Everspin Technologies, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report; it does not provide standalone fourth-quarter results. Amounts are in U.S. dollars.
Business context
Everspin develops and sells magnetoresistive random access memory (MRAM), including discrete and embedded memory products, sensors, licenses and related services. Its target markets include industrial, automotive and transportation, and enterprise storage. Higher-density STT-MRAM production relies on GLOBALFOUNDRIES.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $49.4 million | $35.9 million |
| Gross profit / margin | $25.3 million / 51.3% | $21.5 million / 59.8% |
| Operating loss | $17.3 million | $20.2 million |
| Net loss | $17.8 million | $21.1 million |
| Adjusted EBITDA (non-GAAP) | $(12.0) million | $(15.6) million |
| Cash used in operating activities | $14.7 million | $18.9 million |
| Cash used in investing activities | $1.9 million | $3.1 million |
| Cash provided by financing activities | $27.0 million | $5.2 million |
- Cash and cash equivalents were $23.4 million at year-end, up from $13.0 million. Current assets were $40.7 million and current liabilities $13.6 million.
- Year-end debt carrying value was approximately $12.5 million; principal outstanding was $12.84 million, due in 2019 and 2020. The loan is secured by substantially all assets other than intellectual property. Everspin reported compliance with covenants at year-end.
- February 2018 follow-on stock offering generated $24.5 million net proceeds. Year-end shares outstanding were approximately 17.1 million.
Material changes versus FY 2017
- Revenue rose 37.5%, driven by higher MRAM product volume and mix and increased licensing, royalty and other revenue. Product sales increased 28.1%; licensing, royalty and other revenue increased 94.3%.
- Gross margin fell 8.5 percentage points, primarily due to lower MRAM yields and $1.6 million of inventory scrapped, partly offset by a one-time licensing event.
- Operating expenses increased modestly to $42.7 million. R&D declined to $23.6 million, while general and administrative and sales and marketing expenses increased.
- Net loss narrowed by $3.3 million. Operating cash use also declined, but remained substantial.
- Revenue recognition changed with adoption of Topic 606 in 2018; the company reported FY 2017 under the prior standard without restatement. Topic 606 increased reported FY 2018 revenue by $3.5 million and reduced reported net loss by $2.7 million versus the amounts calculated without adoption.
Outlook, risks and unusual items
- Management said available cash, together with anticipated growth and sales, was expected to fund requirements for at least 12 months from the financial-statement issuance date. Additional financing may be needed later and may not be available on acceptable terms.
- Management expects to continue investing in product and technology development. The 1Gb STT-MRAM product was delayed and remained in development; the company had not sold 1Gb products. Customer qualification and design cycles can take months to years.
- Key risks include continuing losses and negative operating cash flow; lower product yields, pricing pressure and inventory write-downs; dependence on GLOBALFOUNDRIES for advanced-node production; customer concentration; and uncertainty in adoption of newer products. Four largest end customers represented 29% of 2018 revenue, with one above 10%.
- The GLOBALFOUNDRIES joint development agreement was extended through December 2019. Everspin also entered a Silterra collaboration intended to add Toggle MRAM capacity, with initial production expected in 2020; Everspin paid $0.8 million of the planned $1.0 million engineering costs in 2018.
- A material weakness in internal control over financial reporting remained at December 31, 2018, and management concluded both internal controls over financial reporting and disclosure controls were ineffective. The weakness related to inventory tracking at third-party sites, communication between operational and financial teams, and staffing. It followed an error that required restatement of prior 2018 interim financial statements. Management described remediation efforts as ongoing.
- The independent auditor issued an unqualified opinion on the financial statements. The auditor did not provide an opinion on internal controls; Everspin was not required to obtain an auditor attestation as an emerging growth company.
- No legal proceedings were identified as expected to have a material adverse effect. No income tax provision or benefit was recorded, primarily due to losses; a valuation allowance covered the company’s net deferred tax assets.
Most important facts for investors to verify
- Whether growth in product sales and MRAM adoption can offset falling gross margin, yield issues and ongoing operating losses.
- Actual cash burn, debt repayments and covenant headroom after the interest-only period ended in December 2018.
- Progress in remediating the material weakness and preventing further inventory-accounting errors or restatements.
- Customer concentration, backlog conversion and the durability of the 2018 licensing revenue, including the one-time license fee.
- Timing, production readiness and customer qualification of 1Gb STT-MRAM and the Silterra capacity plan.