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 June 30, 2019

 

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


Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001

MRAM

The Nasdaq Stock Market

 

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 July 31, 2019 was 17,151,478. 

 

 

 

Table of Contents

Table of Contents

 

 

 

 

 

 

    

 

Page

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. 

 

Financial Statements 

3

 

 

Condensed Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018

3

 

 

Condensed Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2019 and 2018 (unaudited)

4

 

 

Condensed Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018 (unaudited)

5

 

 

Condensed Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)

6

 

 

Notes to Condensed Financial Statements (unaudited)

7

Item 2. 

 

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

20

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4. 

 

Controls and Procedures

30

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

Item 1. 

 

Legal Proceedings

32

Item 1A. 

 

Risk Factors

32

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3. 

 

Defaults Upon Senior Securities

52

Item 4. 

 

Mine Safety Disclosures

52

Item 5. 

 

Other Information

52

Item 6. 

 

Exhibits

53

EXHIBIT INDEX 

54

SIGNATURES 

56

 

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)

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

2019

 

2018

 

 

(Unaudited)

 

(See Note 2)

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

15,273

 

$

23,379

Accounts receivable, net

 

 

5,864

 

 

7,522

Inventory

 

 

8,964

 

 

9,097

Prepaid expenses and other current assets

 

 

488

 

 

688

Total current assets

 

 

30,589

 

 

40,686

Property and equipment, net

 

 

3,867

 

 

4,286

Right-of-use assets

 

 

2,947

 

 

 —

Other assets

 

 

73

 

 

73

Total assets

 

$

37,476

 

$

45,045

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

2,197

 

$

2,637

Accrued liabilities

 

 

3,704

 

 

5,001

Current portion of long-term debt

 

 

5,977

 

 

5,977

Lease liabilities

 

 

1,583

 

 

 —

Total current liabilities

 

 

13,461

 

 

13,615

Long-term debt, net of current portion

 

 

3,642

 

 

6,509

Lease liabilities, net of current portion

 

 

1,726

 

 

 —

Total liabilities

 

 

18,829

 

 

20,124

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 June 30, 2019 and December 31, 2018

 

 

 —

 

 

 —

Common stock, $0.0001 par value per share; 100,000,000 shares authorized; 17,151,290 and 17,095,456 shares issued and outstanding as of June 30, 2019 and December 31, 2018

 

 

 2

 

 

 2

Additional paid-in capital

 

 

160,564

 

 

158,912

Accumulated deficit

 

 

(141,919)

 

 

(133,993)

Total stockholders’ equity

 

 

18,647

 

 

24,921

Total liabilities and stockholders’ equity

 

$

37,476

 

$

45,045

 

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

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2019

    

2018

    

2019

    

2018

Product sales

 

$

8,003

 

$

9,449

 

$

17,026

 

$

18,814

Licensing, royalty, and other revenue

 

 

643

 

 

1,316

 

 

1,646

 

 

6,804

Total revenue

 

 

8,646

 

 

10,765

 

 

18,672

 

 

25,618

Cost of sales

 

 

4,627

 

 

6,229

 

 

9,868

 

 

11,127

Gross profit

 

 

4,019

 

 

4,536

 

 

8,804

 

 

14,491

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Research and development

 

 

3,519

 

 

6,773

 

 

7,517

 

 

13,253

General and administrative

 

 

2,856

 

 

3,329

 

 

6,451

 

 

6,548

Sales and marketing

 

 

1,239

 

 

1,713

 

 

2,603

 

 

3,079

Total operating expenses

 

 

7,614

 

 

11,815

 

 

16,571

 

 

22,880

Loss from operations

 

 

(3,595)

 

 

(7,279)

 

 

(7,767)

 

 

(8,389)

Interest expense

 

 

(186)

 

 

(222)

 

 

(397)

 

 

(433)

Other income, net

 

 

111

 

 

132

 

 

238

 

 

176

Net loss and comprehensive loss

 

$

(3,670)

 

$

(7,369)

 

$

(7,926)

 

$

(8,646)

Net loss per common share, basic and diluted

 

$

(0.21)

 

$

(0.44)

 

$

(0.46)

 

$

(0.55)

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

 

 

17,137,338

 

 

16,635,261

 

 

17,117,777

 

 

15,717,248

 

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

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EVERSPIN TECHNOLOGIES, INC.

