mram_Current_Folio_10Q

Table of Contents

 

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, 2018

 

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)


 

Delaware

    

26-2640654

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

5670 W. Chandler Boulevard, Suite 100

Chandler, Arizona 85226

(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 every Interactive Data File required to be submitted 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 such files).    YES      NO  

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

  

 

Small reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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 2, 2018 was 17,094,074.

 

 


 

Table of Contents

Table of Contents

 

 

 

 

 

 

    

 

Page

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. 

 

Financial Statements 

3

 

 

Condensed Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

3

 

 

Condensed Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017 (unaudited)

4

 

 

Condensed Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited)

5

 

 

Notes to Condensed Financial Statements (unaudited)

6

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4. 

 

Controls and Procedures

37

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

Item 1. 

 

Legal Proceedings

38

Item 1A. 

 

Risk Factors

38

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3. 

 

Defaults Upon Senior Securities

59

Item 4. 

 

Mine Safety Disclosures

59

Item 5. 

 

Other Information

59

Item 6. 

 

Exhibits

59

EXHIBIT INDEX 

60

SIGNATURES 

61

 

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.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

 

EVERSPIN TECHNOLOGIES, INC.

Condensed Balance Sheets

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

2018

 

2017

 

 

(Unaudited)

 

(See Note 2)

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

31,438

 

$

12,950

Accounts receivable, net

 

 

5,582

 

 

4,041

Inventory

 

 

9,482

 

 

9,837

Prepaid expenses and other current assets

 

 

436

 

 

590

Total current assets

 

 

46,938

 

 

27,418

Property and equipment, net

 

 

4,438

 

 

3,946

Other assets

 

 

73

 

 

73

Total assets

 

$

51,449

 

$

31,437

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

2,847

 

$

2,920

Accrued liabilities

 

 

8,588

 

 

3,748

Deferred income on shipments to distributors

 

 

 —

 

 

1,720

Current portion of long-term debt

 

 

4,472

 

 

3,987

Total current liabilities

 

 

15,907

 

 

12,375

Long-term debt, net of current portion

 

 

7,928

 

 

8,178

Total liabilities

 

 

23,835

 

 

20,553

Commitments and contingencies

 

 

  

 

 

  

Stockholders’ equity:

 

 

  

 

 

  

Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized; no shares issued and outstanding as of September 30, 2018 and December 31, 2017

 

 

 —

 

 

 —

Common stock, $0.0001 par value per share; 100,000,000 shares authorized; 17,065,846 and 12,817,201 shares issued and outstanding as of September 30, 2018 and December 31, 2017

 

 

 2

 

 

 1

Additional paid-in capital

 

 

158,125

 

 

128,422

Accumulated deficit

 

 

(130,513)

 

 

(117,539)

Total stockholders’ equity

 

 

27,614

 

 

10,884

Total liabilities and stockholders’ equity

 

$

51,449

 

$

31,437

 

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

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EVERSPIN TECHNOLOGIES, INC.

Condensed Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Product sales

 

$

10,469

 

$

8,323

 

$

29,283

 

$

22,171

 

Licensing, royalty, and other revenue

 

 

1,049

 

 

685

 

 

7,853

 

 

3,642

 

Total revenue

 

 

11,518

 

 

9,008

 

 

37,136

 

 

25,813

 

Cost of sales

 

 

6,109

 

 

3,753

 

 

17,235

 

 

10,549

 

Gross profit

 

 

5,409

 

 

5,255

 

 

19,901

 

 

15,264

 

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

Research and development

 

 

6,453

 

 

6,420

 

 

19,706

 

 

19,236

 

General and administrative

 

 

2,913

 

 

3,031

 

 

9,461

 

 

8,669

 

Sales and marketing

 

 

1,582

 

 

1,112

 

 

4,661

 

 

3,331

 

Total operating expenses

 

 

10,948

 

 

10,563

 

 

33,828

 

 

31,236

 

Loss from operations

 

 

(5,539)

 

 

(5,308)

 

