Everspin Technologies, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted. Everspin develops and sells MRAM products and related licenses, royalties, and services for industrial, automotive, transportation, and enterprise-storage markets.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $11.52 | $9.01 | $37.14 | $25.81 |
| Gross profit | $5.41 | $5.26 | $19.90 | $15.26 |
| Gross margin | 47.0% | 58.3% | 53.6% | 59.1% |
| Operating loss | $(5.54) | $(5.31) | $(13.93) | $(15.97) |
| Net loss | $(5.63) | $(5.45) | $(14.27) | $(16.72) |
| Net loss per share | $(0.33) | $(0.43) | $(0.88) | $(1.35) |
| Adjusted EBITDA (non-GAAP) | $(4.09) | $(3.76) | $(9.77) | $(12.56) |
Q3 revenue rose 27.9% year over year, led by higher MRAM product sales; legacy product sales declined. Gross margin fell, which management attributed mainly to product mix and lower Toggle and MRAM yields. Nine-month revenue rose 43.9%; the increase included a $5.0 million non-refundable license fee recognized in Q1 2018. Nine-month net loss narrowed, but remained substantial.
Cash flow and liquidity: For the first nine months, operating cash use was $6.88 million, investing cash use was $1.51 million, and financing provided $26.88 million. Financing included $24.52 million net proceeds from a February stock offering. Cash and cash equivalents were $31.44 million at September 30, 2018, versus $12.95 million at year-end 2017. Current assets were $46.94 million and current liabilities $15.91 million.
Debt: The Silicon Valley Bank facility had $12.84 million of principal, including the end-of-term fee, outstanding at September 30; the reported balance-sheet carrying amount was approximately $12.4 million. Interest was floating at 4.50% at quarter-end. Interest-only payments were extended through December 31, 2018; principal payments were scheduled to begin in January 2019, with maturity in December 2020. The company reported compliance with its covenants.
Material changes and notable items
- Revenue comparisons are affected by adoption of Topic 606 on January 1, 2018 using the modified retrospective method; prior-year results were not restated. Under the new policy, distributor sales are generally recognized on delivery to the distributor, with estimated price concessions recorded at that time. Without Topic 606, reported Q3 revenue would have been $10.12 million and nine-month revenue $34.22 million; reported net losses would have been $6.49 million and $16.46 million, respectively.
- Nine-month cost of sales included approximately $0.8 million of inventory scrapped in Q2, as well as costs related to higher sales volume and lower MRAM yields.
- In February, Everspin sold 3.77 million shares at $7.00 per share, raising $24.5 million net. Shares outstanding increased to 17.07 million at September 30, from 12.82 million at December 31, 2017.
- The company entered a collaboration intended to add Toggle MRAM manufacturing capacity; initial production was expected in 2020. It paid $0.5 million toward $1.0 million of engineering costs during the period.
- In October 2018, an amendment extended the GLOBALFOUNDRIES joint development agreement through December 2019 and capped Everspin’s costs at $5.8 million.
Outlook, risks, and controls
- Management stated existing cash, together with anticipated growth and sales, was expected to fund requirements for at least 12 months from the financial-statement issuance date. This is not a guarantee; management said future financing may be needed and may not be available on acceptable terms.
- No specific revenue or earnings guidance was provided. Management expects research and development spending to increase as it develops MRAM technology and works with GLOBALFOUNDRIES; it also anticipates higher general and administrative and sales and marketing costs as operations expand.
- Key business risks include continuing losses, uncertain adoption and ramp of newer STT-MRAM products, customer concentration, price erosion, yield and inventory risks, and reliance on third parties—including a single foundry for higher-density advanced-node production. Four end customers represented 35% of nine-month revenue; two individually exceeded 10%.
- Disclosure controls were deemed ineffective as of September 30 because of a material weakness involving inventory monitoring at third-party locations, communication between operational and finance teams, and insufficient experienced financial-reporting personnel. The company reported that it restated and amended its previously filed Q2 2018 financial information. Remediation plans include ERP and inventory-control improvements, staff training, process changes, and additional qualified personnel.
- The filing reports no material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether MRAM yields and gross margins recover, and whether the reported Q3 margin decline persists.
- How much future revenue growth is attributable to recurring product demand versus license, royalty, milestone, and Topic 606 timing effects.
- Progress in remediating the inventory-related material weakness and whether subsequent filings report effective controls or further corrections.
- Customer concentration, distributor credits, accounts receivable collection, and inventory levels, including inventory held at third-party sites.
- Cash burn against management’s 12-month liquidity assessment, scheduled debt repayments, floating-rate exposure, and compliance with credit-facility covenants.
- Execution and cost limits under the GLOBALFOUNDRIES agreement and the expected timing and economics of the Silterra manufacturing collaboration.