Condensed Statements of Stockholders’ Equity

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three and Six Months Ended June 30, 2019

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Stockholders’

 

  

Shares

  

Amount

  

Capital

  

Deficit

  

Equity

Balance at December 31, 2018

 

17,095,456

 

$

 2

 

$

158,912

 

$

(133,993)

 

$

24,921

Issuance of common stock under stock incentive plans

 

12,607

 

 

 —

 

 

13

 

 

 —

 

 

13

Stock-based compensation expense

 

 —

 

 

 —

 

 

704

 

 

 —

 

 

704

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(4,256)

 

 

(4,256)

Balance at March 31, 2019

 

17,108,063

 

 

 2

 

 

159,629

 

 

(138,249)

 

 

21,382

Issuance of common stock under stock incentive plans

 

43,227

 

 

 —

 

 

137

 

 

 —

 

 

137

Stock-based compensation expense

 

 —

 

 

 —

 

 

798

 

 

 —

 

 

798

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(3,670)

 

 

(3,670)

Balance at June 30, 2019

 

17,151,290

 

$

 2

 

$

160,564

 

$

(141,919)

 

$

18,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three and Six Months Ended June 30, 2018

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Stockholders’

 

  

Shares

  

Amount

  

Capital

  

Deficit

  

Equity

Balance at December 31, 2017

 

12,817,201

 

$

 1

 

$

128,422

 

$

(117,539)

 

$

10,884

Adjustment to opening balance for adoption of new accounting standard

 

 —

 

 

 —

 

 

 —

 

 

1,300

 

 

1,300

Issuance of common stock in secondary offering, net of issuance costs

 

3,772,447

 

 

 1

 

 

24,608

 

 

 —

 

 

24,609

Issuance of common stock under stock incentive plans

 

58,229

 

 

 —

 

 

309

 

 

 —

 

 

309

Compensation expense related to vesting of common stock issued to GLOBALFOUNDRIES

 

 —

 

 

 —

 

 

237

 

 

 —

 

 

237

Stock-based compensation expense

 

 —

 

 

 —

 

 

625

 

 

 —

 

 

625

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(1,277)

 

 

(1,277)

Balance at March 31, 2018

 

16,647,877

 

 

 2

 

 

154,201

 

 

(117,516)

 

 

36,687

Issuance of common stock under stock incentive plans

 

152,628

 

 

 —

 

 

723

 

 

 —

 

 

723

Compensation expense related to vesting of common stock issued to GLOBALFOUNDRIES

 

 —

 

 

 —

 

 

225

 

 

 —

 

 

225

Stock-based compensation expense

 

 —

 

 

 —

 

 

717

 

 

 —

 

 

717

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(7,369)

 

 

(7,369)

Balance at June 30, 2018

 

16,800,505

 

$

 2

 

$

155,866

 

$

(124,885)

 

$

30,983

 

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)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2019

    

2018

 

Cash flows from operating activities

 

 

  

 

 

  

 

Net loss

 

$

(7,926)

 

$

(8,646)

 

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

 

 

  

 

 

 

 

Depreciation and amortization

 

 

876

 

 

729

 

Loss on disposal of property and equipment

 

 

20

 

 

19

 

Stock-based compensation

 

 

1,502

 

 

1,342

 

Non-cash interest expense

 

 

153

 

 

200

 

Compensation expense related to vesting of common stock to GLOBALFOUNDRIES

 

 

 —

 

 

462

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

1,658

 

 

(1,391)

 

Inventory

 

 

133

 

 

940

 

Prepaid expenses and other current assets

 

 