 

(13,927)

 

 

(15,972)

 

Interest expense

 

 

(229)

 

 

(178)

 

 

(662)

 

 

(584)

 

Other income, net

 

 

139

 

 

40

 

 

315

 

 

83

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

(246)

 

Net loss and comprehensive loss

 

$

(5,629)

 

$

(5,446)

 

$

(14,274)

 

$

(16,719)

 

Net loss per common share, basic and diluted

 

$

(0.33)

 

$

(0.43)

 

$

(0.88)

 

$

(1.35)

 

Weighted-average shares used to compute net loss per common share, basic and diluted

 

 

16,944,660

 

 

12,559,812

 

 

16,130,882

 

 

12,425,390

 

 

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

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EVERSPIN TECHNOLOGIES, INC.

Condensed Statement of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2018

    

2017

 

Cash flows from operating activities

 

 

  

 

 

  

 

Net loss

 

$

(14,274)

 

$

(16,719)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

  

 

 

  

 

Depreciation and amortization

 

 

1,069

 

 

837

 

Loss on disposal of property and equipment

 

 

19

 

 

 —

 

Stock-based compensation

 

 

2,064

 

 

1,511

 

Non-cash loss on extinguishment of debt

 

 

 —

 

 

185

 

Non-cash interest expense

 

 

286

 

 

188

 

Compensation expense related to vesting of common stock to GLOBALFOUNDRIES

 

 

709

 

 

1,224

 

Changes in operating assets and liabilities:

 

 

 

 

 

  

 

Accounts receivable

 

 

(1,876)

 

 

(527)

 

Inventory

 

 

309

 

 

(2,628)

 

Prepaid expenses and other current assets

 

 

154

 

 

320

 

Other assets

 

 

 —

 

 

(11)

 

Accounts payable

 

 

(140)

 

 

(333)

 

Accrued liabilities

 

 

4,840

 

 

1,109

 

Deferred income on shipments to distributors

 

 

 —

 

 

323

 

Shipping term reversal

 

 

(39)

 

 

 —

 

Net cash used in operating activities

 

 

(6,879)

 

 

(14,521)

 

Cash flows from investing activities

 

 

  

 

 

  

 

Purchases of property and equipment

 

 

(1,513)

 

 

(2,170)

 

Net cash used in investing activities

 

 

(1,513)

 

 

(2,170)

 

Cash flows from financing activities

 

 

  

 

 

  

 

Proceeds from the issuance of common stock, net of offering costs

 

 

24,524

 

 

 —

 

Proceeds from debt

 

 

1,000

 

 

12,000

 

Payments on debt

 

 

(1,000)

 

 

(8,356)

 

Payments of debt issuance costs

 

 

 —

 

 

(49)

 

Payments on capital lease obligation

 

 

(8)

 

 

(7)

 

Proceeds from exercise of stock options and purchase of shares in employee stock purchase plan

 

 

2,364

 

 

1,218

 

Net cash provided by financing activities

 

 

26,880

 

 

4,806

 

Net increase (decrease) in cash and cash equivalents

 

 

18,488

 

 

(11,885)

 

Cash and cash equivalents at beginning of period

 

 

12,950

 

 

29,727

 

Cash and cash equivalents at end of period

 

$

31,438

 

$

17,842

 

Supplementary cash flow information:

 

 

 

 

 

  

 

Interest paid

 

$

370

 

$

396

 

Non-cash investing and financing activities:

 

 

  

 

 

  

 

Purchase of property and equipment in accounts payable

 

$

183

 

$

764

 

Issuance of warrants with debt

 

$

43

 

$

 —

 

 

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

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EVERSPIN TECHNOLOGIES, INC.

 

Notes to Unaudited 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 magnetoresistive (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, 2018, coupled with its anticipated growth and sales levels will be sufficient to meet its anticipated cash requirements for at least the next twelve months from the financial statement issuance date. The Company’s future capital requirements 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 at some point in the future to seek additional equity or debt financing, to sustain operations beyond that point, 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.

