Everspin Technologies, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; balance sheet compared with December 31, 2020. Amounts are in U.S. dollars. Everspin develops and sells Toggle MRAM and STT-MRAM memory products and licenses related technology for industrial, medical, automotive, aerospace, and data-center applications.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $14.8 million | $10.1 million | $36.9 million | $32.1 million |
| Gross profit | $8.4 million | $2.3 million | $21.6 million | $12.9 million |
| Operating income (loss) | $1.1 million | ($3.7 million) | $1.2 million | ($6.4 million) |
| Net income (loss) | $0.9 million | ($3.9 million) | $0.7 million | ($6.9 million) |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $2.9 million | ($3.5 million) |
- Q3 revenue increased 46.2%; nine-month revenue rose 15.2%. Product sales grew 25.7% in Q3 but only 3.8% year to date. Licensing, royalty, patent, and other revenue increased substantially, including $1.3 million from patents sold during Q3.
- Gross margin was 57.1% in Q3 and 58.6% year to date when calculated from reported revenue and gross profit. The MD&A reports 60.7% for Q3 and gives 58.2% in its nine-month narrative, so its margin figures do not consistently reconcile with the statements.
- Adjusted EBITDA, a non-GAAP measure, was $2.5 million for Q3 and $4.8 million for nine months, versus losses of $2.0 million and $2.1 million, respectively, in 2020.
- Cash and cash equivalents were $14.6 million, essentially unchanged from year-end 2020. Current assets were $32.2 million and current liabilities $11.0 million. Net debt carrying value was $5.5 million; principal outstanding was $5.6 million. The company repaid $2.8 million of debt during the first nine months.
- Accounts receivable rose to $10.6 million from $7.6 million at year-end, and inventory increased to $6.7 million from $5.7 million. Operating cash flow included working-capital use from higher receivables and inventory, partly offset by deferred revenue and accrued liabilities.
Material changes and unusual items
- Q3 product-sales cost fell year over year, which management attributed to improved manufacturing yields and lower inventory-related charges; the prior-year period included inventory and accelerated-depreciation adjustments. Higher licensing and patent revenue also supported gross profit.
- In September, Everspin agreed to sell five patents for $5.25 million. Two patents transferred in Q3, producing $1.30 million of revenue; the remaining $3.95 million was expected to be recognized in Q4 after the other three patents transferred in October.
- A customer RAD-Hard product development arrangement totals $6.5 million. Everspin recognizes revenue over time; $1.4 million remained deferred at September 30.
- The company terminated its Silterra collaboration agreement in October 2021. It had paid $0.6 million of the contemplated $1.0 million engineering costs and expected no additional costs for the rest of 2021. Initial production had been delayed from 2020 to 2022 before termination.
- Two new office leases entered into in September and October are scheduled to begin in February 2022, with terms extending into 2027 and 2029.
Outlook, risks, and controls
- Management said existing cash, credit-facility availability, and anticipated sales and growth were expected to fund requirements for at least 12 months from the financial-statement issuance date. It provided no specific revenue or earnings guidance and cautioned that future capital needs depend on growth, R&D, sales investment, and new products; additional financing may be needed and may not be available on acceptable terms.
- The credit facility includes a $5.0 million revolving line, with $3.0 million reported available subject to borrowing-base availability, and covenants including minimum cash and availability requirements. Everspin said it was in compliance at quarter-end. Debt is secured by substantially all assets except intellectual property; the facility restricts certain actions and prohibits cash dividends.
- COVID-19, Delta-variant effects, supply-chain constraints, and factory shutdowns had disrupted demand and order patterns, particularly for Toggle MRAM from industrial customers. Remote work also affected manufacturing efficiency and cost of sales. Management said the ultimate impact remained uncertain.
- Other principal risks include reliance on third-party manufacturing and distribution, a single foundry for advanced-node products, customer and revenue concentration, demand forecasting and inventory risk, competition and declining selling prices, and the uncertain adoption of STT-MRAM. The four largest end customers represented 44% of nine-month revenue.
- An inventory-related material weakness in internal control over financial reporting remained under remediation, including enhanced systems, dashboards, procedures, training, and staffing. Management reported disclosure controls effective at a reasonable-assurance level, noting the ongoing weakness. No material legal proceedings were reported.
- Darin Billerbeck remained Interim CEO; Anuj Aggarwal became permanent CFO in September 2021. Management cited leadership transition as a risk.
Investor verification priorities
- Reconcile the MD&A gross-margin figures with gross profit and revenue in the financial statements, especially Q3’s reported 60.7% versus the statement-implied 57.1%.
- Track whether the remaining $3.95 million patent-sale revenue was recognized in Q4 and assess how much reported growth depends on this non-recurring transaction and other licensing revenue.
- Monitor receivable collection, inventory levels, operating cash generation, and the amount actually available under the borrowing base.
- Assess progress in remediating the inventory-control material weakness and the effects of continuing supply-chain and COVID-related disruption.
- Confirm whether the company sustains profitability and positive cash flow, given its accumulated deficit of $156.5 million and potential need for future financing.