200

 

 

(635)

 

Other assets

 

 

 —

 

 

(136)

 

Accounts payable

 

 

(456)

 

 

51

 

Accrued liabilities

 

 

(907)

 

 

2,591

 

Lease liabilities

 

 

(43)

 

 

 —

 

Shipping term reversal

 

 

 —

 

 

(39)

 

Net cash used in operating activities

 

 

(4,790)

 

 

(4,513)

 

Cash flows from investing activities

 

 

  

 

 

 

 

Purchases of property and equipment

 

 

(461)

 

 

(347)

 

Net cash used in investing activities

 

 

(461)

 

 

(347)

 

Cash flows from financing activities

 

 

  

 

 

 

 

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

 

 

 —

 

 

24,609

 

Payments on debt

 

 

(3,000)

 

 

(1,000)

 

Payments on finance lease obligation

 

 

(5)

 

 

(6)

 

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

 

 

150

 

 

1,032

 

Net cash (used in) provided by financing activities

 

 

(2,855)

 

 

24,635

 

Net (decrease) increase in cash and cash equivalents

 

 

(8,106)

 

 

19,775

 

Cash and cash equivalents at beginning of period

 

 

23,379

 

 

12,950

 

Cash and cash equivalents at end of period

 

$

15,273

 

$

32,725

 

Supplementary cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

257

 

$

233

 

Operating cash flows paid for operating leases

 

$

837

 

$

 —

 

Financing cash flows paid for finance leases

 

$

 5

 

$

 —

 

Right-of-use assets obtained in exchange for new operating leases

 

$

23

 

$

 —

 

Non-cash investing and financing activities:

 

 

  

 

 

 

 

Purchases of property and equipment in accounts payable

 

$

27

 

$

27

 

 

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 random-access memory (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, 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 June 30, 2019, 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, 2018 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 six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 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, 2018, 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, product warranty reserves, income taxes, and stock-based compensation. The Company believes its estimates and assumptions are reasonable; however, actual results may differ from the Company’s estimates.

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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 June 30, 2019, the allowance for product returns and the allowance for price concessions were $212,000 and $100,000, respectively. At December 31, 2018, the allowance for product returns and the allowance for price concessions were $144,000 and $569,000, respectively.

 

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

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

2019

 

2018

Trade accounts receivable

 

$

5,584

 

$

7,297

Unbilled accounts receivable

 

 

592

 

 

938

Allowance for accounts receivable

 

 

(312)

 

 

(713)

Accounts receivable, net

 

$

5,864

 

$

7,522

 

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

 

Six Months Ended

 

As of

 

 

 

June 30, 

 

June 30, 

 

June 30, 

 

December 31, 

 

Customers

    

2019

    

2018

    

2019

    

2018

    

2019

    

2018

 

Customer A

 

23

%

*

 

16

%

 *

 

40

%

23

%

Customer B

 

13

%

*

 

12

%

 *

 

*

    

*

 

Customer C

 

12

%

14

%

12

%

14

%  

*

 

 *

 

Customer D

 

11

%

*

 

13

%

*

 

*

 

 *

 

Customer E

 

*

 

*

 

*

 

20

%  

*

 

 *

 

Customer F

 

*

 

19

%

*

 

13

%

*

 

 *

 

Customer G

 

 *

 

*

 

 *

 

 *

 

11

%

21

%

Customer H

 

 *

 

*

 

 *

 

 *

 

 *

 

11

%

Customer I

 

 *

 

*

 

 *

 

 *

 

 *

 

11

%


*Less than 10%

 

Fair Value of Financial Instruments

 

Fair value is defined as an exit price, representing the amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. The framework for measuring fair value provides a three-tier hierarchy prioritizing inputs to valuation techniques used in measuring fair value as follows:

 

Level 1— Observable inputs such as quoted prices for identical assets or liabilities in active markets;

Level 2— Inputs, other than quoted prices for identical assets or liabilities in active markets, which are observable either directly or indirectly; and