 

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, 2017 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, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 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, 2017, 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, and stock-based compensation. Actual results could differ from those estimates and assumptions.

 

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Accounts receivable, net

 

The Company estimates credits to distributors based on the historical rate of credits provided to distributors relative to sales. At September 30, 2018, the allowance for product returns and the allowance for price concessions were $230,000 and $362,000, respectively. At December 31, 2017, the allowance for product returns and the allowance for price concessions were $147,000 and $0, respectively.

 

Accounts receivable, net consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

2018

 

2017

Trade accounts receivable

 

$

5,687

 

$

4,188

Unbilled accounts receivable

 

 

487

 

 

 —

Allowance for accounts receivable

 

 

(592)

 

 

(147)

Accounts receivable, net

 

$

5,582

 

$

4,041

 

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 net 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 or licenses 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

Revenue

 

Accounts Receivable, net

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

As of

 

As of

 

 

 

 

September 30, 

 

September 30, 

 

September 30, 

 

December 31, 

 

 

Customers

    

2018

    

2017

    

2018

    

2017

    

2018

    

2017

 

 

Customer A

 

13

%

*

 

13

%

*

 

*

 

11

%

 

Customer B

 

13

%

16

%

13

%

14

%  

*

    

*

 

 

Customer C

 

10

%

18

%

*

 

17

%  

*

    

*

 

 

Customer D

 

10

%

*

 

*

 

*

 

11

%  

*

 

 

Customer E

 

*

 

*

 

14

%

*

 

*

    

*

 

 

Customer F

 

*

 

*

 

*

 

*

 

17

%  

*

 

 

Customer G

 

*

 

*

 

*

 

*

 

12

%  

*

 

 

Customer H

 

*

 

*

 

*

 

*

 

*

 

15

%

 

Customer I

 

*

 

*

 

*

 

10

%  

*

 

10

%

 


*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

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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 readily convertible into cash approximate fair value because of the short-term nature of the instruments. As of September 30, 2018, based on Level 2 inputs and the borrowing rates available to the Company for loans with similar terms and consideration of the Company’s credit risk, 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 tables sets forth the fair value of the Company’s financial assets measured at fair value on a recurring basis (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

 

Total

Assets:

 

 

 

  

 

 

  

 

 

  

 

 

Money market funds

 

$

31,683

  

$

 —

  

$

 —

  

$

31,683

Total assets measured at fair value

 

$

31,683

  

$

 —

  

$

 —

  

$

31,683

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Level 1

    

Level 2

    

Level 3

    

 

Total

Assets:

 

 

 

  

 

 

  

 

 

  

 

 

Money market funds

 

$

13,369

  

$

  

$

  

$

13,369

Total assets measured at fair value

 

$

13,369

  

$

 —

  

$

 —

  

$

13,369

 

Revenue Recognition

 

The Company recognizes revenue when a customer obtains control of the promised products or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those products or services. Revenue is recognized net of allowances for returns and price concessions, and any taxes collected from customers, which are subsequently remitted to governmental authorities.

 

Nature of Products and Services

 

The Company’s revenue is derived from the sale of MRAM-based products in discrete unit form, licenses of and royalties on its MRAM and magnetic sensor technology, the sale of backend foundry services and design services to third parties. Sales of products in discrete unit form are recognized at a point in time, revenue related to licensing agreements is recognized when the Company has delivered control of the technology, revenue related to royalty agreements is recognized in the period in which sales generated from products sold using the Company’s technology occurs, sales of backend foundry services are recognized over time, and design services to third parties are recognized either at a point in time or over time, depending on the nature of the services.

 

Product Revenue

 

For products sold in their discrete form, the Company either sells its products directly to original equipment manufacturers (OEMs), original design manufacturers (ODMs) and contract manufacturers (CMs), or through a network

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of distributors, who in turn sell to those customers. For sales directly to OEMs, ODMs and CMs, revenue is recognized when the OEM, ODM or CM obtains control of the product, which occurs at a point in time, generally upon shipment to the customer.

