Everspin Technologies, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Everspin develops and sells magnetoresistive random-access memory (MRAM) products and earns licensing, royalty, and related revenue for industrial, automotive, transportation, and enterprise storage applications.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $9.2 million | $11.5 million | $27.9 million | $37.1 million |
| Gross profit / margin | $4.4 million / 47.4% | $5.4 million / 47.0% | $13.2 million / 47.2% | $19.9 million / 53.6% |
| Operating expenses | $7.9 million | $10.9 million | $24.5 million | $33.8 million |
| Operating loss | $3.6 million | $5.5 million | $11.3 million | $13.9 million |
| Net loss | $3.7 million | $5.6 million | $11.6 million | $14.3 million |
| Adjusted EBITDA (non-GAAP) | $(2.2) million | $(4.1) million | $(7.3) million | $(9.8) million |
- Cash and liquidity: Cash and cash equivalents were $14.8 million at September 30, 2019, down from $23.4 million at December 31, 2018. Current assets were $28.9 million and current liabilities $8.1 million.
- Cash flow, nine months: Operating activities used $5.5 million; investing activities used $0.6 million, primarily for equipment; financing activities used $2.6 million. Cash decreased $8.6 million during the period.
- Debt: The 2019 Silicon Valley Bank facility had $8.42 million of principal outstanding, with a $7.75 million net carrying value after debt discounts. It included a $6.0 million term loan and a $5.0 million borrowing-base revolver, of which $2.0 million was drawn and $3.0 million remained available subject to borrowing-base availability. The term loan rate was 4.75% and the revolver rate 6.75% at period end; effective rates were higher due to financing costs.
- Equity financing: The company raised $2.2 million net through its at-the-market offering, issuing 377,115 shares. A further $22.6 million remained available under the $25.0 million sales agreement at quarter-end.
Material changes versus the prior comparable period
- Q3 revenue declined 20.3%; product sales fell 20.0%, primarily due to the loss of a customer. Nine-month revenue declined 25.0%, reflecting lower product sales and substantially lower licensing and other revenue.
- Nine-month licensing, royalty, and other revenue fell to $2.5 million from $7.9 million. The 2018 period included a one-time $5.0 million cross-license fee and higher GLOBALFOUNDRIES milestone revenue. That license fee had no associated cost of sales and lifted the prior-period gross margin.
- Gross margin was nearly flat year over year in Q3, but fell 6.4 percentage points for the nine-month period, principally because of the prior-year license fee. Management attributed Q3’s modest margin improvement to product mix.
- Operating expenses fell 27% in Q3 and 28% over nine months, chiefly as research and development spending decreased. Management cited lower GLOBALFOUNDRIES development costs, materials spending, equipment repair costs, and headcount-related costs.
- Qualified design wins rose to 22 in Q3, from 14 in each of Q1 and Q2 2019.
Outlook, risks, and notable matters
- Management said cash, expected sales and growth, and the available revolver were expected to fund anticipated cash needs for at least 12 months from the filing’s issuance date. It also warned that operating losses and cash-flow deficits were expected to continue, and additional financing may be needed. No specific revenue or earnings guidance was provided.
- Management expects R&D spending to remain flat overall while investing in products and technology; it expects G&A and sales and marketing spending to remain broadly flat, excluding variable commissions. R&D spending may fluctuate by quarter with product qualification cycles.
- Customer concentration is significant: the four largest end customers represented 38% of Q3 revenue and 30% of nine-month revenue. The filing identifies customer loss as a cause of lower sales.
- The company depends on third-party manufacturing and suppliers, including GLOBALFOUNDRIES for higher-density products. Supply capacity, yields, customer qualification, pricing pressure, product adoption, and the delayed development of the 1Gb STT-MRAM product are cited risks.
- The 2019 credit facility is secured by substantially all assets other than intellectual property and includes a minimum-liquidity covenant and restrictions on certain actions. The company reported compliance at September 30, 2019; default could permit acceleration and a higher interest rate.
- Disclosure controls were deemed ineffective at the reasonable-assurance level because a material weakness in internal control over financial reporting remained. The weakness involved inventory tracking at third-party locations, operational-financial communication, and insufficient experienced personnel. Remediation efforts included ERP and dashboard improvements, process changes, training, and additional finance personnel.
- The GLOBALFOUNDRIES joint development agreement was extended through December 2019, subject to the agreement’s terms concerning statements of work. The filing says failure to extend or continuation could affect MRAM development. No material legal proceedings were reported.
Important facts for investors to verify
- Whether customer losses and concentration continue to pressure product revenue, and whether new product sales offset the decline.
- Whether design wins convert into production orders, including adoption and qualification progress for 256Mb and 1Gb STT-MRAM products.
- Cash burn, revolver availability under its borrowing base, financing needs, and compliance with debt covenants.
- Whether the GLOBALFOUNDRIES development relationship continues beyond its stated term and whether manufacturing capacity, yields, and alternative sourcing are adequate.
- Progress in remediating the material weakness, particularly inventory controls and financial reporting staffing.
- Effects of product mix, pricing, manufacturing costs, and the absence of repeat licensing fees on future gross margins.