 

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Level 3— Unobservable inputs in which there is little or no market data requiring the reporting entity to develop its own assumptions

 

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 June 30, 2019, 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

  

 

 

  

 

 

  

 

 

Money market funds

 

$

15,417

  

$

 —

  

$

 —

  

$

15,417

Total assets measured at fair value

 

$

15,417

  

$

 —

  

$

 —

  

$

15,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

  

 

 

  

 

 

  

 

 

Money market funds

 

$

23,478

  

$

  

$

  

$

23,478

Total assets measured at fair value

 

$

23,478

  

$

 —

  

$

 —

  

$

23,478

 

Leases

 

The Company leases office, lab, manufacturing space and equipment in various locations with initial lease terms of up to five years.  These leases require monthly lease payments that may be subject to annual increases throughout the lease term.  The terms of these leases also include renewal options at the election of the Company to renew or extend the lease for a range of an additional two to five years. These optional periods have not been considered in the determination of the right-of-use-assets (ROU) or lease liabilities associated with these leases as the Company did not consider it reasonably certain it would exercise the options.

 

The Company determines if an arrangement is a lease at inception. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The classification of the Company's leases as operating or finance leases along with the initial measurement and recognition of the associated ROU assets and lease liabilities is performed at the lease commencement date. The measurement of lease liabilities is based on the present value of future lease payments over the lease term. The Company’s uses its incremental borrowing rate, based on the information available at commencement date, to determine the present value of lease payments when its leases do not provide an implicit rate. The Company uses the implicit rate when readily determinable. The ROU asset is based on the measurement of the lease liability, includes any lease payments made prior to or on lease commencement and excludes lease incentives and initial direct costs incurred, as applicable. Lease expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. Amortization expense for ROU assets associated with finance leases is recognized on a straight-line basis over the shorter of the useful life of the asset or the lease term and interest expense associated with finance leases is recognized on the balance of the lease liability using the effective interest method based on the estimated incremental borrowing rate.

 

The Company has lease agreements with lease and non-lease components. The Company has elected to not separate lease and non-lease components for any leases involving real estate and office equipment classes of assets and, as a result, accounts for the lease and non-lease components as a single lease component. The Company will separate lease and non-lease components for any leases involving manufacturing facility classes of assets. Further, the Company elected the short-term lease exception policy, permitting it to not apply the recognition requirements of this standard to

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leases with terms of 12 months or less (short-term leases) for all classes of assets. As of June 30, 2019, the Company did not have any short-term leases.

 

Operating leases are included in right-of-use assets, lease liabilities, and lease liabilities, net of current portion in the Company’s balance sheet. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in the Company’s balance sheet. 

 

Stock-based Compensation

 

Stock-based compensation arrangements include stock option grants and restricted stock unit (RSU) awards under the Company’s equity incentive plans, as well as shares issued under the Company’s Employee Stock Purchase Plan (ESPP), through which employees may purchase the Company’s common stock at a discount to the market price.

 

The Company measures its stock option grants made to employees based on the estimated fair value of the options as of the grant date using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized over the requisite service period using the straight-line method. The Company has made an accounting policy election to account for forfeitures as they occur, rather than estimating expected forfeitures at the time of the grant.

 

Stock-based compensation expense for options granted to non-employees as consideration for services received is measured on the date of performance at the fair value of the consideration received or the fair value of the equity instruments issued, using the Black-Scholes option-pricing model, whichever can be more reliably measured. Compensation expense for options granted to non-employees is recognized as the underlying options vest. The Company has made an accounting policy election to account for forfeitures as they occur, rather than estimating expected forfeitures at the time of the grant. In addition, the Company made an accounting policy election to use the contractual term as the expected term rather than estimating the expected term.