 

The Company sells the majority of its products to its distributors at a uniform list price. However, distributors may 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 the delivery of product to them and such amounts are dependent on the end customer and product sales price. The price 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. The Company estimates these credits and records such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of an allowance for price concessions due to distributors. The Company estimates credits to distributors based on the historical rate of credits provided to distributors relative to sales. Revenue on shipments to distributors is recorded when control of the products has been transferred to the distributor.

 

The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company estimates its product return liability by analyzing its historical returns, current economic trends and changes in customer demand and acceptance of products. The Company has received insignificant returns to date and believes that returns of its products will continue to be minimal. 

 

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, an allowance is recorded for the estimated discount that will be provided to the distributor, and the net of these amounts is recorded as revenue on the statement of operations.

 

License Revenue

 

For licenses of technology, recognition of revenue is dependent upon whether the Company has delivered rights to the technology, and whether there are future performance obligations under the contract. In some instances, the license agreements call for future events or activities to occur in order for milestones amounts to become due from the customer. The terms of such agreements include payment to the Company of one or more of the following: non-refundable upfront fees; and royalties on net sales of licensed products. Historically, these license agreements have not included other future performance obligations for the Company once the license has been transferred to the customer. 

 

The transaction price in each agreement is allocated to the identified performance obligations based on the standalone selling price (SSP) of each distinct performance obligation. Judgment is required to determine SSP. In instances where SSP is not directly observable, such as when a license or service is not sold separately, SSP is determined using information that may include market conditions and other observable inputs. 

 

Revenue from non-refundable up-front payments is recognized when the license is transferred to the customer and the Company has no other performance obligations.

 

Royalties

 

Revenue from sales-based royalties from licenses of the Company’s technology are recognized at the later of when (1) the sale occurs or (2) the performance obligation to which some or all of the sales-based royalty has been allocated is satisfied (in whole or in part).

 

Other Revenue

 

For certain revenue streams, the Company recognizes revenue based on the pattern of transfer of the services. The Company uses the input method of measuring costs incurred to date compared to total estimated costs to be incurred

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under the contract as this method most faithfully depicts its performance.  The Company will record an unbilled receivable (within accounts receivable, net) for the portion of the work that has been completed but not invoiced at the end of each reporting period. 

 

Revenue from milestone payments must be estimated using either the expected value method or the most likely amount method. At the inception of each agreement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price by using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur, the associated milestone value is included in the transaction price. At the end of each subsequent reporting period, the Company re-evaluates the probability or achievement of each such milestone and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

 

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, less shares subject to repurchase, 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.

 

Prior Period Reclassifications

 

Certain amounts in the prior period have been reclassified to conform with current period presentation. There was no impact on total revenue or net loss for the prior period.

 

Recently Adopted Pronouncements

 

ASU No. 2014-09, Revenue from Contracts with Customers

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). 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. The Company adopted this standard on January 1, 2018 using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of its accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

Topic 606 permits the application of certain practical expedients. The Company’s billing practices approximate the Company’s performance as measured by an output method, where each output represents the completion of a performance obligation. Accordingly, the Company utilizes the invoice practical expedient as defined in Topic 606, resulting in recognition of revenue in the amount that the Company has the right to invoice.

 

The Company incurs direct and incremental costs of obtaining contracts and such costs are expensed as incurred, as the life of the underlying contract is less than one year. Accordingly, the Company has concluded, based on the structure of its contracts, no adjustments are necessary under Topic 606.

 

As a result of the adoption of the new standard, the Company changed its accounting policy for revenue recognition and the details of the significant changes and quantitative impact of the changes are disclosed below.

