Everspin Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Everspin develops and sells magnetoresistive random-access memory (MRAM) products and related technology for industrial, automotive, transportation, and enterprise storage applications. Financial amounts below are in U.S. dollars; “$m” means millions.
Financial performance and liquidity
- Q2 revenue: $8.65m, down 19.7% year over year. Product sales were $8.00m, down 15.3%; licensing, royalty, and other revenue was $0.64m, down 51.1%.
- First-half revenue: $18.67m, down 27.1%. Product sales declined 9.5% to $17.03m; licensing, royalty, and other revenue declined 75.8% to $1.65m.
- Gross profit and margin: Q2 gross profit was $4.02m and gross margin 46.5%, compared with $4.54m and 42.1% in Q2 2018. First-half gross profit was $8.80m and margin 47.2%, versus $14.49m and 56.6% a year earlier.
- Operating expenses and loss: Q2 operating expenses were $7.61m, down from $11.82m; operating loss was $3.60m versus $7.28m. First-half operating expenses were $16.57m, down from $22.88m; operating loss was $7.77m versus $8.39m.
- Net loss: Q2 net loss was $3.67m ($0.21 per share), compared with $7.37m ($0.44 per share). First-half net loss was $7.93m ($0.46 per share), compared with $8.65m ($0.55 per share).
- Cash flow: First-half operating cash used was $4.79m, versus $4.51m in 2018; investing cash used was $0.46m. Financing used $2.86m, including $3.00m of debt payments. Cash and cash equivalents fell $8.11m from year-end 2018.
- Liquidity and debt at June 30: Cash and cash equivalents were $15.27m; current assets were $30.59m and current liabilities $13.46m. Debt carrying value was $9.62m, including $5.98m current and $3.64m long-term; outstanding principal was $9.84m. Accumulated deficit was $141.92m.
Material changes versus the prior comparable periods
- Management attributed lower product revenue principally to lost sales from a customer, partly offset over the first half by new product sales.
- The first-half licensing and other revenue comparison was affected by a $5.0m non-refundable cross-license fee recognized in 2018, as well as lower GLOBALFOUNDRIES (GF) milestone revenue. The 2018 license fee had no associated cost of sales and elevated the prior-year gross margin.
- Q2 gross margin improved year over year partly because 2018 yields had been affected by a manufacturing tool failure in late 2017. First-half margin nevertheless declined from the unusually high 2018 comparison.
- Research and development spending fell substantially, mainly due to lower GF joint-development spending and timing of materials purchases. G&A and sales and marketing expenses were also lower or broadly flat.
- Cash declined from $23.38m at December 31, 2018, while the company made $3.00m of scheduled debt payments. The 2018 comparison included $24.61m of net proceeds from a follow-on stock offering.
Outlook, risks, contingencies, and unusual items
- Outlook and funding: Management said cash at June 30, together with anticipated growth and sales, was expected to fund requirements for at least 12 months. The filing also expects operating losses and cash-flow deficits to continue for the foreseeable future and says additional financing may be needed. No specific revenue or earnings guidance was provided. Management expects G&A and sales and marketing costs to remain broadly flat; R&D may vary with product and technology qualification activity.
- Subsequent debt refinancing: In August 2019, the company replaced its 2017 Silicon Valley Bank facility with a $6.0m term loan and a borrowing-base revolver of up to $5.0m. It drew $2.0m on the revolver, leaving $3.0m available subject to borrowing-base limits, and paid the old facility’s $0.8m final payment. The term loan has 12 months of interest-only payments followed by 30 months of principal payments; the facility includes a minimum-liquidity covenant and collateral over company assets other than intellectual property.
- Going-concern and operating risks: The company has a history of losses and states that insufficient future capital or operating cash could require it to curtail plans or cease operations. Key risks include customer concentration and loss of a customer, lengthy design-in and qualification cycles, competition and price erosion, dependence on third-party manufacturing, and reliance on GF for advanced-node production. The GF joint development agreement was extended through December 2019, subject to its terms.
- Internal controls: Management concluded disclosure controls were not effective at June 30 because a material weakness in internal control over financial reporting remained. The weakness involved inventory tracking at third-party locations, communication between operational and finance teams, and insufficient experienced personnel. Remediation efforts include ERP and dashboard improvements, process changes, training, and additional qualified staff. The company had previously restated and amended 2018 interim financial statements related to this weakness.
- Other items: The company adopted lease accounting on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. No material legal proceedings were reported. The filing says the company was in compliance with its 2017 credit-facility covenants at June 30.
Important facts for investors to verify
- Whether sales and design wins recover after the reported customer loss, and how concentrated revenue remains among major customers.
- Whether operating cash burn, cash balances, and borrowing-base availability support management’s stated 12-month liquidity outlook.
- The terms, covenant headroom, borrowing availability, and cash cost of the August 2019 refinancing, including its fees and repayment schedule.
- Progress and effectiveness of remediation of the material weakness, particularly controls over inventory at third-party locations.
- Whether the GF development relationship and manufacturing arrangements support product qualification, capacity, and commercialization plans, including the delayed 1Gb STT-MRAM product.