 

Recently Adopted Pronouncements

 

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016 02, Leases (Topic 842), 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 ROU asset for leases with a lease-term of more than 12 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. The Company adopted this standard on January 1, 2019, using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

Topic 842 permits the application of certain practical expedients, of which the Company elected the “package of three” expedient, that eliminated the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. Further, the Company elected the short-term lease exception policy, permitting it to not apply the recognition requirements of this standard to short-term leases.

 

Upon adoption of Topic 842, on January 1, 2019, the Company recorded an operating lease ROU asset of $3.6 million, operating lease liabilities of $4.0 million, and derecognized the deferred rent liability of $390,000. The accounting for the Company’s finance leases remained substantially unchanged.

 

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 adopted this standard on January 1, 2019 and the impact of its adoption on the Company’s financial statements was not material.

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Recently Issued Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements Financial Instruments-Credit Losses (Topic 326). The new ASU provides narrow-scope amendments to help apply ASU No. 2016-13. The Company is evaluating the impact of the adoption of ASU 2016-13 on its financial statements.

 

 

 

3. Revenue

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

 

2019

 

2018

 

2019

 

2018

 

Distributor

 

$

5,564

 

$

8,386

 

$

12,749

 

$

16,531

 

Non-distributor

 

 

3,082

 

 

2,379

 

 

5,923

 

 

9,087

 

Total revenue

 

$

8,646

 

$

10,765

 

$

18,672

 

$

25,618

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

 

2019

 

2018

 

2019

 

2018

 

Point in time

 

$

8,180

 

$

9,644

 

$

17,631

 

$

24,116

 

Over time

 

 

466

 

 

1,121

 

 

1,041

 

 

1,502

 

Total revenue

 

$

8,646

 

$

10,765

 

$

18,672

 

$

25,618

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

 

2019

 

2018

 

2019

 

2018

 

Product sales

 

$

8,003

 

$

9,449

 

$

17,026

 

$

18,814

 

License fees

 

 

 —

 

 

 —

 

 

 —

 

 

5,000

 

Royalties

 

 

177

 

 

195

 

 

605

 

 

302

 

Other revenue

 

 

466

 

 

1,121

 

 

1,041

 

 

1,502

 

Total revenue

 

$

8,646

 

$

10,765

 

$

18,672

 

$

25,618

 

 

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 June 30, 

 

Six Months Ended June 30, 

 

 

 

2019

 

2018

 

2019

 

2018

 

North America

 

$

3,528

 

$

2,379

 

$

5,717

 

$

4,110

 

EMEA

 

 

2,094

 

 

2,096

 

 

4,728

 

 

5,147

 

APJ

 

 

3,024

 

 

6,290

 

 

8,227

 

 

16,361

 

Total revenue

 

$

8,646

 

$

10,765

 

$

18,672

 

$

25,618

 

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4. Balance Sheet Components

 

Inventory

 

Inventory consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

2019

 

2018

Raw materials

 

$

38

 

$

288

Work-in-process

 

 

6,501

 

 

6,759

Finished goods

 

 

2,425

 

 

2,050

Total inventory

 

$

8,964

 

$

9,097

 

Accrued Liabilities

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2019

 

2018

Accrued payroll-related expenses

 

$

785

 

$

1,558

Accrued joint development agreement expenses

 

 

1,190

 

 

661

Accrued inventory

 

 

812

 

 

1,678

Deferred rent

 

 

 —

 

 

390

Other

 

 

917

 

 

714

Total accrued liabilities

 

$

3,704

 

$

5,001

 

 

 

 

 

5. Leases

 

During 2017, the Company entered into an operating lease for 27,974 square feet of office space for its corporate headquarters located in Chandler, Arizona, that expires in January 2022. The Company has the option to renew the lease through August 2024; however, the Company does not consider it reasonably certain it will exercise the renewal option.

 

The Company leases office and lab space for its design facility located in Austin, Texas, under an operating lease that expires in January 2022. The Company has the option to renew the lease for an additional five years; however, the Company does not consider it reasonably certain it will exercise the renewal option.

 

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 and expires in January 2021.