 

Distributor sales - Some of the Company's contracts with distributors provide the distributor with certain concessions and price protection credits. Under Topic 605, Revenue, these concessions and price protection credits were not fixed or determinable and, as a result, the associated revenue was deferred until delivery of the product to the end customer. At the time of shipment to distributors, the Company recorded a trade receivable for the selling

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price as there was a legally enforceable obligation of the distributor to pay for the product delivered, inventory was reduced by the carrying value of goods shipped, and the net of these amounts, the gross profit, was recorded as deferred income on shipments to distributors on the balance sheet. Under Topic 606, the Company recognizes revenue from sales to distributors upon delivery of the product to the distributor and estimates the amount of the concessions and price protection credits at the point of revenue recognition. Accordingly, the balance of the deferred income on shipments to distributors was eliminated as a cumulative effect adjustment of implementing Topic 606 as of January 1, 2018, net of the Company’s estimate of concessions and price protection credits for those contracts.

 

Performance obligations delivered over time –Topic 605 permitted straight-line recognition of revenue for performance obligations that were delivered over time. The new revenue standard requires an entity to recognize revenue based on the pattern of transfer of the services. Entities must use either an input method or an output method to measure progress toward complete satisfaction of a performance obligation. The Company determined that the input method of measuring costs incurred to date compared to total estimated costs to be incurred under the contract most faithfully depicts its performance. Under Topic 606, the Company will record an unbilled receivable (within accounts receivable, net) for the portion of the service that has been completed but not invoiced at the end of each reporting period.

 

Milestone payments – Topic 605 permitted recognition using the milestone method, whereby revenue was recognized upon the completion of substantive milestones once the customers acknowledge the milestones have been met and the collection of the amounts is reasonably assured. The milestone method no longer exists under the new revenue standard. Revenue from milestone payments must be estimated using either the expected value method or the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur, the associated milestone value is included in the transaction price. The adoption of Topic 606 did not have an impact on milestone revenue recorded to date as the performance obligations related to such milestones were completed as of the adoption date.

 

Sales-based royalties – Topic 605 permitted recognition of royalties when reported to the Company, which generally coincided with the receipt of payment. Under the new revenue standard, revenue generated from sales-based royalties from licenses of technology are recognized at the later of when (1) the sale occurs or (2) the performance obligation to which some or all of the sales-based royalty has been allocated is satisfied (in whole or in part).

 

The change in revenue recognition upon adoption of Topic 606 resulted in a decrease in the accumulated deficit balance of $1.3 million on January 1, 2018.

 

The following table summarizes the impact of adopting Topic 606 on select unaudited condensed balance sheet line items (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Balances without

 

 

 

 

 

 

the adoption of

September 30, 2018

 

As reported

 

Adjustments

 

Topic 606

Accounts receivable, net

 

$

5,582

 

$

(630)

 

$

4,952

Inventory

 

 

9,482

 

 

58

 

 

9,540

Total current assets

 

 

46,938

 

 

(572)

 

 

46,366

Total assets

 

 

51,449

 

 

(572)

 

 

50,877

Deferred income on shipments to distributors

 

 

 —

 

 

2,917

 

 

2,917

Total current liabilities

 

 

15,907

 

 

2,917

 

 

18,824

Total liabilities

 

 

23,835

 

 

2,917

 

 

26,752

Accumulated deficit

 

 

(130,513)

 

 

(3,489)

 

 

(134,002)

Total liabilities and stockholders’ equity

 

 

51,449

 

 

(572)

 

 

50,877

 

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The following table summarizes the impact of adopting Topic 606 on select unaudited condensed statement of operations line items (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances without

 

 

 

 

 

 

the adoption of

Three Months Ended September 30, 2018

 

As reported

 

Adjustments

 

Topic 606

Product sales

 

$

10,469

 

$

(1,330)

 

$

9,139

Licensing, royalty, and other revenue

 

 

1,049

 

 

(72)

 

 

977

Total revenue

 

 

11,518

 

 

(1,402)

 

 

10,116

Cost of sales

 

 

6,109

 

 

(541)

 

 

5,568

Gross profit

 

 

5,409

 

 

(861)

 

 

4,548

Loss from operations

 

 

(5,539)

 

 

(861)

 

 

(6,400)

Net loss and comprehensive loss

 

