Everspin Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with the three months ended March 31, 2018. Everspin develops and sells magnetoresistive random-access memory (MRAM) products and related licenses and services for industrial, automotive, transportation and enterprise-storage markets.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 or comparison |
|---|---|---|
| Revenue | $10.0 million | $14.9 million; down 32.5% |
| Product sales | $9.0 million | $9.4 million; down 3.7% |
| Licensing, royalty and other revenue | $1.0 million | $5.5 million; down 81.7% |
| Gross profit / margin | $4.8 million / 47.7% | $10.0 million / 67.0% |
| Operating expenses | $9.0 million | $11.1 million |
| Operating loss | $4.2 million | $1.1 million |
| Net loss | $4.3 million; $0.25 per share | $1.3 million; $0.09 per share |
| Adjusted EBITDA (non-GAAP) | Loss of $2.9 million | Income of $0.2 million |
| Cash used in operating activities | $3.1 million | $3.7 million |
Cash and cash equivalents were $18.5 million at March 31, 2019, down from $23.4 million at December 31, 2018. Cash used in investing activities was $0.2 million; financing activities used $1.5 million, principally for debt payments. Total assets were $42.2 million and stockholders’ equity was $21.4 million. Long-term debt had a net carrying value of $11.0 million ($11.34 million principal); $6.0 million principal was classified current. The facility matures in December 2020, bears a 4.75% stated rate at quarter-end, and is secured by substantially all assets except intellectual property. Everspin reported compliance with its debt covenants.
Current assets were $34.8 million and current liabilities $13.6 million. Inventory was $9.7 million, compared with $9.1 million at year-end. Adoption of lease accounting added right-of-use assets and lease liabilities; at March 31, total lease liabilities were $3.7 million, including $1.5 million current.
Changes versus prior period
- Revenue declined mainly because Q1 2018 included a one-time $5.0 million cross-license fee with no associated cost of sales. Q1 2019 included no license-fee revenue; royalty revenue increased by $0.3 million.
- Gross margin fell 19.3 percentage points. Besides the unusually high prior-year margin from the license fee, management cited lower MRAM yields.
- Research and development expense declined 38.3% to $4.0 million, primarily reflecting lower GLOBALFOUNDRIES joint-development spending, lower direct materials spending, and reduced personnel costs.
- Net loss widened despite lower operating expenses, reflecting the lower revenue and gross margin. Cash used in operations improved by $0.6 million year over year, while cash declined $4.9 million during Q1 2019.
Outlook, risks and notable items
- Going concern: Management expects operating losses and cash-flow deficits to continue and states that cash balances and these conditions raise substantial doubt about the company’s ability to continue as a going concern for at least one year after issuance. The filing says existing capital may not fund operations beyond some time into 2020 and that additional financing is needed in 2019. No committed funding source is identified. Potential responses include spending reductions, margin improvements, revenue growth, financing and IP licensing; success is not assured.
- Operating outlook: No specific revenue or earnings guidance is provided. Management expects R&D expense to fluctuate with product and technology qualification cycles and has anticipated reduced spending related to the GLOBALFOUNDRIES agreement. Initial production under the Silterra collaboration for additional Toggle MRAM capacity is expected in 2020; Everspin expects to pay $1.0 million in non-recurring engineering costs and had paid $0.1 million in Q1.
- Business risks: Revenue depends on customer design wins and adoption, particularly for STT-MRAM; the 1Gb product had not generated sales beyond customer samples. Customer concentration, demand and pricing volatility, manufacturing yield and inventory risk, and dependence on third-party suppliers—including GLOBALFOUNDRIES for advanced-node products—could affect results.
- Controls: Management concluded disclosure controls were not effective at March 31, 2019 because of a continuing material weakness in financial reporting controls. Issues included inadequate systems to monitor inventory at third-party locations, insufficient operational-finance communication, and insufficient experienced personnel. Remediation efforts include ERP and dashboard improvements, process changes, training and additional finance staff. The filing notes a prior-period restatement related to this weakness.
- Other: The company reported no material legal proceedings. It adopted lease accounting on January 1, 2019; adoption recorded a $3.6 million operating lease right-of-use asset and $4.0 million of lease liabilities. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much additional capital is required, when it must be raised, and whether financing is available on acceptable terms.
- Cash burn and liquidity runway, especially in light of management’s going-concern disclosure and 2019 financing need.
- Whether MRAM yields and gross margins improve, and whether product revenue can offset the absence of large, irregular license fees.
- Progress on customer design wins, adoption of 256Mb and 1Gb STT-MRAM, and the expected timing of production ramps.
- Remediation and independent assessment of the material weakness, including inventory controls at third-party manufacturing and assembly locations.
- Debt repayment capacity, covenant compliance, and the impact of the December 2020 maturity and secured-credit terms.