 

The undiscounted future non-cancellable lease payments under the Company’s leases were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2019

    

Operating Leases

 

Finance Lease

    

Total

2019 (remaining six months)

    

$

857

    

$

 5

 

$

862

2020

 

 

1,736

 

 

10

 

 

1,746

2021

 

 

859

 

 

 —

 

 

859

2022

 

 

50

 

 

 —

 

 

50

Total undiscounted lease payments

 

 

3,502

 

 

15

 

 

3,517

Less: Present value adjustment

 

 

(208)

 

 

 —

 

 

(208)

Total lease liability

 

 

3,294

 

 

15

 

 

3,309

Less: Current portion of lease liability

 

 

(1,573)

 

 

(10)

 

 

(1,583)

Total lease liability, net of current portion

 

$

1,721

 

$

 5

 

$

1,726

 

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As determined under ASC 840, the future minimum rental commitments under the Company’s operating leases at December 31, 2018 were as follows (in thousands):

 

 

 

 

 

Year Ending December 31,

 

Amount

2019

 

$

1,645

2020

 

 

1,701

2021

 

 

846

2022

 

 

47

Total minimum lease payments

 

$

4,239

 

Other information related to the Company's lease liabilities was as follows:

 

 

 

 

 

 

 

 

As of June 30, 2019

    

Operating leases

    

    

Finance lease

    

Weighted-average remaining lease term (years)

    

2.12

 

 

1.42

    

Weighted-average discount rate

 

6.01

%

 

3.50

%

 

Lease costs for the Company’s operating leases were $401,000 and $420,000 for the three months ended June 30, 2019 and 2018 respectively, and $800,000 and $851,000, for the six months ended June 30, 2019 and 2018 respectively. Variable lease payments for operating leases were immaterial for the three and six months ended June 30, 2019 and 2018. Lease costs for the Company’s finance lease were immaterial for the three and six months ended June 30, 2019 and 2018.

 

 

 

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 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 First Amendment). The First Amendment extended 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. The Company determined it would not meet the milestones, therefore, the 2017 Credit Facility is based on a 24-month amortization schedule and matures in December 2020. The 2017 Credit Facility provides for interest at a floating rate equal to the prime rate minus 0.75%.  As of June 30, 2019, the interest rate was 4.75%.  The terms of the First Amendment included 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 June 30, 2019, the effective interest rate under the 2017 Credit Facility was 7.77%.  

 

In January 2019 and June 2019, the Company entered into the Second Amendment and the Third Amendment to the 2017 Credit Facility, respectively, which primarily modified the financial covenants under the 2017 Credit Facility.

 

The Company is permitted to make voluntary prepayments of the 2017 Credit Facility with a prepayment fee, calculated as of the effective date of the First Amendment, equal to (i) $240,000 during the first 12 months and (ii) $120,000 if prepaid in months 13-24.  The Company is required to make mandatory prepayments of the outstanding loan upon the acceleration by lender following the occurrence of an event of default, along with a payment of the end of term fee, the prepayment fee and any other obligations that are due and payable at the time of prepayment. In the event of default, the interest rate in effect will increase by 5.0% per annum.

 

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In conjunction with the First Amendment, 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 2017 Credit Facility includes all of the Company’s assets except for intellectual property. 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 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 June 30, 2019.  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 June 30, 2019, management does not believe that it is probable that the clause will be triggered within the next 12 months, and therefore the term loan is classified as long-term.

 

The carrying value of the Company’s 2017 Credit Facility at June 30, 2019 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Current

    

Long-Term

    

 

 

 

 

Portion

 

Debt

 

Total

Credit Facility

 

$

6,000

 

$

3,840

 

$

9,840

Unamortized debt discounts

 

 

(23)

 

 

(198)

 

 

(221)

Net carrying value

 

$

5,977

 

$

3,642

 

$

9,619

 

The carrying value of the Company’s 2017 Credit Facility at December 31, 2018 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Current

    

Long-Term

    

 

 

 

 

Portion

 

Debt