 

(5,629)

 

 

(861)

 

 

(6,490)

Net loss per common share, basic and diluted

 

 

(0.33)

 

 

(0.05)

 

 

(0.38)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances without

 

 

 

 

 

 

the adoption of

Nine Months Ended September 30, 2018

 

As reported

 

Adjustments

 

Topic 606

Product sales

 

$

29,283

 

$

(2,748)

 

$

26,535

Licensing, royalty, and other revenue

 

 

7,853

 

 

(169)

 

 

7,684

Total revenue

 

 

37,136

 

 

(2,917)

 

 

34,219

Cost of sales

 

 

17,235

 

 

(728)

 

 

16,507

Gross profit

 

 

19,901

 

 

(2,189)

 

 

17,712

Loss from operations

 

 

(13,927)

 

 

(2,189)

 

 

(16,116)

Net loss and comprehensive loss

 

 

(14,274)

 

 

(2,189)

 

 

(16,463)

Net loss per common share, basic and diluted

 

 

(0.88)

 

 

(0.14)

 

 

(1.02)

 

The following table summarizes the impact of adopting Topic 606 on select unaudited condensed statement of cash flows line items (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances without

 

 

 

 

 

 

the adoption of

Nine Months Ended September 30, 2018

 

As reported

 

Adjustments

 

Topic 606

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Net loss

 

$

(14,274)

 

$

(2,189)

 

$

(16,463)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,876)

 

 

965

 

 

(911)

Inventory

 

 

309

 

 

(12)

 

 

297

Shipping term reversal

 

 

(39)

 

 

1,236

 

 

1,197

 

ASU No. 2017-09, Compensation-Stock Compensation

 

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 was permitted. The Company adopted this standard on January 1, 2018, and the impact of its adoption on the Company’s financial statements was not material.

 

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ASU No. 2016-15, Statement of Cash Flows

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 identifies how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows. The standard is effective for fiscal years and interim periods beginning after December 15, 2017. The standard should be applied retrospectively and early adoption was permitted, including adoption in an interim period. The Company adopted this standard on January 1, 2018, and the impact of its adoption on the Company’s financial statements was not material.

 

Recently Issued Pronouncements

 

In February 2016, the FASB issued ASU No. 2016‑02, Leases, which establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 Leases and ASU No. 2018-11, Leases (Topic 842) Targeted Improvements. ASU 2018-10 clarifies how to apply certain aspects of ASU 2016-02. ASU 2018-11 provides entities with an additional transition method to adopt Topic 842. Under the new transition method, an entity initially applies the new leases standard at the adoption date, versus at the beginning of the earliest period presented, and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the impact that the adoption of ASU No. 2016‑02 will have on its financial statements and related disclosures along with ASU 2018-10 and ASU 2018-11.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 is intended to reduce the cost and complexity and to improve financial reporting for nonemployee share-based payments. The ASU expands the scope of Topic 718, (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606. The Company is currently evaluating the impact that the adoption of ASU 2018-07 will have on its financial statements and related disclosures.

 

In August 2018, the Securities and Exchange Commission (SEC) adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018; however, in light of the proximity of the effective date to the filing date for most filers’ quarterly reports, the SEC will allow a filer’s first presentation of the changes in stockholders’ equity to be included in its Form 10-Q for the quarter that begins after the effective date. The Company will begin to present a statement of changes in stockholders’ equity in its quarterly financial statements beginning on January 1, 2019.

 

 

 

3. Revenue

 

Adoption of ASU No. 2014-09

 

On January 1, 2018, the Company adopted ASU No. 2014-09 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with Topic 605.

