Everspin Technologies, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Everspin develops and sells magnetoresistive random-access memory (MRAM) products and licenses related technology. This unaudited quarterly report covers the three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $15.24 | $14.80 | $44.30 | $36.92 |
| Gross profit | $8.96 | $8.45 | $25.88 | $21.63 |
| Gross margin | 58.8% | 60.7% | 58.4% | 58.6% |
| Operating income | $1.91 | $1.08 | $5.68 | $1.25 |
| Net income | $1.91 | $0.88 | $5.51 | $0.68 |
| Diluted EPS | $0.09 | $0.04 | $0.27 | $0.03 |
| Adjusted EBITDA (non-GAAP) | $3.37 | $2.46 | $9.72 | $4.80 |
- Revenue mix and growth: Q3 product sales increased 21.1% to $14.57 million, while licensing, royalty, patent and other revenue fell 75.7% to $0.67 million. Nine-month product sales grew 29.3% to $40.47 million, partly offset by a 32.0% decline in other revenue to $3.83 million.
- Expenses and margins: Q3 gross margin declined primarily due to supplier price increases and lower licensing and other revenue. Nine-month operating expenses were $20.20 million, down slightly from $20.38 million; lower R&D costs were partly offset by higher G&A and sales and marketing expenses.
- Cash flow: For the first nine months, operating cash flow was $4.26 million, investing cash outflow was $1.12 million, and financing cash outflow was $1.11 million. Cash increased $2.03 million to $23.44 million. Operating cash flow included a $4.36 million increase in receivables and a $1.47 million increase in inventory.
- Liquidity and debt: Current assets were $44.15 million and current liabilities $10.96 million at September 30. Debt carrying value was $3.18 million, all current, compared with $4.90 million at year-end 2021. The company had $1.0 million outstanding on its revolving line and reported $4.0 million of remaining availability, subject to borrowing-base limits. The line matures August 2023; the term loan matures June 2023. The company reported covenant compliance.
- Other balance-sheet items: Inventory was $7.86 million, up from $6.40 million at year-end. Lease liabilities totaled $6.97 million, following a new operating lease reflected in right-of-use assets and liabilities.
Material changes versus the prior comparable period
- Q3 revenue rose 3.0%, as higher product sales were substantially offset by lower licensing and other revenue. Nine-month revenue increased 20.0%, led by product sales growth.
- Q3 net income more than doubled to $1.91 million; nine-month net income rose to $5.51 million from $0.68 million. Lower interest expense contributed to the improvement.
- Distributor sales represented 92% of Q3 revenue, versus 62% in Q3 2021; for the first nine months, the share was 85% versus 67%.
- Cash grew from $21.41 million at December 31, 2021. Debt declined, with the remaining facility balances classified as current.
Outlook, commentary, risks and unusual items
- Management said existing cash, credit availability and anticipated growth and sales levels were expected to meet cash requirements for at least the next 12 months. It cautioned that long-term capital may be insufficient and that additional financing may be needed. No specific revenue or earnings guidance was provided.
- Management cited lingering COVID-19 effects, supply-chain and labor constraints, inflation, factory shutdowns and unusual order patterns; these factors have affected demand, particularly Toggle MRAM demand among industrial customers. The full future impact remains uncertain.
- The company reported a material weakness in inventory controls, including unit-level cost allocations and communication between operations and accounting. Remediation actions included new reconciliations and procedures, added personnel and training; management stated the weakness remained relevant to the assessment of disclosure controls as of September 30, 2022.
- Customer and channel concentration are notable: one customer represented 24% of Q3 revenue and 41% of net receivables. The four largest end customers represented 29% of nine-month revenue. Receivables and collections warrant attention.
- Licensing and patent-related revenue is variable and transaction-dependent. A RAD-Hard development and license arrangement totals $6.5 million; $0.8 million was deferred at quarter-end, and the company expects to recognize the remaining $1.8 million of transaction price as services are performed, with completion expected in 2024. A patent sale contributed approximately $1.3 million in Q3 2021, with no patent sales in Q3 2022.
- Principal operating risks include dependence on third-party manufacturers and suppliers, limited foundry capacity and potential cost increases, uncertain adoption of STT-MRAM, competition, and the possibility that design wins do not translate into volume sales. The filing reports no material legal proceedings.
Most important facts for investors to verify
- Progress and effectiveness of remediation of the inventory-control material weakness, including any subsequent accounting adjustments.
- Receivables aging, customer concentration and cash collections, given the large increase in accounts receivable and the disclosed customer exposure.
- Product demand, distributor ordering patterns, supplier pricing and gross-margin trends, especially as pandemic-related and broader supply-chain conditions evolve.
- Debt repayment timetable, revolving-line availability and compliance with minimum-cash and other credit-facility covenants.
- Timing and remaining performance obligations under the RAD-Hard contract, and the extent to which future revenue depends on variable licensing or patent transactions.
- Whether the company’s cash and operating cash flow remain adequate as it funds development, manufacturing equipment and growth plans.