer concentration.  A relatively small number of end customers have historically accounted for a significant percentage of our revenue. Revenue, including through distributors, from NXP, STMicroelectronics, Novomatic Gaming Industries, Broadcom and Dell, collectively, accounted for approximately 32% and 34% of our total revenue in the three and nine months ended September 30, 2017, respectively. None of these customers accounted for in excess of 10% of our total revenue in the three and nine months ended September 30, 2017.  Revenue, including through distributors, from Dell, Broadcom, STMicroelectronics, NXP, and Hyundai Mobis, collectively, accounted for 39% and 36% of our total revenue in the three and nine months ended September 30, 2016, respectively. None of these customers accounted for in excess of 10% of our total revenue in the three and nine months ended September 30, 2016. It would be difficult to replace lost revenue resulting from the loss, reduction, cancellation or delay in purchase orders by any one of these customers. Consolidation among our customers may further concentrate our customer base and expose us to increased risks relating to increased customer concentration. In addition, any significant pricing pressure exerted by a significant customer could adversely affect our operating results.

 

Pricing, product cost and gross margins of our products. Our gross margin has been, and will continue to be, affected by a variety of factors, including the timing of changes in pricing, shipment volumes, new product introductions, changes in product mix, changes in our purchase price of fabricated wafers, assembly and test service expenses, manufacturing yields and inventory write downs, if any. In general, newly introduced products, and products with higher densities and performance, tend to be priced higher than older, more mature products. Average selling prices in the semiconductor industry typically decline as products mature. Consistent with this historical trend, we expect that the average selling prices of our products will decline as they mature. In the normal course of business, we seek to offset the effect of declining average selling prices on existing products by reducing manufacturing expenses and introducing newer, higher value-added products. If we are unable to maintain overall average selling prices or to offset any declines in average selling prices with savings on product costs, our gross margin will decline.