 

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The Company sells the majority of its products to its distributors, but does recognize some revenue under licensing and royalty agreements. The following table presents the Company’s revenues disaggregated by sales channel, (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2018

 

September 30, 2018

Distributor

 

$

9,692

 

$

26,223

Non-distributor

 

 

1,826

 

 

10,913

Total revenue

 

$

11,518

 

$

37,136

 

All of the Company's performance obligations and associated revenue are generally transferred to customers at a point in time, with the exception of certain revenue streams which are performed over time commensurate with the delivery of service. The following table presents the Company’s revenues disaggregated by timing of recognition (in thousands):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2018

 

September 30, 2018

Point in time

 

$

10,613

 

$

34,729

Over time

 

 

905

 

 

2,407

Total revenue

 

$

11,518

 

$

37,136

 

The following table presents the Company’s revenues disaggregated by type (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2018

 

September 30, 2018

Product sales

 

$

10,469

 

$

29,283

License fees

 

 

 —

 

 

5,000

Royalties

 

 

144

 

 

446

Other revenue

 

 

905

 

 

2,407

Total revenue

 

$

11,518

 

$

37,136

 

The Company recognizes revenue in three primary geographic regions: North America; Europe, Middle East and Africa (EMEA); and Asia-Pacific and Japan (APJ). The following table presents the Company’s revenues disaggregated by the geographic region to which the product is delivered or licensee is located (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2018

 

September 30, 2018

North America

 

$

2,104

 

$

6,214

EMEA

 

 

2,749

 

 

7,896

APJ

 

 

6,665

 

 

23,026

Total revenue

 

$

11,518

 

$

37,136

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4. Balance Sheet Components

 

Inventory

 

Inventory consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

2018

 

2017

Raw materials

 

$

232

 

$

682

Work-in-process

 

 

8,525

 

 

7,970

Finished goods

 

 

725

 

 

1,185

Total inventory

 

$

9,482

 

$

9,837

 

Accrued Liabilities

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

    

2018

    

2017

Accrued payroll-related expenses

 

$

1,485

 

$

1,331

Accrued joint development agreement expenses

 

 

4,711

 

 

749

Accrued inventory

 

 

1,038

 

 

897

Deferred rent

 

 

382

 

 

230

Accrued sales commissions payable to sales representatives

 

 

104

 

 

75

Other

 

 

868

 

 

466

Total accrued liabilities

 

$

8,588

 

$

3,748

 

 

 

 

 

 

5. Commitments and Contingencies

 

Operating Leases

 

During 2017, the Company entered into a lease for 27,974 square feet of office space for its corporate headquarters located in Chandler, Arizona. The lease expires in January 2022, however the Company has the option to renew the lease through August 2024. 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 April 2018, the Company entered into a lease termination agreement that released the Company from any further obligations on its previous headquarters’ space in Chandler, Arizona. The remaining unamortized balance of deferred rent of $18,000 was written off and a lease termination fee of $43,000 was recognized as rent expense on the unaudited condensed statement of operations and comprehensive loss.

 

The Company leases office and lab space for its design facility located in Austin, Texas. The lease expires in January 2022.

 

The Company has another operating lease for its Arizona manufacturing facility, which includes office and fabrication space. This lease is cancellable upon 24 months’ notice by either of the parties. The lease originally expired in January 2020, however it could be further extended through January 2021 if an option to extend was initiated by the lessor.  In August 2018, the Company amended its lease agreement for its Arizona manufacturing facility to extend the lease term through January 2021.

 

 

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6. Debt

 

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 provided for interest at a floating rate equal to the prime rate minus 0.75%.  The term loan provided 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 met certain sales milestones. As of December 31, 2017, the Company determined it would not meet the sales milestones and as such the term loan was based on a 24-month amortization schedule. 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.

 

On July 6, 2018, the Company entered into the First Amendment to the 2017 Credit Facility (the Amended Credit Facility). The Amended Credit Facility extends the period of interest-only payments through December 31, 2018, followed by fixed principal and interest payments based on either a 24-month or a 36-month amortization schedule if the Company achieves certain milestones. As of September 30, 2018, the Company determined it would not meet the milestones, as such the Amended Credit Facility will be based on a 24-month amortization schedule. The Amended Credit Facility provides for interest at a floating rate equal to the prime rate minus 0.75%. As of September 30, 2018, the interest rate was 4.50%. The terms of the Amended Credit Facility include the refund of $1.0 million in principal payments previously made by the Company. An end of term fee of 7% 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. As of September 30, 2018, the effective interest rate under the Amended Credit Facility was 7.52%. Borrowings under the Amended Credit Facility mature in December 2020.

