Everspin Technologies, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The company develops and sells Toggle MRAM and STT-MRAM memory products and licenses related technology for industrial, medical, automotive/transportation, aerospace and data-center applications. This unaudited quarterly report covers the three and six months ended June 30, 2022; comparisons are with the same 2021 periods. Amounts below are in U.S. dollars unless noted.
Financial performance and position
- Q2 revenue: $14.7 million, up 24.1% year over year. Product sales were $13.2 million, up 29.8%; licensing, royalty, patent and other revenue was $1.5 million, down 10.7%.
- First-half revenue: $29.1 million, up 31.3%. Product sales rose 34.5% to $25.9 million; licensing, royalty, patent and other revenue rose 10.0% to $3.2 million.
- Profitability: Q2 net income was $1.7 million ($0.08 diluted EPS), versus $0.3 million ($0.01 diluted EPS) in Q2 2021. First-half net income was $3.6 million ($0.17 diluted EPS), compared with a $0.2 million net loss in first-half 2021. Operating income was $1.7 million for Q2 and $3.8 million for the first half.
- Margins: Gross margin was 58.4% in Q2 versus 60.7% a year earlier, and 58.2% for the first half versus 59.6%. Management attributed the decline primarily to supplier price increases. First-half operating margin was 13% versus 2%.
- Adjusted EBITDA: $3.3 million in Q2 versus $1.5 million in Q2 2021; $6.3 million for the first half versus $2.3 million. This is a non-GAAP measure.
- Cash flow: First-half operating cash flow was $3.4 million, compared with $1.1 million in 2021. Investing used $0.8 million, including $1.0 million of equipment purchases partly offset by equipment-sale proceeds. Financing used $0.9 million, primarily for debt payments. Cash increased $1.6 million to $23.1 million.
- Liquidity and debt: Current assets were $39.5 million and current liabilities $9.6 million at June 30. Debt carrying value was $3.8 million, all classified as current; lease liabilities totaled $3.7 million. The credit facility had $1.0 million outstanding on its revolving line and $2.8 million on the term loan, with $4.0 million of line availability subject to borrowing-base limits. The company reported covenant compliance.
- Balance sheet: Total assets were $45.8 million, stockholders’ equity $33.3 million and accumulated deficit $149.2 million at June 30, 2022.
Material changes versus the prior comparable period
- Product growth reflected higher unit volume and average selling-price increases intended to offset supplier price increases. Distributor sales represented 87% of Q2 revenue versus 77% in Q2 2021, and 81% of first-half revenue versus 70%.
- Q2 licensing-related revenue declined, while first-half licensing-related revenue increased, primarily reflecting revenue recognized under a customer development and licensing arrangement for a radiation-hardened product.
- Operating expenses were $6.9 million in Q2, slightly above the prior-year quarter. Research and development decreased as development spending on a new 28nm product declined after samples began production in 2022; general and administrative expense increased, principally due to stock-based compensation.
- First-half debt carrying value declined from $4.9 million at year-end 2021 to $3.8 million, following scheduled repayments. Cash rose from $21.4 million to $23.1 million.
Outlook, risks and notable items
- Management said cash, anticipated sales and available credit were expected to fund requirements for at least the next 12 months. It also cautioned that future capital needs depend on growth, R&D, sales and marketing investment, and product introductions; additional financing may be needed and may not be available on acceptable terms.
- After quarter-end, a July 22, 2022 amendment extended the revolving line’s maturity from August 5, 2022 to August 5, 2023. The term loan matures June 1, 2023.
- Management cited continuing COVID-related demand and supply-chain disruptions, labor constraints and inflation. It noted that shutdowns and unusual ordering patterns had slowed Toggle MRAM demand, particularly among industrial customers, and that remote work had affected manufacturing efficiency and costs.
- Other principal risks include dependence on third-party manufacturers and a single foundry for advanced-node products; customer, distributor and supplier concentration; uncertain STT-MRAM adoption and design-win conversion; competition and selling-price declines; product yields and quality; and potential need for additional funding. One customer accounted for 24% of Q2 revenue and 45% of net receivables at June 30.
- Disclosure controls were deemed ineffective at the reasonable-assurance level because of a material weakness in inventory controls, including unit-cost allocations and communication between operations and accounting. Management described remediation steps, including additional reconciliations, procedures, training and personnel; the weakness was not reported as remediated.
- The company reported no material legal proceedings. No specific quantitative full-year revenue or earnings guidance was provided.
Important facts for investors to verify
- Whether revenue growth and customer demand persist, particularly given distributor reliance, customer concentration and pandemic-related order volatility.
- Whether supplier inflation, product mix and manufacturing costs continue to pressure gross margin.
- Whether the inventory-control material weakness is fully remediated and controls become effective.
- Availability and terms of revolving credit, covenant compliance, and repayment or refinancing of debt maturing in 2023.
- Whether the company can convert product development and design wins into sustained volume sales while managing foundry capacity, yields and supply-chain risks.