Everspin Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company develops and sells magnetoresistive random-access memory (MRAM) products and licenses related technology, serving industrial, automotive, transportation, medical, aerospace and data-center markets. Financial amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $10.12 | $9.18 | $32.05 | $27.85 |
| Gross profit / margin | $2.33 / 23.0% | $4.35 / 47.4% | $12.87 / 40.2% | $13.16 / 47.2% |
| Operating expenses | $6.04 | $7.94 | $19.25 | $24.51 |
| Operating loss | $(3.71) | $(3.58) | $(6.38) | $(11.35) |
| Net loss | $(3.90) | $(3.66) | $(6.92) | $(11.59) |
| Net loss per share, diluted | $(0.21) | $(0.21) | $(0.37) | $(0.67) |
| Adjusted EBITDA, non-GAAP | $(2.03) | $(2.18) | $(2.18) | $(7.33) |
- Revenue mix and growth: Product sales were $9.58 million in Q3, up 14.4%, and $30.14 million year to date, up 18.7%; management attributed the increase to STT-MRAM sales. Licensing, royalty and other revenue declined 32.8% in Q3 and 22.0% year to date. APJ revenue increased substantially year to date, while North America and EMEA revenue declined.
- Margins and earnings: Q3 gross margin fell sharply, primarily due to a $1.7 million excess and obsolete inventory reserve, higher production and sales volume, declining forecast demand for certain products, and loss of certain customer designs. Lower operating expenses—principally associated with the restructuring—partly offset weaker gross profit. Q3 net loss widened slightly; nine-month net loss narrowed materially versus 2019.
- Cash flow: Operating activities used $3.54 million during the first nine months, compared with $5.46 million in 2019. Investing activities used $0.31 million. Financing activities provided $3.28 million, including $2.08 million net ATM proceeds and $1.21 million from employee equity plans. Cash declined $0.56 million to $13.93 million.
- Balance sheet and liquidity: At September 30, cash was $13.93 million, current assets $28.37 million, current liabilities $9.70 million and total assets $33.22 million. Accounts receivable was $8.17 million and inventory $6.17 million. Accumulated deficit was $155.58 million. Management believes cash, available line-of-credit capacity and anticipated sales are sufficient for at least 12 months from issuance of the financial statements; additional capital may be needed thereafter and may not be available on acceptable terms.
- Debt: Gross principal under the SVB credit facility was $8.42 million, with net carrying value of $7.90 million, including $3.61 million current and $4.28 million long term. The $5.0 million revolving facility had $2.0 million drawn and up to $3.0 million remaining available, subject to borrowing-base availability. The July 2020 amendment extended the term loan’s interest-only period, lowered rate floors, extended maturity to June 2023, removed a liquidity-ratio covenant and added a minimum $11 million cash-and-availability covenant. The company reported compliance with covenants at quarter end.
Material changes and management commentary
- Compared with Q3 2019, revenue grew 10.3%, but gross margin decreased from 47.4% to 23.0% and net loss increased from $3.66 million to $3.90 million. For the first nine months, revenue rose 15.1%, while gross margin declined from 47.2% to 40.2%.
- Operating expenses fell 23.2% year to date, including lower research and development spending on the GLOBALFOUNDRIES joint development agreement and reduced personnel costs following the restructuring completed in January 2020. The company said restructuring activity was completed by September 30.
- New design wins in the first three quarters of 2020 were 37, 43 and 52, respectively, versus 14, 13 and 22 in the comparable 2019 quarters. The filing cautions that design wins may not lead to production orders or revenue.
- The planned initial production under the Silterra collaboration for Toggle MRAM, previously anticipated in 2020, was delayed to some time in 2021. The company had paid $0.6 million of the required $1.0 million engineering costs and did not expect additional payments for the remainder of 2020.
Outlook, risks and unusual items
- COVID-19: Management reported disrupted supply chains and demand, unusual ordering patterns and reduced Toggle demand, particularly among industrial customers. Remote work also impeded manufacturing yield-improvement projects, affecting cost of sales. The full effect on demand and operations remained uncertain.
- Customer and operating concentration: One customer represented 38% of Q3 revenue and 47% of receivables at September 30. The four largest end customers accounted for 57.7% of nine-month revenue. The company relies on third parties, including a single foundry for higher-density advanced-node products, and faces risks from demand forecasting, production yields, supplier capacity and inventory obsolescence.
- Funding and debt risks: The company has a history of losses and may require future equity or debt financing. The credit facility is secured by substantially all assets other than intellectual property, includes operating restrictions and minimum liquidity requirements, and prohibits cash dividends. The ATM offering was suspended in March 2020; $17.7 million remained available for future sales under the agreement at quarter end.
- Other unusual items: The $1.7 million inventory reserve was a significant Q3 charge. The company issued SVB a warrant for 21,500 shares at a $0.01 exercise price in connection with the credit-facility amendment. No material legal proceedings were reported.
- Controls: Management concluded disclosure controls were effective at a reasonable assurance level. A material weakness identified in connection with a 2018 financial-statement restatement remained under remediation; actions included a new ERP system, inventory monitoring processes, added personnel and training. Management said it would continue monitoring the remediation.
Key facts for investors to verify
- Whether demand, customer forecasts and the inventory reserve assumptions support future sales and gross-margin recovery, particularly after the loss of certain designs.
- Customer concentration, including the largest customer’s revenue and receivables exposure and the contribution of the four largest end customers.
- Cash burn, the availability conditions on the remaining revolving credit, and compliance with the $11 million cash-and-availability covenant.
- Progress on manufacturing yields, supply-chain resilience, the Silterra production schedule and the company’s ability to convert design wins into recurring orders.
- Completion and effectiveness of the material-weakness remediation, and the potential dilution from future ATM sales and outstanding equity awards.