 

In conjunction with the Amended Credit Facility, outstanding warrants held by SVB to purchase 9,229 shares of the Company’s common stock at $26.00 per share were cancelled. The Company subsequently issued a warrant to SVB for the purchase of 9,375 shares of the Company’s common stock at an exercise price of $8.91 per share. The warrant can be exercised at any time and expires five years after the date of issuance. The Company estimated the fair value of the warrant as $43,000 on the date of issuance using the Black-Scholes option pricing model. The warrant was recorded as a discount to the debt and will be amortized into interest expense over the remaining term of the loan using the effective interest method.

 

Security for the Amended Credit Facility includes all of the Company’s assets except for intellectual property. The Company is required to comply with certain covenants under the Amended 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 limitations on its ability to engage in mergers or acquisitions, sell assets, 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 cash dividends with respect to its capital stock. The Company was in compliance with all covenants at September 30, 2018. The Amended 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, 2018, 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 Amended Credit Facility at September 30, 2018 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Current

    

Long-Term

    

 

 

 

 

Portion

 

Debt

 

Total

Debt, including end of term fee

 

$

4,500

 

$

8,340

 

$

12,840

Less:

 

 

 

 

 

 

 

 

 

Discount attributable to end of term fee, warrant, and debt issuance costs

 

 

(38)

 

 

(425)

 

 

(463)

Net carrying value of debt

 

$

4,462

 

$

7,915

 

$

12,377

 

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The carrying value of the Company’s 2017 Credit Facility at December 31, 2017 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Current

    

Long-Term

    

 

 

 

 

Portion

 

Debt

 

Total

Debt, including end of term fee

 

$

4,000

 

$

8,720

 

$

12,720

Less:

 

 

 

 

 

 

 

 

 

Discount attributable to end of term fee and debt issuance costs

 

 

(23)

 

 

(563)

 

 

(586)

Net carrying value of debt

 

$

3,977

 

$

8,157

 

$

12,134

 

The table below includes the principal repayments due under the Amended Credit Facility as of September 30, 2018 (in thousands):

 

 

 

 

 

 

 

Principal Repayment

2018 (remaining three months)

 

$

 —

2019

 

 

6,000

2020

 

 

6,840

Total principal repayments

 

$

12,840

 

 

 

7. Stockholders’ Equity

 

In February 2018, the Company completed a follow-on underwritten public offering of its common stock under its Registration Statement filed in November 2017 (File No. 333-221331), selling 3,772,447 shares of its common stock at an offering price of $7.00 per share for proceeds of $24.5 million, net of $1.9 million of underwriting discounts and commissions and other offering costs.

 

 

 

8. Stock-Based Compensation

 

The following table summarizes the stock option and award activity for the nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

 

 

 

 

 

Weighted-

 

Weighted-

 

 

 

 

 

Options and

 

 

 

Average

 

Average

 

 

 

 

 

Awards

 

 

 

Exercise

 

Remaining

 

Aggregate

 

 

Available for

 

Number of

 

Price Per

 

Contractual

 

Intrinsic

 

    

Grant

    

Options

    

Share

    

Life (years)

    

Value

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Balance—December 31, 2017

 

83,929

 

1,593,195

 

$

8.88

 

6.6

 

$

1,997

Immaterial prior period adjustment

 

(1,026)

 

13,784

 

 

4.54

 

 

 

 

 

Options authorized

 

1,084,516

 

 —

 

 

 —

 

 

 

 

 

RSUs granted

 

(75,700)

 

 —

 

 

 —

 

 

 

 

 

RSUs cancelled/forfeited

 

1,900

 

 —

 

 

 —

 

 

 

 

 

Options granted